Our VAT guru Melanie Lord is finding HMRC more hardline than in previous times
Has anyone else noticed that HMRC are using their discretion much less freely than they used to? We recently encountered several situations where in years gone by HMRC would have agreed to our proposal, but now we are being refused.
This is all under provisions that allow HMRC a discretion to accept an alternative to the normal rule. Unfortunately, it seems that the circumstances in which they see fit to give the taxpayer the benefit of the doubt are becoming fewer and fewer, for example missing purchase invoices and import documentation. It is important that these situations are resisted otherwise everyone will be worse off.
Less than perfect
Of course, standing back from it all, B2B VAT accounting is supposed to work with one taxpayer charging VAT that another reclaims. In years gone by, when the documentation was less than perfect, HMRC allowed themselves to be persuaded that the tax was washing through the system and as a result flaws in documentation could be overlooked. This involved obtaining declarations and other peripheral evidence proving beyond reasonable doubt that VAT had been paid at one end and therefore there would be no loss to the revenue to allow it to be reclaimed at the other. Sadly, the sand underneath this type of situation seems to have shifted and, of course, it is to the taxpayers’ detriment.
The power to exercise a discretion and allow a person to reclaim input VAT without holding a VAT invoice is contained in the general regulations (SI 1995/2518 reg. 29), which refers to ‘such other evidence of the charge to VAT as the commissioners may direct’. Although HMRC’s manuals do not appear to have changed and we have their Statements of Practice to guide us (see below), nevertheless, it seems HMRC’s attitude has hardened almost to the point of there having been an effective change of policy without this first being discussed or debated. There are also echoes of this same line hardening being seen in relation to intending trader registrations, export evidence and belated option to tax notifications. Needless to say, none of this is good news for the taxpayer.
In relation to purchase invoices, HMRC’s instructions to officers in their internal manual reads: “HMRC staff should give a customer every chance to produce evidence to support its claim to input tax. Normally a business can ask its supplier for a valid VAT invoice when one is not available right away. Sometimes this may not be possible, for example if the supplier is missing. HMRC staff should balance the need to protect the revenue against the need to ensure that businesses pay no more tax than is properly due from them.”
No one is saying that VAT claims should be allowed unless VAT has been accounted for by the supplier. I also doubt that any right-minded person would question HMRC’s entitlement to only exercise its discretion to allow VAT claims without an invoice before being satisfied that an actual supply took place. In addition, it is quite reasonable for HMRC to take a closer look where the supply involves goods that are commonly open to widespread fraud and abuse such as mobile phones, computers, alcohol and oil. Where we seem to have a problem is in situations that seem clear cut but HMRC are refusing the claim.
The questions that need to be answered before pursuing a claim without an invoice are:
1. Is there alternative documentary evidence?
2. Is there evidence of receipt of a
VAT-able supply on which VAT has been charged?
3. Is there evidence of payment?
4. Is there evidence of how the goods or services have been used?
5. How did the claimant know that the supplier existed?
6. How was the claimant’s relationship with the supplier established?
The VAT officer should then adopt the following approach:
A. Conclude that a genuine supply took place;
B. The claim is by the person who received the supply;
C. VAT was charged at the correct rate; and
D. There must be satisfactory evidence of input tax entitlement; for example, correspondence, order details, delivery notes, statements of account, evidence of paying VAT, details of the supplier’s VAT number.
• Melanie Lord is Managing Director of AVS VAT. Email firstname.lastname@example.org or call 01438 716 176 if you need help with VAT