VAT After Brexit – Installed Goods

Assuming a deal cannot be done, the UK will sit outside of the Single Market and the Customs Union. Even if a deal is done, the UK Government is currently adamant it will sit outside of the Single market and the Customs Union.

That means we will see changes on contracts involving the supply and installation of goods. My view is that these changes will both increase red tape and costs for both suppliers and supplied.
I will use the UK as an example of how things work now. Please remember that each member state has its own administrative requirements.

The law throughout the EU at present

To quote from the Principal VAT Directive: –

“Where goods dispatched or transported by the supplier, by the customer or by a third person are installed or assembled, with or without a trial run, by or on behalf of the supplier, the place of supply shall be deemed to be the place where the goods are installed or assembled.”

The effect of the law

So, if a business in the UK contracts with a Belgian supplier to provide installed goods, then the place of supply is the UK, and the tax must be accounted for in the UK.
The default position in the UK is that the supplier MUST register for VAT and charge local VAT.

However, there is a simplification solely for intra-community supplies whereby the supplier can notify HMRC that the recipient of the supply will reverse charge the supply – i.e. no UK VAT ID needed by the supplier. The notification MUST be sent before the first invoice is issued on EACH contract.

In other member states the system is somewhat simpler – an intra -community supply in similar circumstances is treated as a reverse charge (but check!).

However, suppliers from outside the EU are required to register for VAT in the UK and to account for VAT in the UK, subject to a simplification mentioned later.

What is “supply and installation”?

This aspect of the tax also causes problems, especially in the UK, as the dividing line between “supply and installation” and “supplies related to land” – broadly construction – are at best grey, despite clarification at EU level.

Because of inconsistency on the interpretation of what is and what is not the supply and installation of goods, the EC issued a binding regulation with definitions.

They said: –
“For the application of Directive 2006/112/EC, the following shall be regarded as “immovable property”:

(a) any specific part of the earth, on or below its surface, over which title and possession can be created;
(b) any building or construction fixed to or in the ground above or below sea level which cannot be easily dismantled or moved;
(c) any item that has been installed and makes up an integral part of a building or construction without which the building or construction is incomplete, such as doors, windows, roofs, staircases and lifts;
(d) any item, equipment or machine permanently installed in a building or construction which cannot be moved without destroying or altering the building or construction.

“Immovable property” is what we treat in the UK as “land and property”. Items c and d are the important ones for supply and installation purposes. If the supply complies with these descriptions, then it is construction services (for UK VAT), and if it does not it is the supply and installation of goods. There are still grey areas.

UK simplification for suppliers from outside the EU

As regards the simplification, it does NOT apply to suppliers from outside of the EU. This will also be the position post-Brexit if a deal is not done to cover this aspect of the tax. HMRC summarises a one-off concession: –

There is a more limited simplification arrangement for installed or assembled goods imported from a third country. So long as it is a one-off supply the supplier can exceptionally treat the supply as taking place outside the UK. This requires the customer to act as the importer of the goods and the full contract price to be declared on the import entry.

Now there are two things that stand out.

The first is that it is a one-off arrangement. Thus, it can only be used by the SUPPLIER once. If the supplier has more than one contract in the UK, then it cannot use the arrangement. It must therefore register for VAT in the UK, and charge local VAT. At the moment it is not clear whether businesses from the EU27 will be permitted to use the UK VAT Agent route or else be required to appoint a tax representative. Tax representatives are harder to find, because they are jointly and severally liable for any tax due the fees for representation tend to be higher, and they may also want a bank guarantee to manage their risk. Reciprocal issues will need to be managed for UK businesses with supply and installation customers in the EU27.

The second is the mechanism. The sale of goods is treated as being made outside the UK (usual contractual issues apply, including which court is to be used for disputes, for example) and then the full contract value is used at importation. So that mans the value of the services is added into the value of the goods, as well as the other cost additions (CIF for example), to create a value of duty (more duty duty) and then the value for VAT. Higher VAT will be due by the importer, creating a greater demand on cash flow – but see my earlier article on possible ways to manage this- and a higher guarantee needed for deferment (additional bank charges).

UK Suppliers

Quite how the EU27 intend to manage the issue is not known at this stage, but I think UK suppliers would be sensible to plan on the basis that they will have to get local VAT ID’s anywhere they install or assemble goods in the EU27.

EU27 suppliers to the UK

Indeed, I think it would be sensible for EU27 suppliers to the UK to think in terms of obtaining a local VAT ID as I cannot say whether the concessionary treatment will survive Brexit.

The UK VAT registration process

Just a final few words about registering for VAT.
Covertax has prepared a lot of VAT registrations in the UK for supply and installation contracts. They take time. Lots of questions are asked. HMRC needs to satisfy itself that the contract is not one that can be reverse charged.
We’ve even had issues on EU VAT refunds, where the contract was reverse charged, but one part of HMRC refused the refund as they thought there should be a local VAT registration in place and the VAT Registration Unit refused registration because it thought that there should not.
So please do not leave it until the last minute. Start planning now. The HMRC VAT registration service norm is around six weeks presently. That will increase significantly as Brexit draws closer – more registrations will be needed in the UK and as far as I know, no extra resources have been deployed by HMRC to address this. I suspect waits in excess of three months will not be a surprise towards the end of this year and during 2019.

Construction Industry Scheme (“CIS”)

Further complications arise in the UK as most supply and installation contacts, even where covered by a VAT simplification, also require registration under the Construction Industry Scheme – a withholding tax scheme. Look into that early as failing to do so could result in up to 30% of your invoice value being withheld.
At present, it is possible to gain “Gross Payment Status” – you get paid without stoppage – provide you have a good tax compliance record. HMRC cannot discriminate against companies from other member states, and so will take into consideration evidence produced as to the EU27’s tax compliance record.
We do not know if that will continue after Brexit. If not, the cost of doing supply and installation business in the UK will increase for many EU27 businesses.

So, we need a deal?
Of course, a deal might get done to avoid all of this cost and red tape for businesses. One can but hope.

Steve Botham

VAT: Consignment and Call Off Stocks Post Brexit

At the moment, whilst the UK is a member of the Single Market and sits within the Customs Union, the UK benefits for call of stock and consignment stock simplifications for intra EU transactions.  That’s both for goods coming into the UK from the EU27 and to the EU27 from the UK.

In brief, in the UK call off stocks (roughly, stock under the control of a single customer) do not require a local VAT registration, whereas Consignment stocks (roughly, your stock held to distribute to several customers) does.  The registration involves a little red tape, but once set up it is fairly straightforward.  There are similar, but not identical rules, in the EU27.

At the moment, consignment stocks and call off stocks moving into the EU (including the UK) from third countries (for example the United States) are treated as imports with VAT and duty incurred at importation.  Stocks then distributed from a stock within the EU (effectively consignment stocks, but dependent upon your contractual arrangements, this can include call off stocks) require a local VAT ID – so once again some red tape which is fairly routine to manage once set up, but you have the extra cost and hassle of importing the goods.

Unless a deal can be done to replicate the current arrangements (and the prospect changes daily) movements between the UK and the EU27 will follow the third country rules.  Imports with VAT and duty, plus a local VAT registration in many if not all cases.

Some businesses are already moving stocks around the EU, both to and from the UK, in order to manage the position post 29 March 2019 – once again planning on a “no deal” or “no single market and Customs Union” solution, or just outright confusion (for example, the Customs authorities may struggle to cope or the IT solutions proposed may have issues).  This is currently being driven by the logistics risks, but some are also changing the way they do business.  Certainly, if you have call off stocks, or are moving goods for processing between the UK and the EU27, you would wish to minimise the logistics delays at import or export.  Therefore, consideration needs to be given now as to whether local VAT registrations are required.

Indeed, some businesses which do not current use consignment or call off stock arrangements may need to start to do so because of Brexit, if only to protect their supply chain.  In my opinion, the cost of an unneeded VAT registration is far outweighed by the cost of getting goods trapped at the port or being unable to set up a VAT registration timeously post Brexit.

There are some technical issues with applying early for a UK VAT ID, for example.  This is because if you are moving call off stocks from the EU27 to the UK, you currently enjoy a simplification and it is possible that HMRC will refuse a registration until matters are clear.  That is going to create problems for all businesses concerned because, if they do, HMRC is highly unlikely to have the resources to meet their current level of efficiency – six weeks.  In brief, you could be waiting months for a VAT ID.  It may be better to consider provoking a registration, perhaps by forming a consignment stock in the UK.  And if the registration isn’t needed – cancel it.

Steve Botham

EU Draft Withdrawal Agreement – the basis of a good plan

In my life, one gift horse I grab with both hands is the basis of a good plan. It may need a little work, but could then involve an extra trip to the pub. This skill is also useful when transferred to my working life.
And the EU Draft Withdrawal Agreement, which I link to, is undoubtedly the basis for a good plan.

I’ve been through the draft UK EU Withdrawal agreement – all 118 pages. I’ve not read every word, but I know enough to say that there’s the makings of a very good deal in there for brave and imaginative politicians. It should make very good reading for business people in both the UK and the EU27. And could resolve visa issues.
And remember, this is a draft, so there is time to work it up to a final working version, as is normal with most EU agreements.

Unfortunately, it was shot down by the UK Government on 28 February 2018 because of talk of a regulatory environment within the Irish draft Protocol which is within the draft agreement. The draft protocol recognises it is made in the light of the 8 December 2017 Belfast Agreement, which the UK agreed with and signed at the time.
The basis of the UK’s rejection appears to be that Northern Ireland will be separated from the rest of the UK. If you read the agreement related to the movement of goods and people, you’ll find that it contains the basis of an agreement which could well suit all parties. It was certainly not worthy of being rejected out of hand. And in my opinion it goes not one step further than was agreed in Belfast on 8 December 2017.

Dealing with people, the Republic of Ireland sits outside the Schengen area, as does the UK. As far as I understand things, they operate the same admission criteria as the UK – i.e. they too already have control of their borders. Indeed, they already rely on us to control people moving into the Republic and we already rely on them to control people moving into Northern Ireland. So, unless the UK says that it does not trust the Republic to continue to manage people at its borders honestly and effectively, the UK can rely on the Irish to manage that side of things (and vice versa).

Then with what the draft withdrawal agreement says, there is no reason to believe that the UK would have more unwanted migrants than it would in any event, whilst keeping a pretty free environment for the movement of labour. Indeed, on 28 February 2018, the UK and the EU moved a further step in that direction, albeit that agreement was overshadowed by the rejection of the draft withdrawal agreement and largely unreported.
But a neat solution for the Irish Land Boundary as regards people, and probably a neat solution for all UK borders with the EU given that the UK already operates border controls for people moving into the UK from the rest of the EU. These controls could probably be tightened up further if the UK adopts the EU free movement opt outs which it has failed to do so far. The opt outs address most of the alleged problems identified in the UK with EU migration in any event, but still allow employers to attract EU workers.

As for goods, the draft Northern Ireland protocol refers to the Belfast Agreement of 8 December 2017, which the UK agreed to and was unambiguous. There is nothing about an EU controlled regulatory environment.

There is reference to a regulatory environment which would be quite normal for any agreement between nations dealing with matters like Customs Duty and taxes. This is an agreed (or more properly, to be agreed) joint regulatory environment between the UK and the EU27.

Earlier in the draft there is detail provided on the essential day to day mechanisms needed to manage cross border movement of goods (including the Irish Land Border). Calling upon existing mechanisms (not new as yet undeveloped as well as untried and untested information technology, cameras, scanners etc). Providing a regulatory solution for Ireland and possibly the whole of the UK. And offering a path to a sensible Customs Agreement (please call is something other than “Customs Union” – even “Wendy” if that’s acceptable) solution to all parties.

If you read the draft carefully it creates room for the UK to do its own trade deals if it wants to (without being explicit, which is definitely the EU way), but provides a solution as regards taxes etc on third country goods brought into the UK for onwards shipment to the EU (and vice versa). This allows both sides to maintain their fiscal integrity of their respective borders and businesses to continue trading as they are now (basically following “origin” rules) with a minimum of intervention (or red tape if you must).

So, I think it is the basis of a good plan. I might discuss it at the pub on Friday evening. And my companions will of course talk about something completely different.

Brexit VAT Implementation – a dangerous game of Brussels roulette

On 6 January 2018, The Guardian, a quality UK newspaper renowned for misprints, published an article related to the imposition of VAT on imports from the EU following Brexit.  To say this awakening was at the eleventh hour is a bit of an understatement – the relevant legislation passed through the UK Parliament on 8 January 2018.

A problem came to light – well, not really

However, it is good to see that the UK press, and so it seems the influential Parliamentary Treasury Committee, has caught up with what just about every VAT specialist in Europe has been pointing out since before the referendum in 2016.  Cross border VAT law is changing.  I said “just about every VAT specialist” because the newspaper quoted “experts” who seemed unaware of the full position at present with imported goods, were clearly unaware that VAT changes for services are indeed far from simple, and that there are problems for UK exporters to the rest of the EU and of course for EU importers from, and exporters to, the UK following Brexit unless something is resolved both in the UK and in the rest of the EU.

What has since become clear is that ministers have either spoken off the cuff on the subject or that their briefings have been incomplete at best.

So, I am setting out here what we know so far.  And I will be parochial and address goods imported into the UK from the rest of the EU.

That does not mean that exporting goods from the UK to customers in other EU member states will not be a problem.  It could well be.  Indeed, some UK business may find that they need to change the way they trade (holding stocks in France or Holland, for example), and others may find their margins squeezed as customers seek to share the burden of their added costs of importation form the UK.

Background

In theory the change will happen on 29 March 2019.

I say “in theory” because the implication of the Brexit Phase I agreement on 8 December 2017 was that we would have a transitional period on broadly similar rules to what we have now (I celebrated – briefly).

Sadly, the UK Government then made it clear that it would renege on that agreement if it suited them, creating big issues at the time.  Things have been smoothed over since, barring the occasional sabre rattle, and so we are now to believe that all will be OK on 29 March 2019, and there will be no change for VAT on imports into the UK from 29 March 2019.

That is until 31 December 2020, according to the EU negotiators, when they expect the transition to be completed.

Of course, none of that has been agreed between the UK and the EU27, the contradictory messages from the UK Government have not been helpful for anybody considering international trade, and an influential cabal within the Conservative Party (the political party forming a minority Governing in the UK) seems determined for the UK to fall out of the EU and all EU mechanisms from 29 March 2017.  No, I don’t understand why.

In the meantime, Mrs May, the UK Prime Minister has suggested recently that we may need a longer transitional period – no surprise there for those of us living in the real world, but this of course contradicts what is wanted by her colleagues who wish to cut the ties as soon as possible.  And then the UK Government is yet to tell us what it wants out of Brexit.  We are promised something “concrete” shortly.

Why all of this background?  Just to highlight that it is difficult if not impossible to second guess what will happen from 29 March 2019 onwards.

So once again I can only advise that we plan for the worst and hope for the best.  As far as international trade is concerned, dropping out of the EU on 29 March 2019 with no transitional arrangements is the worst scenario, whilst allowing a reasonable period to put the new mechanisms in place (an extended transitional period) is what I’d hope for.

Right now, the UK reversing the Brexit decision is but a dream or a nightmare dependent upon which side of the UK fence you sit.

A step back in time

At this stage, for those who remember the completion of the Single Market in 1992, I would remind you that the solution Europe came to then on VAT is the one we have now.  So, it is those far reaching measures that are being reversed for trade between the UK and the rest of the EU.

And as you will also recall there was a five-year transition period lasting until 1997 to finalise the completion of the Single Market for VAT.  And you will know that deadline was eventually abandoned, which is how we get to where we are today.  The 1992 transitional period has either lasted for 25 years or else the transitional rules were adopted as the final rules in 1997, dependent upon your point of view.  I subscribe to the latter.

There are many things I could extrapolate from this set of facts, but I will stick to one – the transitional period cannot be finalised on 31 December 2010.  It cannot be done.  So, provided Mrs May’s cabal are kept under control and the EU27 also take a sensible approach, common sense suggests an extended transitional period.  Probably not one which goes on for ever, as with what happened in 1992, but maybe one for five years.

Brussels Roulette – where will you place your bets?

But that is a sideshow of reality within a difficult technical scenario.

According to the UK judiciary, “Beyond the everyday world… lies the world of VAT, a kind of fiscal theme park in which factual and legal realities are suspended or inverted”.  I think that it is more akin to a “game” of Russian Roulette, but with the life of businesses at risk – Brussels Roulette.

So, let us look at the facts from a worst-case scenario, based on planning for the worst and hoping for the best.

These are the loaded chambers of the gun if the UK just falls out of the EU on 29 March 2019.

Do Nothing

Goods imported from the remaining EU member states will bear UK VAT at importation at the prevailing rate (let’s assume 20%).

If you do NOTHING, then the VAT must be paid to Customs at importation and payment will be by cash or bankers draft and you will reclaim the VAT on your current VAT return.  That is a cash flow hit, an administrative hit and, if you delay payment you don’t get your goods, thus putting your business at risk.

Freight Forwarder

But you can ask your freight forwarder to pay the VAT for you, which they will do, generally for a fee of up to 2%.  You then pay the freight forwarder according to your commercial terms, and then reclaim the VAT on your current VAT return.  This is still a cash flow hit but does at least provide some certainty which may well make the 2% cost worthwhile.

Duty Deferment

If you are a regular importer you can apply for “duty deferment”.  An important part of the process is to obtain a bond from a UK bank or insurer equal to twice the maximum VAT (and customs duty) you expect to pay each month.

Typically, a bank will try to charge you 1% of the value of the bond each year.  Also, typically, the bank will take the value of the bond out of your overall facility – you could find your overdraft reduced substantially if you are not careful.

If approved, your goods will move “smoothly” off the port and the VAT and Duty will be collected by direct debit two weeks into the following month.  The VAT can then be reclaimed on your VAT return for the month of importation.

Sorry for the “smoothly”.  As a rule, goods do move smoothly now.  However, there are doubts as to how prepared UK Customs will be for Brexit, so “smoothly” is not a word I expect UK importers (or exporters) to use for at least a period of time following Brexit (and “frictionless” seems even less likely).

For that cynicism, I will atone by dropping in a planning tip – model your VAT as if you will no longer use acquisition tax, but instead just reclaim the VAT on imports as you do now.  If the result is that you look like you will be in a regular repayment position, apply for monthly VAT returns from March 2019 onwards.

But I digress.  This is still a cash flow hit, but as a rule not as bad as paying by cash or bankers draft or using a freight forwarder to pay the import VAT for you.

Simplified Import VAT Accounting (SIVA)

Not to be confused with the Hindu God Lord Shiva, sometimes spelt Siva.  Shiva is the quintessential destroyer. His duty is to destroy all the worlds at the end of creation and dissolve them into nothingness.  SIVA, however, should be good news, and something businesses currently paying VAT on imports should consider applying for in any event.  But not as potent as Lord Shiva.

You must apply to be SIVA authorised.  You will need a very good compliance record to be accepted.  However, once accepted, the impact is that, whilst you will still have a duty deferment guarantee for Customs Duty, it could well be much reduced or even nil for imported goods that do not attract any Duty.  The scheme lets you defer the VAT on imports so that you account for the VAT very much as you already do with goods acquired from other EU member states.

My recommendation would be to start preparing for your application immediately and to try to get it in early.  There could be a mad rush come 1 January 2019 – maybe not the January sales, but still too much for HMRC to cope with.

Postponed Accounting System (PAS)

You need to be quite old to remember PAS, scrapped in 1985 by the then Chancellor Nigel Lawson as he needed a cash flow boost and so took £200m out of the cash flow of UK importers.  PAS works very similarly to SIVA.  Except that everyone could use it – even if you had a bad compliance record.

During the last UK Budget a suggestion was made as to the return of PAS, although all has gone quiet on this since.  And it was this suggestion from the Treasury that the many “experts”, ministers and politicians omitted to mention during the hysteria in January.  At a stroke, a return to PAS could eradicate the import VAT issue for UK VAT registered businesses, cut down the need for Customs staffing and resources, and help “frictionless” trade between the UK and the EU27.

But of course, this is right at the “hope for the best” end of the scale.

Suspensive regimes

Pretty much standard reliefs can also be looked at for specific circumstances such as Customs Warehousing (it can even be on a computer for some goods), temporary importation, inward processing relief and outward processing relief.

More businesses will need to look at these, especially those that for the time being will retain their current manufacturing process with goods moving backwards and forwards between the UK and the EU27.

Once again, my view, because of the limited staff available in HMRC, is that businesses should start considering and applying for these processes now.  Leaving it too late could mean that you are not “approved” come the day (whenever that is).

Brussels Roulette

The name of the game is very unfair, but that is the nature of British politics.

You’ll see I’ve come up with six alternatives, much like the six chambers in a revolver used in a game of Russian Roulette.  You’ll note that there are no empty chambers!  You’re going to catch something.  You’re aim, though, is simple – identify your risk and manage it.  Yes, we can all hope for a return to PAS, but even then, Customs Duty will be payable on imports from the EU27, so you will need to get duty deferment in place for goods coming from the EU27 or, if you can, apply for one of the suspensive regimes.

If you fail to manage it, then you risk going out of business – it is that stark.  I’d like to think that the UK Government would set up some form of safety net but given how far on the politicians seem to be with the high level strategic thinking, that is more likely to be thought about on April Fool’s Day 2019, rather than before.

Steve Botham

HMRC Penalties and the “Answer to the Ultimate Question of Life, the Universe, and Everything”

In this article I will disclose to you the similarity to the way in which HMRC applies penalties and the Answer to the Ultimate Question of Life, the Universe, and Everything.  This disclosure you will find is as important to you as the output of Deep Thought in The Hitchhiker’s Guide to the Galaxy (Douglas Adams).  But, a bit like The Hitchhiker’s Guide, where we follow the journey of Arthur Dent and Ford Prefect, there is a story to follow here.  I’m not sure I would describe HMRC as The Vogons (I’ve never been quoted poetry by a tax inspector), but this tale is not fiction, so I’ll leave you to make up your mind.

 What underpins the tax penalty regime?

On 17 September 2015 HMRC published a Summary of Responses to document called “HMRC Penalties: A Discussion Document”.

In the introduction to that document, at paragraph 1.2 on Page 3, HMRC stated: –

“1.2. The Discussion document proposed five broad principles that HMRC consider should underpin any new penalty regime. These principles are:

  1. The penalty regime should be designed from the customer perspective, primarily to encourage compliance and prevent noncompliance. Penalties are not to be applied with the objective of raising revenues.
  2. Penalties should be proportionate to the offence and may take into account past behaviour.
  3. Penalties must be applied fairly, ensuring that compliant customers are (and are seen to be) in a better position than the non-compliant.
  4. Penalties must provide a credible threat. If there is a penalty, we must have the operational capability and capacity to raise it accurately, and if we raise it, we must be able to collect it in a cost-efficient manner.
  5. Customers should see a consistent and standardised approach. Variations will be those necessary to take into account customer behaviours and particular taxes. “

I am not aware of any legal changes to this approach.  Neither am I aware of any published change of policy.  This leads me to believe that this must still be the policy of HMRC and vicariously enacting the Intention of Parliament.

I think any right-minded taxpayer (and that includes advisers!) would not quibble with these aims.

But are these aims being met, or is something else happening?

However, it has long been my view that this is not how the tax civil penalty regime acts in practice in the UK.  And evidence is now starting to accrue which indicates that my view is more likely to be consistent with the reality than what HMRC had to say on 17 September 2015.

There are a number of issues with the civil penalty regime in the UK.  In theory such issues should not exist, but they do.

Carelessness

As a rule, the “carelessness” penalties – the frontline tax geared penalties – are not supposed to be applied for a simple mistake.  Yet it seems that the norm is for a penalty to be sought, leaving the taxpayer to fight that decision.

In direct taxation a carelessness penalty means that HMRC can assess the tax back six years instead of four (there is no such measure for VAT).  There is no doubt in my mind that penalties have been sought with the view to assessing tax back six years.  And of course, maximising the revenue from the penalty.  That is certainly an abuse of process, and probably an abuse of power.

Deliberate

Similarly, when it came to the deliberate penalties, when these were to be imposed the expectation, we heard from HMRC, was that for such a penalty to be applied the admission of deliberate behaviour would come from the mouth of the taxpayer.  We were assured that it would not be taken lightly and that HMRC would apply the penalty responsibly.  And HMRC’s guidance even now still appears to adhere to these principles.  For example, there is a definition of “Deliberate”: –

This is where you knew that a return or document was inaccurate when you sent it to us. Examples of deliberate inaccuracies include deliberately:

  • overstating your business expenses
  • understating your income
  • paying wages without accounting for Pay As You Earn and National Insurance contributions”

[Source: HMRC Compliance checks series – CC/FS7a]

I am not sure just how effective this guidance is as to the term” deliberate” since it uses the term to define itself, but if I am being fair, in normal usage I think we would all say we’d know this when we saw it.  Except of course that relies upon a subjective judgment, and you and I may have greatly differing views as to what is and what is not done “deliberately”.  The point is, however, that the term cannot be used subjectively – it must be used objectively if the penalty principles published on 15 September 2015 are to be abided by.  Why?

Use of penalties other than as Parliament intended?

Well, apart from the deliberate, and deliberate and concealed penalties having a tariff of up to 100%, they also open the door to HMRC to seek collect tax from up to twenty years ago.

And there is evidence that HMRC have increasingly used the deliberate category in a quite startling trend.

And there is now a case decision that makes it quite clear that the rule of thumb of being able to know it when you see it is not a reliable yardstick in the hands of HM Revenue & Customs.

Knowingly

However, there is something HMRC skips over.

A deliberate act is committed knowingly.  The perpetrator knows that he or she is doing it.  And in my view admission to that effect must come from the mouth of the person concerned.  It is not something to be assumed.  It is not something where an assertion could be relied upon.

There is no “should have known” test.

And frequently HMRC omits any work whatsoever in this respect and jumps straight into “deliberate”.  In the example of one case on a transfer of a going concern, the taxpayer was accused of a deliberate and concealed action because the transfer of a going concern treatment had not been disclosed separately to HMRC – there is no legal requirement or even guidance from HMRC that this is required to be done.

“Special knowledge”

And elsewhere you will also find a concept of what I call “special knowledge”.  This asserts that certain taxable persons, whether individuals or companies with internal advisers, know more about the taxation matter than Joe Public.

One such example we have dealt with is a physics teacher who HMRC is determined had special knowledge of taxation because of his professional qualification.  This particular taxpayer  took the advice of someone holding himself out to be an expert who missed out an important piece of advice, resulting in HMRC treating the case as “deliberate”.  Now, I would say that a physics teacher is likely to be a pretty bright person.  I would also say that a toolmaker, for example, is on a level with a physics teacher, but I suspect that a toolmaker may not have received such a challenge.

It is a bit like the Frost Report Sketch including John Cleese, Ronnie Barker and Ronnie Corbett; I look down on him etc.  HMRC won’t have it as they clearly look up to the physics teacher.  This may be because he speaks in a language that they do not understand.  But what they do not recognise is that the physics teacher does not speak their language either.

So, apart from a very useful piece of case law, we were tempted to send the inspector a Quantum Physics paper from the University of Southampton and ask him, without help or any other guidance, to answer all nine questions completely and correctly in two hours.  For this is no less than HMRC expects of a taxpayer, it would seem, in that unrealistically, and unreasonably, HMRC expects a taxpayer to know all about every tax, something I will illustrate that not even someone advising on tax is expected to be able to do.  Which then puts this “special person” status firmly at risk, or even completely debunked.

Cannon

The commentary in the decision of Cannon TC6354 is, in my opinion, and excellent dissection of the relevant law for not only “reasonable care”, but also the meaning of “deliberate”.  It also looks at the concept of special knowledge and just how far that can be taken.  This is very relevant as Mr Cannon is a barrister who advises on Stamp Duty Land Tax.  He though sought and followed advice on his tax affairs from an adviser he believed knew what he was doing (we come back to that).  And let me make something very clear – Cannon breaks new ground.  It looks at the law as it stands.

In respect of “reasonable care” it argues that you have to look at each of the words – “reasonable” and “care”.  In tax law, certainly amongst VAT specialists, the separation of the elements of a phrase including “reasonable” is not at all a strange concept.  There the analysis fell upon the phrase “fair and reasonable”, mainly in the context of a partial exemption method.  Each element must be examined to determine that the test has been passed.

So it is, argues Judge Geraint Jones QC with “reasonable care”.

No room for subjective judgments by HMRC

And here it is also pertinent that the judge considered whether such an assessment was subjective or objective.  It is not sufficient for HMRC to assert subjectively that reasonable care has not been taken.  Nor indeed, that an act was deliberate. The judgement must be objective.  That should set alarm bells ringing in many penalty cases, whether appealed or not.  It also helps explain why we take the approach we have and will continue to do on penalties.

What is reasonable for a taxpayer to do?

In respect of what is “reasonable” for an ordinary taxpayer, like our physics teacher, to do – it is to take and implement advice received from a professional person acting as an adviser, and that will normally lead to the conclusion that the taxpayer has acted reasonably.

Negligent adviser

This is so even if the professional adviser has acted negligently, provided that the taxpayer has no reason to believe that the adviser did not know what he or she was doing.  This set of facts is not unusual in my opinion.  But HMRC argues, and indeed argued in Cannon, that a taxpayer is careless even if the negligence or carelessness is that, and only that, of the professional adviser even where that advisor is acting in a truly professional capacity.  The judge was of the opinion that this approach is wrong in law.

And once again, this is something we see and have fought on the same grounds.

What is “care”?

Having addressed “reasonable”, the judge in Cannon then examined “care”.

Now this is remarkable in that it goes back to precisely the training HMRC provided to accountants and advisers, which we were told was the same training officers and inspectors received, upon the introduction of the penalty regime.  I know, because I took that training.  More than once.  And I worked through the online packages provided by HMRC at the time.

The penalty regime is not there to penalise simple mistakes.  Indeed, I would argue that this is no more and no less than the intention of Parliament.

To quote from Cannon: –

We should also mention that the very phrase “reasonable care” indicates that the test will be satisfied, provided that the care taken is reasonable. It carries with it the implication that perfection need not be reached, and it necessarily recognises that errors might occur even when a reasonably prudent taxpayer has taken that degree of care which is requisite when dealing with the respondents. A taxpayer might genuinely and honestly misconstrue legislation; a taxpayer might inadvertently make an arithmetic error or press an inappropriate key on a computer keyboard (and fail to notice having done so); or genuinely mis-remember a salient fact. The test is not to ask whether any such error or failure would have occurred in a perfect world, because that would be to elevate the test beyond that which is applicable. The test is not to ask whether the taxpayer could have done something else which, if done, might have revealed the error unless the doing of that other task is itself something which a reasonable taxpayer ought to have done, and which, if done, would have revealed the initial error.”

Good law

Now dragging this back into the VAT world and indeed mainstream law, we already have the concept of what a reasonable taxpayer would reasonably have done, within a decision which called upon Lord Denning’s “man on the Clapham Omnibus”.

My point is simple, Judge Jones was not breaking new ground here.  This is good law and it is old law and it has already been applied in respect of the previous VAT penalty regime.

As such, as a basis of arguing cases, it is a sound footing and taxpayers and advisers should not be put off by the usual refrains from HMRC: –

  • “a Tribunal decision does not create law”. Correct, but it is persuasive as it help us to understand the law: and
  • each case turns on its own merits”. True, each case does indeed turn on its own facts, but each case will also address the law.  The facts will change, but the law does not.  This argument is also a double edged sword for HMRC.

Is HMRC “policy” a good enough reason?

Too often now we are told that something has been done because it is policy, or because that is what the officer or inspector has been told to do.

An example, here is penalties issued for failing to produce records where now officers are issuing the penalty warning at the first application for information, whereas , at least until quite recently, the application of the power relied upon a process which involved contacting the taxpayer first.  The penalty regime would only be applied in a case of lack of co-operation.  But if each case turns on its own merits, there cannot be a one size fits all approach by HMRC and the first step just cannot be a threat to impose a penalty.  As an example, we have a case where repeated penalties have been issued to a dyslexic taxpayer who was just issued the detailed letter and rights paperwork by HMRC with no attempt to establish the facts and, quite frankly, the taxpayer could not deal with it.  There is no doubt in our mind that the taxpayer’s human rights have been violated in this case – which again the Judge in Cannon has something to say about.

How the law on penalties should be interpreted

My point here is that HMRC will have difficulty is walking away from the law as interpreted in the Cannon case.  To summarise, the Judge in Cannon says

“it seems to us to be counter-intuitive to speak about a taxpayer being negligent when he has placed his affairs in the hands of an accountant or sought specific advice on a specific matter and the professional adviser has then been negligent in providing that advice.“

The Judge then looked at “deliberate” –

By contrast, a deliberate error in a tax return requires that the taxpayer knew about the error and intended to misrepresent the true position to the respondents. Nothing short of that will do, save in circumstances where a taxpayer has deliberately shut his eyes to the true factual position, sometimes referred to as “Nelsonian blindness.””.

So that is not subjective either; it requires knowledge to be proven – i.e. from the mouth of the taxpayer, and in my view does not include a “must have known” test.

The judge is clear that where such a serious allegation of deliberate conduct is made by HMRC, then the Tribunal will undertake more assiduous fact finding to ensure that the allegation being made by HMRC is sufficiently credible, relevant and cogent to warrant such an adverse finding.

Minimum standard of evidence of HMRC’s decision

I would argue that this standard of evidence is the one which HMRC must also rely upon when making such an allegation, and a mere assertion, perhaps related to the amount of the tax, or the continuity of an error is not sufficient.

The Judge in Cannon reminds us not only of the legal basis (once again the Judge does not break new ground), but also that the principle is not only well recognised, but also necessary to render a decision where such a serious allegation is made compatible with Article 6 of the European Convention on Human Rights.

Failed tax avoidance schemes – penalties

In this respect, you may also wish to have another look at what HMRC says in respect of penalties for failed tax avoidance schemes, where they seek to apply the dishonesty test, but where in reality the taxpayer is acting upon professional advice (setting aside the emotionally furore surrounding the phrase “tax avoidance”.

Correct deliberate approach

I would contend, therefore, that the approach I suggest in respect of the “deliberate” penalties is the correct one, and it is not the approach often taken by HMRC, and one which is resisted by HMRC when challenged.

Putting HMRC to Proof

Well the key to it all is that objective tests must be applied by HMRC when coming to their decisions, they must look at each element firstly, in my view, beginning at the “reasonable care” end of the spectrum, and then working up the scale toward “deliberate” or “deliberate and concealed”.  I have not tried to go into “concealed” here, as that too is contentious although suffice to say my view is clear in that following professional advice is not concealment.

HMRC must also be prepared to evidence their contention.  HMRC starting with an assertion, or an assumption, is just not good enough.  But many advisers would say that this is exactly what we see from HMRC.  For example, I personally have seen the physics teacher alleged to have “special knowledge”, which is patently incorrect, and a taxpayer appointing an accountant having carried out due diligence on that accountant who turned out to be both incompetent and a liar as to his professional qualifications being dismissed by HMRC as taking “reasonable care”.  It is clear that HMRC must be put to proof.

Grounds for complaint

And certainly in cases where HMRC say that a challenge to their decision would be seen as lack of co-operation, or else any concession given to date would be withdrawn, they should be put immediately into the HMRC complaints procedure as such coercion has no place in the penalty system and indeed may well be an abuse of power and contrary to Article 6 of the Human Rights Convention.

Vulnerable customers

Finally, whilst not part of the Cannon case, it is our view that HMRC must have proper regard to vulnerable customers before starting the penalty process.  For example, it is no good issuing pages of complicated paperwork to a dyslexic person, and expecting that person to deal with it in the same was as a director of a multinational company.

Number 42

To put what I argue in another way, the number 42 is, in The Hitchhiker’s Guide to the Galaxy by Douglas Adams, the “Answer to the Ultimate Question of Life, the Universe, and Everything”, calculated by an enormous supercomputer named Deep Thought over a period of 7.5 million years.

Unfortunately, no one knows what the question is.

Thus, to calculate the Ultimate Question, a special computer the size of a small planet was built from organic components and named “Earth”.

The similarity is that we are often asked by HMRC to have more faith in their penalty decisions than we place in the number 42.  I would contend that the Hitchhiker’s Guide contains more evidence than HMRC uses in many of the cases we see.

Penalty decisions need to be challenged to ensure that they have been properly made.

Quantum Physics

The quantum physics?  Well I do have the answer paper as well as the question paper.  Sadly, I understand the answers about as much as the average taxpayer understands the intricacies of tax law.  And that, of course, is at the heart of reasonable care as examined in the Cannon case.

As for the quote from 17 September 2015?

Analysis has been made of the number of “deliberate” penalties issued by HMRC.  It keeps increasing year on year at rates which cannot, in my view, be put down to better training, more fraudulent taxpayers, or chance.

I have heard from the mouth of an officer how HMRC looks towards penalties being issued at the outset.

I am not alone in thinking that penalties are being used as a revenue raiser by HMRC.  It may not be a diktat from the Treasury, nor even from senior management in HMRC, but many advisers feel that there are targets to be met and that meeting the targets has become the be all and end all.

One much maligned former Prime Minister talked about “outcomes” rather than “targets”.  And my suspicion is that the civil penalty system has become corrupted by targets and does not aim itself at outcomes, as indicated by the declaration by HMRC on 17 September 2015.

The system does not need reform.  It needs to be put back on track.  Perhaps this is one for The Public Accounts Committee?

Steve Botham

Brexit Phase II; Over a Barrel?

As we move into Phase II of the Brexit negotiations, both sides are scrambling to avoid being seen as being “over a barrel”.

The phrase originated in the middle of the 20th century in the United States and is thought to allude to the situation of someone being draped over a barrel, either to empty their lungs after being close to drowning, or else to be flogged! In either case, the person over the barrel is in a position of helplessness, and is certainly under the control of another party.

Whilst there seems little doubt that extremists on both sides of the argument would love to give the other side a good flogging, it seems to me that the drowning man may be more apt. But the question must be who is saving whom?
Being a cynic, I’m already sure what the politicians will tell us, but what I’m concerned with is ordinary businesses within the EU, including the UK (we have not left yet!). The way things are going, there is no doubt some of them could be left over a barrel whilst the politicians laud their respective victories.

In the microcosm of Brexit that is VAT, we have many “simplifications” for cross border supplies of goods and services. Right now, we have no solutions offered for post Brexit. Thus, for example, a French company undertaking B2B construction work in the UK faces having to obtain a UK VAT ID, charge UK VAT, and submitting UK VAT returns, all of which can currently be avoided if the UK customer is established in the UK and has a UK VAT ID. Similarly, post-Brexit a UK company working on goods in Germany would be required to have a German VAT ID, will have to submit German VAT returns and obey German VAT rules (which as things stand are different to UK VAT rules!).

These are not isolated instances – in broad terms there are dozens of VAT simplifications for both supplies of goods and supplies of services. These need to be resolved, or at least some form of certainty given to businesses as to the position as at the end of March 2019, when the UK formally leaves the EU, and then again as at 31 December 2020 when the remaining member states have said they want the transitional phase to end. I will say at this stage that I find these timetables totally unrealistic.

And these are not the only tax issues. Just to give one example. The Construction Industry Scheme is a UK direct tax withholding arrangement whereby up to 30% of the value of a construction service must be withheld by the customer – there’s more to it, but that’s for another day. Right now, it applies to all contractors working in the UK, including those from other member states of the EU.

But, the scheme cannot discriminate against businesses from other EU member states operating in the UK, and thus to get a status whereby the business in another member state can be paid in full (“gross payment status”), the UK tax authority must look at the “home” compliance record of the contractor. If the French contractor has a good record in France, then it is possible to be paid in full.

As things stand, there are no proposals to carry this arrangement forward either within the transitional phase or after 31 December 2020. This will apply equally to existing contracts and to new ones. So, in theory a business on a major UK construction project such as HS2 may suddenly find itself with not only a UK VAT registration it does not want, but also with major cash flow and administrative issues arising from the Construction Industry Scheme.
And are we really to face three different sets of criteria over a period of 21 months? The current system to 29 March 2019, the transitional system to 31 December 2020 and the fresh solution from 1 January 2021? That in terms of both tax administrations and business is absolutely crazy – I have no doubt that the tax administrations do not have the resources to manage this. Surely the politicians must grasp this nettle very early in 2018. But do they have the desire?

In the meantime, we have had a couple of pieces of interesting news in the last week or so about borders. Firstly, we understand that the French government wants the UK Government to contribute to the French costs of Brexit. Secondly, a suggestion has been made in the UK that the UK Border Force be reinforced by volunteers who would have no power of arrest or search.

Both ideas are equally crazy – for years the UK faced General De Gaulle saying “Non” as it tried to gain access to the Common Market. It would appear likely that M Macron will hear only a firm “No” to the suggestion. He must know that acceding to such a request is just not politically possible for the UK Government – so this can only be calculated mischief, something that needs to be cut out by both sides.
In the meantime, a volunteer Border Force in the UK is about as sensible a suggestion, albeit one which will receive support from an awful lot of zealots with romantic views of smugglers with barrels of brandy slung over their shoulder landing in some isolated cove in Cornwall. If those romantics check out their history they will find that then, much as now with organised cross border crime, the smugglers were not jolly chappies but armed and happy to kill or maim. Guarding borders is not a game for plucky amateurs.
My great Brexit wish for 2018 is a large dose of pragmatism amongst the negotiators and politicians (I am not stupid enough to ask for that from the British press). Without this, businesses from the UK and the rest of the EU will face incredible difficulties doing business cross border as Brexit progresses. Costs will increase. Red tape will increase. And I fear that businesses may even fail as a result.

Happy New Year!

Don’t look back in anger

I originally started this article with “It is only when you look back that you can find how far you have come.  And as we come to the end of another year, it does not hurt to look back.”
However, it did!

Looking back

I got to Brexit and quite frankly the admission by Mrs May, the UK Prime Minister, on 19 December that she and her senior ministers had formally discussed for the first time what the UK’s long-term relationship with the EU should be really made me feel that the rest of the year of grief and turmoil over Brexit had been a waste of time. Indeed, this was a shock even after another recent revelation by the UK Government that economic analyses they had boasted about and upon which they had relied did not exist.

Many people who read this newsletter are business people, business advisers and business investors. Would you run a business like this? But it does answer an important question as to Brexit.
We’ve sought clarity for a long time and now we know that there isn’t any.

We can choose to just get on with things as best we can, making our decisions on what we know, or we can join the UK Government and do nothing. Of course, if we do nothing we will soon run into trouble with our businesses, so that’s not a real choice for us. Mind you, we could improve our cash flow by playing fast and loose with our tax declaration and payments, following the example of the UK Government. Sorry – only slightly tongue in cheek, but you get the point, not least because they are wasting our money!

Looking forward

So, I have put together a wish list for 2018 which is about as substantive as the UK’s position on Brexit.

Brexit

Could we please have a trade agreement in the round by Easter?
Could we please have operational detail by September 2018?
And please could common sense prevail, and a five-year transitional period be agreed – everyone knows that two years won’t do it, so why not admit to that negotiators?

UK Taxation

Could the reduced resources of HMRC please concentrate on collecting tax from the largest avoiding taxpayers, starting with the corporates? Cracking one set of arrangements would be enough to reward the effort. Tax avoidance is legal. So is successfully stopping it. We work hard protecting businesses which are subject to tax investigations. tax dispute work is a key part of what we do, and we are good at it. But can it be right to drag a case out for two years over £40,000 from a retired small businessman in poor health with no liquid assets?

Please could we finish off the “new” IT projects, and particularly those which relate to international trade? And then make sure they work? Properly? And make sure that taxpayers can use them? Please? And don’t start any more until we’ve achieved that? Please? We all know that Information Technology can be a money pit, especially when it does not work properly, or has been superseded by the time it is implemented? And after all, the UK Government’s track record in such matters is not good.

Scrap MTD (Making Tax Digital). It is a waste of time and money for UK businesses. The timing of introduction coinciding with Brexit is appalling. And please take the new points based penalty system with it. We don’t need another set of penalties. As for the new systems – please see my earlier comments – free up some resource by at least shelving MTD.

UK Government spending

Call a moratorium on “great ideas”, particularly in the NHS and Education, and concentrate on properly funding and getting right what we have now. As a country apparently determined to get rid of “red tape”, why do we tie ourselves up in it?

I guess Brexit comes in here, but my wish to scrap Brexit in order to save £billions of wasted money, red tape and administrative hassle will fall upon deaf ears. My justification? Please see “Brexit” above. Who would commit to spending at least £50bn when they don’t know what they intend to achieve? Except a Government, of course, spending someone else’s money.

Love and peace for the world

This is a tax wish – conflict costs Governments money. Governments’ money comes from taxation. Remember, that colonies have been lost over taxation to pay for wars.
Normally this last wish would be the most outlandish. However, given the other wishes on my list, it is probably the most achievable!

And “Don’t look back in anger”? Noel Gallagher’s lyric makes more sense every day when faced with all of this.

We wish you a Happy Christmas and a Prosperous and Peaceful New Year.

Doing business differently

As a practice we have worked hard to move ourselves onto web based products so that our team can work anywhere with a decent Wi-Fi connection. We also like to think Covertax is well entrenched in 21st century values.
Our infrastructure means we all have access to video conferencing and telephone conferencing. We do not see these as a real substitute to meeting face to face, but there are times when it is a sensible solution.

Right now is one such example.

We are based in Coventry in the heart of the UK which is about to see its worst snowfall for thirty years. For those of you living outside the UK, you may wonder what the problem with a few centimetres of snow is, but we in the UK are just not set up to manage severe weather. Whilst the weather is a well know British obsession, extreme weather always seems to catch us by surprise – for example, there is no requirement or encouragement to have a set of winter tyres for our vehicles.

Accordingly, over the next few days we expect road closures, public transport disruption and also communications and power disruption.

We will continue to do business but all team members are encouraged not to put themselves or anyone else, including the emergency services, at risk. We all can and do work from home.
However, there may be some disruption to our service caused by power or communication failures, for which I am sorry.

We have added our Severe Weather Policy to our website so please feel free to read and share it.
The Severe Weather Policy include reference to team members who are vulnerable persons. We also apply it to our vulnerable clients – we do not wish to put them at risk.

Steve Botham

Why so little care from HMRC for Vulnerable Customers?

We have some vulnerable customers. We take them seriously. So much so that in the last year we have developed a ‘vulnerable customer policy‘, and now all Covertax team members have undergone enhanced DBS checks.

Why bother?

Well our view is that just like you wouldn’t put your friends and relatives in the care of someone who has not been checked, we feel that the same should be expected of professional advisers.
In some of our cases we do develop a close working relationship. We are relied upon. And we wish our clients and their advisers to be sure that they are in safe hands. Hence going that step further.

And what about HMRC?

Whilst the Government seeks to protect vulnerable customers, there is no consistent vulnerable customers policy within HMRC or indeed the Tribunal Service. We know this because we have asked in respect of our own vulnerable customers. And we accept that either the respondents correctly reported a lack of vulnerable customers policy for all their customers, or else were living in ignorance of their policy, which in some respects is worse and would indicate a serious training need within HMRC. Indeed, we feel that there is a serious training need in any event.

HMRC makes no effort in normal circumstances to identify a vulnerable customer, or indeed agent, upon first contact.
The nearest we have to an HMRC policy is some isolated comment in respect of Direct Recovery of Debts (“DRD”), whereby HMRC can help themselves to the contents of the person’s bank account. Our understanding is that this policy arose because of pressure upon the Government to ensure that DRD did not disadvantage vulnerable customers. We have not seen this extended to other vulnerable customers within HMRC’s Debt Management regime, HMRC’s general contact with its “customers” nor within the appeals process either within HMRC or the Tribunal.

Direct Recovery of Debts

As regards DRD, HMRC says “Those who are identified as vulnerable will not be considered for DRD, and will be given alternative support to help them pay the money they owe.” Briefly, this means that HMRC will take the money in any event, but not by raiding the person’s bank account.

From what we have seen, there seems little regard to the challenges vulnerable people face. For example, we have live cases where the vulnerable person has received penalties instead of help – the worst example of this is a dyslexic HMRC customer served complex notices.
HMRC has, however, set out indicators for identifying vulnerable customers, but only in respect of DRD:

Indicator A – a disability or long-term health condition

For example, a disability, mental health condition or learning difficulty that directly impacts on debtors’ ability to communicate with HMRC or to manage their HMRC affairs, meaning they are unable to understand or appreciate their indebtedness. The effects of the disability or condition may be temporary or long-term in nature.

Indicator B – a temporary illness, physical or mental health condition

For example, diagnosed with a serious illness or condition that affects them to such an extent that they are unable to understand or appreciate their indebtedness or to put their HMRC affairs in order.

Indicator C – personal issues

Issue that affect them to such an extent that they could not understand or cope by themselves.

For example:

  • becoming recently widowed
  • a family bereavement
  • being made redundant
  • a serious illness
  • caring issues
  • trauma caused by an assault
  • domestic or financial abuse

These may be issues that affect [the taxpayer] directly or someone close to them (such as an immediate family member).

Indicator D – lower levels of literacy, numeracy and/or education

For example, learning difficulties that mean they are unable to fully understand their indebtedness without advice or support.”

Action

It is our view that both HMRC and the Tribunal’s Service should have a vulnerable customers policy for all aspects of their work. This is something we will campaign for through our various professional bodies, as well as in direct contact with HMRC.
We would encourage other professional firms to follow our lead, both in respect of their own customers, but also in respect of contact with their professional bodies and contact with HMRC.

Steve Botham

 

The lunatics have taken over the asylum (Fun Boy Three, 1981)

The original remark is attributed to Richard A. Rowland about the founding of United Artists. It is now commonly used to describe a situation in which those in charge are incapable of handling their responsibilities, and should rather be put under scrutiny themselves.

Fun Boy Three sung a protest song about the action of the Government at the time and the song has real echoes today some 36 years later.  But here I am writing about the crazy way in which the UK’s taxation civil penalty regime is now being applied.

In a widely reported VAT case, a business failed to reclaim input tax to which it was entitled on a VAT return and made the claim on a subsequent return.  To be clear, the business was out of pocket for a while, and the taxman was therefore better off.

However, the business failed to follow the VAT voluntary disclosure rules and just reclaimed what it was owed.  HMRC disallowed that claim to input tax, and then applied a penalty because of the careless error of overclaiming input tax on that specific return.

Really!  I’m not making it up.

There is a very good quote about VAT from Lord Justice Sedley in Royal & Sun Alliance (2003): –

“Beyond the everyday world … lies the world of VAT; a kind of fiscal theme park in which factual and legal realities are suspended or inverted.”

But don’t blame VAT, as we’ve now seen our first CIS case where tax is owed to the taxpayer, but upon which penalties running well into five figures have been levied for the administrative errors.

Now, before you get your pen out to write to your local MP, Horrified of Tunbridge Wells, technically HMRC can do this.  They did say they would not when the penalty regime was first introduced, and it was certainly not the intention of the Keith Committee when it considered how to improve VAT compliance all those years ago.  And there lies another tale.

They say that the then Prime Minister, Mrs Thatcher, was horrified by the press coverage reporting the alleged misbehaviour of Customs & Excise VAT officers.  This was doing her Government no good at all, so she asked her civil servants to get “Keith” to sort it out.  And accordingly, they appointed Lord Keith to commit his review, which instead of curbing the powers of Customs & Excise VAT officers, strengthened them.  Word has it that the civil servants appointed the wrong “Keith” – Mrs Thatcher, so they say, wanted her right-hand man Keith Joseph to do the job.  And that is the genesis of the current civil penalty regime for all taxes – a careless error.

So, all this is very interesting (for a tax consultant), but where does it leave us.  Well the first thing to say is to review your compliance procedures as soon as possible.  Get it right. Indeed, that was what Lord Joseph sought from the civil penalty regime – the right tax at the right time.  For example, when dealing with late input tax on VAT returns, we now mark those entries up, check whether they fall below the de minimis limit for adjustment on returns, and if so mark up the entries with “VD” for voluntary disclosure.  If not, we make sure that separate voluntary disclosures are made to reclaim tax to which our clients are entitled.

Crazy?  Maybe Lord Sedley was absolutely right.

And when we are faced with a penalty case on behalf of a client, after establishing the facts (which sometimes help us, but are always needed), we are left with taking a legalistic approach: –

  • Did HMRC properly consider whether the taxpayer had taken reasonable care? 
  • What evidence is there of reasonable care having been taken (effectively, a “compliance audit”?).
  • Did the taxpayer believe that his or her advisers knew what they were doing? 
  • Does the taxpayer have any “special knowledge”, meaning a higher threshold to show reasonable care?  And has HMRC used an arbitrary threshold?
  • Has HMRC applied discretion where the law provides for it?
  • Are the penalties capable of being suspended? 
  • Why wasn’t suspension offered by HMRC? 
  • And even whether the assessment as to penalty has been properly made and in time?

In the meantime, I now need to start ferreting my way through Hansard to establish Parliament’s intention.

Now there is an asylum!

Steve Botham