LEXLAW Defeats HMRC’s £900,000+ VAT Assessment After Establishing HMRC Assessed the Wrong Taxpayer

A VAT assessment is only as strong as its foundations. In this matter, LEXLAW’s tax litigation team secured the complete withdrawal of a substantial VAT assessment not by disputing the arithmetic, but by demonstrating that HMRC had assessed the wrong legal person altogether. What began as a conventional appeal over quantum became, through forensic preparation, a decisive challenge to the validity of the assessment itself. The result was that HMRC withdrew the assessment in full, accepted that its records had been wrong for years, and the Tribunal proceedings came to an end with no liability falling on our client.

Origins of the Dispute

Our client was an individual who had been served with a substantial VAT assessment. HMRC had raised the assessment to best judgment, on the basis of supplies it considered had been made and on which it said VAT was due.

There was, however, a critical problem with HMRC’s analysis that was not apparent on the face of the assessment. The trading activity in question had not been carried on by the individual at all. It had been carried on through a limited company. The economic activity, the contractual relationships, the invoicing and the commercial substance all belonged to the company, not to the person HMRC had chosen to assess.

The root of the difficulty lay much earlier, in the VAT registration process. Years before, a VAT1 registration application had been submitted that identified the limited company as the applicant. Our client, like most taxpayers, had relied on professional advisers to complete and submit the registration in the ordinary way. HMRC, however, processed that application incorrectly and registered the individual rather than the company. That single administrative error then sat embedded within HMRC’s records for several years, unnoticed and uncorrected, until it surfaced in the most damaging way possible, as the basis for a best judgment assessment raised against the wrong taxable person.

The Problem

When LEXLAW was instructed, the appeal was proceeding on conventional VAT grounds. The focus, as is so often the case, was on the substance of the supplies and the quantum of the assessment: how much VAT was said to be due, on what supplies, and whether HMRC’s best judgment could be displaced.

During the preparation of witness evidence, however, our specialist team identified a far more fundamental issue. The assessment appeared to have been issued against the wrong legal person. The distinction between a limited company and the individual standing behind it is one of the most basic principles in law, and it is no less important in VAT. A company is a separate legal person. Where it is the company that makes taxable supplies in the course of its business, it is the company, and not its director, shareholder or proprietor, that is the taxable person liable to account for VAT.

That distinction is not a technicality to be glossed over. An assessment raised against the wrong taxable person is potentially fatal to HMRC’s case. It does not matter how compelling HMRC’s figures might be if the assessment is directed at a person who is not, in law, liable to be assessed at all. Recognising this transformed the nature of the appeal. The right question was no longer simply how much, but who.

The Investigation

Establishing the point required disciplined, evidence-led investigation rather than assertion. LEXLAW carried out a detailed review of the historic VAT registration records to reconstruct what had actually happened at the point of registration and in the years that followed.

That work included obtaining and analysing the original VAT registration application, which showed on its face that it was the company that had been put forward as the applicant. We reviewed the correspondence that had passed between HMRC and the professional advisers, building a documentary timeline that demonstrated the company had always been intended to be the registered and taxable person. We gathered the wider commercial record, supplier invoices, trading documents and other registration material, to show where the economic activity genuinely sat.

Crucially, we did not stop at the documents. We obtained witness evidence from both the taxpayer and from the professional adviser who had been responsible for the VAT registration process. That combination of contemporaneous documentation and first-hand testimony is what gives a case like this its strength. It is one thing to argue that an error occurred; it is another to be able to prove, from the original paperwork and from the people who completed it, that the company was always the intended registrant and that HMRC’s records were simply wrong.

Litigation Strategy

Once the issue had been identified and the supporting evidence assembled, LEXLAW instructed specialist tax counsel and developed a strategy designed to put the point at the centre of the case.

A deliberate decision was taken to seek the First-tier Tax Tribunal’s permission to amend the grounds of appeal so that the case squarely raised the question of whether HMRC had assessed the wrong legal entity. Fresh directions were sought to accommodate the reshaped case and the additional evidence. Rather than allowing the dispute to drift towards a lengthy hearing about the quantum of supplies, the strategy was to focus the Tribunal’s attention on a single, potentially decisive point of legal identity.

That issue was well suited to being determined as a preliminary matter. If our client succeeded in showing that the assessment had been raised against the wrong person, that finding would dispose of the entire appeal, regardless of the underlying figures. Framing the case in this way placed real and immediate pressure on HMRC to confront the validity of its own assessment rather than simply defending its calculations.

The Evidence Filed

The evidence was prepared with care and directed precisely at the issue. Detailed witness statements were filed which demonstrated that it was the company, and not the individual, that carried on the economic activity giving rise to the supplies HMRC had assessed.

Equally important, the evidence showed that this was not a problem HMRC was learning about for the first time. The material established that advisers had, over a period of years, repeatedly tried to persuade HMRC to correct the VAT registration so that it properly reflected the company. HMRC had therefore been placed on notice of the registration issue long before the assessment was ever raised. That point mattered considerably: it removed any suggestion that the error was a recent or convenient invention and instead showed a long-standing, documented attempt to put HMRC’s records right.

HMRC’s Response

The response to the amended grounds and the supporting witness evidence was telling. Once served, HMRC did not press on regardless. Instead, it sought additional time to consider its position.

HMRC took specialist internal advice and obtained the advice of its own counsel. That is the natural step for a responsible litigant faced with a properly evidenced challenge to the foundation of its assessment. Having reviewed the position, HMRC reached the conclusion that the assessment could not stand.

The Outcome

HMRC formally withdrew the assessment in full. It accepted that the VAT registration had been processed incorrectly at the outset. It accepted that the individual registration should be cancelled, and that the company should instead be treated as the relevant VAT registrant going forward.

With the assessment withdrawn, the Tribunal proceedings came to an end. Our client avoided liability under the disputed assessment entirely. A substantial exposure, one that had been hanging over our client and that, on HMRC’s original case, ran to a significant sum, was removed not after a contested hearing, but because the legal foundation of the assessment had been shown to be defective.

Why This Case Matters

The most important lesson from this matter is also the simplest: HMRC must assess the right person. The identity of the taxable person is not a preliminary formality to be assumed; it is a precondition of a valid assessment. As section 73 of the Value Added Tax Act 1994 makes clear, an assessment must be raised against the person who is liable, and that question of legal identity is fundamental, not peripheral.

The case is a clear illustration of why the distinction between an individual and a limited company cannot be treated casually. Where a business is carried on through a company, it is the company that is the taxable person. An assessment that ignores that separation, however large, and however carefully the figures have been calculated, is exposed to challenge at its root.

It also demonstrates that procedural and VAT registration issues can be every bit as decisive as substantive tax arguments. A great deal of litigation effort is devoted to disputing the amount of an assessment. This case is a reminder that the more powerful question is sometimes whether the assessment is valid at all. Reviewing the legal foundations of an HMRC assessment, who has been assessed, on what basis, and whether the registration position supports it, can be far more effective than arguing only about quantum.

Finally, the outcome shows what careful witness evidence and forensic analysis can achieve. The decisive point here was not visible on the face of the assessment and did not emerge from the original grounds of appeal. It surfaced because the historic records were examined closely, the original registration application was obtained and analysed, and witnesses were able to speak to what had actually happened. Preparation of that quality can change the entire course of litigation.

It is also worth noting that where professional advisers have made errors in the VAT registration process that contributed to the client’s exposure, there may be a separate professional negligence claim worth exploring against the adviser responsible. LEXLAW’s litigation team regularly advises on claims against accountants and tax advisers whose failings have caused or compounded a client’s tax difficulties.

Key Takeaways

• The taxable person is fundamental. An assessment raised against the wrong legal person is vulnerable to challenge no matter how the figures are calculated. HMRC’s assessment powers under section 73 VATA 1994 depend on the correct person being identified.
• A company and its owner are not the same. Where trade is carried on through a limited company, it is the company that is the taxable person for VAT, not the director or shareholder behind it.
• Registration errors have long tails. A mistake made at the point of VAT registration can lie dormant in HMRC’s records for years before resurfacing as a significant liability.
• Look at validity, not just quantum. Before disputing how much is owed, test whether the assessment is properly founded at all. The identity of the taxpayer is a threshold question.
• Evidence wins these cases. Original registration documents, contemporaneous correspondence and credible witness evidence are what turn a good argument into a decisive one.
• Notice matters. Showing that HMRC was alerted to a registration problem well before raising an assessment removes scope for HMRC to claim ignorance and strengthens the case for withdrawal.
• Reshaping a case can be the right call. Seeking permission to amend grounds of appeal to put a decisive point front and centre, including requesting a preliminary issue hearing, may resolve an entire dispute before any final hearing.

Facing an HMRC Dispute? Contact LEXLAW’s Tax Litigation Team

If you or your business has received a VAT assessment, is the subject of an HMRC investigation, or has been served with a best judgment assessment, the earliest possible specialist review can be critical. The same applies to disputes over VAT registration and de-registration, and to allegations concerning historic VAT liabilities.

This case shows that the right outcome is not always found by arguing about figures. Sometimes it is found by questioning the foundations of the assessment itself, and that requires experienced tax litigators who know where to look. Where the underlying difficulties stem from negligent professional advice, a claim in professional negligence may run alongside or in addition to the tax appeal.

LEXLAW’s tax litigation team advises individuals, companies, accountants and tax advisers on the full range of HMRC disputes, from enquiries and assessments through to appeals before the First-tier Tax Tribunal and beyond. We are based at Middle Temple, City of London, and our team includes solicitors, barristers and lawyers with first-hand experience of the internal workings of HMRC.

If you are facing a VAT assessment, an HMRC enquiry, a best judgment assessment, a VAT registration dispute or any allegation concerning historic VAT liabilities, contact LEXLAW’s specialist tax litigation team for a confidential discussion of your position.