VAT visits and inspections – is it the end of the story if HMRC do not find any errors?

What is next after a VAT visit and inspection?

You may breathe a sigh of relief when HMRC completes a VAT compliance visit and no issues are identified. You might assume that if no assessment is raised by HMRC, the conclusion is that you are operating VAT correctly in your business. A recent High Court decision has dispelled that belief.

The High Court considered if HMRC were correct to raise a VAT assessment to a business, even though HMRC had conducted eleven previous VAT visits without raising an issue.

Background

Reelreed Limited (RRL) owns the freehold of a block of 600 flats in West London and since 1989, it had treated the residential letting income as exempt from VAT. As the income was treated as exempt, no VAT was charged to tenants, or declared to HMRC.

RRL provided additional services to occupiers of a significant proportion of flats including cleaning, Wi-Fi, key replacement, luggage storage and linen changes. In February 2019, HMRC decided that RRL provided serviced accommodation and 20% VAT should have been charged and declared to HMRC. HMRC raised an assessment of £4.8 million relating to the income received between 2015 and 2019.

Between 1990 and 2014, HMRC had conducted eleven compliance visits to review the VAT records of RRL. At each of the compliance visits, HMRC had never focused on whether the supplies the business made were correctly treated as exempt.

RRL has separately appealed to the First Tier Tribunal regarding HMRCs decision that the income it received is from serviced accommodation and not residential lettings. This decision will be issued separately.

What is VAT Legitimate Expectation?

As HMRC had not on its eleven previous VAT compliance visits challenged the VAT exemption, did RRL have ‘legitimate expectation’ that it was correctly treating the income as exempt? RRL asked the High Court for a judicial review.

The High Court concluded that no representations were made by HMRC on the earlier VAT compliance visits that could be relied upon by RRL to assume it was correctly treating its income as exempt.

The Judge commented, “The fact that [HMRC] do not challenge the taxpayer’s treatment of a particular supply on a particular occasion or occasions is not to be treated as shifting the burden from the taxpayer to HMRC”.

In our experience, when HMRC conduct VAT compliance checks, they usually state within the closing email or letter a caveat:

• ‘It is important that you understand that this check is not a full check of your VAT Return.’
• It is important that you understand that this check is not a full audit of the company’s VAT declarations. If we consider that a more detailed check of the same periods is appropriate, we may carry out a further review at a later date.

This High Court decision highlights that even if HMRC do not discover an error during a review or reviews, it does not necessarily follow that VAT is being correctly calculated.

What does this mean for me?

VAT is a self-assessed tax. The burden is always on the VAT registered business to submit accurate VAT returns and to seek advice if the treatment of transactions is unclear. As a business owner, you should also be able to demonstrate that you have taken reasonable care in relation to the preparation of VAT returns. At regular intervals and particularly ahead of a VAT inspection, we recommended that you review the assumptions on VAT liabilities, the recovery of VAT on costs, and the underpinning processes which lead to the preparation of your VAT returns.

Get in touch

We can help with the review to carry out a VAT health check to review VAT declarations. If necessary, we can contact HMRC to request a liability ruling on your business activities or assist with the correction of any errors identified.