HMRC losing almost two-thirds of VAT cases

11th July 2013

HM Revenue and Customs (HMRC) lost 60 per cent of appeals from businesses regarding VAT penalties during the 2011/12 tax year.
 
Although this is a slight decline from the 65 per cent of appeals that were lost in the previous tax year, the relatively high failure rate suggests HMRC is being too aggressive in its pursuit of VAT fines and increasing revenues.
 
According to the report from international law firm, Pincent Masons, HMRC dealt with 30,345 appeals from businesses regarding VAT penalty notices throughout the 2011/12 tax year. HMRC’s penalties were cancelled in 18,317 of these cases.
 
Jason Collins, head of tax at Pinsent Masons, said: “HMRC is operating under a lot of pressure to increase its revenues across the board, but this pressure is particularly acute in VAT.
 
“The NAO report highlighted the huge difference between the VAT HMRC believes it should be collecting, and the amount it actually does receive.
 
“The fact that HMRC loses 60 per cent of the penalty cases that businesses appeal shows that it may have become over-aggressive in hunting for cases of VAT evasion, and is making errors in pursuing penalties. HMRC is also too quick to say a taxpayer has been negligent when it gets things wrong.”
 
Earlier this month, a separate study found that UK firms collectively owe £2.5 billion in overdue VAT; despite HMRC’s more aggressive approach. The amount owed declined from £2.7 billion last year, but HMRC doubled its use of distraint and its spend on external debt collectors to around £13 million.
 
An HMRC spokesman said: “Only a small proportion of the millions of decisions HMRC makes each year are challenged. The review and appeal system provides a quick and easy way to resolve disputes.

“Where we change a decision it is often because our customer has given us new information: for example, a reasonable excuse for their tax return being late, or fresh evidence to support a claim.”
 
HMRC’s heavily weighted focus on VAT cases looks to be genuine, with Pinsent Masons revealing only 24 per cent of penalties for all other taxes were cancelled on appeal.

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