Just because an HMRC VAT review doesn’t result in a VAT assessment doesn’t necessarily mean that HMRC agrees with what you’re doing.
Since 1989, a property company, Realreed, had owned a freehold block of over 600 flats in London known as Chelsea Cloisters. The company treated its supplies of the flats as VAT-exempt residential lettings and didn’t account for output VAT on its income.
However, in 2019 (following a VAT inspection in 2017) HMRC informed Realreed that the business was making VAT-able supplies of accommodation on the basis that, since at least 2005, two things had changed:
fewer Assured Short-term Tenancy agreements had been signed and the proportion of occupants who stayed for more than 28 days had steadily decreased; and
Realreed’s marketing had changed from direct marketing, including to Human Resources teams at large city institutions, to short-term / leisure travellers through Realreed’s brochure and website and the use of internet booking agencies.
In effect, HMRC was saying that the business was operating like a hotel, and consequently it raised output VAT assessments totalling £4.8m for the previous four years (the normal statutory limit for such retrospective VAT assessments).
A ‘legitimate expectation’?
Unsurprisingly, Realread appealed, challenging HMRC’s 2019 assessments in the Tax Tribunal on VAT technical grounds, and bringing legal proceedings in the High Court.
The basis of Readreed’s legal case was that, even if its supplies were VAT-able, HMRC’s decision to issue retrospective VAT assessments was “unreasonable, conspicuously unfair” and an “abuse of power” because:
HMRC had never queried Realreed’s VAT treatment of its supplies during any of its 11 VAT inspections in 1992, 1993, 1995, 2005 and 2014, and
HMRC raised low-value VAT assessments during these inspections on related VAT issues that were based on Realreed’s supplies of the flats being exempt.
Realreed therefore argued that it had a ‘legitimate expectation’ that HMRC had agreed that its income from Chelsea Cloisters was VAT-exempt.
The importance of evidence
However, the High Court sided with HMRC and their decision came down to a lack of evidence that during any of HMRC’s VAT inspections before the 2017 inspection:
Realreed had informed HMRC (and provided ALL relevant supporting information / documents) as to how its supplies of Chelsea Cloisters had materially changed over the years
Realreed had told HMRC how the business had concluded that its supplies were all still VAT-exempt despite the changes to its supplies
Realreed had asked HMRC to give a view on the VAT treatment of its supplies in light of the changes
HMRC had given its view on the VAT treatment of Realreed’s supplies in light of the changes.
In addition, because HMRC could not issue VAT assessments going back more than four years, the High Court found that Realreed had actually made a significant VAT saving by applying the incorrect VAT treatment to its supplies.
Don’t just assume
Businesses incorrectly read too much into HMRC (i) having sight of their transactions and (ii) not challenging the business’s chosen VAT treatment of those transactions at the time. To avoid a similar fate to that of Realreed, businesses faced with an HMRC VAT review (even just a pre-credibility check of a VAT return showing a net VAT refund) should consider taking the following steps:
Clarify the purpose of the review and which transaction(s) HMRC will review
Provide all the information / documents HMRC needs in order to reach an informed view of the correct VAT treatment of the relevant transaction(s)
Keep (for many years) a detailed record of the review including (i) all information / documents provided to HMRC, (ii) written confirmation of the outcome of the review and (iii) any next steps from HMRC
Specifically ask for HMRC’s view of the VAT treatment of the relevant transaction(s) giving HMRC options (with supporting rationale) for differing potential VAT treatments.