We have seen an increase in the number of small businesses facing VAT assessments of significant amounts, likely to have a severe impact on the company’s cashflow and financial status, particular in light of the current challenges concerning COVID-19. In a recent case concerning a construction company, HMRC objected to the company’s application for hardship requiring payment of an assessment in full despite an existing appeal in the Tribunal.
Deferring payment for direct and indirect tax
For disputes concerning direct tax e.g. income tax, it is possible to agree to defer payment of the tax until the dispute is resolved, whether that is via the internal HMRC review or an appeal in the Tax Tribunal. In cases concerning indirect tax e.g. a VAT assessment dispute, the taxpayer is required to pay the assessment before the appeal can proceed to be heard in the Tax Tribunal.
Construction company’s hardship application
A taxpayer can apply under section 84 VAT Act 1994 to defer payment of any assessment in dispute, if payment of the same would “cause the appellant to suffer hardship“.
This was considered in the case of a construction company, Rok Construction and Hire Ltd (TC07638).
The Company submitted an appeal to the First Tier Tax Tribunal against a VAT assessment for the sum of £6,189 issued in October 2018. The Company claimed that the assessment was based on errors made on the Company’s VAT returns for the periods December 2015 and March 2016.
The Company also made a hardship application and requested that the collection of payment under the assessment be deferred until the outcome of the appeal. The Company argued that HMRC should not collect payment of £6,189 demanded in the assessment because the company was owed a refund of £34,958 relating to the Construction Industry Scheme. In addition, the company informed HMRC it owed £13,000 for another VAT period.
Information requested by HMRC when considering hardship applications
In giving serious consideration to hardship applications and exercising their discretion, HMRC has previously issued guidance on the information they require about a company’s financial affairs.
- An explanation as to why the company would suffer financial hardship if it required to pay the disputed amount before a Tribunal Hearing
- Copy of the most recent annual accounts and management accounts
- Bank account statements for a requested period
- Any loan or overdraft facilities the company has with any bank or financial institution
- Assets and liabilities of the Company
- Budget and cash flow forecast (at least the next six months) to include all income streams, revenue costs and capital expenditure. It should identify the expected funding requirements throughout the year and also the maximum funding available.
- Business premises’ owned or leased by the business
- Investments that are held by the company. This should include stocks, shares and investments in other businesses
- Steps taken by the company to raise funds to pay the assessments
- Any assets subject to a charge by a bank or other financial institution as security against existing borrowings
In this case, the Company did not provide all of the requested information to HMRC and on this basis, HMRC rejected the hardship application and the Tax Tribunal dismissed the appeal.
This case highlights HMRC’s discretion when considering hardship application and the importance of information to be provided in proving hardship to obtain a successful outcome.
What is the Appeal to the Tax Tribunal Process?
The Tax Tribunals can be used by a taxpayer when appealing a HMRC decision. If the appeal to HMRC after the penalty notice is issued is unsuccessful and the HMRC internal review procedure has not yielded a satisfactory conclusions then recourse is available by appealing to the First Tier Tax Tribunal (section 49D, TMA 1970). It is not permissible to appeal to the Tax Tribunal during the course of the internal review.
The procedural rules governing the First Tier Tribunal are found in the Tribunal Procedure (First-tier Tribunal) (Tax Chamber) Rules 2009 (SI 2009/273). The Tax Tribunal is completely independent of HMRC and is governed by an overriding objective to deal with cases fairly and justly (rule 2, First Tier Tribunal Rules (FTR 2009)). The Tribunal will consider the evidence of both parties, equally whilst the judge heavily relies on previous case law.
Commencing proceedings at the First Tier Tax Tribunal is subject to statutory time limits. It is recommended that legal advice is sought as soon as you become involved in a HMRC dispute to prevent a situation where a potential claim becomes time-barred.
The First Tier Tax Tribunal is in essence a fact-finding court, therefore it is imperative to prepare the optimum set of facts in advance and this usually requires the most extensive preparation. We are well-versed in the Hearing procedure itself and presenting our clients’ cases to the Tax Tribunal. We consider the preparatory stage an essential part of the Hearing process and extensively complete the best factual picture from which the First Tier Tax Tribunal will draw its inferences.
Our specialist Tax Solicitors and Barristers have successfully represented taxpayers before the First Tier Tax Tribunal. Our Tax Disputes team will typically:
- advise you for a long period of time prior to the hearing;
- discuss the evidence required;
- prepare the appeal in detail; and
- rehearse your case with you.
Expert VAT Appeal Tax Lawyers
If you need HMRC Tax Disputes advice, we are available to aid you at every stage of the HMRC appeals process. Members of our legal team have first-hand experience and working knowledge of the internal workings of HMRC. We can provide you with the very best representation in negotiations, throughout the HMRC internal review process and in front of the Tax Tribunal. Our team specialises in successfully challenging HMRC decisions and will assist you in every aspect including developing a strategy.
We are experts in adeptly presenting evidence and employing bespoke arguments combining the facts of your case, previous cases and current legislation to ensure your appeal is a successful one. We provide urgent advice and representation to clients from our unique expert team of established tax and duties specialist solicitors and barristers with a proven track record of delivering authoritative results. Just call us on 0207 1830 529, or email .