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.
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.
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.
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
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.
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.”
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.
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.
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.