The court found an experienced accountant’s decision to leave three sales invoices off a VAT return was a ‘deliberate error’ which attracted higher penalties.
Here is a key question to consider with this case: when does a sales invoice become a valid legal document?
- When it is raised by the supplier.
- When the information is entered on the customer’s computer system.
- When it is issued to the customer.
- When the goods or services shown on the invoice have been delivered to and received by a satisfied customer.
The answer to the above multiple-choice question is 3. when the invoice is given to the customer (VAT Notice 700, para 16.2.1). The customer then has scope to claim input tax (subject to usual conditions) and the supplier will account for output tax, assuming that neither party is on the cash accounting scheme.
Promo International Ltd (TC06787) raised three sales invoices on its computer in June 2014 but claimed that the invoices were never issued to the customer and that no goods had been supplied because the customer had cash flow problems and subsequently became insolvent.
A manual adjustment was made to reverse the output tax of £50,641 on these invoices from its June 2014 return. HMRC provided the court with details of subsequent credit notes that partly reduced the invoiced amounts and because these credits were for damaged goods, this indicated that the invoices and goods must have been received by the customer. There was also evidence of payment having been made.
HMRC decided that the VAT omission was a deliberate error which was not concealed and that the error had been discovered by a visiting officer rather than declared by the taxpayer – ie a prompted disclosure.
The company was liable to a penalty of between 35% and 70% of the tax at stake (potential lost revenue). The court had to decide whether output tax was due on the invoices and, if so, whether the behaviour of the taxpayer was deliberate.
Onus of proof
The onus of proof is on HMRC when it comes to issuing penalties for deliberate behaviour and the tribunal supported HMRC, based on the balance of probabilities. The court also decided the tax was due on the invoices in question – ie supplies had been made by the company and paid for by the customer.
A key factor with the penalty outcome was that the VAT return had been completed by an “experienced accountant” who had “made a conscious decision to omit the invoices from the return, and made a manual adjustment to exclude them”.
Many businesses have a number of big transactions in a VAT quarter that either involve large amounts of output tax or input tax. These are the transactions that require care and attention and are also most likely to be queried by HMRC. It is important to ensure the VAT paid or claimed is correct.
These are my top three VAT risk areas concerning invoices.
Buying fixed assets
Make sure the purchase invoice details are correct and there are no hidden traps, eg assets on lease/hire purchase where finance is involved. In that case, the VAT may instead be claimable on the monthly lease instalments instead of at the time when the asset is first acquired.
If the business is buying commercial property and is being charged VAT by the seller, make sure that the seller proves he opted to tax the building and has issued a valid VAT invoice. Also, consider what the business will use the property for and whether the business may need to opt to tax the building as well.
Major sales invoices
Is the amount of VAT correct (check there is no incorrect zero-rating) and has it been properly declared on the VAT return?
In summary, the Promo directors should have been completely sure of their ground before leaving these three sales invoices off the VAT return. That did not appear to have happened, hence the heavy penalty the company incurred.
About Neil Warren
Neil Warren is an independent VAT consultant and author who worked for Customs and Excise for 14 years until 1997.