Shambles and a Disgrace

HMRC humiliated at tribunal

HMRC were recently scolded by the First Tier Tax Tribunal for allowing a VAT appeal to get as far as a tribunal hearing.

Background

Gekko & Company Ltd are a property investment business that registered for VAT in May 1997.

In 2015, the company underwent a VAT compliance check which culminated in HMRC raising an assessment and penalties in respect of a number of errors, as follows:

All penalties, with the exception of the Ferry Lane penalty, were offered for suspension provided the conditions for such were abided by for a period of six months. This is because penalties can only be suspended for ‘careless’ behaviour.

In January 2016, the company asked HMRC for a review of the case which resulted in the following:

• Penalty notices had been issued incorrectly and would have to be cancelled and reissued correctly.
• The VAT officer would be asked to reconsider the characterisation of the ‘deliberate’ behaviour in relation to Ferry Lane and if there was any possibility of the penalty being suspended.

The VAT officer partly heeded her colleagues’ recommendations and revised the penalty assessments as follows:

All penalties were available for suspension this time.

In May 2016, the company e-mailed HMRC to object to the disclosure of the sale of Ferry Lane now being treated as “prompted”. Had it remained treated as “unprompted”, then the penalty could have potentially been reduced to nil. A month later, Gekko & Company Ltd appealed to the Tribunal against the penalties.

Hearing

The Tribunal cancelled the VAT and penalty assessments and then went on to order for costs against HMRC, which is rare in such cases. As the case was classified as a standard case, the Tribunal could only make an order for costs if they considered that “a party or their representative has acted unreasonably in bringing, defending or conducting the proceedings.”

HMRC has a ‘Code of governance for resolving tax disputes’ and within that a Litigation and Settlement Strategy (LSS). Paragraph 15 of the LSS states:

“HMRC will aim to work disputes to the same professional standard whether or not the disputes are ultimately resolved by agreement or through litigation. Furthermore, HMRC will not usually persist with a tax dispute unless the revenue flows potentially involved justify doing so and HMRC has a case which it believes would be successful in litigation.“

In the judge’s view, a failure to abide by the LSS in a material way would be unreasonable conduct by HMRC.

That the HMRC caseworker changed her view of the Ferry Lane transaction from being “unprompted” to “prompted”, the Tribunal found disturbing for two reasons. Firstly, there was no explanation as to this change of heart. Secondly, when the taxpayer spotted the change they were given an explanation which, according to the judge, “beggars belief” as an appropriate response. This involved a flagrant misreading of a passage from a VAT Notice and a complete ignoring of an admission that had been previously made by the HMRC caseworker.

The Tribunal considered that there were two explanations for this abrupt one-eighty degree turnaround. One was that there was incompetence on a grand scale. The other was that there was a deliberate decision to keep the dispute alive, when on the basis of the reviewing officer’s remarks it would have been discontinued, by seeking to revisit the “prompted” issue.

Once proceedings commenced, HMRC should have considered whether the appeal should have been defended and to take the LSS into account. The Tribunal also considered that HMRC’s Solicitor’s Office should have unilaterally, ie overriding Local Compliance, decided to withdraw.

This case only serves to illustrate how detached HMRC are from reality at times and how bombastic and incompetent some of its officials are. These civil servants need to remember it is our money they are frittering away in their pursuit of personal glories. Is anyone in that department capable of exercising a modicum of common sense??