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VAT De-Registration Appeals

We have understood from many client companies that instruct us that HMRC are increasingly seeking to clamp down on tax fraud and businesses in a variety of sectors (away from the traditional MTIC cases involving mobile phones or alcohol trading) are subject to HMRC decisions de-registering a VAT number.

It is essential that any company deal with tax issues as soon as they occur to prevent their appeal from being time-barred (and such decisions are usually subject to a strict 30 day time limit).

Our HMRC Tax Disputes Solicitors and Barristers have years of experience of UK and Community tax law and first hand commercial, litigation and advocacy experience . We have a proven track record of successfully contesting disputed tax assessments and penalties with HMRC. The tax authorities have lost many cases that are appealed through negotiation, internal review or through the Tax Tribunal.

Why should a company appeal a HMRC decision to deregister its VAT number?

VAT number de-registration can lead to serious consequences for a company, especially one where taxable supplies are being made and are contemplated. For example, a company without a VAT number would be:

  • unlikely to secure future lucrative contracts;
  • would not be able to issue tax invoices charging VAT or showing a VAT registration number; and
  • would not be able to claim back input tax from taxable supplies and as such would be consequently subject to a hefty assessment.

It is crucial to take specialist advice early and appeal the decision to de-register in good time. There are a number of avenues a company can take in appealing such a decision from the Commissioners.

In what circumstances do HMRC de-register VAT numbers?

HMRC justifies its decision to de-register by exercising its powers under paragraph 13 of Schedule 1 of the VAT Act 1994 to cancel a VAT registration. The two main reasons are:

  1. when HMRC conclude after an investigation that a company is either no longer making taxable supplies; or
  2. a Commissioner believes that the company has been registered with the principal aim of the registration is to facilitate a fraud on the VAT system.

If there is fraud in a supply chain can this lead to de-registration of a VAT number?

The UK VAT Act 1994 is governed by the EU Principal VAT Directive (Dir. 2006/112), the directive requires UK VAT legislation to be interpreted in conformity with it. Case law such as Kittel (C-439/04) and Mecsek (C-273/11) establishes the principle that Community law cannot be relied on for fraudulent ends and the right to input tax recovery can be denied in circumstances where a transaction chain is connected with VAT fraud and the trader is found to have the requisite level of knowledge.

Our tax solicitors have seen cases where HMRC cancel a VAT registration where the Commissioners conclude that a trader is using its VAT registration for fraudulent purposes (or will do so in the future).

How can a company get its VAT number re-instated?

It depends on the facts of each individual case. For example, in cases where fraud is alleged, the onus is on HMRC to establish that fraudulent activity has occurred or that the company is part of a chain of fraudulent transactions and that the trader knew- or ought to have known- about the fraud. Fraud is a serious accusation to level and HMRC should be put to the proof on this at the outset. Normally, such decision letters from HMRC do not go into detail. De-registration would ordinarily be a step taken after months of investigation by HMRC into a company’s affairs.

In other cases, HMRC seek to import a wider interpretation to Community law than what the judges intended at the time. For example, Kittel refers to taxable goods, however, we have seen cases where HMRC attempt to expand the meaning of Kittel to include taxable supplies. It is not known at this stage how a Tribunal would interpret such a wide importation given by HMRC.

Can a company seek judicial review of a decision to cancel a VAT registration?

Again, the answer depends on the facts of the case. Generally it can be argued that cancelling the VAT number of a business that makes taxable supplies can be disproportionate. Arguments could be made that such a disproportionate action is incompatible with rights under the European Convention on Human Rights, contrary to section 6(1) of the Human Rights Act 1998.

Is there a time limit to bring a judicial review claim?

Yes. A judicial review claim must be made promptly and in any event no later than 3 months after the grounds to make the claim arose (CPR 54.5(1)). Note that this date cannot be extended by agreement between parties.

Therefore, if you believe that you may have a claim against HMRC for judicial review, then you should seek legal advice promptly.

The HMRC Appeal Process

If a taxpayer disagrees with HMRC regarding a VAT de-registration decision, there is a 2-stage process for a taxpayer to dispute a HMRC decision:

Stage 1: give notice of appeal to HMRC. A taxpayer can appeal in writing within 30 days of HMRC’s notice of their decision. HMRC will confirm their first decision, amend their decision or agree with the taxpayer’s assessment.

Stage 2: if the taxpayer’s position cannot be agreed with HMRC in stage 1 then a taxpayer can avail themselves of two further options:

i. HMRC can offer an internal review of the disputed decision (or the taxpayer can request this procedure at any time). The review is an entirely internal procedure completed not by the original HMRC decision maker but by a different HMRC officer.

ii. A taxpayer can appeal to the First Tier Tax Tribunal if the taxpayer cannot agree their position following the review. The independent tribunal will make a determination on the case. A further appeal is permitted if a taxpayer does not agree with the decision.

Notice of Appeal to HMRC

If you disagree with HMRC’s deicison to de-register a VAT number, then you should first send notice to appeal the decision to HMRC. If HMRC makes a tax decision against you, you can contact HM Revenue and Customs (HMRC) or professional advice should be sought.

The first recourse of a taxpayer wishing to dispute a decision of HMRC is to examine the decision letter sent by HMRC which will contain instructions on how to appeal the decision made. Notice to appeal the tax decision must be made in writing by the taxpayer (or their legal representative) to HMRC by completing the appeal form attached to HMRC’s penalty letter or by following the instructions on the letter.

It is essential to appeal promptly within 30 days and seek early specialist advice because a late response can be fatal to any appeal. Members of our legal team have first-hand experience and working knowledge of the internal workings of HMRC. As specialist London Tax Disputes Solicitors, we have the competency and experience to unblock negotiations with HMRC.

More detailed guidance on HMRC Penalty Appeals can be found: here.

HMRC Internal Review

The HMRC internal review process can be used by a taxpayer when appealing a HMRC decision. If the stage 1 appeal to HMRC after the penalty notice is issued is unsuccessful then either the taxpayer or HMRC can request an internal review of the decision.

The review is a statutory process conducted by a different tax officer from the first reviewer and is seen as a useful tool in providing a fresh set of eyes on the interpretation of facts. Not on whether the decision was “fair” or for a technical dispute- but on determining whether the decision was made in line with HMRC guidelines.

There are a number of advantages in utilising the internal review procedure. The internal review process is conducted within strict time periods, allowing the taxpayer to gain control of the timing of the case and resolution may be achieved faster than using the Tax Tribunal option. Moreover, previously published official statistics shows that 49% of internal reviews have resulted in HMRC penalties being annulled or amended. This demonstrates that HMRC is prone to making errors when issuing a penalty notice.

HMRC’s internal review process is subject to a number of formalities and strict time limits, it is important to seek legal representation as soon as possible. If the taxpayer neither accepts the review process nor notifies the appeal to the Tax Tribunal, the tax dispute is considered settled under section 54 TMA 1970 in line with HMRC’s view of the matter. Therefore, it is important to seek legal representation early to help navigate the internal review process because after missing this response deadline, it is impossible to resile from the settlement according to section 54(2) TMA 1970 (unless the Tax Tribunal allows late notification of the appeal).

If after the completion of internal review process the tax issue is still in dispute then recourse is also available by appealing to the First Tier Tax Tribunal (section 49D, TMA 1970) or by considering alternative dispute resolution (ADR).

More detailed guidance on HMRC Internal Review Advice can be found: here.

Appeals to the Tax Tribunal

The Tax Tribunals can be used by a taxpayer when appealing a HMRC decision. If the appeal to HMRC after the penalty notice is issued is unsuccessful and the HMRC  internal review procedure has not yielded a satisfactory conclusions then recourse is available by appealing to the First Tier Tax Tribunal (section 49D, TMA 1970). It is not permissible to appeal to the Tax Tribunal during the course of the internal review.

The procedural rules governing the First Tier Tribunal are found in the Tribunal Procedure (First-tier Tribunal) (Tax Chamber) Rules 2009 (SI 2009/273). The Tax Tribunal is completely independent of HMRC and is governed by an overriding objective to deal with cases fairly and justly (rule 2, First Tier Tribunal Rules (FTR 2009)). The Tribunal will consider the evidence of both parties, equally whilst the judge heavily relies on previous case law.

Commencing proceedings at the First Tier Tax Tribunal is subject to statutory time limits. It is recommended that legal advice is sought as soon as you become involved in a HMRC dispute to prevent a situation where a potential claim becomes time-barred.

Case study: company has its VAT number retrospectively deregistered

Our tax lawyers are representing a company that received: (i) a decision to deny the right to deduct input tax and a VAT assessment in excess of £200,000; and (ii) a decision to retrospectively deregister the company’s VAT number.

We were instructed on an urgent basis and within one day, arranged a telephone conference with the head of our tax team and a highly experienced specialist tax barrister. Within 2 days of instruction, we appealed the decision to deregister its VAT number and 24 hours later appealed the VAT assessment and submitted a hardship application. All of this was done within the 30 day time limit to appeal HMRC decisions.

HMRC justified its decisions by alleging suspected fraudulent activity within the company’s supply chain after an investigation. Full details of the case will not be expounded, save that cases such as our client’s are commonplace and should your VAT number be registered, rest assured that our tax disputes team have the specialist and niche experience to effectively deal with your matter and advise you at the outset, when it matters most.

Expert VAT De-registration Solicitors

If you need HMRC Tax disputes advice, we are available to aid you at every stage of the HMRC investigate process. Members of our legal team have first-hand experience and knowledge of the internal workings of HMRC (having worked there). We can provide you with expert legal representation in negotiations with HMRC and defending all forms of HMRC fraud, tax inquiry, tax fraud investigation, criminal tax evasion and HMRC enquiries and investigations. Our team specialises in successfully challenging HMRC decisions and will assist you in every aspect of the investigation.

Our specialist Tax Solicitors and Barristers deliver expert technical knowledge, strong negotiation skills and respected advice, which can make a pronounced difference to eventual tax penalties, charges and liability.