I received an email this week asking one of the most common questions about VAT: “how much does it cost to appeal HMRC’s decision?” And it made me think not just about potential consultants/accountants/legal fees, but the other things that you don’t consider. So I started to think: what’s the real cost of appealing a VAT decision?
Usually these queries are about the direct costs of appealing HMRC’s ruling. These would typically include preparing a letter explaining the taxpayer’s reasons for disputing the ruling and asking HMRC to carry out an internal review of their initial decision. Then, if HMRC uphold the original decision, submitting an appeal to the VAT Tribunal and the costs of representing the appellant.
But as I’ll explain below, the professional costs are only one very distinct part of what can be a long drawn out nightmare, which has serious effects for the business, causing long term financial and trading problems. And the implications for the business owners can be the worst; sometimes with life-changing implications for them and their families.
The professional costs
In practice, the cost of any review or appeal depends on who you engage, the complexity of the case, and the advisor’s hourly rates.
I would say that at the very least, if you engage an independent consultant or smaller accountancy firm to write a letter requesting a review of HMRC’s initial ruling, you can expect to pay anything upwards of £1,000. This might just about cover the cost of a meeting/teleconference with the advisor, their review of the facts and writing the letter. In reality, even at the more affordable end of the scale, the cost is more likely to be at least £2,000 – £3,000. The larger accountancy firms would probably charge upwards of £5,000 for this part of the process. If you have to go to the Tribunal, the potential cost is mind boggling.
And remember that these figures are the lowest you can expect to pay.
The time cost
But that’s just the direct costs of the professionals. The actual cost, in terms of disruption to your business and personal life can be significantly higher.
To begin with, it can take a large amount of time just to deal with the basic appeal process – dealing with HMRC, your advisors, the bank etc. And the whole process can take anything from a couple of months – if HMRC agree to withdraw their ruling in the course of their internal review – to the best part of a year if you have to go to the Tribunal. This is a huge draw on management resources and can cause all sorts of disruption to your business.
The costs you never anticipate.
But the true costs of appealing are the ones that you don’t anticipate; the financial drain on a business, and often major problems for the business owners and their families.
If HMRC have issued an assessment for underdeclared VAT, you normally have to pay the VAT before they will consider a review or go to the Tribunal. You might have to borrow money to fund the VAT payment and your costs. You might have been relying on a VAT repayment to pay this month’s wage bill and fund product development or manufacturing costs. And even if you ultimately win your case, HMRC are not required to pay any of your costs, so either way you’ll be left out of pocket.
Consider this scenario: you can’t pay the VAT assessment, you lose customer orders because of the disruption and the business ends up bankrupt EVEN THOUGH THE ASSESSMENT WAS INCORRECT. You’re still left having to foot the bill and sort out the mess.
HMRC’s ruling could be the most significant issue affecting your business and, in many cases, your personal and family life. Unfortunately, as far as HMRC is concerned, you’re just another taxpayer and you’re no more important than anybody else waiting to be dealt with. You end up stuck in the system and unless you have the economic clout that would enable you to dictate terms to HMRC (of course HMRC would never admit to such situations), there’s little you or your professional advisors can do to expedite the process.
Of course, dealing with VAT or any other tax is one of the costs of running a business.
It goes without saying that the best way of avoiding this situation is to make sure that your VAT affairs are correct in the first place, but we all know that HMRC can still disagree, even in the best, most well-organised businesses.
Marie
September 2015