Neil Warren investigates why a company which submitted 13 repayment VAT returns that included numerous input tax errors didn’t receive a single penalty.
I never get bored of reading reports of VAT tribunal cases, particularly when they are as absorbing as the case of recycling operations company Wasteaway Shropshire Ltd (TC07214).
Wasteaway made an incredible number of VAT errors between 2012 and 2015. These were mostly input tax errors but some sales invoices were omitted as well. This prompted HMRC to issue an assessment for £20,593.
Nature of errors
If I were asked to make a list of every possible input tax error that a taxpayer could make on their VAT returns, I would struggle to find one that Wasteaway had not made.
Input tax was claimed on payments that were either exempt or outside the scope of VAT eg rent, insurance and bank charges (the landlord had not opted to tax the rent).
VAT at 20% was claimed on invoices subject to 0% and 5% VAT.
Purchase invoices were missing, supposedly lost, when the company was evicted from its trading premises by its landlord.
Input tax was claimed on private and non-business expenses, such as clothes.
Input tax was claimed twice on the same supplies and also on pro-forma invoices and statements rather than the actual invoices.
Input tax was claimed on business entertainment.
My favourite error was that input tax was even claimed on the payment for a TV licence!
The tribunal judge commented that the business records were “sketchy, incomplete and to a significant extent incredible.” Judge Poole also referred to the director’s involvement with a previous business where he had a “slapdash approach to record keeping.”
Interest but no penalty
After reading the case report and noting the incredible range of basic VAT errors made by the company, I realised that there had not been a single mention of the word ‘penalty’ against the company for either careless or deliberate errors.
The company was charged interest of £1,441.32 on the assessment but this is for commercial restitution and is not a penalty. How did the company escape a penalty, especially as it submitted 13 out of 14 repayment VAT returns for the periods in question?
To submit repayment VAT returns is a very strange outcome for a business that was apparently only making standard-rated sales.
I suspect that company director Ashley Clayton dug his heels in and resolutely challenged the HMRC officer on all aspects of her assessment. He probably adopted a determined argument that his input tax claims should be allowed on the basis that a payment through his company bank account was adequate evidence to support a claim. In cricketing terms, he put HMRC on the back foot with some fearsome fast bowling.
An indication of his determination was that he even made a claim in his report to the tribunal “for an award of costs in the sum of £2,500” against HMRC and referred to the HMRC officer as “a disgrace to the HMRC service.”
Clayton seems to have given the HMRC officer the run-around, and I suspect she didn’t want to muddy the waters even further by going down the penalty route.
My analysis is supported by a comment in the case report where the judge said that the HMRC officer had been “somewhat generous in some of the credit adjustments she had made.”
I don’t advocate giving HMRC a hard time. My view has always been that co-operation is the best approach, with give and take being necessary. However, Clayton’s hard stance seems to have averted a potential penalty, which is a bit worrying.
As a final note, the penalties should have been considered by the HMRC officer at the time she raised the assessment, so I believe it is not possible for HMRC to retrospectively apply penalties, even if the errors are now deemed to be careless or deliberate.