Ding Dong
Blogger
Share this content
0
51
15076

Very difficult situation

Very difficult situation

In summary, a potential client has approached me as they think they have a problem. I feel genuinely sorry for them as it appears to be a completely honest mistake howevr it is potentially going to send them under.

Basically, they have been contacted by HMRC under the VAT disclosure initiative but they ignored the letter as "it doesn't apply to us" and put it in with all their papers and I found it when rummaging through.

When I saw them yesterday it was ther and on going through it appears they should have registered for VAT as they are "just" over the threshold. The issue arises that on going back over the last two years of their records they should have registered in 2008 when in one rolling 12 month period income was some £75k, way over the limit at the time. This it would appear was not spotted as it was the year they changed their company year end to 31 March to be in line with the tax year. Their previous advisor failed to spot this.

After this period in 2008 their income did drop below the limit for a while and accounts for 2009 show they are under so I suppose it never raised it's head again.

Having looked at their records I estimate they should have registered in 2008 and after allowing for input tax deductions their net liability to HMRC will be some £25k. Obviously they were a tad upset when I pointed this out.

As a company they do not make a great deal, each director shareholder earns £20k out of the business and they operate hand to mouth like a lot of small clients do. Personally they do not have a lot, one lives in council rented and one in a small house( value £170k) with 2 kids and a decent mortgage - you probably have clients like this.

They have said they have to obviously disclose the error (which meant I didn't have to walk away from th emeeting and end the relationship there) and asked how long they would get to pay it back - I said that in the current climate HMRC would accept a plan and they reckon they could afford £100/week - so £5k pa which means HMRC would not get all the money for 5 years. They are going to tell HMRC and see what happens as they accept they owe the money.

I have left it with them that I will take further advice before doing anything or deciding to accept the appointment but they are a friend of friend so I don't want to leave them in the lurch. They are scared of going bankrupt for not being able to payup - I pointed out it was the company that would go bankrupt not them if they couldn't pay but that was not a great consoloation.

Before I take further professional advice, and one meeting I will be having is with an IP as basically this will put the company insolvent to the tune of this vat debt as they have no money in the bank, no assets (2 vans worth £500 each), have any readers had clients make declarations under this initiative and if so have HMRC indicated how long they might get to pay back the money.

Also, should this have been spotted by their previous advisor - he didn't prepare the accs for them he merely advised on the errors in the sets they produced themselves using downloaded templates - he didn't have a great deal of input but optentially could have spotted this.

As you can imagine I in two minds as to what to do next - run is the first one as I doubt it will earn me any money but as I said earlier they are a friend of a friend so I want to do the right thing - if that is run then I will

Thoughts welcome

Replies

Please login or register to join the discussion.

21st Aug 2011 15:23

Couple of thoughts

Firstly, with regard to your involvement, it might be one of those cases where, once you've decided that helping them is what you should do or what you want to do, then the fees are secondary, ie look at it as mainly pro-bono with perhaps the possibility of referral or just plain goodwill for the future.

I think you've covered most of the angles however, in a case I dealt with recently HMRC used the flat rate scheme to calculate the liability, for the period they remained over the limit, which actually worked out better than full VAT.  This was automatic, ie we didn't ask them to do it. I also got into a discussion with HMRC about the fact that, at the time, as there was a distinctive one off job that had taken them over and that they then fell below the de-registration limit for 2 years, had they registered they would have applied to be excused because the turnover was clearly going to drop down again.

I have to be honest this was a long shot and, if nothing else, was in an attempt to avoid or mitigate the late registration penalty.  The VAT office did not blow this out the water but went back to the figures and pointed out that they stayed over the limit for 13 months, whereas to be excused they would have had to drop below within 12 months.  Anyway may be pointless but, depending on the exact numbers and that they fell below the deregistration (not registration) limit, might be worth a go?

At a professional level, I think that spotting a VAT registration problem is something you'd expect from an accountant (bit like looking at a company with a load of company cars but no P11Ds) but, unless there was a written or implied requirement then I doubt you'd get anywhere with a professional complaint or court action.  In reality, and after the horse has bolted, more a case that this was always the risk of not getting an accountant more involved in their affairs.

Good luck and certainly an IP would be my next port of call, as best to know what the worst case is.

 

Thanks (1)
21st Aug 2011 15:42

Realistic

Let me get this right - they went over the registration limit for a short period in 2008 then fell back under it again right through 2009.

First you need to look at 2008 on a monthly basis, if it was a "one off" event taking them over the limit for that year you have a good argument that it was exceptional circumstances and there was no need to register as turnover was not expected to continue above the threshold - as confirmed by the 2009 results.

Presumably accounts for 2008 were submitted showing annual turnover above the threshold, so there is an argument that HMRC had a duty to point this out and have had 2+ years to do so. In other words push much of the blame onto HMRC. 

The pragmatic approach would be to develop a touch of amnesia, tell then to register from 2010 onwards, and with any luck 2008 will never raise it's head. I would also discuss this with them over a pint in the local pub - ie not in the course of your work.  

 

Thanks (1)
avatar
By BKD
AnonymousUser
21st Aug 2011 17:15

HMRC are not to blame

It is the taxpayer's responsibility to determine if and when he should register, and his alone.

There are plenty of reasons why a business's turnover could be over the limit without there being a need to register. I had a client in exactly that position - HMRC wrote to her saying that according to their records she ought to be registered - oblivious to the fact (not their fault) that the majority of her supplies were to overseas (non-EU) recipients and therefore outside the scope. Presumably had that been your client you would have accused HMRC of needlessly bothering her?

I agree that it would do no harm to ask HMRC to reconsider the obligation to register if the limit were breached temporarily. However, HMRC are pretty inflexible on this point - it is clear that it is the taxpayer's responsibility to notify liability to register and then ask for exemption. Bearing in mind that the exemption is entirely at HMRC's discretiion, it is very rare that they will backdate such a request. I've seen it once, but there were a number of extenuating circumstances.

I think the OP needs to consider their MLR position in all of this. 'Talking about it in the pub' doesn't get them off the hook - they are already aware of the apparent default and that knowledge has been acquired via their business.

Thanks (2)
avatar
21st Aug 2011 18:13

Thanks so far!

Going through the responses and answering and adding a bit more;

@Paul - Just revisted on the flat rate, would bring them down to approx £20k liability so worth disussing - thanks.

It was not just a one off, I have looked at their rolling monthly t/over from 2008 and they were over and then for an 11 month period dropped under but went over again in 2009.

@Daffy - all accounts submitted showed turnover under the threshold so at no point did it rear it's head as balatantly obvious, the change of period end covered the increase with a short period (which was £47k t/over in 6mths so perhaps should have been spotted??

Pub is not an option i'm afraid on this one, and the guys in question are honest guys who have said that they will hold their hands up and "confess" as they see that they have messed up in a significant way. I think my MLR position is clear that if they doe "fess up" then no loss has occurred.The next matter is that of what to do next, hence the potential IP discussion.

oh, and as I write this we have just taken another wicket - Laxman is gone!

 

 

Thanks (0)
avatar
By Tosie
21st Aug 2011 18:23

If they have no money or assets and owe hmrc they are insolvent and should not be trading.

You are wasting your effort with this one, look to getting a new company and get things correct from the outset.

Let HMRC wind the company up no IP will be interested if there is no money in company.

Thanks (1)
21st Aug 2011 18:41

New start

Either way HMRC aren't going to get their money.

There is no chance of HMRC giving them 5 years to pay.

I wouldnt bother HMRC with it until the company has been wound up. Just close it down as insolvent including a creditor for the VAT and start a nice shiny new company. I certainly wouldnt lose any sleep over HMRC losing out, after all they are quite happy to allow "the big boys" to do this sort of thing all the time. When it comes to morals HMRC have none, so why should taxpayers have any?  It's legal, so do it.

 

Thanks (1)
21st Aug 2011 19:26

MLR (not)

It seems to me that the failure to register on time has not been dishonest (which would require a deliberate failure) but has been accidental.

So the original accidental failures do not trigger an MLR reporting requirement.

A 'cover up' now however would be deliberate and dishonest (and would trigger an obligation to report) but it does not appear that a 'cover up' is proposed.

So I do not see a need to report this under MLR 2007 / s330 PoCA 2002.

David

Thanks (2)
avatar
By PennyC
fcamba
21st Aug 2011 21:00

As always, David

davidwinch wrote:

It seems to me that the failure to register on time has not been dishonest (which would require a deliberate failure) but has been accidental.

So the original accidental failures do not trigger an MLR reporting requirement.

A 'cover up' now however would be deliberate and dishonest (and would trigger an obligation to report) but it does not appear that a 'cover up' is proposed.

So I do not see a need to report this under MLR 2007 / s330 PoCA 2002.

David

 

Thank you for your valuable expert legal opinion on such matters

Thanks (1)
avatar
By Flash Gordon
21st Aug 2011 20:37

Against a new start

I may be a lone voice but I'd disagree with Daffy's suggestion of doing HMRC out of the money. They may have no morals & yes plenty of folk will do that but it's not right and at the end of the day it's not just HMRC losing out but the general public. HMRC are just the collectors, we're the ones who benefit by them collecting tax, and likewise lose out (in the form of higher taxes, lower pensions and so forth) when someone pays less than they should. This client sounds like a decent sort who is willing, and expects, to do the right thing so I'd suggest trying to reach agreement with HMRC on time to pay (and talking to an IP)....

 

I'll now get my head down ready to take the flack!

Thanks (2)
21st Aug 2011 22:35

OK - here comes the flack

Flash Gordon "I'll now get my head down ready to take the flack! "

 

Do you think HMRC will agree to 5 years? Not a snowballs chance in hell. And I think your argument about cost to the taxpayer is short sighted too.

HMRC will demand that they obtain a loan (probably backed by personal guarantees), or dip into the equity on any property. They will also try every means possible to get the directors to personally guarantee repayments. All of which means the business goes belly up and the directors get stitched up for £25k.

Alternatively they try to pay, can't, get wound up, and end up on the dole at what cost to the taxpayer ?  More than £25k I guarantee.

It isn't our job to lecture clients on morals or what we might think is right or wrong - thats the job of the vicar.  Our job is to advise clients on the most financially beneficial legal course of action for them, not the taxman.  

Once we set ourselves up as moral guides we are ceasing to act professionally and really shouldnt be doing the job at all. After all "morally" we might be opposed to wars in Iraq & Afghanistan - do we advise our clients to withhold their taxes rather than pay for them? There's a hell of a lot of government spending that I am "morally" opposed to but I still have to pay my taxes unfortunately.

There is a way they can walk away from this without much cost, it's legal, and morals have nothing to do with it.

 

Thanks (2)
avatar
By Flash Gordon
22nd Aug 2011 07:48

Differences of opinion are fine

I'm fine for you to disagree with me Daffy and yes we can't (and shouldn't) always take morals into account but I'm of the belief and always will be that if you're supposed to pay tax (and this client should have been paying vat but through an error didn't) then you pay it. Otherwise there's nothing to stop everyone from saying 'I'll pretend I didn't know so I can avoid paying' and there where will we be? Legal doesn't mean it's right.

For me some things in life are black and white with a lack of grey. This is one of them. So I'll respect your viewpoint but just disagree with it. That way everyone's happy...

Thanks (2)
avatar
22nd Aug 2011 09:22

Might not be a bad as you think

I had a similar case not long ago where I thought my client may be done for however HMRC surprisingly agreed to only seek the VAT on the period where the business traded above the registration threshold.

I thought the fact that a de-registration can't be backdated would have snookered them but it seems in this case it was simply ignored.

How long did your client fall into this bracket?

 

Thanks (0)
avatar
22nd Aug 2011 10:01

What is the customer base

Any chase of VAT only invoicing to customers who would be able to recover the VAt in any case.

A long shot I know but does happen and although increasing the liability reduces the amount to be funded by your client personally.

Thanks (0)
avatar
22nd Aug 2011 10:07

VAT only invoices

Might it be an option to raise VAT only invoices on the original customers if they are VAT registered they can claim the VAT back as input tax

This actually happened in a company I worked for a few years back and the customers paid and reclaimed the VAT back from HMR&C

Polly

 

 

Thanks (0)
22nd Aug 2011 10:29

Flash
 Flash Gordon

"For me some things in life are black and white with a lack of grey. This is one of them. So I'll respect your viewpoint but just disagree with it. That way everyone's happy.".. 

 

 

I wouldn't necessarily disgree, IF HMRC were reasonable and likely to accept that the taxpayer made a genuine mistake and IF they then allowed him to pay it over a reasonable and affordable timescale.

 

Unfortunately that will not be the case.

HMRC policy seems to be to demand payment in full within a year or face bankruptcy. They also sem to have great difficulty in understanding the concept of simple mistakes by taxpayers, quite ironic really from an organisation constantly having to admit to  "errors" (incompetence) of it's own.

This case will go only one way - HMRC demand unrealistic payments, client cant pay, HMRC bankrupt company.  The difference is that by taking HMRC out of the driving seat, you ensure that the directors dont get stuck with personal guarantees etc.

 

 

 

Thanks (1)
22nd Aug 2011 10:50

£20K liability?

Just confirming what Roland said above, in the case I mentioned HMRC also only applied the FRS to the 13 month period they went over, not sure if your 20K is based on that or the past 3 years?

Thanks (0)
avatar
By Monsoon
22nd Aug 2011 11:20

My 2p

I agree that the company should see if it can pay the tax first.

However, if the VAT bill is going to cripple the company, by virtue of the bill itself, or HMRC's reluctance to agree to reasonable payment terms, the company would have a legitimate commercial reason for ceasing to trade. If it will make the company insolvent, then the company has to cease to trade. In either of these cases, I don't see a moral issue with closing the company and opening a new one, as long as everything is done properly.

Edit: The choice is of course the client's. I think the responsible thing to do is to advise the various courses of action and let them decide. It's not up to us as advisers to only tell them they have to pay the tax, or only tell them they have to close the company. We have to give the client an informed choice.

Thanks (2)
avatar
By Old Greying Accountant
22nd Aug 2011 11:35

The problem is ...

... once HMRC are aware, I find these days they will watch any "phoenix" venture like a hawk.

I had one client that was a "phoenix" purely because having agreed a schedule for unpaid PAYE, HMRC reneged and demanded immediate payment in full so the company folded and HMRC got squat all, but, when registering the new company they had to jump through hoops and if the PAYE was a day late the collector was knocking on the door!

Thanks (0)
avatar
By Flash Gordon
22nd Aug 2011 11:35

If you don't ask

If you don't give HMRC the chance to agree a decent payment term then you'll never know what might have been. I agree they're not always the most generous or indeed logical of people but there have to be some, by the law of averages, that employ a few brain cells and can see that a small amount regularly over an extended period is better than bugger all in any time scale.

Ask the question and if you get shot down in flames then potentially cessation is the only option as Monsoon points out. If you have to close through insolvency then yes there aren't any morals involved because there's no choice to make. But hey maybe just maybe HMRC will turn round and say 'yes 5 years is acceptable given the circumstances which you've fully informed us about' and then everyone can have a clear conscience.

 

ps The advantages of taking the moral high ground - a great view, no risk of flooding and the steep climb puts off unwanted visitors :)

 

Thanks (2)
avatar
22nd Aug 2011 14:38

thanks v much all

Thanks for all the valued responses

 

David – as always your technical input is very well received

 

To others – having gone over it all again (the figures) whichever way it is looked at it is £20k+penalties so even on Flat rate and de-registering for when under the limit they are insolvent.

 

90% of their income is from the public so re-issuing invoices is not an option – can’t think many people will want to pay up VAT from 2/3 years ago!

 

I have to confess to never having been in this situation where I now need to advise a client they are in a position where they might have cease trading and start again. Are they allowed to purchase the vans at MV? Should they notify HMRC they are going to go under? The only insolvency case I have had the (dis)pleasure of dealing with went straight to an IP.

 

They have indicated that they might start up as a partnership so HMRC would not be able to stop the company registering for PAYE etc

 

It seems to me they either a) Tell HMRC they should register for VAT, make the declaration and then let HMRC bankrupt them or b) go under now.

 

As I said above I have never had this case before so any “tips” would be very welcome – including how to deal with the inevitable HMRC aggressiveness once the company files thr papers.

 

The big concern is immediate, they are at this point insolvent to the tune of £20k+, so should they cease immediately?

 

Also, as they have previously been taking salary and dividends are there any other implications at this stage? 

Thanks (0)
avatar
By Monsoon
22nd Aug 2011 14:49

From experience

Hi Dingdong,

I've had a few of these, none of which have gone through to conclusion in the old companies yet, but for whom the new companies are trading quite happily and with little HMRC hassle. I've not seen PAYE or VAT being declined for the new company - but then that gets applied for first, as the new company gets formed ASAP. Yes, if it is insolvent, it must cease to trade straight away, unless they think they can trade out of it.

I don't recommend a partnership without limited liability for obvious reasons (look what would have happened has this been an ordinary partnership, plus the tax savings).

In cases where it's cut and dried and the client knows what they want I will get payment up front and form NewCo ASAP.

NewCo buys assets from OldCo at current market (fire sale) value and pays the money over to OldCo.

A liquidator will cost about £5k. There is no complusion to use one unless a creditor petitions for winding up.

The only tricky situation is if the DLA is overdrawn - but dividends declared from profit they genuinely thought they had before the VAT reclaculations should stand.

The simplest (and tried and tested) way of proceeding is this:

OldCo writes to its creditors to state that it is insolvent and has ceased trading. Words to the effect of "There are no assets (or, we intend to distribute remaining small assets proportionally amongst all creditors) and we invite you to wind up the company. If no-one petitions to wind it up, we will apply for voluntary strike off at Companies House using DS01 and you will be notified of this in accordance with the Companies Act."

Then sit back and wait.

After 3 months, DS01 can be filed if nothing has happened.

Some people will write to HMRC straight away; others will wait for creditors to contact them. How you wish to proceed is of course up to you and your clients and down to the details of the case.

If you wish to dicuss via PM, I would be happy to help.

 

 

Thanks (0)
22nd Aug 2011 15:46

-

I would go along with monsoon,

Personally I wouldnt bother making any special attempt to notify HMRC.

Thanks (1)
22nd Aug 2011 16:55

Professional advice

There seems to be a bit of a parting of the ways here on the advice to give.

A few months back there was an outcry because HMRC did not have the facilities to keep track of all the companies being struck off and so, in theory, individuals were getting away with millions (if not billions) in undeclared profits and tax. 

Now you can treat this is an opportunity and so tell any struggling clients (or any cliants that just don't want to pay any tax) not to submit accounts or annual returns and The Registrar will make the problem go away when they strike off the company OR you can help them comply with law and regulation regardless of whether HMRC are firing on all cylinders.

Personally, I've spent years learning and keeping up to date with law & practice and charge my clients for that expertise and it's an anathema to me to think of advising them to do something because they will probably get away with it. 

It's often forgotten that, in Law, once a director is aware the company is insolvent their prime responsibility is to the wellbeing of the creditors and, in this case I would suggest that this is even more the case if the major creditor, HMRC, don't currently know they are a creditor.

So for this reason and the ML point above I don't think there is any reasonable alternative but to inform HMRC of the lack of registration, potential liability and consequent insolvency and following Monsoon's steps above.

If any asssts are transferred to a new company make sure that the market value is sound.  With regard to safety of past salaries & dividends, again, if they acted properly and there's no hint they have overdrawn dividends to compound the insolvency, before the VAT discovery, then they should be OK.

Thanks (2)
avatar
By Monsoon
22nd Aug 2011 17:36

Wellbeing of creditors

Thanks Paul, agreed the wellbeing of creditors is indeed now the primary responsibility of the directors.

My little devil's advocate brain says letting HMRC know isn't really going to advantage them any - if there ain't no money, there ain't no money!

Professionally though, I agree that in this instance where the situation has been discovered, the right thing to do is to contact HMRC about the discovery. It won't help them any, but if the official receiver, or a liquidator gets involved, it will show the directors were doing their best in the siruation, which can only be a good thing. From what Dingdong has said of the directors, it sounds like they are those sort of people anyway.

 

Thanks (0)
avatar
22nd Aug 2011 18:06

Just to add another angle

If back in 2008 the directors had anticipated that their turnover would fall the following year ( as it in fact did), do they have a case for not registering at that point?

They could then register from the more recent date when they went over.

Just a thought.

 

Thanks (0)
avatar
By BKD
mrkisnon
22nd Aug 2011 20:12

Not registering

zarathustra wrote:

If back in 2008 the directors had anticipated that their turnover would fall the following year ( as it in fact did), do they have a case for not registering at that point?

They could then register from the more recent date when they went over.

Just a thought.

 

Yes, but - the taxpayer still has an obligation to notify HMRC as soon as they are liable to register. It is then up to HMRC to apply their discretion and exempt the taxpayer from registration based on predicted future turnover. As already stated, such decisions are rarely backdated - though it has happened.

Thanks (0)
23rd Aug 2011 08:38

Quote

To quote HMRC - "You are liabile to register if at the end of any month, the value of your taxable supplies in the previous 12 months or less, is over the registration threshold (unless you expect that the value of your taxable supplies in the next 12 months will not exceed the deregistration threshold), 

 

So in fact it is not "up to HMRC to apply their discretion and exempt the taxpayer from registration based on predicted future turnover" .

  -

 

Thanks (1)
avatar
By BKD
AnonymousUser
23rd Aug 2011 09:56

Another quote

To quote the legislation, which I would prefer to rely upon rather than anything HMRC say in their guidance:

"A person does not become liable to be registered by virtue of sub-paragraph (1)(a) or (2)(a) above if the Commissioners are satisfied that the value of his taxable supplies in the period of one year beginning at the time at which, apart from this sub-paragraph, he would become liable to be registered will not exceed £71,000."

In other words,HMRC have to be satisfied as to the value of supplies - if they're not, they don't have to exempt the taxpayer from registration. As noted above, in practice they will rarely deny the exemption (which might explain HMRC's wording) but, legally, they do have the discretion.

But since you're interested in quoting HMRC, how about this one:

 

"If you've gone over the threshold for registration temporarily

You can apply for exception from registration if:

you have to register for VAT because the value of your taxable supplies in the previous 12 months has exceeded the registration threshold of £73,000 (including the value of supplies made by a VAT-registered business that you have taken over)you can demonstrate to HMRC that in the longer term you will only be trading below the de-registration threshold of £71,000

You can ask HMRC if they can make an exception, and allow you not to register for VAT, by filling in a VAT registration form, stating why you are applying for an exception.

If HMRC agrees to make an exception and allow you not to register this time, you must let them know of any relevant change in circumstances - for example, if your turnover goes over the threshold again."

If HMRC does not agree to make an exception, you will become registered for VAT from the day you should have been registered. You will need to account for VAT from that date."

Seems pretty discretionary to me.

Thanks (1)
avatar
By DMGbus
23rd Aug 2011 09:00

HMRC internal guidance

HMRC DO have the power to grant retrospectively agreement to exception to registration based on a temporary blip (increase) in turnover expected to be followed by a decrease below the registration limit.

In any case where HMRC choose NOT to apply this power the question should be asked "why in other cases have you allowed this, but not in this case?  It looks rather like discrimnatory treatment".

6.5.3 Retrospective applications

Schedule 1, paragraph 1(3) gives the Commissioners discretion to allow

requests for retrospective exception. It is important to consider each case on

the basis of reasonableness.

For example:

If you receive an application for retrospective exception containing information

which would have been available at that time and would have led you to grant

exception from registration at the earlier date, then it would be reasonable to

allow retrospection now.

This was confirmed by the tribunal case of Nash and Nash – MAN/96/1332

which held that only factors which are evident at the time that registration

should have taken place should be taken into account.

Thanks (0)
23rd Aug 2011 10:32

Guidance

BKD - "To quote the legislation, which I would prefer to rely upon rather than anything HMRC say in their guidance:.........Seems pretty discretionary to me. "

 

Once HMRC is notified of potential liability to register then they have discretionary powers, however, the point is that if "you expect that the value of your taxable supplies in the next 12 months will not exceed the deregistration threshold", there is no requirement to notify them of temporarily exceeding the registration threshold.

The discretion not to notify them lies with the taxpayer in the above circumstances.

As regards "law" v "guidance", the courts have repeatedly ruled that taxpayers & their representatives are legally entitled to rely upon HMRC guidance "as if it were the law".

Thanks (1)
avatar
By BKD
verasage
23rd Aug 2011 12:07

Selective quotation

Daffy Duck wrote:

Once HMRC is notified of potential liability to register then they have discretionary powers, however, the point is that if "you expect that the value of your taxable supplies in the next 12 months will not exceed the deregistration threshold", there is no requirement to notify them of temporarily exceeding the registration threshold.

The discretion not to notify them lies with the taxpayer in the above circumstances.

Completely wrong. I have assumed that your quote is from para 2.3 VAT Notice 700/1. If so, you should also have referred to paragraph 2.7 to which the above quote goes on to direct the reader (it actually refers to para 2.3, which is obviously a typo):

"If at the end of any month the value of your taxable supplies for the last 12 months has gone over the registration threshold, but you can provide evidence and explain why the value of your taxable supplies will not go over the deregistration threshold in the next 12 months, then you may not have to register, unless you are otherwise required to do so because of the level of your distance sales or acquisitions. This is called exception from registration.

You must still tell our VAT Registration Service that you have reached the threshold within 30 days of the end of that month, but you will not have to fill in any forms; unless you are refused exception from registration.

If you are granted exception from registration you do not become immune from a later liability to register for the supplies you continue to make. You should continue to monitor the value of your taxable supplies on a monthly basis to determine if a further liability arises. The granting of exception does not create a cut-off date which means you must continue to include ‘pre-exception’ turnover in your calculations. If a further liability arises you will have to apply again for exception, if appropriate.

If your application for exception in not accepted by HMRC you will be registered for VAT from the day you were otherwise liable to be registered (see paragraph 3.3) and you will need to account for VAT from that date. Therefore any application should be submitted as early as possible with a full explanation to enable HMRC to reach a decision in good time."

The taxpayer has no discretion as regards notifying HMRC when they have breached the threshold, temporarily or otherwise, and I hope that you have not been mis-advising your clients.

Thanks (2)
23rd Aug 2011 11:18

Clarification please

As regards "law" v "guidance", the courts have repeatedly ruled that taxpayers & their representatives are legally entitled to rely upon HMRC guidance "as if it were the law". 

I have heard (at various times) the exact opposite, in that legislation takes precedence over HMRC guidance. HMRC themselves have, at times, wanted to ignore legislation (see link below).

As this can have far-reaching implications, and can affect the advice we give to clients (ie. HMRC guidance v legislation), is it possible for you to provide more information, please.

Can both opinions be right, or is it a case of choose which scenario helps the client best and then use those examples as a precedence?

http://www.accountingweb.co.uk/topic/tax/hmrc-reasonable-excuse-definition-under-fire/515383

Thanks (1)
avatar
By DMGbus
23rd Aug 2011 12:49

Retrospective request for exception - HMRC internal guidance

27.2 Considering retrospective requests

Requests for retrospective exception should be considered on the basis of information that would have been available at the time a liability to register first arose.

If you are not satisfied, on the basis of the information to hand at that time, then the request is not to be allowed.

Issue specimen letter at paragraph 27.3. 

===========================================

Therefore advice NOW is to produce evidence (if it can be found) that at the time the registration threshold was exceeded there was information to hand to show future turnover would be below the registration threhold.

 

Thanks (1)
23rd Aug 2011 12:58

@daffy

I have a similar situation currently. We have just received records for a non-VAT Reg client who exceeded VAT threshhold on his rolling 12 month turnover.

This involves 2 consecutive months (Oct & Nov of 2010), due to obtaining an unusually large contract, and the following months reverted to his 'normal' sales which should keep him below the dereg threshhold.

It would save us (and our client) a great deal of trouble (and possible penalties) by NOT informing HMRC, so I would appreciate any information that will back up/justify your advice. Much as I would enjoy it, I cannot use the excuse that 'Daffy Duck said so!'. ;)

Thanks (1)
23rd Aug 2011 14:03

Shirley
Where HMRC issues "guidance" the taxpayer has a legitimate expectation for it to be correct.  B&J Shopfitting Services v HMRC (First Tier Tribunal) http://tax.uk.ey.com/UKTaxLibrary/Case+law/2010/BJ+Shopfitting+Services+v+HMRC+First+Tier+Tribunal.htm   

In the case of N A Dudley Electrical Contractors Ltd v R&C Commrs [2011] (“Dudley”), the Tribunal explicitly rejected HMRC’s formulation of the “reasonable excuse” defence, saying:

HMRC argues that a “reasonable excuse” must be some exceptional circumstance which prevented timeous filing. That, as a matter of law, is wrong. Parliament has provided that the penalty will not be due if an appellant can show that it has a “reasonable excuse”. If Parliament had intended to say that the penalty would not be due only in exceptional circumstances, it would have said so in those terms. The phrase “reasonable excuse” uses ordinary English words in everyday usage which must be given their plain and ordinary meaning.’

I too consider that HMRC’s formulation of the ‘reasonable excuse’ defence is too narrow and reflects neither the normal and natural meaning of the term (per Dudley), nor the earlier dicta of this Tribunal quoted above.” 

 Therefore in the OP's case - There was no requirement per HMRCs own guidlines to register or even inform HMRC.The reliance upon HMRCs guidelines, which the taxpayer can legitimately expect to be correct, DOES give a "reasonable excuse".

____________________________________________________________________

As regards BKD's claims that my comment is "absolutely wrong" - perhaps a deeper knowledge of precedents set by the courts & tribunals would assist.

The accusation that I have been "misadvising my clients" is offensive and I expect BKD to immediately and unreservedly withdraw such an offensive, indeed almost libelous, accusation.

 

   

Thanks (2)
avatar
By BKD
dahowlett
23rd Aug 2011 15:09

What are you trying to say?

Daffy Duck wrote:

Where HMRC issues "guidance" the taxpayer has a legitimate expectation for it to be correct.  

 

OK, I'll accept that - but the [complete] guidance that you cited quite clearly states that the taxpayer must notify HMRC when they go above the threshold. So if that guidance is correct then the taxpayer must notify.

Or are you trying to convince us that the taxpayer may, as you have done, rely on only those parts of the guidance that suit him and ignore those that do not, despite clearly being required to be read together. The taxpayer might have a reasonable excuse that the guidance was not clear and/or that, as you seem to have done, did not fully read or understand it. So a court may well decide in a particular case that he had reasonable excuse in failing to notify if the guidance/legislation was unclear. But that does not alter the fact that both the legislation and HMRC guidance require notification - as is the case here.

 

So, in citing a decision that the taxpayer is entitled to "rely on HMRC's guidance as a correct statement of the law", where the guidance in this case is unambiguous and totally in accordance with the law, you've kind of blown your own argument out of the water.

Daffy Duck wrote:

As regards BKD's claims that my comment is "absolutely wrong" - perhaps a deeper knowledge of precedents set by the courts & tribunals would assist.

The accusation that I have been "misadvising my clients" is offensive and I expect BKD to immediately and unreservedly withdraw such an offensive, indeed almost libelous, accusation.

 

For the reasons above, I consider your view, to the extent that it relies on HMRC's guidance, to be wrong - the guidance could not be clearer. You may argue otherwise but that is my opinion. I made no such accusation that you have been misadvising your clients, what I actually said was that I hoped that you haven't. If that has been misconstrued as offensive then I do apologise but I will not withdraw it.

Thanks (2)
23rd Aug 2011 15:00

Thank you Daffy

But that tribunal case just repeats my previous observation that HMRC were not allowed to give precedence to their own guidance, and had to comply with the legislation.

You quoted the opposing view, and that is the one that would help me & my client, ie. can you please give me links to judgements where a tax payer was allowed to give precedence to HMRC guidance, which overruled legislation.

Thanks (1)
avatar
By BKD
23rd Aug 2011 15:15

@Shirley

B&J Shopfitting did just that. HMRC's guidance was wrong, the legislation was correct and penalties ought to have been charged. But taxpayer was allowed to rely on HMRC's erroneous guidance.

 

But that case is distinguised from the current discussion - here, HMRC's guidance is in full accordance with the law, so there is no question of one overruling the other. Both are quite clear, the taxpayer has an obligation to notify HMRC of his liability to register. It is up to HMRC to decide whethr or not to grant exception - retrospectively or otherwise.

Thanks (2)
23rd Aug 2011 15:36

Thanks BKD

.... not the answer I was hoping for ... but that's life I suppose.

My apologies for the mix-up, Daffy. When I saw 'reasonable excuse' I thought it was one of the cases my link pointed to.

Thanks (0)
23rd Aug 2011 15:43

It is YOU that is selectively picking sections that suit

 

HMRC's guidance notes at s2.3 http://customs.hmrc.gov.uk/channelsPortalWebApp/channelsPortalWebApp.portal?_nfpb=true&_pageLabel=pageExcise_ShowContent&id=HMCE_CL_000086&propertyType=document#P132_11266   clearly state - "you are liable to register if ...................a). at the end of any month, the value of your taxable supplies in the previous 12 months or less, is over the registration threshold (unless you expect that the value of your taxable supplies in the next 12 months will not exceed the deregistration threshold (see paragraph 2.3);

 

That is totally unambiguous and clear - Despite exceeding the registration threshold at the end of a particular month there is NO requirement to register if you expect that the value of your taxable supplies in the next 12 months will not exceed the deregistration threshold.

 

That cannot be misinterpreted or misunderstood, it is clear, and is demonstrably intended to be relied upon as it is on HMRCs own site, and the term "you are liable to register....UNLESS" clearly states that in the circumstances stated their is NO requirement to notify HMRC.

 

BKD states "the guidance couldnt be clearer" on that point I agree - "you are liable to register....UNLESS " could not be clearer.

 

 

Similarly the offensve innuendo in your original comment and in the following comment could not be clearer.

 

BKD - "For the reasons above, I consider your view, to the extent that it relies on HMRC's guidance, to be wrong - the guidance could not be clearer. You may argue otherwise but that is my opinion. I made no such accusation that you have been misadvising your clients, what I actually said was that I hoped that you haven't. If that has been misconstrued as offensive then I do apologise but I will not withdraw it. "

 

Whether you state "have" or "hoped I hadnt" the innuendo is the same, and it is offensive. Our clients receive the CORRECT advise and assistance, not merely the line of least resistance which you seem to favour.

 

 

 

Thanks (1)
avatar
23rd Aug 2011 15:57

Are you ignoring 2.7 on purpose

Why are you still pushing this argument.

2.3 states you are required to register unless you believe you turnover for the next 12 months will be below the de-registration limit.

2.7 tells the tax payer what to do if the above applies.

 

Are you trying to say reasonable excuse would allow a taxpayer to stop reading the guidance as soon as they have read 2.3 and not finish the rest of the page which clearly tells the taxpayer how to get Revenue approval of exemption from registration. Or is it that it doesn't apply because of the typo reference to 2.3.

The Revenue would argue that a reasonable person would read the whole page of the guidance which states in simple terms the correct procedure.

 

 

Thanks (2)
avatar
By BKD
Ainsley2
23rd Aug 2011 16:11

Spot on

valentino rossi wrote:

Why are you still pushing this argument.

2.3 states you are required to register unless you believe you turnover for the next 12 months will be below the de-registration limit.

2.7 tells the tax payer what to do if the above applies.

 

Are you trying to say reasonable excuse would allow a taxpayer to stop reading the guidance as soon as they have read 2.3 and not finish the rest of the page which clearly tells the taxpayer how to get Revenue approval of exemption from registration. Or is it that it doesn't apply because of the typo reference to 2.3.

The Revenue would argue that a reasonable person would read the whole page of the guidance which states in simple terms the correct procedure.

 

Nothing to add, really - clear, unambiguous, analysis of clear, unambiguous, guidance.

Thanks (2)
avatar
23rd Aug 2011 16:06

Its worth talking to VAT registration unit

and saying:-

We're very sorry but our client has twice in the last few years breached the threshold but the turnover went back down and they thought they did not have to write to you. We have put them right on this and they will not do it again without contacting you. Our client sells to the public and so is unable to pass on the additional VAT that would be due if you insist on registering them and so we would ask you very nicely to forgive them this time

 

They may say yes or no, but you catch more files with honey then with vinegar and the VAT registration team do not need another nothing registration that will go bump straight afterwards.

 

But get your clients agreement first.

Thanks (2)
23rd Aug 2011 16:17

Thanks Valentino

I will trust the judgement of yourself and BKD, and fortunately, this is the procedure I have always followed in the past.

Thanks (1)
avatar
By PennyC
23rd Aug 2011 16:56

My tuppence worth

BKD and Valentino are spot on the mark. The guidance in both the VAT Notice and the main HMRC website (the whole guidance, that is, not carefully selected wording) is crystal clear - the taxpayer has a duty to tell HMRC when he breaches the registration threshhold. He may apply for exception, but the obligation to notify is there for all (or most) to see.

This is not an accusation, but if anyone is giving advice based on an incorrect or selective interpretation of the guidance, and the underlying legislation, then the only logical conclusion is that the advice may be less than correct. As I say, that is not an accusation against anyone in particular, but is a point of fact.

Thanks (1)
23rd Aug 2011 18:59

Ignorance of the law

So, a lesson in law.

Firstly lets make one thing very clear, the law is superior to any rules, regulations, or interpretations which HMRC or indeed parliament may wish to apply to any given situation. Only by specific legislation can parliament overturn or ammend a judicial decision.

The courts have held throughout history, and continue to do so, that where a document, contract, Act of Parliament, or in this case official guidance, is contradictory in its content, then the content which appears at the earliest point in that document is that which is applied.

In this case it states in s2.3 that in the circumstances described there is no requirement to register, the fact that it contradicts this in 2.7 is therefore totally irrelevent as it appears later in the document.

The judicial reasoning behind this rule is that a reasonable person (the man on a Clapham omnibus) wishing to establish a fact (in this case the requirement to register) would commence reading the guidance at page 1 and, upon reaching that section which purported to answer his query, in this case 2.3, would then perfectly reasonably cease reading as he had the answer he was seeking.

As far as I am aware HMRC has not succeeded in overturning a thousand years of jurisprudence and is unlikely ever to do so.  Therefore there is an absolute legal right for a taxpayer to rely upon 2.3 and ignore 2.7.

I will now withdraw from this thread as it is clear that others have decided to post offensive and insulting posts -

 

 

Thanks (2)
avatar
By BKD
carnmores
23rd Aug 2011 19:38

Unbelievable, quite unbelievable

2.7 does not contradict 2.3. 2.3 merely directs the reader to 2.7 which expands on what to do in those circumstances.

 

The man on the Clapham omnibus might be excused for getting off at 2.3 were it not for the fact that 2.3 directs him straight to 2.7 (or would do were it not for the typo). Even considering the confusion that the typo might cause (I consider myself a reasonable person and realised immediately that para 2.3 could not possibly refer to para 2.3 - 2.7 is not that hard to find).The point is echoed in the guidance on the main website (where I would suggest the Clapham omnibus passenger is more likely to go first): "However, if your turnover has gone over the registration threshold temporarily then you may be able to apply for exception from registration see the section later in this guide for more information." If you choose to ignore the last 10 words in that guidance (my emphasis), you do so at your own peril.

But that is all beside the point. The leglisation, and the guidance, does clearly set out the taxpayer's obligations. It is quite an absurd proposition to suggest otherwise. I suppose the issue here is that we are talking about what a reasonable person would do.

Therefore there is an absolute legal right for a taxpayer to rely upon 2.3 and ignore 2.7

I really would love to see you try and defend that in court based on your claim that one contradicts the other.  You cite carefully chosen parts of the guidance, I cite the whole of the guidance and yet it is I that am being accused of selective behaviour? As I said, unbelievable, quite unbeleivable.

I too will be adding nothing further to this discussion. I'm quite confident of my ground and believe that anyone that advises clients based on a selective and incorrect interpretation of the legislation and guidance is opening themselves up for a PI claim. You might consider that your interpretation of the guidance is correct, I happen to think otherwise. Quite why you should think that amounts to an offensive insult is beyond me.

Thanks (2)
23rd Aug 2011 19:37

-

BKD " I really would love to see you try and defend that in court based on your claim that one contrdcits the other.. "

 

 

Been there and done that - and WON.  

 

I have never had a PII claim made against me, although I have helped several clients make succesful claims against incompetent previous accountants.

 

Thanks (3)
24th Aug 2011 08:53

Daffy

You say "been there & done that".  Given my own experience a few months back (above) in which I lost mainly because the client did not follow 2.7 would you be able to tell me how you achieved this as I may be able to revisit the case? 

Was it the case for example that HMRC used their discretion in not allowing 2.7 or did you manage to persuade them that 2.7 was contradictory or of no consequence?

Thanks (2)
24th Aug 2011 11:58

Moderation

This thread was temporarily removed and has been heavily moderated this morning. We have removed all the content that has broken rules and will be contacting people privately about their own conduct today.

I am appalled that the original poster, Ding Dong, was subjected to such abhorrent behaviour, it is shameful and I hope it does not put them off posting their questions in the future.

This was a serious question that required serious and sensible responses, and once again it is the actions of the few that spoil things. That those members involved could not show the sensitivity expected toward Ding Dong is absolutely astounding.

We are having some serious conversations at Sift about how to deal with members who continually flout the rules and show no respect for their fellow members.

If you intend to post beyond this statement, ensure that your reply relates to the original question and is helpful.

Thanks (0)

Pages