How do you solve a problem like….a VAT dispute with HMRC?
In our experience, most businesses generally try hard to comply with their VAT obligations – an approach we wholeheartedly recommend. When advising our clients on VAT issues we also always try to take a constructive approach and strive to maintain good relations with “the VAT man” (or woman!).
However, there are occasions when taxpayer and VAT inspector simply cannot accept each other’s point of view. In this article, we explore some of the options for resolving such disputes.
In the last couple of years we have had considerable success in settling a number of cases (across a wide range of issues) using each of the methods described below.
If you do find yourself in disagreement with HMRC on a VAT issue, we highly recommend that you explore the following options to try and break the deadlock.
What does a typical case look like?
Most commonly, the disputes we advise on arise from one of three areas:
- The taxpayer has sought a ruling on a doubtful area (‘non statutory clearance application’);
- HMRC have made a change to existing legislation and/or policy where the effect on a particular taxpayer’s situation is unclear; or,
- As the result of a routine VAT inspection.
The disputed issue could, in theory, relate to any aspect of VAT. In our experience, however, it will very often centre on one of the following areas:
- The VAT liability of a product or service;
- Whether or not a product or service is supplied in the UK;
- The amount of VAT a taxpayer is entitled to reclaim on their costs; or,
- The value of a supply.
What should I do if a dispute arises?
There are a number of different options available here. The three that we usually recommend are:
- HMRC Review
- Alternative Dispute Resolution (ADR).
In the second part of this article, we will set out a summary of the pros and cons of each of these strategies.
How it works
In cases where HMRC make a formal decision on a VAT issue, they must make the offer of a review. The taxpayer isn’t obliged to accept this and may decide instead to proceed directly to litigation and/or ADR (assuming the matter is suitable for either of those routes).
In practice, we often advise clients to accept the offer of a review as, if it works, it is likely to provide the least formal (and least expensive) method of resolving a dispute.
- Relatively inexpensive
- Relatively quick (HMRC have 45 days in which to carry out a review)
- Does not preclude formal appeal/ADR route (if review unsuccessful)
- HMRC have the opportunity to identify an incorrect decision/apply discretion/reach agreement with the taxpayer on the points in dispute.
- Taxpayer only has 30 days in which to accept offer of review
- Whilst taxpayer can request that review be carried out by an officer not previously involved in the case, it is still an internal HMRC process and, therefore, not fully independent
- If positions are entrenched, a review is unlikely to resolve the position.
How it works
VAT litigation normally starts with a formal appeal being lodged at Tribunal (First Tier or Upper Tribunal depending on the nature of the specific case). Once the preparation is complete and a date is set, the appeal proceeds to a formal hearing in front of a Tribunal judge.
- Tribunal is completely independent of HMRC
- HMRC HQ and/or Solicitors’ Office will review the case in preparation for Tribunal (cases are sometimes resolved as a result of this process)
- If you win, HMRC are bound by the result (although if the appeal is on a point of law, they could potentially appeal to a higher court)
- If you win, you may be entitled to costs (although these are less likely to be awarded under the current appeal regime)
- Can be expensive (professional representation at Tribunal is strongly recommended)
- Formal process (can be stressful)
- Returns and payment must be up to date before appeal can proceed
- Normally, you must pay or deposit the disputed amount of tax upfront.
How it works
There are two ADR schemes: one for Large and Complex cases, the other for Small and Medium Sized Enterprises.
These are a fairly recent addition to the ‘armoury’ of dispute resolution strategies.
In essence, the ADR process is one that both parties must sign up to in an effort to resolve the case.
The process works by using a trained facilitator (who will either be external and, therefore, fully independent; or, an HMRC officer who will give a formal undertaking to act neutrally). The facilitator will work with the taxpayer and HMRC to reach a negotiated settlement.
- Relatively quick and inexpensive
- Still possible to appeal (subject to normal rules) if ADR fails
- Offers scope for negotiation
- A ‘round the table’ rather than ‘across the table’ approach
- Result is confidential and does not reach the public domain.
- Not suitable for cases where HMRC take the view there is a ‘red line’ issue which would require a change to their policy
- Requires careful preparation for what will be a very intensive day.
We recently concluded our first case using the ADR process. We were most impressed with the overall process – and our client was extremely happy with the end result. We expect many more cases to be settled using this route in the future.
Top tips for surviving a VAT dispute
- Seek appropriate professional advice early in the process
- Be realistic about the best outcome achievable
- Try to keep emotions out of the dispute (difficult we know!)
- Whether you go for review, litigation or ADR, think: “preparation, preparation, preparation”. This is absolutely crucial to your chances of success.
We are always happy to have an informal chat about any VAT problems you might be facing. If you have any questions or need any further information, do get in touch at: Rhona.firstname.lastname@example.org.