British taxpayers cannot be punished for relying on specific VAT advice received directly from HMRC, even if it contradicts publicly available guidelines produced by the tax authority.
This is the ruling handed down by the First-Tier Tribunal (FTT) in October 2024 in two separate cases concerning taxpayers’ legitimate expectations and reasonable excuses to have assessments and penalties cancelled.
Unambiguous
In the Treasures of Brazil Limited vs HMRC case, the appellant successfully contended that it had been unfairly assessed for underdeclared VAT, which it had been specifically told not to charge.
The key facts of this case are as follows. Shortly after voluntarily registering for VAT and requesting the registration to be effective from 1 October 2022, Treasures of Brazil (a business selling jewellery to retail customers) received an unsolicited message from HMRC stating: ‘You should wait until your VAT registration is confirmed before you charge customers for VAT.’
The taxpayer had a legitimate expectation that they should have followed what HMRC told them to do
This confirmation and the newly created VAT number reached the taxpayer only at the end of December 2022, but HMRC argued that the company should have started to account for VAT from 1 October and assessed it for underremitted VAT between October and December.
In fighting its corner, the tax authority quoted some extracts of the guidance available on its website, including such unequivocally clear instructions as ‘You cannot include VAT on your invoices until you get your VAT number, but you can increase your prices to account for the VAT you’ll need to pay to HMRC.’
The FTT acknowledged that these guidelines clearly indicate that taxpayers may need to account for VAT before obtaining their VAT number. However, it concluded that ‘a specific statement provided to a taxpayer by HMRC must necessarily be expected to be more targeted to the individual taxpayer’s circumstances and to override any more general guidance’.
‘The issue was entirely caused by HMRC’s poor communications’
Legitimate expectation
In essence, the FTT established that the taxpayer had a legitimate expectation that they should have followed what HMRC unambiguously told them to do (or rather not do, in this case), regardless of any other general piece of information.
For this reason, the appeal by Treasures of Brazil was allowed, the assessment cancelled, and the appellant entitled to retain £4,502 of input tax credit claimed prior to receiving confirmation of its newly created VAT registration.
This windfall for the taxpayer was because, the tribunal explained, ‘the issue was entirely caused by HMRC’s poor communications’.
Requesting guidance
In the second case, Sandra Krywald vs HMRC, the FTT was requested to decide whether the penalties levied on the taxpayer for failing to submit three VAT returns on time and to pay VAT on a timely basis were justifiable or not.
To understand why HMRC ultimately lost this case, with the court ruling that the appellant had a reasonable excuse for her failure, it is again crucial to consider the interactions between the taxpayer and the authority.
The VAT specialist explained there is no requirement to have an opening balance on the returns
In June 2023 the taxpayer had some concerns that the figures to be included in the latest VAT return, prepared by an external firm of bookkeepers and sent for her approval, were incorrect, so she reached out to HMRC for guidance. HMRC advised that before proceeding with the submission of the return she required ‘opening balances’.
Since she was not comfortable with the figures sent to her nor with any opening balances, the taxpayer delayed the submission of three VAT returns beyond the relevant time limits, pending further investigation by and with the bookkeepers.
She subsequently engaged a VAT specialist, who explained there is no requirement to have an opening balance on the returns and that it is simply necessary to ensure the relevant quarterly figures included in each VAT return are correct. She then hired a new firm of bookkeepers to reprepare her returns and ultimately submitted them, albeit late. HMRC assessed the taxpayer for the late submissions.
The FTT decided to reduce all imposed penalties to zero and ruled that the appellant had a reasonable excuse for not submitting the returns on time ‘because she took reasonable care to avoid the failings’ of both the first firm of bookkeepers and HMRC, which provided her with incorrect information.
The judge also provided guidance on which basic test a taxpayer needs to pass for claiming a reasonable excuse, quoting Judge Medd QC in the case of Clean Car Co Ltd v C&E Commissioners [1991]: ‘One must ask oneself: was what the taxpayer did a reasonable thing for a responsible trader conscious of and intending to comply with his obligations regarding tax?’
For your amusement
For those who prefer practical, real-life examples for a better understanding of what does not constitute a reasonable excuse, HMRC earlier this year updated its list of the funniest and most bizarre excuses for late tax returns. They include: ‘My husband told me the deadline was 31 March, and I believed him,’ ‘After seeing a volcanic eruption on the news, I couldn’t concentrate on anything else,’ and ‘Our business doesn’t really do anything.’
