A broker that is registered for VAT and successfully claiming refunds on input VAT from HMRC might consider that its historic refunds are secure. Unfortunately, this is not the case, as Mark Ellis explains.
Since the change in Government, we have seen a reinvigorated HMRC starting to review VAT returns filed in the past four years by brokers and other insurance sector businesses. Many of these VAT inspections arise out of a pre-credibility check of the most recently filed VAT return form that claimed a refund of VAT – and there are a number of lessons to be learned.
Lesson 1: Resolve HMRC enquiries quickly
Unless and until HMRC’s enquiries are satisfactorily resolved, HMRC holds on to the input VAT refund claimed, as well as any further input VAT refunds claimed in the meantime. This is so that any monies that HMRC identifies as owed to it from the past can be set off against the most recent input VAT refund claims. So, from a cashflow perspective, it is in the interests of the broker concerned to resolve HMRC’s enquiries as quickly as possible.
Lesson 2: Past treatment does not mean you are safe
If HMRC issues an assessment to claw back previously made input VAT refunds, the cashflow impact on the broker can be significant: the firm will be expected to pay back the refund plus interest (currently 8%) and potentially also a ‘careless error’ penalty of up to 30% of the amount of VAT clawed back. It’s tempting to think that HMRC’s previous conduct towards the broker (ie making VAT refunds without challenge) should somehow prevent HMRC from retrospectively applying its current position on previous refunds. However, that would be a mistake.
This is because the VAT Act gives HMRC the power to review, and challenge where necessary, the underlying VAT return workings going back up to four years.
Lesson 3: Input VAT refunds following a pre-credibility check are ‘provisional’
Where a broker points towards a previous four-year HMRC VAT inspection or a pre-credibility check of one VAT return that did not result in any VAT assessment raised in respect of the VAT accounting error(s) that HMRC is now identifying on a current basis, the broker may try to argue that HMRC approved its VAT accounting during those previous HMRC interactions. However, when HMRC concludes a pre-credibility check of a single VAT return form, it states the following in its closing email / letter issued to a business:
“It is important that you understand that this check is not a full audit of your VAT declarations. If we consider that a more detailed check of the same periods is appropriate we may carry out a further review at a later date.”
So, input VAT refunds received following a ‘successful’ pre-credibility check of a single VAT return form claiming a VAT refund are, as far as HMRC is concerned, provisional and subject to future HMRC inquiries as part of any future in-depth four-year VAT inspection.
Lesson 4: Unless HMRC made a positive statement in a previous VAT inspection, you could still be caught
Where HMRC has previously carried out a four-year VAT inspection without challenging the broker’s VAT accounting at the time, then a broker may feel that it has stronger grounds to rebut any retrospective VAT assessments issued now. However, the courts have confirmed that this is not the case on several occasions, the most recent of which being the case of Realreed Ltd t/a Chelsea Cloisters.
Here the taxpayer lost its judicial review High Court case against HMRC’s retrospective four-year VAT assessment issued after several previous VAT inspections had passed without incident. The Court ruled that a taxpayer can only defend against retrospective VAT assessment action where HMRC does or says something positively during a previous VAT inspection about the taxpayer’s VAT accounting (ie HMRC clearly states in writing that it agrees with the taxpayer’s VAT accounting) rather than just not take issue with the taxpayer’s VAT accounting by issuing a VAT assessment.
The same taxpayer also lost its argument in the First-tier Tribunal that HMRC should not have levied a ‘careless error’ penalty, on top of the retrospective four-year assessment for VAT and interest, because HMRC considered that the taxpayer had not taken ‘reasonable care’ in its VAT accounting. The Tribunal provided the following reasons for its view:
- The taxpayer did not take considered professional advice from a specialist VAT adviser about (i) its VAT accounting or (ii) whether HMRC’s ‘positive’ conduct following previous VAT inspections (ie no assessments being issued) gave the taxpayer a ‘legitimate expectation’ that HMRC had effectively approved the taxpayer’s VAT accounting.
- When they arrived at the business, the taxpayer’s finance director did not investigate (internally or externally) the taxpayer’s VAT accounting – they just accepted that it was correct.
- HMRC offers a VAT ruling service – the taxpayer did not use this to try to obtain positive written confirmation from HMRC that HMRC agreed with its VAT accounting.
How can a broker protect itself?
In short, obtain VAT advice from a specialist VAT adviser. Even if HMRC disagrees with the VAT accounting adopted, it does not levy ‘careless error’ penalties on top where a competent adviser has provided an arguable view that the broker’s VAT accounting is correct based upon full knowledge of all of the relevant facts.
Where there is risk that HMRC may seek to clawback previous VAT refunds (plus interest) then consider one or more of the following actions:
- Earmark funds to cover any potential future VAT assessments
- Where the total potential amount at stake is greater than £0.5m, consider taking out tax exposure insurance
- Where possible, follow the advice given by the specialist VAT adviser and change contractual and commercial arrangements to support the VAT accounting currently being adopted.
For further advice on issues raised in this article, please contact Mark Ellis.
