HMRC's incorrect advice in VAT cases highlights need for second opinion

In the recent case of Gregory Sewell v HMRC, HMRC gave incorrect advice to Mr Sewell which made him believe he could make a claim for VAT costs incurred on the construction of a new caravan under the DIY housebuilders scheme.

On the back of this advice, Mr Sewell submitted a VAT refund claim to HMRC, but this was rejected as caravans are not part of the DIY housebuilders scheme.

Mr Sewell appealed HMRC’s decision to the tribunal on the basis that he was provided with incorrect information by HMRC, essentially arguing he had a legitimate expectation that his claim would be accepted. Unfortunately, Mr Sewell’s appeal could not be considered as HMRC highlighted that the tribunal did not have the jurisdiction to hear such an appeal, so his case was closed before it got started.

The tribunal, however, appeared critical of HMRC’s behaviour. The judge noted that he had sympathy for the “view that HMRC are behaving in an objectionable way in having first said that he could have the refund and are now saying that he should be denied it. I have not seen that HMRC have made any apology for this error.”

Fortunately for Mr Sewell, money did not appear to be as significant an issue as it may have been for others. He said he would have undertaken the works irrespective of the VAT position. For other people, HMRC’s mistake followed by them taking an aggressive stance could have led to financial hardship.

Another recent tribunal case highlights an HMRC procedural mistake and subsequent questionable behaviour by its staff. Go City Limited was corresponding with HMRC about the VAT treatment of its product. The HMRC staff involved issued assessments to “protect HMRC’s position”. Their aim was to avoid HMRC losing out on historic VAT that could potentially be collected.

Go City Limited’s tax adviser reminded HMRC that it cannot issue assessments until it has concluded there is a loss of tax. HMRC ignored this fundamental principle and issued assessments while it considered the technical position.

The tribunal agreed that assessments cannot be issued until HMRC has formed its opinion that a taxpayer’s VAT returns are incorrect, going on to say that the assessments in this case “were issued to ‘protect HMRC’s position’ shortly before the expiry of the two-year time limit [for issuing the assessments].”

Furthermore, HMRC staff provided inadequate and contradictory explanations to defend the position it took, which led the judge to note that certain evidence provided by HMRC staff ”lacked credibility”.

Both these cases demonstrate that HMRC can sometimes get things wrong, underlining the benefits of taking advice from a VAT specialist and, where possible, holding HMRC to account.