Are protective VAT assessments valid?

Adam Cutler, Director, VAT and Customs Duty Services

A recent tribunal decision potentially narrows the situations in which HMRC can make protective assessments where they believe that a VAT treatment may be wrong.

VAT litigation can take a very long to run its full course. This is especially the case where an issue has wide application, and it might pass through four levels of courts before it is resolved. Even before an issue has reached the First-tier Tribunal, there could have been several years since the actual transaction while the taxpayer and the investigating HMRC officer discuss the matter, obtain further advice and information, request independent reviews and obtain opinions from counsel.

Time limits

Many businesses will have experience of knowing that there is a challenge taking place to an established VAT treatment which may mean they have overpaid VAT. As VAT returns can generally only be corrected for the last four years, in these situations they may seek to make an error correction notification. This will be stating that VAT returns submitted, while arithmetically correct and submitted in line with their understanding of HMRC’s policy at the time, may be incorrect if HMRC’s policy is proven to be incorrect. For long-running disputes, further claims may need to be made.

Where a business’ VAT return is incorrect, HMRC has the same four year period for which it can assess.

This can lead to a great deal of uncertainty when a VAT inspection is underway. Regrettably, often there can be a period of months between providing the requested information to HMRC and a response confirming whether the inspection is closed, HMRC is making an assessment, or that more information is required. Occasionally, no response is ever received by the business.

Fortunately, the VAT legislation provides some time limits to stop this going on for too long. For instance, where HMRC considers that a VAT return submitted is incomplete or incorrect, it has two years from the end of return period or one year from receiving the full facts it requested to make an assessment.

This can lead to HMRC officers who have not yet been able to conclude their investigations, or know that litigation is underway with another taxpayer, making ‘protective assessments’ at the end of these periods to ensure that VAT returns do not fall out of time to correct.

Go City Limited

The recent case of Go City Limited implies that this approach may not always be effective. Further details on the case can be found in our recent insight but at its heart this was about whether a city pass was a service subject to 20% VAT when it was issued, or a voucher that could be used for various transport options and attractions so the VAT treatment could not be known (and therefore accounted for) until it was redeemed. The tribunal found for the taxpayer on this main point.

However, had HMRC’s analysis been correct, there was another appeal made by the taxpayer challenging some of the earliest years under assessment which would have had to be considered.

This challenge was premised on the fact that at the time that the officer made her protective assessment, she was still waiting for advice from HMRC’s policy team about the VAT treatment. Although it was not necessary given the tribunal’s earlier opinion on the vouchers, it was held that HMRC had not formed the view that the return was ‘incomplete or incorrect’ when the officer made her assessment. The assessments issued were therefore invalid.

A recent example would be the VAT treatment of call options for land acquisitions. HMRC’s published policy was that payments for these took the same VAT treatment as the land transaction itself. However, many landowners were subject to protective assessments from HMRC while HMRC litigated this point in Landlinx Estates Limited. As HMRC was litigating in opposition to its own public policy, it might be questioned whether an officer could have formed the view that these VAT returns were incorrect.

A current example is cladding remediation works. Following the Grenfell disaster, HMRC confirmed in meetings with industry representatives that these works could be zero-rated in various circumstances and several contractors received rulings that their services qualified. Many of these contractors are now being subjected to assessments as HMRC’s approach has changed. However, because HMRC has never officially published any of its policy on this matter, it is again questionable whether these assessments are valid.

As a self-assessed tax, businesses and HMRC will, inevitably, not always agree on the VAT treatment of certain transactions. However, businesses need to have clarity on what HMRC’s position is in order to be able to prepare their VAT returns in line with this. Hopefully this decision will encourage HMRC to give a clear and early warning when its views change. In the meantime though, any assessments received by businesses should continue to be reviewed as always to check that they are valid and correct.

Why is this important

The tribunal decision raises question marks over many assessments that HMRC have made, especially where a particular officer is going against an established HMRC policy.