HMRC needs to protect honest tax payers, as well as catch dishonest ones

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

One would hope that a taxpayer in these circumstances would be treated more gently than a deliberate 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 was below the VAT registration threshold. He understood that he could reclaim VAT on his petrol costs and franchise fees. His returns seem to have been prepared by his engager, who also inserted figures for his output tax so his returns were correct.

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