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HMRC Aggressively Pursuing VAT From Small Firms

by Jason Gorringe,, London

16 December 2014

The UK tax authority, HM Revenue and Customs (HMRC), collected a record GBP3.9bn (USD6.1bn) in extra value-added tax (VAT) from compliance investigations into small businesses in the last year, up ten percent on the GBP3.6bn brought in during the previous year, according to accountancy firm UHY Hacker Young.

The amount of extra VAT taken from investigations into small- and medium-sized enterprises (SMEs) by HMRC's local offices has more than doubled in three years, rising from GBP2.2bn in the 2010/11 tax year.

According to the firm, HMRC has become increasingly aggressive in probing the VAT arrangements of small businesses. This has involved HMRC in challenging long-accepted VAT arrangements, with varying results.

In July this year, HMRC failed in its attempt to reduce the amount of VAT that can be reclaimed by self-storage businesses, after one such company, Lok'n Store, successfully argued in court that it should be able to reclaim 99.98 percent of the VAT it pays, being the percentage of its floor space that is used for storage. In October, HMRC announced its intention to ignore this ruling, not only when VAT is reclaimed by other self-storage businesses, but also in VAT cases in general, in a move that has been criticized by the tax profession.

The firm noted also that, last year, HMRC argued that online sales of glasses by retailer Glasses Direct were not accompanied by "medical dispensing services," unlike sales in a bricks-and-mortar shop, making Glasses Direct liable to pay VAT on the full value of the spectacles without any exemptions. The First-Tier Tax Tribunal disagreed, in a ruling which UHY Hacker Young said may have significant cost-saving implications, not only for online healthcare businesses, but all online businesses if HMRC attempts to tax them differently than their high-street counterparts.

UHY Partner Simon Newark said: "HMRC has taken an increasingly hard line over the last year in its attempts to increase tax receipts, so more and more small businesses in particular are finding themselves facing investigation over VAT arrangements that have long been accepted by the tax authority. Unfortunately, the law is heavily weighted in HMRC's favor. Once they make a decision it is irrelevant if the decision is right, wrong, or even unlawful. Unless the taxpayer challenges it, the decision will be enforced by the full might of the State with bailiffs if necessary."

"Some argue that HMRC wants to have its cake and eat it when it comes to VAT decisions. When HMRC wins a non-binding Tax Tribunal case on VAT, it may choose to treat it as a precedent and a reason to change official policy, but when it loses a binding case in a higher court, it is sometimes ignored. The belief voiced by many businesses facing these challenges is that HMRC has gone through all the obvious, high-value tax avoidance targets and often met with resistance or the likelihood of expensive court cases being drawn out for years. They are worried that HMRC is hoping to achieve some easy results by targeting smaller businesses using novel arguments against VAT treatments that have been accepted for years."

"The cost of challenging demands for extra VAT through the courts can be prohibitive for a lot of small businesses, and many will simply decide it's simpler and more cost-effective to just write a check to HMRC, even if they believe the demands are incorrect."

There are concerns among SMEs that they are treated as "second-class citizens" in VAT disputes, in comparison with large businesses, the firm said. Large firms are appointed Customer Relationship Managers, while smaller firms must deal with HMRC staff in local offices nationwide. Newark said: "HMRC's Customer Relationship Managers are highly-trained, experienced tax professionals that deal in depth with a relatively small number of large, complex businesses. They have a day-to-day relationship with the businesses they work with, which helps them avoid any nasty surprises in their tax bills."

"Small businesses, on the other hand, run the gauntlet of HMRC's local offices and the much-maligned National Advice Service helpline and Written Enquiries office. The level of service and accuracy of decisions they receive from HMRC can vary quite widely, and there is concern that many of them struggle to get a fair and cost-effective outcome from investigations because of that."

TAGS: court | compliance | VAT tax authority guidance | tax | small business | business | value added tax (VAT) | tax avoidance | VAT legislation | law | United Kingdom | tax authority | professionals | legislation | HM Revenue and Customs (HMRC) | retail | HM Revenue and Customs (HMRC) | services | VAT case law | VAT compliance matters | Tax

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