Further HMRC abuse of DIY scheme.
This is beginning to annoy me!
Not only have HMRC rejected a higher proportion DIY claims during the past three years, but they have implemented a practice to reduce claims which have been successfully appealed at the Tax Tribunal.
Tucked away in HMRC’s original rejection letters is this disclaimer: “because the claim is being rejected the eligibility of the individual invoices has not been determined.” This is understandable. Why should HMRC Officers review individual invoices when the claim is ineligible in principle? But, the claimant is left in an almost impossible situation. He has submitted his invoices in good faith, thinking them to be valid. It is only at a later date that the question of the eligibility of individual invoices is addressed.
Suppose the claimant pursues an appeal to the Tax Tribunal on the eligibility on the whole claim only. This is the usual practice. A proportion are successful, after which the claimant re-submits the invoices for review and reimbursement.
The, on receipt of the invoices for a second time, HMRC reject some of those invoices as being invalid. (Proper VAT invoices are actually not required – Regulation 201(b)(ii) refers.) For conversions, I have sometimes seen invoices at 20% for services instead of at 5%. The difficulty is then that the claimant has to revert to the suppliers to have the invoices corrected. Where an invoice has to be corrected from 20% to 5%, it is the supplier who has to secure a refund from HMRC through his own VAT Return. Assuming the supplier is still in business, it is quite possible that he is no longer able to adjust his VAT Account, due to the four year time limit.
This issue was addressed some four years ago in the FTT in the case of Lady Henrietta Pearson, where the Tribunal was unimpressed by HMRC’s practice.
In the more recent case of Joe Smithers, the Tribunal also noted that HMRC had reserved its decision on individual invoices. Although the Tribunal found against the claimant in principle, it criticised HMRC again, stating that, had the appeal been allowed and HMRC then reduced the claim, a subsequent Appeal would be ‘potentially impermissible.’
I understand that HMRC have been reviewing the DIY scheme. I do hope that this issue is properly resolved, as it leaves claimants seriously out-of-pocket and having to pursue a second appeal, which is time-consuming and pretty stressful.
The Pearson decision is here: https://www.bailii.org/uk/cases/UKFTT/TC/2014/TC04005.html
The Smithers decision is here: https://www.bailii.org/uk/cases/UKFTT/TC/2020/TC07858.html
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Hi, I am a VAT Consultant, part of the team at vatadvice.org We are based in Cambridgeshire. We work largely with charities but also advise a range of commercial organisations.
I have over 30 years experience in VAT, and am currently also a part-time member of the Tax Tribunals.