VAT: don’t get caught out for being ‘careless’ – lessons for VAT practitioners and businesses

TaxTalk - April 2024

read timeRead time: 27 mins

A significant VAT dispute with HMRC reached the First-tier Tribunal decision stage in December. Mark Ellis focuses on the key takeaways regarding ‘reasonable care’.

The dispute between HMRC and Realreed Ltd (which operates serviced apartments Chelsea Cloisters) provides many lessons to VAT practitioners and businesses alike.

It covers how to deal with the letting of dwellings on both a short- and long-term basis. It also asks whether an HMRC VAT inspection that yields no VAT assessments can be taken to be an endorsement of your current/historic VAT accounting. Spoiler alert: it does not. And it gives guidance on what it means to take ‘reasonable care’ in relation to a taxpayer’s approach to its VAT affairs.

So what actually happened? The tribunal ruled that Realreed’s letting of apartments did not qualify for the VAT land supply exemption. This was because it provided accommodation in an establishment similar to a hotel or boarding house. And, crucially, it concluded that the company was careless, even though HMRC had not challenged the liability position during any of its compliance visits.  

What does ‘reasonable care’ look like?

 Imagine a taxpayer has discussions with an accountancy firm (perhaps as part of its annual audit). Unless this includes a full conversation on the taxpayer’s VAT position, with a detailed meeting note and written advice produced afterwards, then there is no evidence that the taxpayer took VAT advice at that time.

A taxpayer should take considered professional VAT advice at regular intervals, and even try to obtain a VAT ruling from HMRC in certain circumstances (albeit it may sometimes be hard to do this in practice). That said, just the demonstration of an intention to seek HMRC’s views before a VAT inspection is carried out should be seen to be ‘reasonable care’. 

If the taxpayer does take VAT advice then they should refresh it from time-to-time (for example, as their business model changes). This will check whether the previous advice still applies in spite of a change in:

  • The taxpayer’s fact pattern

  • VAT law

  • HMRC VAT guidance

  • VAT case law precedent.

If a new finance director is appointed by the taxpayer, it’s important they themselves consider the VAT position of the business they have just joined (potentially with the help of HMRC or a VAT advisor), rather than simply accepting the position on their arrival, and doing nothing to check that it’s correct.

The importance of being proactive

Whilst VAT is a self-assessed tax, it is still policed by HMRC. So a taxpayer wanting to take reasonable care needs to consider, at regular intervals, (with the input of HMRC and/or a VAT advisor) whether its VAT accounting remains correct.

That is the meaning of Self Assessment as far as the Tribunal was concerned in the case of Realreed Ltd. Doing nothing at all, or just carrying on doing what has always been done, is not taking reasonable care. 

In my experience, businesses are usually forced to review their VAT affairs in detail either when there’s an HMRC check of one or more previously-filed VAT returns, or when undergoing a due diligence exercise on their business (for example, on sale or flotation).

But in order to demonstrate that they’re taking reasonable care in the discharge of their VAT accounting duties, businesses should instead proactively self-assess. That means reviewing their VAT affairs regularly, with or without the support of HMRC and/or a VAT advisor.

Only by doing this can businesses avoid the sting of a ‘careless error’ penalty. These can be up to 30% of any VAT back payment to HMRC as a result of VAT owed to HMRC for previous VAT return periods. And they would likely also have to pay HMRC additional VAT plus interest (currently 7.75% p.a.).

If you would like further guidance on any of the issues raised in this article please contact, VAT Partner Mark Ellis