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TaxZone Newthwire 98 - VAT appeals

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2nd May 2006
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Editor's Note
=============
In 1972 what was believed to be a simple little sales tax was
introduced by the government of the day. Almost 25 years later
it is recognised that VAT is a complicated monolith, with
numerous provisions and complications.

This is reflected by publications on the subject. Tolley's VAT
Annual is quickly catching up in size with the Income Tax
Annual. A peculiarity of VAT is that numerous cases are heard by
the VAT Tribunals, yet much fewer proceed to the UK and European
courts. Accordingly Tolley's VAT Cases book has become an
enormous tome, rivalling Tolley's Tax Cases in size.

In this wire I will concentrate on VAT appeals, a subject that
is important to accountants, lawyers and trading individuals,
partnerships and companies.

Contents
========
1. Access and information
2. The right to appeal
3. Timing of the appeal
4. Representation
5. Making the appeal
6. Preliminary procedure
7. The time factor
8. Preparation
9. List of documents
10. Formal witness statements
11. Agreed bundle of documents
12. Prior agreements
13. Cases to quote
14. The skeleton argument
15. The hearing
16. Costs
17. The decision
18. Conclusion

1. Access and information
=========================
Appeals regarding VAT matters are made initially to the VAT and
Duties Tribunals, which deal with appeals regarding VAT, Customs
Duties, Excise, Landfill Tax and other matters. The address from
which the tribunals operate is 15-19, Bedford Avenue, London
WC1B 3AS. Tel: 0202 7612 9700, Fax: 0202 7436 4150.

The tribunals' website can be accessed at
http://www.financeandtaxtribunals.gov.uk and contains
explanatory leaflets about VAT appeals. Appeal forms can be
downloaded on pdf. files, or requested from the address above.

The secondary legislation on VAT appeals is contained in the VAT
and Duties Tribunal Rules, Statutory Instrument No. 590 of 1986,
as amended.

Planning Point

Accountants should note the name and address of the VAT and
Duties Tribunal.

2. The right to appeal
======================
Section 83, VATA 1994 sets out the circumstances in which a VAT
appeal may be made. These are as follows:

Category 1 - Against the 100% penalty for civil evasion of VAT
under section 60, VATA 1994 or section 61 if the penalty was
imposed on a company director.

Category 2 - Against other penalties such as the 15% penalty for
innocent errors and for late registration, as well as the
default surcharge for late submission of a VAT return and for
mitigation of (rather than an appeal against) a civil evasion
penalty.

Category 3 - All other appeals.

Where HMRC have imposed a penalty for dishonesty, the department
must prove that dishonesty. Therefore, their representative
commences the appeal and has the final say after the response
from the appellant. Normally the appellant commences the appeal,
HMRC responds and the appellant has the final say.

When the appellant is contending reasonable excuse or asking for
mitigation of a Category 2 appeal, the basis of the excuse must
be put forward. Where mitigation is claimed, the reasons for
that claim should be quoted in the appeal.

Examples of situations where an appeal cannot be put forward
are:

# Against interest imposed on an assessment.

# Hypothetical situations. For instance if the taxpayer intends
to make a new source of supply, a test sale might have to be
made in order to obtain an HMRC ruling, and possible appeal
against that ruling.

Planning Point

Practitioners should be aware of the issues which can give rise
to a VAT appeal, and those where no appeal is possible.

3. Timing of the appeal
=======================
There is a fundamental difference between the appeal to a VAT
Tribunal and a direct tax appeal. This difference concerns
costs. Whereas the Special Commissioners are only able to award
costs in very specialised circumstances, the 'winning side' in a
VAT appeal can claim and are usually awarded costs.

This goes with a corollary. Costs may be awarded from the time
that the appeal is lodged. No costs award can be made for
discussions or negotiations with HMRC before the appeal is
actually lodged. For this reason appellants and their advisers
should lodge an appeal as soon as a disputed assessment is made
or another issue of conflict arises.

The only exception to this is when the technical issues at stake
are so weak that the Tribunal is likely to find against the
taxpayer anyway, and there is more chance of some relief from a
'local concession'.

The normal time limit for appealing against an assessment is 30
days. Where the taxpayer has asked for a review by HMRC, an
appeal should be made within 21 days of the review.

However, if the appeal is submitted late, the Tribunal has the
power to request HMRC to accept it, provided it is late in terms
of weeks and months, but not years.

Planning Point

Accountants should note that VAT appeals should be made as early
as possible, in order to protect the costs position. The normal
time limits should also be noted.

4. Representation
=================
Normally it is the supplier of the goods or services who makes
the VAT appeal. However, there are instances when the customer,
not necessarily a registered person, has an interest in the VAT
situation. An example of this is building work. The builder may
charge VAT output tax in order to be safe, to which the customer
objects and refuses to pay. The customer therefore has an
interest in making the appeal. If the customer had paid the VAT
without query, the builder would have no interest in pursuing an
appeal.

Any VAT registered trader can represent themselves at the VAT
Tribunal. In the case of a limited company, this includes a
director, executive or company secretary. Whether this is wise
or not is debatable. Some traders who have represented
themselves have been successful. Others have made a mess of the
appeal, and this includes some accountants and lawyers.

In straightforward cases not involving technical points such as
an appeal against a default surcharge or a penalty, and where
the trader cannot afford the potential costs, he or she may wish
to conduct the appeal personally. However, HMRC may be
represented by one of their staff or a solicitor. In cases where
there is any legal complexity, HMRC will be represented by
counsel. Accountancy practitioners will have to decide whether
to engage a VAT specialist or brief counsel when an appeal
regarding one of their clients is contemplated.

Even when counsel is instructed, the practitioner can do much to
assist and reduce costs by providing succinct information and
facts and dealing with background work. This could well reduce
overall costs. Practitioners should remember the possibility of
using a barrister through the Direct Access schemes.

Planning Point

Accountants should be aware of who can make a VAT appeal, and
consider carefully who should represent the client, when an
actual appeal takes place.

5. Making the appeal
====================
A VAT appeal is made direct to the VAT Tribunal, not to HMRC.
The official form for making an appeal can be downloaded from
the Tribunals' website mentioned above, or a hard copy can be
requested by writing to the Bedford Row office.

The appeal must include:

# The grounds of the appeal, such as the legal provisions under
dispute or factual matters which the taxpayer considers HMRC
have misunderstood. These grounds must be presented in a way so
that HMRC are aware of the issues at stake. As space on the form
is limited, it may be better to attach a separate document
showing 'grounds of appeal' in several paragraphs.

# Attached to the appeal form must be a copy of the assessment
or decision letter against which the appeal is being made.

The appeal form and attachments must be sent to the tribunal
office covering the area of the VAT registration address. This
will be London, Manchester, Edinburgh or Belfast. Further
details of the offices can be obtained from the website or
explanatory leaflet sent by post.

The VAT Tribunal will not hear the appeal if the trader is not
up to date with VAT returns and payments. In addition, VAT
assessed, even if under dispute, should be paid before the
appeal is heard. This does not apply to default surcharges or
penalties.

If the trader is unable to pay the VAT at stake, interest will
accrue that is not an allowable expense for direct tax purposes
and which is, of course, much higher than interest receivable
from HMRC. In cases of financial hardship application can be
made to HMRC for the appeal to be heard without payment of the
disputed VAT. Evidence of financial hardship will have to be
provided if this course of action is taken.

Planning Point

Accountants should be aware of VAT appeals procedure, the
requirement for VAT returns and payments to be up to date, and
the necessity for the disputed tax to be paid before the appeal
is heard.

6. Preliminary procedure
========================
Following submission of the appeal the following sequence of
events occurs:

# The Tribunal Centre will acknowledge receipt of the appeal and
forward a copy to HMRC.

# HMRC then has 30 days to submit a Statement of Case in
response to the appeal, justifying the department's original
assessment or decision. The Tribunal Centre will forward a copy
of this to the taxpayer. Severe delay in HMRC submitting a
Statement of Case has led to the appeal being upheld in some
past cases.

HMRC should submit a list of documents relied on by the
department with the Statement of Case. In the case of a
dishonesty appeal, they should list all the documents they hold
that are of any relevance to the matter. This will include visit
reports and the transcript of any formal interview.

# If the appeal is against a dishonesty penalty, the taxpayer
must then submit a defence.

# The appellant must provide HMRC with a list of documents on
which he or she will rely on as evidence.

# The Tribunal Centre will ask both parties for dates when they
are not available during the next few months, and how many days
they estimate the Tribunal will last. They will also be asked
for the estimated number of witnesses to be called. This is not
binding, as the decision to call a witness can be made up to and
including the tribunal hearing. Typically, notification of the
appeal dates is given six-eight weeks ahead.

# The Tribunal Centre will ask if the client and adviser would
prefer the hearing to be at a closer location. If an early
hearing is desired, it may be wise to accept the hearing at the
tribunal centre that is handling the matter.

Planning Points

Accountants should be aware of the sequence of events following
the making of an appeal.

7. The time factor
==================
Despite the published regulations, HMRC rarely produce their
Statement of Case on time, and accountants and their clients
must be prepared for 'the long haul'. It could be up to 12
months before the matter actually goes before the Tribunal.

It may be possible to expedite matters by speaking to the person
in HMRC solicitors' department who is actually handling the
appeal. HMRC often use counsel to take an appeal for them, and
this means that the case may not be looked at until shortly
before the actual hearing. This accounts for the fact that HMRC
sometimes concede the case just before the proposed hearing.

The Tribunal has the power to arrange Directions Hearings,
particularly where the parties to the appeal seem not to be
making any headway, and in order to progress matters.

At the end of the hearing the decision of the tribunal members
will usually be reserved. The issue of the decision will then
follow after a minimum period of two weeks and sometimes two
months or more.

Planning Point

Accountants should stress to their clients that the progress of
an appeal is likely to take a long time - months rather than
weeks.

8. Preparation
==============
It cannot be emphasised too much that the winning or losing of
an appeal, either direct tax or VAT, depends on exhaustive
preparation. The appellant has to show that the assessment or
ruling is based on incorrect law and/or incorrect facts.
Preparation for the appeal will include:

# Facts upon which the case depends. The Tribunal will not admit
'hearsay' evidence.

# Evidence of the facts. Except in the case of a dishonesty
penalty, it is the appellant trader who has to demolish HMRC's
case. The Tribunal may take a pragmatic view and reduce rather
than extinguish an assessment. In cases of supposed under
declaration of takings the Tribunal will take a balanced view
and, in cases of doubt, is likely to find for the appellant -
but only where solid facts have been presented.

# Relevant documentation such as annual accounts, invoices.
These will demonstrate actual evidence, as will contracts,
customer brochures etc.

# Arranging for the attendance of witnesses who will help the
trader's case. Where an expert witness is engaged, their report
should be sent to HMRC, who will have the opportunity to present
their own expert witness.

Planning point

Careful preparation for a VAT appeal is essential and will
demand substantial time of the accountant and his or her staff.

9. Lists of documents
=====================
Each side must produce to the other a list of the documents on
which it will rely. In theory this should be done within 30 days
of the Tribunal Centre acknowledging the appeal, but this time
limit is often ignored. This list extends to copies of documents
to be quoted at the appeal, but does not necessarily include
letters between the trader and HMRC. However, it includes copies
of items to be used in documentary evidence such as accounts,
contracts and brochures.

All documents should be produced to 'the other side' as soon as
possible. If a document is produced for the first time at the
actual hearing, the other side is entitled to ask for an
adjournment to consider it.

Examples of the type of documents that should be produced are:

# Correspondence with HMRC and third parties.

# A copy of the 'Without Prejudice' offer, if such an offer has
been made by HMRC.

# Accounting records, including sales and purchase invoices.

# Contracts relating to the supplies in dispute.

# Marketing material giving details about the product or
service.

# In property cases, planning permission and photographs of the
site before and after the project.

Planning point

It will be the accountant's job to collate all necessary
documents, and if he or she is taking the case at the appeal,
obtaining documents from HMRC. This is a very important part of
the procedure.

10. Formal witness statements
=============================
Sometimes a formal witness statement is supplied by a witness
who is unable to attend the hearing. This might be produced by
either side. However, such statements can be objected to because
the witness is not available for cross examination.

On the other hand what is known legally as 'proof of evidence'
i.e. a written statement of evidence by a witness, can be
useful, provided the witness will be present and can be cross
examined by HMRC. Use of such proof of evidence can speed up the
proceedings.

Planning point

Written statements by attending witnesses can be useful, and
will speed up the proceedings.

11. Agreed bundle of documents
==============================
It is helpful to the Tribunal if a bundle of documents is
provided at the hearing. Both parties should co-operate over
this and make sure that there is no duplication. It is also
necessary to provide enough copies to serve the tribunal
members, the client, witnesses and each party. This means that,
perhaps, seven or more copies will be required.

Bundles should commence with the assessment or decision in
dispute with relevant supporting papers, followed by
correspondence in date order, earliest date first. All pages
should be numbered sequentially, and an index at the front of
the bundle will help to identify each page.

If any items such as original documents are wanted back, these
should be collected from the Tribunal Centre within six weeks of
publication of the decision.

Planning Point

Documents required for the VAT hearing should be carefully
collated and indexed, so that easy reference to them during the
hearing assists the case.

12. Prior agreements
====================
It may be possible to agree a Statement of Facts with HMRC
before the hearing, as well as the legal points in dispute. One
has to make sure that legal issues are only identified in
outline. This procedure may be difficult to achieve if named
individuals have not been appointed by HMRC to deal with pre-
hearing issues.

Planning Point

The accountant will have to decide whether an agreement of facts
and legal cases with HMRC will help the client's case.

13. Cases to quote
==================
The appellant should provide HMRC and the Tribunal with a list
of cases from which he or she intends to quote. HMRC should
observe the same procedure, and failure to do so could render
the case liable to adjournment.

It is best to supply copies of the cases to HMRC and the
Tribunal, as different sources tend to have different page
numbers.

It is tempting to quote only from cases that support the
appellant's case. But it is more sensible to quote cases which
demonstrate both points of view, while emphasising how the
client's case differs from unfavourable decisions.

A previous tribunal decision can be persuasive to the Tribunal,
but is not binding. Cases that have been decided in the High
Court and above, as well as by the ECJ, are binding on the
Tribunal as regards points of law.

Planning point

Selecting cases is part of the preparation for the hearing,
which the accountant, VAT specialist or counsel will have to
deal with.

14. The skeleton argument
=========================
The representative for the appellant needs to prepare a skeleton
argument, with the same number of copies required as for the
bundle of documents. In this document the key facts on which
documentary evidence is being produced are set out, cross
referenced to the bundle of documents. It also sets out the
legislation on which the appellant relies.

The skeleton argument should not be a word for word copy of the
opening speech that is to be made on behalf of the client. A
summary allows extra points to be added at the last minute, and
gives the speaker some latitude to expand on matters in an
interesting way so that the tribunal members remain focused.

Planning point

Care needs to be put into the preparation of the skeleton
argument, as it will be distributed to the tribunal members,
HMRC and the client.

15. The hearing
===============
Hearings are in public, and there will be a legally qualified
Chairman. In some case there will also be a lay member who is
not a lawyer but also professionally qualified. A tribunal
hearing is relatively informal, but evidence is given on oath or
by affirmation. The sequence of events is:

# The representative of the appellant presents the appeal, and
calls the appellant's witnesses. They can be cross-examined by
HMRC.

# HMRC present their case and call their witnesses, who can also
be cross-examined by the appellant's representative.

# The appellant's representative has the final say.

In cases where dishonesty is contended HMRC commence the
proceedings and have the last word.

It is advisable for the appellant to appear as a witness so that
the 'full story' can be told. Human rights legislation can
impact on a case, but the appellant is unlikely to win on those
grounds alone.

The Tribunal Chairman or a tribunal member can ask a question at
any point in the proceedings.

16. Costs
=========
It is important to ask for costs if the taxpayer succeeds in the
appeal. HMRC rarely ask for costs unless the case is a major one
involving counsel on both sides, it is a dishonesty case, or the
department considers the appeal to be frivolous.

The original appeal should not be withdrawn until the costs
issue has been settled. The claim is for 'reasonable costs' from
the time that the appeal was lodged. Costs include the time of a
professional adviser, which should be recorded diligently, plus
travel and witnesses expenses etc.

In some cases the Tribunal awards partial costs to the losing
side or restricts costs awarded to the winner. In the latter
case this will be because procedures such as production of
documentary evidence have not been fulfilled.

In the event of a dispute about costs, the matter can always be
referred to a Taxing Master at the High Court, but this is
rarely required. Negotiation with HMRC will often produce an
informal offer.

Planning Point

It is up to the successful appellant's representative to ask for
costs. They should refrain from withdrawing the appeal until
this matter has been settled, otherwise the costs claim could be
lost.

17. The decision
================
In minor straightforward cases, the decision is given on the
day. In more complex cases the decision will be reserved, and
the decision will not be published until a period of say four
weeks minimum to three months maximum, and occasionally even six
months. The decision is released to both parties at a date when
the Chairman signs it.

The losing party has 56 days in which to make a further appeal
to the High Court, which can only be on a point of law or as a
result of finding of fact that is so extraordinary that no
reasonable Tribunal would have reached.

Where there is an important issue of law, a further appeal can
be made direct to the Court of Appeal.

18. Conclusion
==============
This wire demonstrates just how important the procedures of a
VAT appeal are, and that accountants need to be 'up to speed'
regarding all aspects if they are to advise relevant clients.

Planning Point

If your clients are likely to be appealing to the VAT Tribunal,
then accountants need to be aware of the whole complicated
appeals procedure.

Ask a question
==============
Readers with a current case should post their query in Any
Answers.
https://www.accountingweb.co.uk/anyanswers

JOHN T NEWTH
https://www.accountingweb.co.uk/premium_content/newthwire

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