A recent tax tribunal case holds several lessons for taxpayers who are informed by HMRC that they have underpaid their VAT.
Mr Hodges ran a scaffolding company, Aqua Scaffolding Limited “Aqua” between 2006 and 2011.
One of HMRC’s offices ran a series of “street sweeps” under which a HMRC employee would travel down a residential street noting down contact details of building trade businesses working on different houses. HMRC subsequently visited the traders to see whether there were invoiced sales for the addresses sighted.
Over the course of 3 years HMRC spotted Aqua’s scaffolding 10 times, and of these found only one invoice for a sighting in its records. The one man company had a declared turnover of £401,915 for the four and half year period of VAT quarters from 12/06 to 03/11. On the basis that the company appeared not to have declared VAT in respect of nine out of ten of the street sweep sightings HMRC multiplied turnover by 10 and assessed the company for the VAT due on a now revised turnover of £4,019,150 less the £401,915 of sales already declared, it arrived at £529,536 of VAT due. This was more than the company could pay. As a result of non-payment, HMRC put the company into liquidation.
HMRC had assessed both the company and Mr Hodges personally for penalties on the basis of dishonest conduct. Initially, Mr Hodges did not realise, that even though the company had been liquidated, HMRC were still seeking to penalise him personally.
Eventually Mr Hodges appealed against the penalties.
At the Tribunal hearing, it was pointed out that it was absurd for HMRC to think that one man would not have been able erect £4 million of scaffold, and there was no evidence of a “secret” workforce, or the number of vehicles, that would be required in order to deliver this level of sales. The lack of depth to HMRC’s evidence was noted. HMRC acknowledged in its statement of case that its assessment was “unrefined”.
The Tribunal found that the director was guilty of dishonest conduct, as he had concealed VATable takings. However it found that HMRC’s assessment had been poorly judged. To assess for the large amounts that they did on the basis of the street sightings alone was crude. The parties were requested to provide revised assessment and penalty calculations and the taxpayer’s which considered how many man hours were available in each year, and how much scaffold that it would have been physically possible for one man to lift, won the day.
It is disappointing that this case managed to go through both a HMRC internal review and mediation without HMRC revising its calculations. HMRC’s assessments were bizarre. It may have been the case that if the assessments had been raised by HMRC at the level arrived at by The Tribunal, the business could have continued to trade.
So what can taxpayers learn from this?
· Always read any paperwork from HMRC thoroughly.
· If an assessment is made against a business on the basis of best judgement, it has to produce a result that is plausible.
· Taking early advice from a tax specialist may be money well spent.
If you would like to discuss any of the points raised here, please contact Gill Yates on 0845 177 5500 or contact us on-line.