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DAVE BROWN asks: 'What is wrong with the VAT office?'
SOME MONTHS AGO, I wrote a couple of articles in other publications, asking for feedback from the trading community and the accountancy profession. I was asking about whether there are any areas of VAT procedure that are causing inconvenience or grief. I was totally underwhelmed with the response: not a reply.
DAVE BROWN asks: 'What is wrong with the VAT office?'
SOME MONTHS AGO, I wrote a couple of articles in other publications, asking for feedback from the trading community and the accountancy profession. I was asking about whether there are any areas of VAT procedure that are causing inconvenience or grief. I was totally underwhelmed with the response: not a reply.
So do we deduce from that, that everything is tickety-boo? The answer is no, because every time a couple of VAT consultants get together, it is like when the late comedian Les Dawson and Roy Barraclough dressed up as women, discussing the ills of the world - 'did you hear…?' 'would you believe what they've done now?' and a couple of 'well I nevers' for good measure.
I am frequently astonished to discover how few responses there have been to consultation exercises, but maybe it is the apathetic nature of the Great British public. But when you consider the way that the Customs and their employees behave, we can possibly be forgiven for getting somewhat exasperated from time to time, even if we do not broadcast it very loudly. I have to stress that most VAT officers perform with the utmost courtesy and helpfulness, but as in every profession, there are one or two officers who give them a bad name. Furthermore, as HM Customs and Excise get more and more politicised, there are decisions made fairly high up the command chain that give us cause for concern.
Assessment driven?
Customs say that they are not assessment driven, but then they said that when I was a VAT officer, more years ago than I care to remember. At one point when the topic of an assessment 'league table' was mentioned in hushed tones, my line manager stated quite forcibly that there was no such thing … but after a moment's reflection came back with, 'but how else are we to judge how an officer is performing? If one officer brings in £10,000 a year and his colleague brings in £100,000, who do you think is going to get promoted?' I have no reason to doubt that this concept exists today. I have heard mention of regional or individual targets, with bonuses being paid if these are exceeded, so it is probably not unfair to suggest that an important driving force is a desire to bring in the money. Indeed, if the Customs annual report includes a target of identifying an additional £x liability in roughly every other visit of a certain category, it would seem that this driving force is firmly entrenched in policy.
On the other hand, I recall a comment made by another of my ex-colleagues in Customs, that the best 'patch' is the one where they collect no additional liability, because the compliance of the taxpayers is so good that they do not make mistakes. However, evil forces abound, and honest businessmen do make mistakes, so such a scenario is unlikely to arise. The need, therefore, for a regulatory authority remains. What I would like to suggest is that a different approach is adopted.
Believable statistics
The only way to remove a sinister edge to the issue of statistics is to tell the staff that performance will not be measured by the value of assessments. In that way, the officer's attitude will not be coloured, as it is today, by the pressure from above to 'find something'. Realistically, it will not happen, but if Customs want to publicise the results, the figures need to be believable. If they continue to record the issue of assessments, it would be more honest to record only those assessments that have a revenue effect, and leave out the assessments that are matched by recovery of a corresponding amount of input tax by another party. It would be wishful thinking indeed, for those assessments not to be issued at all.
'In and out'
I have been involved in numerous cases where the mis-declared VAT simply goes round in a circle, after the issue of an assessment. In one of them, the officer insisted on issuing an assessment for £80,000 to a company working in the construction industry, because several suppliers charged VAT incorrectly. As readers probably know, VAT incorrectly charged is not strictly claimable by the other party. In this particular case, the company's only redress was to go back to the suppliers and seek a refund via the issue of credit notes. Naturally, the suppliers would issue the credit note, get the VAT back from the VAT office and only then refund the VAT to my client, who by this time would have had to pay the VAT assessment. I pointed out that there was a severe danger that certain of the suppliers might take the money from Customs and not refund it, especially as my client was in dispute with one of his sub-contractors. Thus my client would lose £40,000 and a supplier would gain £40,000 as a direct result of the action of an officer whose role in life was to protect the revenue! The answer I received was that:
- the law did not permit the officer to let a wrongful claim go unnoticed; and
- if the supplier did not refund the VAT, it would be a civil matter between those two parties, something that Customs could not get involved in.
My point was that if the client was likely to go into liquidation as a result, and the root cause could be avoided, then a common sense approach should, wherever possible, be adopted.
In taking the matter further, I came across the following extract from Customs' internal guidance:
'However, where you are wholly satisfied that the amount of "VAT" on the invoice has been both declared and paid to Customs by the seller, you may allow the purchaser to recover it as if it were input tax. This is allowed under care and management of the revenue, to avoid unnecessary bureaucracy where no tax is at risk. Businesses should be told in writing that, although the department maintains that the "tax" is not actually input tax, in the circumstances no action will be taken to recover it from them. Where returns have not been rendered by the seller or it not clear that the tax has been paid, this treatment is not appropriate.'
I was quite impressed to find something to indicate that a modicum of common sense exists at a reasonably high level within Customs. I was not so impressed when my written complaint was returned with another adverse comment, to the effect that they could not be sure that the VAT charged by the supplier had been declared and paid.
Perhaps, therefore, it is time for a change in law, to enable officers to use their discretion, or else to encourage them to adopt the procedure above. There will be occasions where they will be unable to ascertain easily whether the VAT has been paid, but there is nothing new about that. In the course of carrying out routine control visits, how often do officers allow input VAT recovery without worrying about whether the other party has accounted for output tax? Is it 90 per cent of the time, or 95 per cent? So does the above paragraph from Customs' internal guidance really need the final sentence, or at least the 'has not been paid' part? If there is no will to allow this, then at least let them show common sense where the supplier and recipient are under the same roof, say, when a management charge is raised between associated companies. The officer, on the spot, can easily verify that there is no possible loss, and although his figures might be down this month, he can go home in the secure knowledge that he has done the right thing.
Higher ground
As intimated already, we all know that not all VAT officers are cleaner than the socks on a boy band. However, as long as they do not do anything outrageous, the accountancy profession and the trading public usually manage to co-exist with the visiting officers.
There will be the odd rogue assessment, but we should be comforted that the review procedure will weed them out, and if something absurd got as far as the tribunal, the Solicitor's Office, or someone else at equally exalted heights, would ensure that only the important, and justifiable, cases got as far as a hearing. In that light, one wonders why the following cases progressed beyond the review stage.
M E Smith Electrical Engineers (13594)
M E Smith Electrical Engineers zero rated some work, as subcontractor, on a job that required a certificate from the owner of the building, to the effect that the building had charitable use. Subcontractors on such jobs must charge VAT to the main contractor, even if a certificate has been issued. The taxpayer was in the wrong, but by the time the VAT assessment was issued, the main contractor had gone bust and was unable to accept a late charge of VAT. The assessment was therefore issued in the secure knowledge that there would be sticking tax, which was a blatant case of unjust enrichment enjoyed by Customs. Despite this, the VAT tribunal upheld Customs' assessment.
The taxpayer acted as agent for some residents of a nursing home and had the necessary forms signed by residents to this effect, in order to purchase incontinence aids on their behalf. Customs, however, said that the nursing homes were agents acting in their own names and refused zero-rating by virtue of section 47(2A), VAT Act 1994, which states that:
'Where … goods are supplied through an agent who acts in his own name, the supply shall be treated both as a supply to the agent and as a supply by the agent.'
The tribunal chairman found that the words 'acts in his own name' plainly do not apply to an agent who is expressly acting on behalf of named principals. Zero rating did, therefore, apply. That, to be frank, seems perfectly clear, and reflects badly on whoever gave the go-ahead to proceed.
Morrish
The facts in Commissioners of Customs and Excise v Morrish [1998] STC 954 concerned the re-building of a listed building that had been severely damaged by fire. The taxpayer argued that the works should be regarded as alteration and thus zero rated. The tribunal found for the taxpayer, but the High Court disagreed. Although finding for Customs, it was remitted to be heard by a fresh tribunal. As a final twist, one of Customs' arguments was that if there was no building left after the fire, how could there be any alteration? The judge turned that on Customs and suggested that if there was no building there, any re-building work could potentially be zero-rated by virtue of it being a new house. So why did it have to reach the High Court before someone noticed this?
Danish Firma Center plc (6196)
The taxpayer appealed against a serious misdeclaration penalty, resulting from an error made by a company accountant when he was stressed by the death of his mother, claiming reasonable excuse. The tribunal allowed the appeal. However, I would have thought that even Customs would have backed down long before it hit the tribunal. But no, even before the tribunal, Customs' representative was trying to get the boot in, and I have to submit the following sentence as being one of the harshest submissions of that particular year:
'The bereavement suffered by the company accountant could not have been unforeseen, as it concerned the death of a lady both elderly and infirm.'
One would hope that the person responsible for that statement gets a bit more sympathy, when he becomes elderly and infirm.
In summary
We all accept that there have to be 'police' in this world, be they uniformed streetwalkers, or white collar workers of one sort or another checking figures submitted by taxpayers. Those who regulate us have to appreciate that their actions have to stand up to scrutiny, not only by the recipients of whatever action is taken, but by professional advisers, by the media and by the tribunals or courts.
It is a hackneyed notion, but true that if a VAT officer does a good job, nobody notices, or at least nobody bothers to shout about it in the pub. If, however, a VAT officer makes a mess of something, it does get repeated, at length. This invariably colours the opinions of those who hear it, and taxpayers rapidly lose respect for the person who is going to visit them and potentially cause them grief.
Recently, the press notices issued by the Customs have been pushing the image of a caring, friendly department, easing the burden for small and medium sized enterprises, for instance. Also in print are a few qualities that they envisage their staff being blessed with: integrity, impartiality, courtesy and helpfulness. How many advisers will recognise those qualities in the last officer they dealt with?
Dave Brown is director of VAT services for Bishop Fleming, Torquay.
