Backdated VAT claims by HMRC

[jimbob]

Hi,

My wife has a small part time slimming business selling meal replacement packs and has traded for several years. She registered for VAT voluntarily as there is no VAT on the packs and her turnover was below the registration limit.

She has recently received a letter from HMRC stating they have looked at recent case law and they now believe that the sale of foodpacks together with the support she gives her customers are VAT able and hence that all sale proceeds she has ever had are VATable.What is worse is that they want to backdate this decision to when she started !

She is now faced with a five figure VAT bill ! Her clients are not VAT registered so all the output VAT is down to her to pay. If she had known this ruling was going to happen and then be backdated she would never have registered in the first place.Instead the first communication direct from HMRC was the “you owe us some money” letter in early January this year.

I have several questions, any snippets of information for any of them would be much appreciated !

a) Shouldn’t HMRC have written to her when they first started investigating the sale process (apparently in February 2009) to advise they were looking into it and what the consequences might be for my wife ? Instead they kept quiet, letting the ultimate amount due grow and grow ?
b)Would the withdrawn ESC3.4 Misunderstanding by a VAT trader been a help to her IF the HMRC letter had been issued a month (or even 10 days !) earlier ?
c) Is there any legislation that helps ensure the outcome of a situation like this is not disproportionate to the business concerned ? (The tax due will be much more than her entire profit in her 4 years of trading).

Thank you !

Jimbob

[Marie Stein]

Hi Jimbob

I’m sorry to hear about your situation and I can appreciate how anxious you and your wife must be about all of this.

Unfortunately I think that the answer to all 3 of your questions is no. The ESC3.4 which you mention only applies to situations where liability issues are not covered in HMRC’s guidance and your situation – which I suspect is based on the presumption by HMRC that the supplies of the meal packs and advice constitute a single supply of dietary services (or something similar – obviously I’ve not seen the HMRC letter) and this issue – i.e. the liability of food and the treatment of “mixed” or “composite” supplies are both covered in some detail in their notices. See VAT Notice 700 The VAT Guide section 8 for general information http://tinyurl.com/d64t8jr. There is more detailed guidance about specific industry issues in other notices.

Also, HMRC are not required to notify any business that they are looking into their affairs, nor is there any legislation that prevents them pursuing VAT debts on the basis that the debts are “disproportionate”.

However, I’m not certain that their ruling that the supplies are standard rated is correct and I think that it is worth challenging it. It’s difficult to give a concise summary of the reasoning as it’s based on a lot of legislation and caselaw. But it sounds as though they are saying that the whole supply of the food packs and advice is a single supply and they believe that the predominant element is the advisory services is standard rated, therefore the whole supply is standard rated.

At this stage, I don’t know whether they are correct or not. I’ve dealt with many such situations over the years and each one is decided on its facts. There are dozens of VAT tribunal cases on the subject and some have even gone as far as the European Court of Justice.

There are a number of factors that I think might work in your favour, but what I can’t do here is to provide any helpful guidance on your specific situation. I would, of course be happy to advise through my consultancy services, but before committing yourself to this, I’d be happy to have a look at the HMRC letter and have a discussion on no-obligation basis to help you decide how to proceed. At least then you’d have a better idea of the issues involved and the likelihood of getting the ruling overturned and can make a more informed decision.

If you’d like me to look at the correspondence, please email it to me at the contact address and then we can arrange a time to discuss.

Marie

[Author]

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