‘Aggressive’ HMRC loses 3 in 5 appeal cases

Thursday 11 July 2013

Pressure from government is forcing HMRC to take too aggressive an approach to tax penalties, a major law firm has said.

Pinsent Masons is arguing that the tax authority loses three out of five VAT appeal cases because mounting pressure from Whitehall is pushing officials to be somewhat overzealous in looking for cases of evasion.

The most recent report from the tax assurance commissioner was published at the start of July, showing that of 30,345 VAT appeal cases brought in 2011-12, as many as 18,317 - 60 per cent - resulted in the taxman’s decision being reversed. Among the 12,000 cases that remained, 9,785 were upheld, while the rest were changed at appeal.

Jason Collins, head of tax at Pinsent Masons, says that this is largely the result of HMRC becoming more active in its pursuit of VAT receipts.

VAT is one of the most hotly contested taxes the UK pays and a thorn in the side of tax authorities. An earlier report from the National Audit Office fired harsh criticism at HMRC for its inability to collect the tax after it found that VAT made up £9.6 billion of the UK’s huge £32 billion tax gap.

“HMRC is operating under a lot of pressure to increase its revenues across the board, but this pressure is particularly acute in VAT,” says Mr Collins. “The NAO report highlighted the huge difference between the VAT HMRC believes it should be collecting, and the amount it actually does receive.”

As a result, tax officials may be feeling the need to issue more and more penalties.

“The fact that HMRC loses 60 per cent of the penalty cases that businesses appeal shows that it may have become over-aggressive in hunting for cases of VAT evasion, and is making errors in issuing penalties,” Mr Collins adds.

HMRC has responded by pointing out that less than four per cent of the total penalties issued were actually cancelled on review. Indeed, most of the review cases regard late filing penalties, most of which are issued automatically and can be overturned if the taxpayer has a reasonable excuse for not submitting their paperwork by the deadline.

Indeed, the tax authority said that its new review system means appeals are being resolved quickly and at a much reduced cost to the taxpayer.

VAT has been a part of the UK tax system for 40 years this year and accounts for £100 billion of the UK’s total tax revenue. But for contractors working as limited companies and sole traders, who offset their business expenses against their VAT, an erroneous decision from HMRC can potentially have serious consequences.

The traditional appeal system has often been accused of demanding time and resources that many of the country’s smallest businesses cannot afford to waste. In the face of a hefty tax bill, this could lead to some small companies and contractors facing real financial trouble. However, new methods such as the Alternative Dispute Resolution service allow businesses and individuals to save considerable resources by working with HMRC through a specially trained, neutral mediator.

By Victoria McDonnell

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