VAT claim rejected because of lack of evidence that services were provided. One of my clients submitted a claim for VAT on services received from associated businesses. HMRC has recently refused to pay the claim because they don’t believe that the business has received the services. This is despite the fact that there is a group agreement setting out the arrangements between the companies for supplies of goods and services, plus the work done is evidenced by time sheets. So what is going on here?
So what’s going on?
My client has invested £200k of her own money in setting up a new business. The money came from the sale of her house and other personal assets. Her business is complex and her products must be developed in accordance with strict legal and industry requirements. Like many new businesses, the business’s cashflow is VERY tight and the VAT repayments are a crucial part of the cashflow needed to enable the business to develop.
And this is no small business venture. The group already has agreement in principle for contracts worth several hundreds of thousands of pounds for sales to major highstreet UK retailers and public organisations. This will generate millions of pounds in turnover, employing people in both the manufacturing and logistics process (amongst others) and provide substantial tax revenue from the government. However the products CANNOT be sold until they have gone through meticulous testing and development.
Most of the costs are for supplies of services from associated businesses, who supply high level specialist services to develop the goods and services to meet both UK legal requirements and industry standards. The work is detailed and must be carried out with meticulous attention to detail and can only be done by people with very high levels of skill and experience. So the costs are very high and the VAT claims are high. And like many new businesses, the company receiving the services is on monthly VAT returns to get the benefit of quick VAT repayments.
The arrangements between the group companies are set out in a detailed group agreement, which provides the basis for supplies between the companies.
Despite providing normal commercial evidence that the services were carried out, HMRC say that they do not believe that the services have been provided so will not pay the company’s VAT claim. HMRC has not gone so far as to say that the claim is fraudulent, but they simply don’t believe that the services have been supplied and that they do not accept that the arrangements set out in the group agreement are valid.
LEADING TAX COUNSEL HAS ADVISED MY CLIENT THAT THERE IS A VERY GOOD CHANCE OF SUCCESS AT THE TIER ONE TAX TRIBUNAL.
So why have HMRC refused this claim?
Most tax issues are complex and HMRC’s decision/review letters are set out in long and detailed letters to justify their case, which, according to tax counsel, is incorrect. But the simple fact is that HMRC won’t accept evidence that demonstrates that services have been “supplied” albeit that the evidence would normally be accepted if the services were provided by third parties.
What makes it worse for my client is that 2 previous VAT return claims which included invoices for services from the same companies were approved after visits by a different VAT officer. So it seems that either the initial claims were approved in error, or that HMRC has changed its policy and now requires associated businesses to provide a much higher level of proof that services have been supplied than they would accept if the services were received from a third party. In my client’s case, the work was done, but HMRC have said that they don’t believe that services were supplied. But I don’t know how else my client could demonstrate other than by showing timesheets and explaining about the projects that were being carried out.
I’ve seen HMRC agree repayments for VAT on services from associated businesses where the arrangements were not even in writing, or were the contractual equivalent of being written on the of an envelope.
If HMRC has changed its policy when it comes to the level of proof it requires to demonstrate that services between associated businesses are being supplied, or that they believe that such arrangements between FULLY TAXABLE associated companies are a form of avoidance, they should tell the business community so that other businesses aren’t caught out by organizing their affairs using similar arrangements.
And it’s not simply a case of them refusing a valid VAT claim. In the past, HMRC were required to pay costs of a taxpayer if they made an incorrect decision which was rejected at the Tribunal or in the courts. And this is only fair. If the police were to charge someone of a crime based on unsafe evidence, the law requires that the charged has fair legal representation, which is absolutely right. And taxpayers should also have access to justice.
But now, because of the government’s cost cutting programme, HMRC are no longer required to pay the costs. So unless you’re a large business with access to funds to pay your own costs, HMRC can go ahead and treat taxpayers with disdain because they know that most taxpayers can’t afford legal representation and therefore will not appeal decision that are at best dubious and at worst incorrect and based on their misunderstanding of the facts.
This is not acceptable in our society. As far as I’m concerned, every single one of us, whether in our personal tax affairs or our business tax affairs, is entitled to proper support in dealing with errors made by HMRC or any other government department. If a taxpayer makes mistakes, even if they’re honest mistakes or mistakes caused because we’ve not understood the rules, we end up paying a penalty. So it seems totally unfair that HMRC are allowed to make mistakes but never suffer any penalty when they make a mistake.
I thought government departments were there to provide services, funded by taxpayers, for the benefit of the taxpayers. But this feels like a chapter straight out of “1984” and, for my client, a nightmare situation.
I’m told by a very reliable source that HMRC are increasingly issuing questionable rulings to SMEs, perhaps to try and establish precedents in certain areas of the tax. But I wonder if it’s because they know that the taxpayer probably can’t afford to appeal? And apparently a lot of businesses do back down. Some of these businesses end up becoming insolvent, others take their businesses abroad, while the government benefits from the VAT collected. Is this how the government supports SMEs?
<strong)And what about the human cost?
So why do people bother to set up businesses? Well you certainly don’t do it for 9 to 5 hours or for an easy life. Anybody who is self -employed is used to the regular 12 hour days, working at weekends as par for the course. But the main reason is to earn a living. It’s the same whether you’re a self-employed tax consultant or you have brilliant ideas to develop and sell goods or services on a larger scale. But the ultimate reason is to provide for your family. And for my client, the effects for her family of HMRC’s refusal to pay the VAT claimed have been very distressing.
David Cameron and his government have made a lot of publicity over the years about their support for SMEs. That seems very hollow when you consider how their tax collecting department uses their excessive powers to collect revenue incorrectly. If it was any government organisation, I can’t help thinking that such actions would be regarded as fraudulent.
HMRC say that they cannot take the personal affairs of business owners into account when dealing with tax. I think this is unethical and NOT in keeping with what I believe to government for the good of the people. We all know that there are people who commit fraud and evade paying taxes. But those are the exception, rather than the rule. As far as the rest of the taxpayers are concerned (and make no mistake, we ALL pay tax, whether it’s VAT on buying toilet rolls or income tax), most of us are simply doing the best we can to make a living and support our families.
It seems to me that HMRC are abusing their powers to put taxpayers in a position where they cannot afford to appeal against an incorrect decision.
Nobody ever says that running a business is easy. But to have such problems dealing with a government department is not acceptable. HMRC seem to pay lip service to the concept of treating taxpayers with dignity, fairness and even basic human rights.
In the meantime, my client has to wait months to get to the Tribunal and will have to deal with HMRC reviewing the other companies and claims in detail. probably issuing incorrect assessments for VAT she has previously claimed. It’s not going to be an easy time.
Marie
April, 2015