Businesses often have areas of uncertainty and write to HMRC to clarify the position (i.e. a ‘clearance’ application). Unfortunately, HMRC just refer the business to their published guidance. This policy is most unhelpful to businesses, as they will have already read HMRC guidance, but are still uncertain as to how it applies to their particular situation.
When a business manages to convince HMRC that they should provide a proper response to their query, HMRC provide a ‘non-statutory clearance’ in circumstances where a business can demonstrate genuine uncertainty.
Even when a business obtains a non-statutory clearance for VAT purposes, HMRC say that is only their opinion and is not binding on any party. If the business considers the advice to be wrong they can simply ignore it, but worryingly, HMRC do not consider themselves to be bound by it either. So if the VAT inspector visits you and considers the guidance given in the clearance to be wrong he can impose his own interpretation of the law and assess you for any VAT he considers due, even when you have abided by the guidance in the clearance.
In theory, there is a ‘Statement of Practice’ where HMRC will abide by a previous ruling and only apply a new interpretation from a current date; but they often ignore this, and trying to enforce the Statement of Practice is very difficult.
Formal agreements
Where there is a tax dispute between HMRC and the taxpayer, the parties can come to a formal agreement to resolve the matter. This could occur where the matter has been dealt with through the ‘alternative dispute resolution’ procedure or where an agreement has been reached without it being formally decided by a tribunal.
In one recent case, HMRC reached an agreement with a taxpayer, had second thoughts and tried to go back on the deal. As a result, HMRC issued an assessment and the taxpayer appealed to the tribunal (HMRC v Southern Cross Employment Agency Ltd [2015] UKUT 122 (TCC)). The taxpayer won at the First-tier Tribunal, but HMRC appealed the matter further to the Upper Tribunal. The taxpayer won again.
HMRC argued that the legislation precluded them from entering into an agreement with the taxpayer in the particular circumstance of the case. They also considered that the agreement reached was ‘ultra vires’ (i.e. beyond HMRC’s legal powers) and therefore void; and finally, they disputed that they had ever actually reached a ‘compromise agreement’. Both tribunals completely rejected all three of HMRC’s arguments.
This case has serious implications for HMRC and how it interacts with taxpayers. How could HMRC think it was right to reach a formal agreement with a taxpayer and then renege on it? Having done that, they not only forced the matter to a tribunal hearing but then they also appealed that decision and forced the taxpayer into prolonged uncertainty and a further costly tribunal hearing.
This is unfortunately quite typical of HMRC’s attitude to taxpayers. Even when they come to an agreement with a taxpayer they do not seem to consider themselves to be bound by it and are prepared to act in a high-handed and unfair manner.
However, this case shows that if taxpayers are prepared to stand their ground, they may well have the support of the courts. Hopefully, HMRC will take note of this decision and stand by their agreements in future.
Practical Tip:
It can be dificult to get an agreement with HMRC, and even then they may not stand by it. However, if you are prepared to stand up to HMRC you could get the backing of the courts.
