Accountants UHY Hacker Young says that 49 per cent of the 17,200 automatic penalties HMRC issued for the late filing of VAT in 2013 were overturned when taxpayers requested a review.
Set up in 2009, HMRC’s internal review system re-examines VAT decisions imposed on businesses in relation to tax disputes and the late filing or payment of tax.
UHY Hacker Young explained that HMRC’s computer based system is designed to automatically impose a fine if a VAT return is filed after the deadline regardless of circumstances. Taxpayers are then forced to make an appeal themselves to fight the fine and prove a good reason for the late filing.
Simon Newark, Partner at UHY Hacker Young, said: “HMRC’s late filing system starts off with the premise that the taxpayer is wrong – you then have to prove your innocence. That’s perceived by taxpayers as being unfair, but unfortunately, that’s what the law says.
“With HMRC ultimately admitting that half the fines levied are overturned on appeal, something is going wrong. HMRC has been taking a much harder line on VAT appeals in general in recent times, so they will only overturn penalties where the taxpayer has an overwhelmingly clear-cut case.
“In a lot of ‘borderline’ review cases, where we feel the taxpayer should be given the benefit of the doubt, HMRC is now rubber-stamping the automatic penalty.
“Taxpayers should be allowed to explain their situation first before they are railroaded into a system of fines and penalties.”
It would also appear that HMRC is even less likely to overturn decisions on VAT penalties or tax due when they are made by an officer rather than a computer. In 2013, only 28 per cent of the 2,200 appeals made against these decisions were overturned on review.
Simon Newark said: “HMRC seems comfortable with admitting that computer-generated automatic penalties are often wrong, but is less keen on doing the same thing for officers’ decisions.”
- Number of appeals against automatic VAT penalties....17,200
Appeals won by taxpayer......................49 per cent
- No. of appeals against HMRC officers’ decisions on VAT...2,200
Appeals won by taxpayer......................28 per cent
Breakdown of trust
This has led to a 'breakdown of trust' between business and HMRC as faith in the system declines.
UHY Hacker Young says the increasing proportion of VAT review decisions that HMRC makes in its own favour is one of the factors leading to fewer and fewer businesses to seek reviews of officers’ VAT decisions that have gone against them.
Only 19,400 requests to review VAT decisions were received by HMRC in 2013, a 22 per cent decrease from the 25,000 requests it received in 2012, and a 48 per cent slump from the 37,100 requests made by businesses in 2011.
Simon Newark said: “More and more businesses seem to be deciding it’s not worth the time and effort to fight HMRC, even if they are certain that mistakes have been made.
“There is a breakdown of trust in the system, as businesses see the review process as HMRC ‘nodding through’ its own poor decisions in the hope the business will back down. Unfortunately, many do.
“As the review system moves further away from its original aim of being a detailed and objective examination of potential errors, a greater number of businesses are finding that time spent battling with the tax authority over its mistakes is simply wasted.
“This is a pity, since the original internal review process had a lot of potential to be a low-cost solution for businesses that are unable to take the more formal route of going to a tribunal over their VAT bills.
“HMRC has a patchy record at tax tribunals, and is often rebuked by judges for its procedures and decision-making processes. Unfortunately, the cost of taking HMRC to a tribunal doesn’t make economic sense for a lot of businesses, and many poor or incorrect VAT decisions are left to stand for that very reason.”
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Susie Hughes © Shout99 2014