JOURNAL 50

FAIRNESS IS IN THE EYE OF THE BEHOLDER

Treasury Ministers and senior HMRC staff frequently rage against tax avoidance (which is actually paying the tax the parliament has decreed in circumstances that parliament had not foreseen when it enacted the relevant legislation) on the basis that it is “unfair” to the vast majority of taxpayers. What is fairness as Ministers and HMRC understand it? I don’t know but here is a selection of cases that HMRC have argued before the tax appeals tribunals which might give an indication of what they consider to be fair.

Mr Marsh is a building industry sub-contractor. As such he has tax deducted from his income at 18% before he sees it. He submitted his income tax return on 14 June 2006 showing a tax refund due to him of £30,000 (his profits are only around £27,000 pa on which tax is about £4,600 so it will be seen that contractors who used him were required to deduct tax of seven and a half times his actual tax liability under the “fair” system of taxing sub-contractors). HMRC authorised the money to be repaid to him on 2 August 2006 but the cheque did not arrive until 10 August. Problem! He had a VAT bill due on 31 July of £7,155, which he had no money to pay because HMRC owed him more than the whole of his annual profit. Did he have a reasonable excuse for not paying his VAT on time? “Of course not,” was the HMRC “fair” view. Fortunately the VAT tribunal disagreed. They thought that any conclusion other than “of course he did” ridiculous. They pointed out that if the tax authorities had asked on 31 July “Where is our money?” the correct answer would have been “We have got it”.

HMRC have power under common law to offset money they owe against money due to them. They use it regularly in relation to insolvencies. They have recently issued a consultation document on debt, where they say that they propose to use it more widely – but, it appears, not if setting off would prevent them from seeking to penalise a taxpayer whose finances they have crippled by taking time to make a repayment.

Keen Jewellery Ltd purchased an expensive necklace from Japan. It expected to sell it to a jeweller in Jersey. His customer wanted to see it first so Keen sent someone over to Jersey with the necklace. The customer liked it and bought it on the spot. Keen VAT zero-rated the sale because it had been sold in Jersey outside the EU.

“Hang on”, said HMRC “You haven’t got the right documentation”. This is a form SAD (what an appropriate acronym) which requires the name of a consignee to be shown. “We couldn’t use it”, said Keen, “because we did not have a consignee when our employee flew to Jersey.” “You didn’t try”, said HMRC, “we would have accepted the form without the name of a consignee even though the form gives no indication of this”. The “fair” result? Keen had to pay the VAT because it did not guess correctly what to do in an unusual circumstance.

Mr Duncan runs a car servicing business but is not licensed to carry out MOT tests. If a customer wants an MOT Mr Duncan send the car to an authorised test centre, pays them £35 for the test, and charges his customer £44. He accounts for VAT on his £9 handling fee. Unfortunately he did not specifically state on his invoices that the £35 is a disbursement, although all his customer knew that it was as he did not have the ability to do the test. “Wrong”, said HMRC, “we want VAT on the whole £44”. “But”, retorted Mr Duncan, “MOT fees are exempt from VAT”. Fair? The VAT tribunal disagreed. They said that Mr Duncan cannot and does not provide an MOT test. All that he does is arrange for a test to be carried out for which he charges £9.

Mr Ahmed is a clothing retailer. He bought goods from a number of suppliers some of whom he paid in cash. One of these was Euro-tex. Euro-tex got lost – in the sense that it moved and did not notify HMRC of its new address. Accordingly HMRC deregistered it for VAT. Mr Ahmed was of course not aware of that. In all probably nor was Euro-tex. When Mr Ahmed claimed input tax relief for the VAT it had paid to Euro-tex HMRC refused a deduction on the grounds that he did not hold a valid VAT invoice. “What do you mean?”, said Mr Ahmed; “Here are the invoices, they all bear a VAT number and in any event my own purchases from Euro-tex are sufficiently large to require it to register for VAT.” “So what”, said HMRC “We secretly deregistered Euro-tex so it is not possible for it to issue valid tax invoices after we did so.” Sadly the VAT tribunal had to agree – although it did require HMRC to give relief for the VAT on those invoices issued before the date of deregistration. Fair? Mr Ahmed seems to me to have acted perfectly reasonably throughout. It seems to me unreasonable that HMRC should be able to deny relief to an honest purchaser by secretly deregistering his supplier.

Robert W Maas