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Nil-VAT haulier hit with huge assessment

HMRC turned £120 of undeclared VAT into a VAT assessment for £46,440. Neil Warren explains how this magical multiplication was possible using HMRC’s best judgement.

9th Jul 2020
Independent VAT Consultant
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The VAT assessment issued to vehicle repairer and haulier Sean Convery (TC7682) was one of the most incredible that I have seen in 37 years. I am slightly envious that I did not raise one like it when I worked for Customs and Excise back in the 1980s.

The investigating officer (Ms McMullan) had just two sales invoices available to check, and no other accounting records at all. Each invoice was for £300 + £60 VAT. By the end of the investigation, she converted those invoices into a VAT assessment for £46,440, - a multiplication marvel akin to the biblical miracle of five loaves and two fishes which fed 5000. 

The first-tier tribunal accepted the assessment as “reasonable and not arbitrary” and dismissed the taxpayer’s appeal. 

Runaround

Despite great efforts, HMRC couldn’t contact Convery to arrange a compliance visit so it issued an information notice in September 2015, using the powers given by Sch 36, FA2008. There was still no response from Convery. I should add that Convery had submitted nil VAT returns for periods December 2013 to September 2016. HMRC also enquired into Convery’s income tax affairs.

Good fortune

A bit of good luck gave HMRC an opening it could grasp with both hands. Another compliance visit at a separate business identified two sales invoices supposedly raised by Convery for work carried out, therefore showing he was doing some trading and charging VAT. The nil VAT returns he submitted were clearly wrong.

The invoices were handwritten onto pre-printed forms and details are important:

  • 12 February 2015 – invoice number 20141 - £300 + £60 VAT
  • 4 March 2015 – invoice number 20268 - £300 + £60 VAT

Calculations

Can you work out how HMRC got from VAT of £120 to £46,440? The process is very logical:

  • The range of invoice numbers between 20268 and 20141 suggests that Convery raised 128 sales invoices in a three-week period between 12 February and 4 March 2015 ie 43 invoices a week;
  • HMRC assumed that each invoice showed £30 VAT on average, ie a 50% reduction in the sample of two;
  • £30 VAT x 43 invoices x 48 working weeks = £61,920 annual output tax. This is £15,480 VAT per quarter ie gross sales of £92,880.
  • A flat rate percentage of 10% was applied to this sales figure, effectively given an allowance for input tax. VAT of £9,288 x five VAT quarters = £46,440 assessment for periods March 2015 to March 2016.

Best judgment

HMRC officers have the power to issue an assessment using their ‘best judgment’ if they think VAT has been underpaid on a return (s73(1), VATA1994). HMRC officers are required to honestly use all information available to them and have a logical basis to their calculations.

The role of the tribunal is “to find the correct amount of tax, on the material properly available, the burden of proof resting on the taxpayer.”

Taxpayer arguments

The taxpayer claimed that he did not issue the invoices and that they were raised by another individual called Henry Lee. He claimed that HMRC had not used best judgment - the assessment should have been for £120 output tax, less an allowance for input tax.

Decision

The judge was not sympathetic to the taxpayer. He had “cancelled every meeting that was arranged to see him” and the limited information about his records was “wholly due to him”. The assessment was upheld and the appeal dismissed.

Learning points

This is the sort of taxpayer error which HMRC believes will be eliminated by the MTD regime. If Convery had been required to keep all of his VAT records in a digital format and submit the VAT totals to HMRC using MTD-compatible software, it should not have been possible to omit a range of invoices from the returns. Also, Convery would not be able to claim that someone else issued the invoices.

A second lesson from this case is that despite all of the massive challenges faced by HMRC, it can find time to deal with non-compliant taxpayers. As the judge commented on officer McMullan’s work: “She made an honest and genuine attempt to find a reasoned assessment of the tax payable by Mr Convery.” Well done to HMRC. 

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Replies (15)

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By cbp99
09th Jul 2020 11:45

Re the claim that MTD would eliminate this sort of evasion. The taxpayer submitted 12 consecutive fraudulent nil returns. Presumably the taxpayer would continue to submit fraudulent returns under MTD, possibly keeping two sets of records. We are not told whether the taxpayer has been or will be prosecuted for evasion, but that is a higher order offence to incorrect methods of record-keeping.

Thanks (11)
By ireallyshouldknowthisbut
09th Jul 2020 12:00

"This is the sort of taxpayer error which HMRC believes will be eliminated by the MTD regime."

HMRC are incredibly dim then.

It will never stop this sort of thing. This is blatant fraud by the tax payer. It is naive to the extreme that fraudsters will suddenly stop being fraudsters due to the requirement to submit detailed paperwork. They will just submit fraudulent (or no) paperwork.

Thanks (12)
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By memyself-eye
09th Jul 2020 12:04

The way to eliminate this sort of evasion is by HMRC spending 'customers' cash on investigations, not forcing said ' customers' to buy pointless MTD software.

Thanks (9)
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By Calculatorboy
09th Jul 2020 13:30

If hmrc believe this sort of omission will be eliminated with mtd they are clearly deluded and not fit for purpose

Thanks (7)
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By tom123
09th Jul 2020 14:50

I can type 8 numbers onto a spreadsheet and upload that as MTDfV.

Surely no-one really thinks MTDfV in it's current form is anything other than a waste of everyone's time?

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Replying to tom123:
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By Paul Crowley
09th Jul 2020 18:16

Agreed
MTD serves no valid purpose for VAT

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By NeilW
15th Jul 2020 09:29

This sort of blatant tax evasion requires jail time, not assessments.

The integrity of the tax system must be upheld.

Thanks (8)
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By Rgab1947
15th Jul 2020 10:16

Agree with posters a fraudster will still defraud irrespective of MTD.

The posters that are railing againts MTD, a system or its equivalent that is being or has been implemented worldwide, you are farting against thunder.

MTD is just at its infant stage and will become more complex and intrusive. Its the way technology and the world is going. Forget Huewei, HMRC will spy on you more.

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Replying to Rgab1947:
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By johnjenkins
15th Jul 2020 10:32

Although I tend to agree with you, I think covid has shown the world just how fragile we are and that all this high tech stuff doesn't stop the business world falling apart. I really cannot see MTD making too many inroads this or next year as business will be too busy re-establishing themselves and taking account of what might happen if "lockdown" were to be a yearly occurrence. A lot has been said about the cost of all this and how the taxpayers will have to contribute. Well if business aren't earning money then nothing will be paid for.
Back to the plot. Fraud is fraud.

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By miller215
15th Jul 2020 10:29

Just wait until MTD is slowly extended. Forcing you to enter vat numbers of suppliers to be able to reclaim the vat on them. Those vat numbers then being checked against the supplier name.... Actually a simple process to implement and a bookkeeping nightmare to start with, but once each supplier is set up then would be smooth going forward. Maybe i shouldn't be spreading these ideas.....

Next up, RTI of dividends.... lets really get that cat playing with those pigeons

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By jamiea4f
15th Jul 2020 12:51

Mrs McMullan should be promoted to head of HMRC as she clearly has more sense than the "top people". That's actually pretty ingenious how she's worked that out. Damn her :)

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Replying to jamiea4f:
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By geoffmw1
15th Jul 2020 13:35

It's not that difficult. The problem here was non cooperation by the registered trader.

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By [email protected]
15th Jul 2020 14:40

I see that in 2013 in County Antrim, a haulage contractor of the same name was banned from acting as a director for 12 years following a large number of failures including smuggling goods, avoiding fuel duty, failing to lodge accounts and passing dud cheques. If it's the same man, HMRC should be keeping a close watch.

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By North East Accountant
15th Jul 2020 17:23

In over 25 years in the profession I can't recall one penalty levied against a taxpayer for poor record keeping, despite HMRC having the power to fine people.

Maybe they should actually do this, followed by jail in the second instance.

But this would require someone at HMRC getting off their backsides and actually going and checking. Oh they did that (Business Records Check - remember them) and then abandoned them.

I wonder if it was because HMRC don't actually want decent records so they can come up with what figures they want if you haven't got any.

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By Chris Pittock
20th Jul 2020 16:40

I am not sure I agree with them using £30 as an average VAT figure! Surely the evidence was that it should have been £60? The liability should have been double that. The Tax payer is laughing.

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