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Delayed enquiry by HMRC - any defence?

New company asked HMRC if all tax matters OK. 5 years later HMRC say no. Use delay against them?

My client is a company to which an NHS entity has contracted out some services.  There was already an HMRC enquiry into the use of locums by same NHS body; this enquiry appears to have been about PAYE, employment status, etc.  So when the contract with my client was beginning, the NHS body voluntarily approached HMRC, enclosing a copy of the contract, and asking for the advice of the PAYE inspector so that they could be sure they were getting the tax compliance absolutely right from the start.  (NB no particular tax was specified, they wanted everything right.)  At that time the contract had not been signed, and the NHS body wanted to get HMRC's view first, so that they could amend the contract if need be.  However the inspector said that he needed to see the signed contract before he could give a view on it. 

About a year later, HMRC began a PAYE enquiry into my client. This proceeded very slowly.  After another two years, when it was nearly concluded, the inspector observed that the company was not VAT-registered, and asked why not.  The answer was that it makes exempt supplies of medical care.  Another nine months passed, and then HMRC started a VAT enquiry.  They wanted a more detailed explanation of why my client's supplies were considered to be exempt.  So they got that, and it all went quiet again.  Another year had passed by the time HMRC wrote arguing that the client ought to be VAT-registered   They considered that my client was making taxable supplies of staff, a view they had formed by reading the contract which had been provided to them over 5 years previously. 

Now we're heading to the Tribunal, appealing against the compulsory VAT registration, which of course has been backdated by 5 years.   The VAT liability is huge.  My question is this: how can we use the enormous HMRC delay against them?  I'm not asking for any technical arguments that the client ought to be exempt.  For example, is there any precedent for such a long delay being used to prevent the backdating of the registration?  


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09th Nov 2018 18:44

The problem is that HMRC can do what they like, as slowly as they like, as long as they do not breach time scales. I do wonder if there is any argument under s77, which deals with time scales within which HMRC must raise a VAT assessment.
The other approach is to pursue a claim under the broad misdirection guidance ( but this is not a ground for an appeal to the Tax Tribunal.

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to leshoward
12th Nov 2018 13:23

Thanks Les.
S77 time limit is a good thought, but unfortunately HMRC have set the first return period to run from the date of registration to a fairly recent date. It is over 4 years long and they are well within the time limit for assessing.
I have my doubts that they will consider that they are within ADML1400, as they have never said the client was exempt, but it's something else to throw at them anyway.

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to Alastair Johnston
13th Nov 2018 17:12

Hope you will find this post helpful as it addresses a similar question:

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13th Nov 2018 16:44

Sorry to be negative, but when did you commence acting, and what were the terms of your engagement? I would look at your PI cover !

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14th Nov 2018 11:12

Wierdly, I end up being somewhat in agreement with Montrose.

My first though was that there is an argument that the client would not have been aware that there might be a VAT issue until the Rapid Sequence decision.

At that point though they should have reviewed their position and made a decision as to whether they were in or out of the effect of the decision. One would have expected that view to be documented.

However, the Rapid Sequence decision was, of course, roughly 5 years ago.

It may be that the NHS Trust will accept a current VAT only invoice for any VAT that needs to be accounted for, if the locum services relate wholly to it's non-business activities, but the recovery of VAT by NHS trusts is complicated stuff.

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14th Nov 2018 12:44

If the VAT liability is really huge then perhaps the client can simply stop trading in that company & let it go bust & set up in a new company (if they were able to sue you that would also mitigate their losses - which they are required to do).

This is why having a holding company is always a good idea as asset protection planning.

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