Many clients think that having just had an inspection by an HMRC VAT inspector, they’ve had a ‘clean bill of health’ if no matters or issues are brought out. A recent case in the High Court (Realreed Ltd) highlights that that is NOT the case. The Taxpayer argued that successive HMRC officers had inspected the business without querying the exempt liability treatment of business income, and highlighted that the officers had regularly reviewed (and amended) related partial exemption calculations (which often showed exempt income in excess of 60% of total income). In doing so, they claimed that they had a ‘legitimate expectation’ to be able to rely on the involvement of the HMRC officials as confirmation that their declarations were in order.
HMRC’s view was that VAT visits were not full audits to check compliance with all relevant aspects of VAT law that may apply; the Court appears to have followed that line, focussing on the fact that the taxpayer had not specifically raised the liability question and none of the inspectors had apparently critically reviewed the liability question. Leaving aside the significant routine practical difficulties in getting HMRC to actually provide any kind of view or ruling on supplies (many requests under their ‘Non-Statutory Clearance Service’ simply illicit the response that the Taxpayer should refer to the public guidance), the case highlights the importance of good note and record keeping.
The Court was presented with limited evidence of what was discussed – if the taxpayer had maintained records (or sought access to the HMRC visit reports), they may have at least had a better chance of convincing the Court of their expectation. The Court was not swayed by what the Taxpayer set out as what the expectation of a VAT inspection should or should not cover.
The key learning is a return to the basic principle – that VAT is a self-assessing tax and the Taxpayer bears the responsibility for ensuring compliance. Part of that responsibility is to be clear on the liability of income and in cases of doubt, take notes and seek advice – from HMRC or your tax advisor.
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