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WHAT SORT OF TAX AUTHORITY DO YOU WANT – 5
From time to time I come across a tax case where I think that HMRC have acted so unreasonably that it amounts to an abuse of power. As a taxpayer I want them to act fairly; I do not want them to use the law to deprive taxpayers of money to which any right-thinking person would think they are entitled.
The case that has infuriated me is the First-tier Tribunal decision in Simpson & Marwick v HMRC. This concerns VAT bad debt relief.
The bad debt relief is given by European law and Article 90 of the VAT Directive (formerly Article 11(C) of the Sixth Directive). This provides that, “in the case of total or partial non-payment … the taxable amount shall be reduced accordingly under conditions which shall be determined by the Member States … 2 … Member States may derogate from paragraph 1”. In the UK s 36, VATA 1994 provides for bad debt relief and enables HMRC to make regulations in relation to the relief. They have done so by Regulations 165 – 172J of the VAT Regulations 1995. Regulation 172(3) provides that where a purchaser does not pay the full price for a supply, the relief is calculated as VAT on the proportion of the unpaid amount which the unpaid proportion bears to the consideration for the supply. For example suppose the sale price was £100 plus £17.50 VAT and the purchaser paid only £50. The unpaid amount is £67.50. The bad debt relief is £17.50 x 67.50/117.50 = £10.05 – which is of course the VAT at 17.5% on £67.50. This is fair. It prevents a taxpayer claiming that the full £50 relates to the purchase price and the unpaid amount is £50 purchase price plus £17.50 VAT. The business and the State share the loss proportionately.
But what happens where the customer is insured? The supply is to the customer. However what normally happens is that the insurance company pays the bill if the insured is not VAT registered. If the insured is VAT registered, it pays only the non-VAT element of the bill leaving the customer to pay the VAT direct to the supplier on the basis that the customer can recover that VAT as input tax so it is not part of its loss. It does this because HMRC told it to. So what happens if the customer does not pay the VAT? The supplier has received the full payment for the supply but none of the VAT. This is very different to the payment on account example above where the payment on account cannot be attributed to either the supply or the VAT. Where it is clear that what is unpaid can only be the VAT, logically bad debt relief ought to be given for the full amount of that VAT.
Which brings us to Simpson & Marwick. They are solicitors who act mainly in relation to insurance claims. Although they are instructed by the insurance company, it does so (in HMRC’s view at least) on behalf of the policyholder on whose behalf Simpson & Marwick work. In 1985 the British Insurance Association told the Law Society and the Law Society for Scotland that it had agreed with what was then Customs & Excise that a solicitor should address a tax invoice to the customer requesting payment of an amount equal to the VAT and stating that the balance of the account will be paid by the insurance company. It should also send a copy of the invoice to the insurance company endorsed to say that the policyholder has been asked to pay the VAT amount and the insurance company should pay the balance.
VAT Notice 700/18 states at para 3.11, “What if the debtor’s insurers pay? … for convenience the insurer may pay you direct. If the insured is VAT registered the VAT exclusive amount is usually paid. If the customer does not pay you the VAT element, you can only claim relief on the actual balance written off. Any payment is to be treated as in paragraph 3.2”. Paragraph 3.2 states that payments should be allocated to the earliest supplies. The general restriction where a customer pays part only of a bill is dealt with at paragraph 3.13.
Simpson & Marwick suffered a great many bad debts in relation to the VAT element. They claimed full relief every year from 1985. They had a VAT visit every three years and HMRC were happy with what they were doing - until 2007 that is. In 2007 they had another VAT visit and the HMRC Officer “suggested to the firm” that they were claiming the wrong amount and should be claiming only 17.5% of the VAT. Simpson & Marwick telephoned the VAT National Advice Service who told them that the full amount of the VAT only invoices could be reclaimed under the bad debt procedure. The Officer who had done the VAT visit then wrote to Simpson & Marwick confirming her view that they could reclaim only 17.5% of the VAT only invoices. Simpson & Marwick again called the National Advice Service which again told them that they were right to claim the full amount.
Eight months later HMRC raised an assessment on Simpson & Marwick for £322,843, being the 82.5% of the VAT bad debt relief they had claimed in the previous three years (the statutory three-year cap prevented them from going back further).
By the time the case reached the Tribunal Simpson & Marwick seem to have concluded that the law was against them. I think this a shame as it is by no means clear to me that the EU Directive allows the UK to “determine conditions” only to repay 17.5% of the VAT lost (and the EU published list of derogations do not show a UK derogation from Article 90). The Tribunal case was argued by a QC so I imagine that they were advised that they did not have a legal leg to stand on. Instead they claimed first “legitimate expectation” and secondly the Human Rights Act. The Tribunal dismissed both claims with alacrity. It decided that Simpson & Marwick had claimed the wrong amount; they had produced no evidence that HMRC were ever aware that over the 22-year period it had claimed the wrong amount and so they could neither have had a legitimate expectation of getting a greater repayment than provided for by law, or a “possession” of a claim to a greater repayment than provided for by law.
I have no problem with the decision. My concern is that Simpson & Warwick seem to have acted throughout on the basis of paragraph 3.11 of the HMRC notice and their telephone advice from HMRC. They were caught up in an unusual situation where Customs & Excise had introduced an extra-statutory basis of dealing with VAT on insurance claims in conjunction with the British Insurance Association which Simpson & Marwick was effectively forced to go along with. This basis seems hugely detrimental to Simpson & Marwick as without it they would probably have chased the customer for payment with greater vigour – and it is likely that many customers had ignored their invoices as they wrongly believed that they would have been fully paid by the insurance company.
Furthermore in 1978 the then Treasury Minister, Robert Sheldon, told parliament that Customs & Excise would not collect back tax where they had given a clear and unequivocal ruling on VAT in writing that turned out to be wrong. In 2011, unlike in 1978, HMRC rarely give any rulings in writing; they encourage taxpayers to deal with them through telephone helplines, but even though they record calls to the helplines they have consistently refused to extend the protection that this “Sheldon principle” gives taxpayers to reflect their current mode of working.
Most of all, the current approach of the Courts to tax legislation is to apply a purposive interpretation, i.e. to seek to discern what parliament intended to do and try to interpret the law in accordance with that. It is highly unlikely that when the relevant VAT Regulation was first promulgated anyone imagined that Customs might introduce a non-statutory system whereby the liability to pay the VAT and the remainder of the bill falls on different people. It does not seem to me to conform with the clear purpose of needing to lay down a rule to deal with part payments by a single person, to apply that rule also to the situation where two separate payments fall to be made by different people, one of whom pays and the other of which does not.
HMRC normally shed copious crocodile tears where they act unfairly and claim that they have a statutory obligation to enforce the law and, much as they would like to be fair, parliament prevents them from doing so. This of course ignores the fact that HMRC’s care and management powers enable them “to formulate policy in the interstices of the tax legislation, dealing pragmatically with minor or transitory anomalies” (R on the application of Wilkinson v CIR), which is what this seems to me to be. Furthermore if the law approaches legislation purposively, HMRC surely ought to adopt the same approach in deciding what claims to pursue.
ROBERT MAAS
WHAT SORT OF TAX AUTHORITY DO YOU WANT – 5
From time to time I come across a tax case where I think that HMRC have acted so unreasonably that it amounts to an abuse of power. As a taxpayer I want them to act fairly; I do not want them to use the law to deprive taxpayers of money to which any right-thinking person would think they are entitled.
The case that has infuriated me is the First-tier Tribunal decision in Simpson & Marwick v HMRC. This concerns VAT bad debt relief.
The bad debt relief is given by European law and Article 90 of the VAT Directive (formerly Article 11(C) of the Sixth Directive). This provides that, “in the case of total or partial non-payment … the taxable amount shall be reduced accordingly under conditions which shall be determined by the Member States … 2 … Member States may derogate from paragraph 1”. In the UK s 36, VATA 1994 provides for bad debt relief and enables HMRC to make regulations in relation to the relief. They have done so by Regulations 165 – 172J of the VAT Regulations 1995. Regulation 172(3) provides that where a purchaser does not pay the full price for a supply, the relief is calculated as VAT on the proportion of the unpaid amount which the unpaid proportion bears to the consideration for the supply. For example suppose the sale price was £100 plus £17.50 VAT and the purchaser paid only £50. The unpaid amount is £67.50. The bad debt relief is £17.50 x 67.50/117.50 = £10.05 – which is of course the VAT at 17.5% on £67.50. This is fair. It prevents a taxpayer claiming that the full £50 relates to the purchase price and the unpaid amount is £50 purchase price plus £17.50 VAT. The business and the State share the loss proportionately.
But what happens where the customer is insured? The supply is to the customer. However what normally happens is that the insurance company pays the bill if the insured is not VAT registered. If the insured is VAT registered, it pays only the non-VAT element of the bill leaving the customer to pay the VAT direct to the supplier on the basis that the customer can recover that VAT as input tax so it is not part of its loss. It does this because HMRC told it to. So what happens if the customer does not pay the VAT? The supplier has received the full payment for the supply but none of the VAT. This is very different to the payment on account example above where the payment on account cannot be attributed to either the supply or the VAT. Where it is clear that what is unpaid can only be the VAT, logically bad debt relief ought to be given for the full amount of that VAT.
Which brings us to Simpson & Marwick. They are solicitors who act mainly in relation to insurance claims. Although they are instructed by the insurance company, it does so (in HMRC’s view at least) on behalf of the policyholder on whose behalf Simpson & Marwick work. In 1985 the British Insurance Association told the Law Society and the Law Society for Scotland that it had agreed with what was then Customs & Excise that a solicitor should address a tax invoice to the customer requesting payment of an amount equal to the VAT and stating that the balance of the account will be paid by the insurance company. It should also send a copy of the invoice to the insurance company endorsed to say that the policyholder has been asked to pay the VAT amount and the insurance company should pay the balance.
VAT Notice 700/18 states at para 3.11, “What if the debtor’s insurers pay? … for convenience the insurer may pay you direct. If the insured is VAT registered the VAT exclusive amount is usually paid. If the customer does not pay you the VAT element, you can only claim relief on the actual balance written off. Any payment is to be treated as in paragraph 3.2”. Paragraph 3.2 states that payments should be allocated to the earliest supplies. The general restriction where a customer pays part only of a bill is dealt with at paragraph 3.13.
Simpson & Marwick suffered a great many bad debts in relation to the VAT element. They claimed full relief every year from 1985. They had a VAT visit every three years and HMRC were happy with what they were doing - until 2007 that is. In 2007 they had another VAT visit and the HMRC Officer “suggested to the firm” that they were claiming the wrong amount and should be claiming only 17.5% of the VAT. Simpson & Marwick telephoned the VAT National Advice Service who told them that the full amount of the VAT only invoices could be reclaimed under the bad debt procedure. The Officer who had done the VAT visit then wrote to Simpson & Marwick confirming her view that they could reclaim only 17.5% of the VAT only invoices. Simpson & Marwick again called the National Advice Service which again told them that they were right to claim the full amount.
Eight months later HMRC raised an assessment on Simpson & Marwick for £322,843, being the 82.5% of the VAT bad debt relief they had claimed in the previous three years (the statutory three-year cap prevented them from going back further).
By the time the case reached the Tribunal Simpson & Marwick seem to have concluded that the law was against them. I think this a shame as it is by no means clear to me that the EU Directive allows the UK to “determine conditions” only to repay 17.5% of the VAT lost (and the EU published list of derogations do not show a UK derogation from Article 90). The Tribunal case was argued by a QC so I imagine that they were advised that they did not have a legal leg to stand on. Instead they claimed first “legitimate expectation” and secondly the Human Rights Act. The Tribunal dismissed both claims with alacrity. It decided that Simpson & Marwick had claimed the wrong amount; they had produced no evidence that HMRC were ever aware that over the 22-year period it had claimed the wrong amount and so they could neither have had a legitimate expectation of getting a greater repayment than provided for by law, or a “possession” of a claim to a greater repayment than provided for by law.
I have no problem with the decision. My concern is that Simpson & Warwick seem to have acted throughout on the basis of paragraph 3.11 of the HMRC notice and their telephone advice from HMRC. They were caught up in an unusual situation where Customs & Excise had introduced an extra-statutory basis of dealing with VAT on insurance claims in conjunction with the British Insurance Association which Simpson & Marwick was effectively forced to go along with. This basis seems hugely detrimental to Simpson & Marwick as without it they would probably have chased the customer for payment with greater vigour – and it is likely that many customers had ignored their invoices as they wrongly believed that they would have been fully paid by the insurance company.
Furthermore in 1978 the then Treasury Minister, Robert Sheldon, told parliament that Customs & Excise would not collect back tax where they had given a clear and unequivocal ruling on VAT in writing that turned out to be wrong. In 2011, unlike in 1978, HMRC rarely give any rulings in writing; they encourage taxpayers to deal with them through telephone helplines, but even though they record calls to the helplines they have consistently refused to extend the protection that this “Sheldon principle” gives taxpayers to reflect their current mode of working.
Most of all, the current approach of the Courts to tax legislation is to apply a purposive interpretation, i.e. to seek to discern what parliament intended to do and try to interpret the law in accordance with that. It is highly unlikely that when the relevant VAT Regulation was first promulgated anyone imagined that Customs might introduce a non-statutory system whereby the liability to pay the VAT and the remainder of the bill falls on different people. It does not seem to me to conform with the clear purpose of needing to lay down a rule to deal with part payments by a single person, to apply that rule also to the situation where two separate payments fall to be made by different people, one of whom pays and the other of which does not.
HMRC normally shed copious crocodile tears where they act unfairly and claim that they have a statutory obligation to enforce the law and, much as they would like to be fair, parliament prevents them from doing so. This of course ignores the fact that HMRC’s care and management powers enable them “to formulate policy in the interstices of the tax legislation, dealing pragmatically with minor or transitory anomalies” (R on the application of Wilkinson v CIR), which is what this seems to me to be. Furthermore if the law approaches legislation purposively, HMRC surely ought to adopt the same approach in deciding what claims to pursue.
ROBERT MAAS
posted by CBW at 4:40 am
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