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Feb

VAT: HMRC and the “Art of Public Relations” PUBLISHED IN VAT

At one level HMRC is careful about how the public views them. They offer time to pay when cash is short, or when foot & mouth stalks the land. They write helpful leaflets and updates. But they seem to have a habit of washing these brownie points away by moments of carelessness, and a general lack of awareness. The following two cases are examples.

 

The first is a case dealing with the flat rate scheme for very small businesses. This scheme eases administration by allowing a reduced effective rate of VAT in lieu of claiming input tax on purchases. It is supposed to be deregulatory and simple. The scheme allows the taxpayer to select from several different trade “sectors”, each given different reduced rates. But, that rate then has to be applied to all turnover, even where it is generated by a different subsidiary trade. Dangerously, it even applies to exempt turnover.
 
The litigant in my example was the well known and much admired VAT technical training provider: Mike Thexton, in his guise as Thexton Training Limited. It is worth my repeating that Mike Thexton is a well known authority on VAT, so hardly a “small man” in the sense of being a push over. He asked HMRC as to whether bank interest received by the company also had to be treated as subject to VAT under the flat rate scheme. 
 
At this stage HMRC might have adopted the following thought process:
 
·         Even though the legislation requires exempt turnover to bear a VAT burden under the scheme, the reason for that cannot have included a specific desire to tax bank interest
·         The point is capable of being interpreted in the taxpayer’s favour by saying that interest is just a happenstance and does not arise from an economic activity, is similar to private bank savings and thus outside the scope rather than exempt
·         Most small businesses will receive some bank interest so this will catch, and annoy, a vast number of small tax payers
·         No specific warning of this narrow point has been given to small businesses or their advisers
·         Thexton is a formidable opponent
·         Perhaps we ought to confirm that HMRC will not take the point that bank interest is subject to VAT under this rule.
 
Instead, HMRC confirmed that the flat rate percentage did, in fact, apply to bank interest.
 
Mike Thexton took a case against this, and won. I will not analyse why he won, or whether the decision stacks up, or provides a broad precedent, because that would make this blog too long. The important point to me is that HMRC committed a public relations faux pas in seeking to extract morsels of VAT by attacking passively generated bank interest from small businesses, and failing in their arguments to boot, when they could so easily have backed away and avoided the impression of being petty and grasping.
 
I have a second example, that of Team Brand Communication Consultants Limited. This related to a default surcharge levied for a late VAT return. The appellant had asked HMRC to accept that there was a reasonable excuse because the responsible person had been recently placed in a redundancy pool, and, as the only person of his grade in the pool, was worried that he stood a high chance of redundancy. This resulted in stress, which gave rise to the oversight.
 
HMRC refused to accept that this was a reasonable excuse, and found themselves in the tribunal trying to defend that stance. In the course of making their case HMRC made a simple point, which was reproduced in the tribunal decision in the following terms: Mr Hall submitted that the impact of redundancies and of the general financial situation of the country was common to businesses across all sectors and even to the public sector. There was nothing unique about the Appellant’s situation. The appellant could have spent time ensuring that the VAT return and payment were submitted or could have spent time dealing with redundancy issues. Alternatively, he could have dealt with both by working longer hours.
 
Presented like that (and the tribunal clearly felt it was that blunt), it presents a level of hard heartedness that is unbecoming. It is the equivalent of saying: “So, being made redundant are you? Just deal with it!”. The reference to public sector workers being in the same boat is utterly graceless, and smacks of a contest being fought across a class divide.
 
Is a large agency of government wise to convey such callousness concerning the plight of the public in difficult economic times? Clearly not. Had HMRC withdrawn before the hearing, they would not have set any public precedent on the issue, would no doubt have continued to collect penalties in similar, but uncontested, cases, and would not have reinforced an unhappy impression of being unsympathetic to the fears and strains of ordinary people trying to do their best in difficult circumstances.
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