Underdeclared VAT £120 = £46K VAT assessment bill
Doesn’t sound reasonable does it?
On first glance, it looks like the vat man has been overzealous and made a few outrageous estimations, however, when looked at more closely, you can understand how he arrived at such a high value VAT assessment.
I came across an article this week written by Neil Warren, an independent VAT Consultant and Columnist for “Accountingweb”.
A VAT assessment was issued to a vehicle repairer and haulier based on just two sales invoices of £300 plus VAT (£60) each. There were no other accounting records.
By the end of the investigation, the VAT assessment was made to the tune of £46440 and this was accepted by the first-tier tribunal as “reasonable and not arbitrary” and dismissed the taxpayers appeal.
The taxpayer had submitted nil VAT returns for the period December 2013 to September 2016.
HMRC had tried to contact the taxpayer to arrange a compliance visit. After no response, HMRC issued an information notice under Sch 36, FA2008.
HMRC also enquired into his income tax affairs.
There was still no response from the taxpayer.
However, during a compliance visit to another unrelated business, coincidently, two sales invoices were found as paid by this business supposedly raised by the said taxpayer for work carried out. The invoices were for £300 plus VAT each.
The handwritten pre-printed forms showed the following information:
12 Feb 2015 Invoice no 20141 – £300 plus VAT
4 Mar 2015 Invoice no 20268 – £300 plus VAT
Given that the taxpayer had submitted Nil VAT returns, having found these two invoices, it showed that he clearly had been trading and charging VAT too and therefore the returns submitted were incorrect.
So how did the calculation go from £120 to £46440?
Well… the two said invoices were within a 3-week period.
The range of invoice numbers between 20268 to 20141 suggests that 128 invoices were raised during that period – 43 invoices a week.
HMRC assumed that each invoice showed £30 VAT on average – 50% reduction in the sample of two
Therefore: £30 VAT x 43 invoices x 48 working weeks = £61920 annual output VAT. (£15480 per quarter). Given that the assessment period is for 5 quarters, the total output VAT being £92880.
A flat rate percentage of 10% was applied to this sales figure, effectively giving an allowance for input VAT.
Therefore, the final calculation being £9288 x 5 =. £46440 covering the period ending March 2015 to March 2016.
HMRC have the power to issue an assessment using their “best judgement” if they think VAT has been underpaid on a return. They are required to honestly use all information available to them and have a logical basis to their calculation.
As the only information available to them was two invoices, the burden of proof rested on the taxpayer.
Given that the taxpayer had cancelled every meeting arranged to see him and there was limited information about his records, the judge was not sympathetic to the taxpayer, resulting in the assessment being upheld and the appeal dismissed.
Moral of the story
This is a very good example as to why complete books and records should be kept by all businesses and the self-employed.
If the taxpayer had been required to keep all his VAT records in a digital format and submit the VAT totals to HMRC using MTD compatible software, it would not have been possible to omit a range of invoices from the returns.
to never underestimate HMRC or to think you can pull the wool over their eyes……
Despite all the massive challenges HMRC faces, they can find time to deal with non-compliant taxpayers.