VAT assessments invalid: HMRC failed to exercise discretion

In Harry Edebiri (t/a TT Trading) v HMRC [2020] TC07988, the First Tier Tribunal (FTT) set aside VAT assessments totalling £16,600 as HMRC had failed to exercise their discretion to allow alternative evidence to support input VAT claims.

• Mr Edebiri started work as a franchisee courier driver for DHL in 2010. DHL registered him for VAT voluntarily despite his turnover being below the Registration threshold.
• DHL prepared Mr Edebiri’s VAT returns, recovering input VAT on his franchise fee and fuel expenditure.
  • He did not realise that DHL had used their own information about his income to also declare output VAT when preparing his returns.
• Mr Edebiri left DHL in 2013 and retrained as a driving instructor, turning over between £20,000 and £26,000 annually.
  • He continued to recover input VAT on his fuel and franchise fees but failed to charge VAT to his customers or account for output VAT to HMRC. 
  • As far as he was aware, this replicated his VAT position when working for DHL as he did not know that DHL were also accounting for output VAT on his sales.
• HMRC assessed £16,380 of undeclared output VAT for the period July 2014 to April 2018 and disallowed most of the input tax claimed in relation to Mr Edebiri’s driving instructor work.
• Following a Statutory Review, HMRC allowed £671 of input VAT paid to one franchisor and advised that if evidence in the form of bank statements was supplied of other franchise fees paid, the VAT element would be considered for deduction.
  • Mr Edebiri subsequently provided bank statements but did not hear anything further from HMRC.

Mr Edebiri Appealed to the FTT.

HMRC has discretion under Regulation 29 of the VAT Regulations to allow a claim for input tax where the person holds “such other evidence of the charge to VAT as the Commissioners may direct”.

The FTT allowed Mr Edebiri’s appeal in part, finding that:

• In allowing £671 of input VAT following the statutory review, HMRC had exercised its discretion under Regulation 29 in respect of the period July 2016 to April 2017.
• HMRC had failed to exercise its discretion under Regulation 29 in respect of all other assessed periods where alternative evidence of input VAT (the additional bank statements) had been provided by Mr Edebiri.
  • Following the decision in GB Housley Ltd v HMRC [2016] EWCA Civ 1299, HMRC's failure to exercise discretion to accept alternative evidence meant that the related assessments were invalid.

The FTT set aside all assessments other than those in the period July 2016 to April 2017, reducing the amount assessed from £20,021 to £3,408.

Comment

HMRC can now make new assessments on Mr Edebiri where they are in time. The FTT asked that HMRC take a number of mitigating factors into account when deciding whether or not to issue new assessments.

Useful guides on this topic

Statutory Review (by HMRC)
What is a Statutory Review? Is it automatic? What happens in a Statutory Review? Can you challenge a Statutory Review's findings? Can you influence a Statutory Review?

Is voluntary VAT registration worthwhile?
When can a business voluntarily register for VAT? When would it be beneficial to voluntarily register?

Registering for VAT
A guide to explain when to register for and charge VAT? VAT registration limits and VAT rules after Brexit. What penalties might HMRC issue for late notification of registration?

How to appeal an HMRC decision
What type of decision can you appeal? What are your different options when you disagree with HMRC? What are the key steps in making an appeal?

External link

Harry Edebiri (t/a TT Trading) v HMRC [2020] TC07988