HMRC: Pay the VAT before we refund you
HMRC rejected a taxpayer’s hardship appeal over a disputed VAT assessment, although the company was owed significant tax refunds in other taxes.
In the last few months, there have been a number of VAT tribunal cases where, to put it bluntly, HMRC seems to have ‘gone for gold’ by raising massive VAT assessments against fairly small businesses.
These assessments have usually been raised on the basis of the HMRC officer’s ‘best judgment’ (s73(1), VATA1994), often where accounting records have been lacking in key areas, mainly for cash traders.
Pay before hearing
For disputes concerning direct tax (eg income tax, corporation tax) the tax at stake can usually be deferred until the dispute is resolved, although this is not the case where an accelerated payment notice (APN) has been raised. Under the indirect tax rules (eg for VAT) the taxpayer has to pay the assessment before the appeal can be heard at the first-tier tribunal (FTT).
The legislation gives a taxpayer the right to request that HMRC defer the collection of any VAT assessment in dispute if payment “would cause the appellant to suffer hardship” (s84(3B), VATA1994). This issue was the crux of the appeal in the case of Rok Construction and Hire Ltd (TC07638).
The director’s key argument was that HMRC should not chase payment of a VAT assessment for £6,189 raised in October 2018 because it owed the company £13,000 for another VAT period. Furthermore, the director claims the company was also due refunds of £34,958 relating to the construction industry scheme (CIS).
The VAT assessment was linked to errors made on returns for December 2015 and March 2016. He appealed to HMRC for a financial hardship order in November 2018, which was considered by HMRC’s hardship team.
A key lesson from this case is that the HMRC hardship team does not give out hardship orders as freely as cake samples at a bakery. They requested a lot of information from the director about the company’s financial affairs:
- bank statements for the last three months
- analysis of debtors and creditors in the 2018 financial accounts
- details of overdraft facilities with the company’s bankers
- management accounts
- budget forecasts and cash flow forecasts for the next six months
- details of investments held by the company
- information about its current debtors and creditors position.
No information given by company
Needless to say, the director did not forward the comprehensive and time-consuming list of documents and the hardship appeal was therefore rejected. The tribunal supported HMRC by dismissing the appeal.
On the Companies House website, the company’s balance sheet in the accounts to 31 March 2019 looks pretty solvent. Even if the information had been duly submitted, I think HMRC would have still rejected the hardship request.
Taxpayer must prove hardship
The message in this situation is clear: a business must either fully pay the disputed assessment or prove financial hardship. The argument that consideration should be given to other tax rebates that are in the pipeline was irrelevant and the HMRC hardship team strictly applied the legislation.
The judge’s decision was based on the fact that “the appellant has not provided the information requested by HMRC for the purposes of determining its current financial position”. An easy win for HMRC.