Sarah Halsted

Written by: Sarah Halsted and Sarah Saunders

Sarah Halsted

Technical Associate Director

HMRC needs to protect honest taxpayers, as well as catch dishonest ones

One of the problems with the gig economy is that it can result in engagers encouraging workers into tax structures they neither need nor understand. This is often done for the engager’s benefit and can lead to long term tax problems and complications for the worker, which they are not equipped to handle and which they cannot afford. 

One would hope that a taxpayer in these circumstances would be treated more kindly than a deliberate tax evader. A recent VAT tribunal indicates that this is not always the case. 

A gig economy courier was registered for VAT by his engager. He had no knowledge of VAT and his turnover was below the VAT registration threshold. He understood that he could reclaim input VAT on his fuel costs and franchise fees. His returns seem to have been prepared by his engager, that also inserted figures for his output VAT so his returns were correct. 

In 2013, he stopped being a courier and became a driving instructor. Again, his turnover was below the VAT registration threshold, he continued to reclaim input VAT on fuel and franchise fees and did not charge output VAT to his pupils. He had no idea he was supposed to charge VAT if he was VAT registered. Finally, in 2018, a VAT compliance officer visited his premises, explained how VAT worked and raised an assessment, not only to reclaim some of the input VAT he wrongly claimed, but to collect the output VAT he had failed to charge his pupils. HMRC issued assessments for £20,021. 

There was no suggestion that at any stage he attempted to mislead HMRC; he merely failed to understand how VAT worked. Had he known, he could have cancelled his VAT registration when he started his new business. He did not have receipts for all his input tax, but offered bank statements as evidence of his expenses, which HMRC had discretion to accept, but appears to have ignored. He also has a chronic illness which has become severe, and in the past year had a serious coronavirus infection. The added pressure of VAT assessments has not helped his mental health. 

He would surely seem a prime case for HMRC to exercise discretion. Instead, he had to appeal to the tax tribunal. The tribunal set aside a number of assessments, due to HMRC’s failure to utilise the alternative evidence of expenses provided, reducing tax to £3,408.  

Whilst it would be open to HMRC to reissue the assessments, the tribunal strongly recommended that the various mitigating factors mentioned above be recognised. Let’s hope HMRC listens. It is frightening that a person who is generally accepted as honest and trying to be tax compliant can find themselves in such a difficult situation.  

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