Thursday, June 30, 2011

BLOG 109


Mrs Jennings built a log cabin. Well not actually with her own bare hands; she used a builder but because he could not fund the purchase of some of the materials, Mrs Jennings bought these herself. A log cabin is a dwelling for VAT. Accordingly Mrs Jennings qualified as a “DIY housebuilder” for VAT purposes which entitled her to claim back the VAT on the cost of the materials.

At least it normally would have done so, but in Mrs Jennings case the planning permission said that she could not occupy the cabin during February and that the cabin could only be used for holiday accommodation.

The VAT legislation on holiday accommodation is a little odd. If a developer builds and sells such a building, he has to charge VAT. If a customer buys land and asks a builder to construct the building on it, the builder does not have to charge VAT as his work is zero-rated. It seems that the other 40 people who built log cabins alongside Mrs Jennings, like her, bought the site and instructed a builder to create the cabin but that, unlike Mrs Jennings, they used builders who could afford to finance the cost. Accordingly they paid no VAT on their building work, including the cost of the materials included therein. Mrs Jennings asked HMRC for the VAT back on her purchase of materials. “No”, said HMRC, “the DIY Housebuilder scheme aims to put you in the same position as a developer not as in the same position as your neighbours who engaged builders – even though that is what Mrs Jennings in fact did in addition to buying the building materials – and a developer could not zero-rate his sale of a cabin”.

Mrs Jennings felt aggrieved and went to the Appeals Tribunal – or to be precise, sent Mr Jennings along to argue the case on her behalf. The Tribunal held that Mrs Jennings was entitled to have her VAT refunded. They did so in 2009 and I had assumed that, elated with their victory, Mr and Mrs Jennings have lived happily ever after in traditional fairy story manner.

But sadly this is not a fairy story; it is the real world. When Mrs Jennings sought to claim the fruits of her victory, HMRC demanded that she produce a VAT invoice to support the VAT reclaimed. Mrs Jennings produced a document on the supplier’s letter-heading, which bore its VAT number, confirmed that they would deliver the logs, and set out the price and the VAT. It started, “statement for the payments we have received … and to confirm the outstanding balance that will be required”.

“Sorry”, said HMRC, “You have achieved merely a pyrrhic victory; we don’t have to repay your £15,712 VAT because that is not an invoice. The law is perfectly clear; no invoice, no repayment”.

Back went Mr & Mrs Jennings to the Appeals Tribunal. The Tribunal judge listened to the arguments on both sides, and sent everyone away while they considered the position. He then looked up the word “invoice” in his dictionary, which defined it as “a statement identifying a supply of goods or services, the amount payment for them and the time when payment is to be made”.

But that is precisely what the document that Mrs Jennings holds does, said the Tribunal. Therefore it is an invoice. Therefore Mrs Jennings is entitled to her VAT.

Can Mr and Mrs Jennings now live happily ever after? I hope so. But I’m not too sure. The Tribunal said that the document is an invoice, not that it is a VAT invoice. If HMRC were so mean as to force Mr and Mrs Jennings back to the Tribunal again, they could feel “third time lucky” and have another go at holding onto Mrs Jennings’ money.

After all, it is at least five years since HMRC publicly set out their mission as being to collect the right tax at the right time, so perhaps it no longer holds good. Indeed I have just keyed “mission statement” into HMRC’s search engine and the result page gives no indication whatsoever that it is any longer anywhere on HMRC’s website.

Many people feel that the current mission statements seems to be “to collect all the money that we can, without worrying too much about what is legally due, and to hang on as long as possible to anything that might belong to someone else”. I’m sure that is not right though – well, reasonably sure!


BLOG 108


People are always saying to me, “Surely HMRC’s behaviour in this case has been so embarrassing that they won’t want to take it to the Tribunal.

I generally explain that if HMRC have a choice between foregoing tax and being publicly embarrassed they go for the embarrassment every time.

The First-tier Tribunal case of McMullen Holdings is a good example.

McMullen applied through its accountants, Moore Stephens, to register voluntarily for VAT on 8 April 2008. They did not receive their VAT registration. Moore Stephens called HMRC. They then called again, and again, and again … Moore Stephens say that most of the calls were unanswered. On some occasions the call was answered; on those occasions the person who answered said that he wasn’t dealing with the matter but someone would call them back. Guess how often they were called back? That’s right, nil times! Moore Stephens wrote to the Registration Unit on 1 September 2008 asking when their letter of 8 April would be dealt with. Further telephone calls ensued, again either unanswered or eliciting an unfulfilled promise to call back.

On 6 April 2009 Moore Stephens submitted a second application for registration with a covering letter recounting the above history and saying that the company no longer wanted to register voluntarily; they were now required to register as their turnover had exceeded the registration limit. This galvanised HMRC into action. They registered the company for VAT with effect from 1 April 2008.

They also said that they had no knowledge of either of the letters of 8 April 2008 or 1 September 2008 and had never had a single phone call from Moore Stephens. As far as HMRC were concerned the company had applied for registration nine months late and were liable to a penalty of £4,936.

Moore Stephens pointed out that they had had a similar problem in registering with another client in 2009-2010 and HMRC had written to Moore Stephens in response to a complaint on that client, “Unfortunately your client’s application had been misfiled and has not yet been found by the Wolverhampton registration team. I am very sorry that you were promised call backs from a number of caseworkers within the registration team and they failed to do so”.

HMRC also admitted that the Joint VAT Consultative Committee (the minutes of which are on public record) had been expressing disquiet about problems with VAT registration from sometime in 2008.

The Tribunal were therefore faced with having to decide between HMRC’s claims that they record everything meticulously and were confident that they had received not a single letter or phone call prior to 6 April 2009, and Moore Stephens’ evidence that they had written twice and phoned constantly during that period. Who was to be believed in circumstances where it was well known that HMRC had major problems with the registration system and had admitted in another case that the registration office had lost letters and not kept promises to phone?

Not really surprising that it preferred the Moore Stephens version! But surely very surprising that HMRC insisted that the Tribunal should be called upon to decide between the two conflicting stories in circumstances where they had already put on record that their registration process was unreliable at the time concerned. (It is much improved now!).