Independent VAT Consultant
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Cash accounting confusion goes to tribunal

Misunderstandings about the cash accounting scheme by the taxpayer and HMRC led to errors in VAT returns and assessments - but they were not deliberate.

23rd Feb 2021
Independent VAT Consultant
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There are times when I read a VAT tribunal report and come to a simple conclusion: “The taxpayer confused HMRC and HMRC confused the taxpayer – let sleeping dogs lie and don’t let it get to the tribunal.”

That was the situation in the case of Michael Robinson (TC7951). HMRC issued him with a personal liability notice (PLN), but it was incorrect because he had not made any deliberate inaccuracy on the VAT returns submitted by his company PMR Ltd.  

Robinson won his appeal against the PLN.

The facts

Robinson had an interest in three companies; two were building companies and could not use the cash accounting scheme (CAS) because their annual taxable sales exceeded the joining threshold of £1.35m (VAT Notice 731, para 2.1). The CAS means that output and input tax is included on a VAT return based on payment rather than invoice dates.

The other company (PMR) supplied project management services to the two building companies and was eligible to use the cash accounting scheme.

The problem

You can probably guess the problem that excited HMRC’s visiting officer in 2014:

  • PMR invoiced the other two companies, but did not account for output tax because the cashflow problems of the other companies meant they could not afford to pay their bills.
  • The other two companies still claimed input tax on the accruals basis – so HMRC was out of pocket.
  • The officer instructed PMR to leave the CAS at the end of May 2014 but PMR objected because of the cashflow problems it would encounter with debtor accounting.

VAT accounting

I am confused why normal VAT accounting rules did not provide solutions to HMRC’s concerns:  

  • A business must repay input tax claimed on purchase invoices that are more than six months overdue for payment, ie reducing its box 4 input tax figure. If there is no due payment date shown, the six month period is based on the invoice date, (VAT Notice 700/18, section 4).
  • If a business stops using the CAS, there is an option to account for output tax on closing debtors over the next six months as they are paid. If they are still unpaid, then bad debt relief is an option. In other words, PMR’s cashflow challenges with leaving the scheme are resolved.

Correspondence chain

Many letters went backwards and forwards between the taxpayer and HMRC, with a lot of revised dates as to when PMR needed to exit the CAS. The departure date never seemed to happen, with HMRC raising assessments for 10 different VAT quarters.

As the director of PMR, Robinson seemed to think he had an agreement with the HMRC officer to carry on using the cash accounting scheme until the other companies could pay their bills.

Even the judge got confused, referring to the “case accounting basis” in his report.

Personal liability notice

The tipping point was that HMRC issued a PLN to Robinson for £31,933 in April 2018, four years after the initial VAT visit. This related to “deliberate not concealed” errors made by PMR in continuing to use the cash accounting scheme. A PLN is issued through powers given by para 19, Sch 24, FA 2007.

The decision

The judge considered the key question that is relevant for “deliberate” behavioural penalties: on the balance of probabilities, did the taxpayer intend to submit a return to HMRC that he knew contained underpayments of VAT?

The judge commented: “We only need to determine if he genuinely did hold that belief.”

He decided that the director thought he was acting with HMRC’s approval and allowed the appeal. The PLN was cancelled.


If you have clients who are suffering cashflow problems and paying suppliers slowly in these difficult times, it might be worth reviewing their aged creditors report to check that input tax is being reduced under the six-month rule, assuming they are not on the CAS. The VAT can be reclaimed again when the supplier is eventually paid.

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