When it comes to HMRC and VAT, it seems there is good reason to be prepared for the worst outcome – and plan accordingly. We look at two court cases that prove the point.
Many businesses make three assumptions:
All HMRC VAT officers are well-trained and knowledgeable on VAT law, and on HMRC’s own VAT guidance
There are always internal checks to make sure that no wrong decisions are made by HMRC VAT officers
HMRC does not litigate any VAT cases where HMRC is clearly wrong.
Nevertheless, many VAT advisers who deal daily with HMRC know that none of the above is true. But these advisers find their clients are sceptical when they try to explain that they may receive an erroneous VAT assessment (plus interest and potential penalties) from an HMRC VAT officer. And that the incorrect assessment can only then be overturned through lengthy and costly litigation.
We discuss two cases below which should back up VAT advisers when talking to their clients about the view HMRC may take of their transaction(s) from a VAT perspective. They make uncomfortable reading.
Pavan Trading Limited
Following a VAT inspection on 12 October 2018, HMRC raised a VAT assessment for £70,652 on 14 May 2019 on Pavan Trading Limited (“PTL”) for £70,652 (“the assessment”). The assessment was raised on the basis that PTL had failed to provide HMRC with “evidence of export” within three months of PTL supplying goods to US customers and shipping those goods to the US. But this is not what UK VAT law or HMRC’s published VAT guidance say that a business needs to do.
PTL asked HMRC for an independent review. HMRC issued a review conclusion letter on 7 August 2019 which upheld the assessment. PTL then submitted an appeal to the First-tier Tribunal on 3 September 2019. The appeal hearing eventually took place over three years later on 13 January 2023.
At the appeal hearing, the tribunal judge pointed out that HMRC’s view of the law “is plainly wrong” and went on to say the following:
“So it seems to us the only reason that the appellant has had to bring an appeal was based on an erroneous view of the law set out in HMRC’s own Notice 703 (as well as either overlooking or misconstruing the principles in Arkeley). This error was started by Officer Bains, perpetuated by the nonsense written by the review officer, and then compounded by HMRC’s statement of case and skeleton argument.
“If there was ever a counsel of perfection for the provision of export documentation, then this appellant has achieved it.
Accordingly, we have absolutely no hesitation in allowing this appeal. To our mind the appellant has more than adequately demonstrated that within the 3 month period set out in paragraph 3.5 of Notice 703, it held all of the evidence of proof of export of the goods, as is required by paragraph 6.5 of Notice 703, in all of the 13 transactions which are the subject of the assessment.”
So, PTL finally won on 25 January 2023, five years after the HMRC VAT inspection.
Landlinx Estates Limited
In early 2017, Landlinx Estates Limited (“Landlinx”) submitted to HMRC a VAT return for the quarter ending 31 December 2016 in which it claimed a net VAT refund of £23,503, which was higher than usual. HMRC investigated the return and concluded that Landlinx actually owed HMRC VAT for that quarter. After some correspondence with HMRC, HMRC issued a VAT assessment for £237,500 on 28 June 2017 in respect of the 20% output VAT that it considered Landlinx should have paid on its VAT return for the quarter ending 31 December 2016. This was because Landlinx had received a sum of £1,425,000 in December 2016 from the owner of a piece of land in return for releasing that landowner from its obligations under a 2015 call option allowing Landlinx to purchase the land in question. So, Landlinx surrendered to the landowner its legal option to purchase the land in question.
VAT law is clear that this type of supply is VAT-exempt (which is how Landlinx had treated it) and HMRC’s own guidance said at the time (and still says to this day) the following:
“If you grant someone the right to purchase an interest in your land or building within a specified time you’re making a supply of an interest in land. The person acquiring such a right is said to have a ‘call option’ as they can call on you to sell your interest in the land or building as originally agreed. The liability of your supply will be whatever the liability of the land or building would be if supplied at that time.
“A grant includes an assignment or surrender”
On 18 July 2017, Landlinx’s accountants asked HMRC for an independent review. HMRC issued a review conclusion letter on 20 September 2017 which upheld the assessment. Landlinx then submitted an appeal to the First-tier Tribunal and the appeal hearing eventually took place two years later on 27 August 2019.
At the appeal hearing, the tribunal judge pointed out that HMRC’s view of the relevant VAT law was wrong and said the following:
“Landlinx, therefore, had every reason to believe that the grant and surrender of an option to purchase land would be an exempt supply when it entered into the Option Agreement. Indeed, we would have thought that that view would have been regarded as axiomatic for most VAT practitioners. Landlinx, encouraged in that belief by the provisions of UK domestic law and HMRC’s published practice, had no reason to require in the contractual documentation that the consideration paid to it should be VAT exclusive. Had our decision on the main point of this appeal been otherwise, a very real unfairness would have been visited on Landlinx – a matter upon which we would have been unable to adjudicate because we have no judicial review jurisdiction – and one which would have caused us to view this outcome with considerable concern. In the light of our decision, that unfairness does not now arise.”
So, Landlinx finally won on 13 May 2020, four years after the HMRC VAT inspection.
These two cases do indeed prove that the HMRC makes mistakes, and ones which are onerous and time-consuming to reverse. If you would like to discuss the issues raised in this article, please contact Mark Ellis.