Andrew Needham, Busy Practitioner
Using alternative dispute resolution to resolve disputes with HMRC
Under normal circumstances if a business has a dispute with HMRC the usual procedure would be to ask for a formal reconsideration of the disputed decision by an independent officer. If HMRC does not accept the business’ arguments and upholds the decision, the next step would be to appeal to the independent First-tier Tax Tribunal (FTT). This can be time-consuming and costly, particularly as you can’t claim your costs back even if you win!
Alongside these legal rights HMRC has introduced a new alternative dispute resolution (ADR) procedure following extensive trialing. This service aims to help resolve disputes or to reach agreement on which issues need to be taken forward to the FTT for a legal ruling. In order to retain their legal rights, businesses should ask for a statutory review or enter an appeal to the tribunal as well as asking for ADR. If negotiations are going badly a business can also ask for ADR before the VAT man has made a decision.
The tribunals support the new ADR and will ‘stand over’ a case for three months to allow mediation to take place. HMRC will arrange for someone who has not been involved in the case to work with the business and the officer dealing with its case. The person leading the ADR is specially trained to act as a neutral third party mediator. However, they do not take over responsibility for the case. The decision on settling a case stays with the business and the officer handling it.
The person leading the ADR will work with both parties to explore ways of resolving the dispute through meetings and telephone conversations. They will help focus on the areas that need to be resolved and, if needed, help re-establish dialogue. In some cases the business might agree with the VAT man to jointly pay for a professional independent mediator – but obviously this will cost the business money.
A business can ask HMRC to consider ADR or its accountant or tax adviser can ask on its behalf. If you want to ask for ADR there's an online form to send your details to HMRC.
ADR can be particularly useful in long-running disputes where positions on both sides have become entrenched, or progress for whatever reason has stalled. For example, ADR could:
- narrow down the areas of disagreement in one or more component parts of a dispute by clarifying technical issues;
- identify points of difference whilst maintaining or creating good working relationships between the parties;
- unlock provision of further information or assist parties to agree key facts;
- clarify the key questions which need to be answered in order to resolve the dispute (ie agreeing a decision tree); or
- even if settlement is not reached, the process usually results in narrowing the particular points in dispute in preparation for litigation.
ADR is not appropriate for disputes about:
- fixed penalties on the grounds of reasonable excuse; or
- cases being dealt with by HMRC’s criminal investigators.
NOTE: The fact that over 400 applications have been received by HMRC’s Alternative Dispute Resolution Service indicates how successful the scheme has already been. Richard Summersgill, Director of Local Compliance, said: ‘ADR has shown that many disputes, where an impasse has been reached, can be resolved quickly without having to go to tribunal.’
EU Commission to challenge reduced and zero VAT rates
The EU Commission has held a consultation as ‘part of an assessment process’ which it says ‘is not proposing the abolition or introduction of any reduced VAT rate at this stage.’ The results of the public consultation will feed into the preparation of new proposals on VAT rates, which the Commission will present later this year.
Algirdas Šemeta, Commissioner for Taxation said: "It is high time that we take a fresh look at reduced VAT rates. Member States need new revenue sources, while businesses need simpler tax systems with fewer compliance costs. Today we are asking whether certain reduced VAT rates are delivering what they seem to promise, or whether they pose more problems than they are worth."
The areas covered by the consultation were:
- abolition of those reduced rates which constitute an obstacle to the proper functioning of the internal market. Reduced rates justified in the past can have distorting effects today because the economic, business and legal environments have changed in the meantime;
- abolition of reduced rates on goods and services whose consumption is discouraged by other EU policies. This could notably be the case for goods and services harmful to the environment, health and welfare;
- similar goods and services should be subject to the same VAT rate and progress in technology should be taken into account in this respect, so that the challenge of convergence between the on-line and the physical environment is addressed.
It appears that the housing, energy and water industries are on the Commission’s radar on environmental grounds. Drugs, medicines and aids for disabled people could also become more expensive, along with children’s clothing, if it is decided they fall under the Commission’s distortion category due to internet sales.
Import relief for goods supplied onward to another country
VAT Notice 702/7, Import VAT relief for goods supplied onward to another country, has been changed to make it clearer that a VAT-registered importer acting as agent in an onward supply must be ‘acting in his own name’ in relation to that supply. It has also been amended to address changes to the way VAT numbers are entered in box 44 of the import declaration.
VAT liability of rooms provided with catering
Revenue & Customs Brief 02/13, VAT liability of rooms provided in hotels or similar establishments with catering, confirms HMRC's view of the VAT treatment of rooms provided in hotels and similar establishments for the purpose of supplies of catering. It is issued following the review and publication of Notice 709/3, Hotels and holiday accommodation.
HMRC confirms that the provision of accommodation in an hotel, inn, boarding house or similar establishment for the purpose of catering is standard-rated regardless of whether the catering is provided by the operator of the hotel etc, or by another person.
A new system, called notification of vehicle arrivals (NOVA), is being introduced to improve the process for notifying HMRC and paying the VAT due.
From 15 April 2013 vehicles entering the country for permanent use on UK roads will have to be notified to HMRC within 14 days and any VAT due accounted for. This means that taxpayers will not be able to register and license their vehicle with the DVLA until they have received confirmation from the VAT man that their notification has been processed and any VAT due has been paid.
Updated VAT notices
The following VAT notices have been updated to take account of the updated penalties regime and various other general changes:
- VAT Notice 701/21, Gold
- VAT Notice 701/49, Finance
- VAT Notice 727/5, Retail schemes: How to work the Direct calculations schemes
- Notice 275, Customs: Export procedures
Making a mixed supply of land and other services
HMRC contended that the appellant company made a single standard rated supply of services and assessed it for £8,479 in underpaid output tax. The appellant contended that it made a single supply of a licence to occupy land which was exempt from VAT.
The appellant in Antiques Within Ltd v Commissioners for Revenue and Customs  UKFTT 89 (TC) traded as an antiques centre and rented out in the region of 70 per cent of its floor space to other antique dealers referred to ‘stallholders.’ There would at any given time have been between five and nine such stallholders, each one occupying either a designated room or a designated space in the main retail area. In either case the space allocated to stallholders was specified and discrete to them, and within it they would display their goods for sale. Each stallholder made one single weekly payment to the appellant ranging from £50 to £100 depending in the main on the size and location of his/her particular space.
The stallholders were often absent, so the appellant collected and recorded monies from the sales of their stock and passed on this income when the stallholders returned. No extra charge was made for this service.
Analysing the transactions before it, the First-tier Tribunal (FTT) was of the view that what the stallholders were getting for their payment were two distinct principal services. They were supplied with a designated and discrete area of space from which to operate – to display their goods and to make their sales. Additionally, they were offered a sales service – a facility by which their displayed goods could be sold even when they, the stallholders, were not on site. Neither of these quite distinct supplies could be seen as merely incidental, or ancillary to, the other.
The FTT decided the stallholders were receiving an exempt supply of an area of space from which to operate, and a standard rated supply of a sales facility which they could take up if they wished but need not if they did not. Therefore the appellant succeeded in part. The tribunal left it to the parties to decide on a fair apportionment of the charges.
When making a mixed supply of land and other services it is necessary to consider if there are two distinct supplies, in which case you might be making a mixed supply of standard-rated and exempt supplies. Alternatively, if one of the supplies is ancillary to the other it is a single supply with a common VAT liability.
First-tier Tribunal could not adjudicate claim based on ‘legitimate expectation’
The central issue raised in Commissioners for Revenue and Customs v Abdul Noor  UKUT 71 (TCC) was whether the First-tier Tribunal (FTT) has any jurisdiction, when dealing with a VAT appeal, to consider a taxpayer’s claims based on the public law concept of ‘legitimate expectation.’
The appeal was from the FTT’s decision released in May 2011. The tribunal allowed Mr Noor’s appeal after HMRC refused a claim to input tax on services incurred prior to registering for VAT.
Mr Noor encountered problems with a builder during the construction of a small commercial property. This resulted in legal action and a reference to adjudication before the building was completed. As a result he received three invoices from the solicitors, dated 24 August 2007, 16 October 2007 and 29 February 2008, and an invoice from the adjudicator dated 3 December 2007.
At the end of 2007 Mr Noor visited the Llanishen office of HMRC to seek advice as to when he should register for VAT so as to be able to claim input tax in respect of the costs incurred on the construction of the property. He was directed to a telephone on a wall of the office on which he could contact HMRC’s telephone National Advice Service (‘NAS’). He was told that he should keep all invoices relating to the new build as he ‘could claim VAT under the option to tax within three years’ – whatever that meant!
HMRC subsequently inspected Mr Noor’s records and disallowed the input tax on the grounds that it was incurred more than six months prior to registering for VAT. Mr Noor appealed on the grounds of legitimate expectation, and the FTT found in his favour. HMRC appealed to the Upper Tribunal (UT).
The UT decided that the FTT erred in law in its approach to the doctrine of legitimate expectation and as to when HMRC, by applying the VAT legislation rather than acting in accordance with advice given to a taxpayer by HMRC, abused their powers. On the facts found by the FTT regarding the relevant telephone conversation and the circumstances surrounding it, no reasonable tribunal could have concluded that Mr Noor had a legitimate expectation such that it would be so unfair as to amount to an abuse of power for HMRC to refuse his claim in respect of the VAT on the Invoices. The UT found for HMRC.
Andrew Needham BA CTA, VAT Specialists Limited (firstname.lastname@example.org)