Friday, January 07, 2011



I am a bit disquieted by the First-tier Tribunal decision in Express Food Supplies v HMRC. The case was argued by Mr Al-Faham, the proprietor of Express. It is often difficult to judge whether a taxpayer in person has been disadvantaged by his lack of knowledge of tribunal procedures, so the usefulness of such cases as precedents is often questionable.

In May 2009, when the April VAT return fell due, Express’ accounts administrator was on holiday and a temporary employee who had been recruited to cover her absence completed the VAT return. This showed a VAT repayment due to Express of £21,660. HMRC asked Express to verify that the repayment was indeed due and asked to see the invoices. Express asked its accountant to have a look at the return. He found two categories of error

a) a small batch of zero-rated purchase invoices had been incorrectly entered with nothing being shown in the “net” column and the amount of the invoice in the VAT column, and
b) some sales invoices had been posted late so were omitted from the VAT return.

The accountant calculated that the refund due was only £1,082. He explained to HMRC that Express had been restocking with standard-rated packaging products and because of this had been expecting a VAT refund for the quarter so that return did not look out of the ordinary.

HMRC duly repaid the £1,082 and everyone lived happily ever after? Well, not quite. HMRC demanded a penalty of £3,086 – getting on for three times the VAT repaid. I should stress that they were being generous. This is 15% of the tax initially wrongly claimed, which is the absolute minimum penalty that parliament has specified for a mistake that is discovered by HMRC and results from a failure to take reasonable care.

I wonder what parliament expected a small business to do? In this case Mr Al-Faham was conscious that the VAT return needed to be submitted. He engaged a temporary employee to do the requisite work. He expected a VAT repayment and the return claimed one. He is not an accountant; he is, I assume, a food wholesaler. Surely parliament could not have expected him to do more than he did. What did he – or indeed the temporary, inexperienced book-keeper – do carelessly?

HMRC said that the largest VAT repayment that Express had had in the past was £5,504. Accordingly a claimed repayment of almost four times that amount would have rung alarm bells in the mind of a reasonably conscientious person. That seems to me questionable. The VAT payments/repayments for small traders can fluctuate wildly. The amount depends on when invoices happen to be issued and when the trader needs to incur capital expenditure or to stock up on particular items. Most of us do not remember all of our prior VAT returns!

Unfortunately Mr Al-Faham shot himself in the foot because at the Tribunal hearing he agreed that he had been careless. As his only escape from the penalty was to demonstrate that he had not been careless, the Tribunal had no option but to uphold the penalty.

MPs of all parties often pay lip-service to small businesses being vital to the economy. I carry around a card from the Federation of Small Businesses that tells me that there are 1.6 million VAT registered small businesses in the UK, that micro-businesses (i.e. businesses with under 500,000 euro of assets, under 1 million euro turnover and less than 10 employees) account for 94.7% of total UK businesses and 30.6% of total UK employment. The card is a few years out of date but I doubt that the figures have changed much. Hitting a conscientious small business with a £3,086 fine in these circumstances does not suggest to me that parliament cares about small businesses. This is not a party political issue. Chancellor Gordon Brown introduced this penalty but no-one in any of the opposition parties spoke out against it during the Finance Bill debates. It is a shame that politicians do not have the guts to say that they believe small businesses are a nuisance and ban people from setting up in business unless and until they are sophisticated enough to be able to run a medium-sized one, as they obviously see no role in 2011 for the traditional new businesses where the budding entrepreneur gets on with generating profits and growing the business without first getting an accounting or legal qualification or an MBA. Expecting a tiny business to be capable of achieving the standards of a larger one is so unrealistic that I cannot believe that any MP seriously thinks that is how the world works.



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