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Chances of succeeding at a VAT tribunal are slim, except with regard to reasonable excuse.Why do HMRC seem inefficient at judging reasonable excuse?

I AM STILL working on taxappealsbetting.com, the offshore gambling site at which you will be able to stake your shirt on who will win the Arctic Systems case in the House of Lords and which Law Lord will 'score first' (give the leading judgment), or make spread bets on the number finding for HMRC. I suppose I should not put customers off, but the best advice given on gambling comes from the musical Guys and Dolls: Nathan Detroit offers to bet Sky Masterson that Mindy's deli sells more strudel than cheesecake, after secretly finding out that this is the case. Sky sees through Nathan's game, and recalls the wise words of his father:

'One of these days, a guy is going to show you a brand-new deck of cards on which the seal is not yet broken. Then this guy is going to offer to bet you that he can make the jack of spades jump out of this brand-new deck of cards and squirt cider in your ear. But, son, you do not accept this bet because, as sure as you stand there, you're going to wind up with an ear full of cider.'

So, with this warning in mind, let me offer you a little action. If you consider the following issues, what would you say was the most likely outcome in the VAT tribunals:

• Customs have issued a demand for security.
• Customs have assessed to disallow input tax claimed on the purchase of a car.
• Customs have refused to accept a reasonable excuse for a default which is being surcharged.

I am not interested in the strength of the case: this is 'percentage law'. If a client came to you with the problem, would you sigh resignedly and tell them to give up because it is hopeless, or would you think you had a fighting chance with a fair wind and a fair judge?
I have been doing a little research into these issues and the first two are clear-cut. I found 20 cases on security before the tribunal in the calendar year 2006: 19 to Customs, one to the taxpayer. Even that one was only a partial victory: the amount of security demanded was too high — a full year's worth of VAT liability — but there was no finding that Customs were wrong to demand some security. I found only six cases on cars: 5-1 to Customs, and the odd one was later overturned in the High Court. That has to be balanced by the Court of Appeal's decision in the taxpayer's favour in Elm Milk Ltd, but that seems still to be an exceptional decision on very specific facts.
So, let's turn to reasonable excuse. If I may put on my Nathan Detroit accent, snappy suit and trilby, you gotta reckon Customs are on a winner. The judge has heard it all before, the trader knows what is required, most traders manage it, don't break my heart. End of story. So, if I take a representative sample of decisions on reasonable excuses, what will you bet: Customs win 90%? 80%? 70%? 60%? 50%?
When I am preparing VAT updates, I trawl through all the published decisions of the tribunal. Many of the reasonable excuse cases are reported only as a 'Direction under rule 30(8)' (of the VAT Tribunals Rules, SI 1986/590). No details of the arguments are given, just a bald statement of the disputed assessment and the outcome. I normally pass these by and only look at the ones that are reported in detail, because it might be possible to glean some general principles from those. Recently I noticed how surprisingly many of the rule 30(8) reports showed that the taxpayer's appeal was allowed, and I decided to research the numbers more fully.
Taking a random period from August 2006 to February 2007, I found 137 such directions. The appeal was dismissed in 68 cases. It was fully allowed in 54, and partly allowed in 15. An appeal will usually be partly allowed where surcharge assessments were raised for several periods, and some of them are cancelled while others are upheld.
So Customs' position was fully vindicated in just under half the cases. This was so striking that I went back again to the rules. Under rule 3(2)(e) SI 1986/590, a reasonable excuse appeal is supposed to contain particulars of the excuse relied on. So Customs should have seen, considered and dismissed the excuse that is being allowed; it is not the case that the tribunal is the first place that Customs hear the defence. It could be that sometimes it is better presented in the hearing than it is in the notice of appeal, but surely some correspondence or reconsideration could establish whether there is something to the excuse. It should not be necessary to take the trader to a formal hearing so often when the excuse will be upheld.
It is not 'happy ever after' for the 50.4% of traders who succeeded or partially succeeded on appeal. Only one of those 69 was awarded any costs, and that award was just £100. In many cases the expense of taking the appeal, combined with the time and effort (and probably stress as well), would outweigh the benefit of winning. My statistics do not record the occasions when a trader has looked at the numbers and decided not to bother to argue a point of principle but take the hit and, we hope, get out of the default surcharge regime by complying with the rules for the next four periods.
So the individual traders suffer from Customs' inability to distinguish between a reasonable excuse that will satisfy the tribunal, and one that really does not stand inspection. Is there any comeback against Customs? Not really. I could begin to sound like a Premiership football manager railing against referees, but it would be comforting to think that someone in HMRC notices these statistics and finds them embarrassing. Traders should be allowed to get on with their businesses and keep the economy running, rather than having to convince a tribunal chairman that Customs are being unreasonable in refusing to accept a reasonable excuse.
Is there anyone else out there who takes any notice of rule 30(8) directions?
(If you would like to know who the chairmen and solicitors are in the 'Form Book' below, you can find the answer on the Taxation website by clicking here: http://194.203.155.55/Articles/2007/03/08/51546/Place+your+bets!+'Form+Book'+names.htm. Readers who do not yet have a password allowing them to access the website, can e-mail additionalusers@lexisnexis.co.uk giving their name, postcode, and the subscription number printed on the plastic wrapper that the magazine comes in, if possible. ) 
Mike Thexton MA, FCA, CTA is director of Thexton Training Ltd. He presents regular VAT updates including the LexisNexis online quarterly VAT update. He also wrote What happened to the hippy man? published by Lanista Partners Ltd.

Form book

Back to taxappealsbetting.com — the statistics throw up some fascinating variations (to me, anyway). We have no idea how strong the various cases were, but if you think that 'form' is a good predictor of the future, then you would conclude that some tribunal chairmen give the taxpayer more cause for optimism than others, and so do some of Customs' advocates.

Of the 137 cases under review, 84 were heard by four chairmen, who for the time being I will call A, B, C and D.

So a backer of past form would like to see 'A' in the chair, and what has 'B' done to be sent to the salt mines of reasonable excuse hearings on so many occasions?

Of the 137 cases, 119 were presented for Customs by four solicitors or counsel, W, X, Y and Z, who also appear to have had varying degrees of success.

These people must get to know each other quite well — chairman 'B' listened to solicitor 'W' arguing 35 cases on four days:

On the 11th reasonable excuse appeal in a row, I think I would be getting out a coin …  but I am sure that the solicitor is still trying as hard and the chairman is still trying as fairly in the last case as in the first.

Issue: 4098 / Categories: Comment & Analysis , Arctic Systems , Jones v. Garnett , VAT