It is taxpayers’ responsibility to prove that HMRC has made a VAT assessment outside of its own time limit when the tax authority has been in possession of sufficient evidence to raise one for a period exceeding 12 months.
This is in essence what the upper tribunal (UT) recently ruled in Nottingham Forest Football Club vs HMRC [2024], agreeing with the decision made in 2022 by the first tier tribunal (FTT) and dismissing the taxpayer’s appeal.
This is a ruling that all UK taxpayers and practitioners should familiarise themselves with, as the UT conclusions could apply to substantially all VAT enquiries and investigations.
The facts
Let’s consider the facts of this case first. On 16 April 2018, HMRC visited the headquarters of Nottingham Forest Football Club (NFFC); on 20 April 2018 it collected certain general ledger data from the club’s new accounting software; and on 9 May 2018 HMRC also obtained some back-up records from NFFC’s old accounting software.
Having discovered a few errors relating both to underdeclared output tax and overclaimed input tax totalling around £350,000, HMRC raised an assessment on 29 April 2019. NFFC did not dispute the fact that it made those errors but argued that the assessment was raised outside the relevant statutory time limit.
Section 73 of the Value Added Tax Act 1994 states that an assessment of an amount of VAT due for any prescribed accounting period ‘shall not be made after the later of the following of two years after the end of the prescribed accounting period; or one year after evidence of facts, sufficient in the opinion of the Commissioners to justify the making of the assessment, comes to their knowledge’.
This was a resounding victory for HMRC on time limits, but it still appears to be a source of contention
According to NFFC, the tax authority had all the necessary ‘evidence of facts’ to assess the football club since 20 April 2018 (when HMRC received the new accounting software records) and should have raised the assessment no later than 20 April 2019.
HMRC argued that only on 9 May, by way of having obtained the old accounting software data, did it have sufficient information to assess the taxpayer.
Burden of proof
Interestingly in this case, the FTT stated that neither the taxpayer nor HMRC were able to successfully demonstrate which data had been used to make the assessment, which required the FTT first and the UT more recently to decide which party should have discharged the burden of proof in the first instance.
In the most recent ruling, the UT referred to the decision in Lithuanian Beer vs HMRC [2018], where it was established that in these situations the burden of proof sits with the taxpayer in the first instance.
The UT went even further, as Bryn Reynolds of Pinsent Masons explains: ‘The upper tribunal established that if the burden of proof had sat with HMRC, the tax authority would have discharged the burden, as there was sufficient evidence to demonstrate that the additional information provided in May 2018 was necessary for the assessment.’
In other words, this was a resounding victory for HMRC on time limits, but it still appears to be a source of contention, even though HMRC clarified a very important point on this matter over 20 years ago.
‘Keep a separate copy of anything provided to HMRC and have a very clear timeline’
As Reynolds explains, ‘HMRC used to argue that the moment they make the assessment was when, to the best of their judgment, they had quantified the assessment and decided to assess internally, rather than the strict notification date to the taxpayer. They have then accepted as a matter of policy that HMRC should use the notification date to the taxpayer, which is both clearer and more equitable.’
On the contrary, some degree of uncertainty remains on the date a taxpayer can be reasonably sure that HMRC has sufficient information to work out whether an assessment must be raised or not.
Best practice
However, there are a few things taxpayers can do to increase the chances of being able to discharge the burden of proof in relation to a specific date. ‘What a taxpayer should do as a matter of best practice is to keep a separate copy of anything provided to HMRC,’ says Reynolds. ‘And with that have a very clear timeline of when and what has been provided.
‘If you have accurately calculated all the figures, then you have a very good argument’
‘You can also choose to make HMRC’s job easier and work out any necessary calculations yourself: if you have accurately calculated all the figures, backed by all relevant data, and HMRC uses them, then you have a very good argument that at that point they have all the information. Finally, if a taxpayer can confirm directly with HMRC that they have all they need and they positively confirm that in writing, that is also helpful.’
It is also worth remembering the four-year rule that HMRC is subject to: the tax authority has in fact the power to assess a taxpayer for a misdeclaration of VAT if the last day of the prescribed accounting period that contains the misdeclaration is no older than four years on the day of the assessment.
The only situation where the maximum time limit available for assessments is more than four years is in cases of deliberate errors made by the taxpayer, where the 20-year rule applies.
HMRC’s internal manual also explains that the clock for capping purposes does not stop running when HMRC has sufficient information to make the VAT assessment, and that ‘the earliest accounting periods may be vulnerable to falling outside the assessing period, during the enquiry time’, in which case HMRC may make an assessment to the best of its judgment.
