Written evidence submitted by VAT Solutions (CTS0003)

 

  1. VAT Solutions welcomes the opportunity to provide evidence to the Committee in relation to its inquiry into “The cost of the tax system”.
  2. We specialise in the provision of VAT advice and regularly interact with HMRC on behalf of our clients.
  3. Our evidence will highlight how inefficiencies in the system result in unnecessary delay and increased costs to taxpayers. These costs are both the direct cost of increased agent’s fees, and the indirect cost of taxpayer time and resources dedicated to resolving these enquiries.

Compliance checks

  1. The compliance checks undertaken by HMRC are, of course, a necessary part of an effective tax system, however, in our experience these checks are routinely being extended beyond any reasonable timescale.
  2. As an indication of the length of time such checks can take, we are currently awaiting decisions in compliance checks which commenced on 10th August 2023, 15th September 2023, 20th September 2023 and 10th October 2023.
  3. The main driver of delay in these cases is the length of time taken by officers of HMRC to respond to information provided to them.
  4. For example, at the time of writing, we are awaiting responses to information supplied to different officers of HMRC in relation to various clients on 20th September 2024, 31st October 2024 and 29th November 2024 respectively.
  5. Such delays are not unusual and, as information is often requested in a piecemeal fashion, are often repeated following each such request.
  6. It is not unusual for checks to become so prolonged that officers appear to forget what information they have previously been provided with and request identical information a second time.
  7. It also appears that officers do not have access to a full record of the information supplied to HMRC in relation to particular taxpayers and will consequently request copies of information provided to them when, for example, VAT registration was applied for.
  8. Whilst the majority of compliance checks are still undertaken remotely, HMRC does appear to be increasing the number of premises visits which it carries out.
  9. Whilst these are also a necessary part of an effective tax system, they represent additional costs and, with increasing frequency, do not result in HMRC obtaining the information they require but appear to be little more than a precursor for the protracted correspondence referenced above.
  10. As an example, we attended a compliance event at the request of one of our clients in November 2024. HMRC had insisted the visit should take place at the head office address in London, despite being advised that no actual business activities take place at that address, and that a director be present. Both the director and we made lengthy and expensive journeys to Central London specifically to attend the visit which, it transpired, was to last less than an hour. At the end of the visit the officer declined to take the copies of the relevant records which had been produced for him and instead wrote to request copies of those records. The compliance check has still not been completed.

 

  1. We should note that the majority of compliance checks with which we have been involved have been undertaken by higher officers who, it is assumed, are the more highly skilled and experienced officers. Consequently, we have very little confidence that the recruitment of additional compliance staff will reduce the cost of the tax system and very real fears that it will actually result in increased delays and costs.
  2. In addition to the costs incurred in assisting HMRC with their compliance checks it should be noted that, in our experience, the majority of such checks are currently being undertaken to verify repayments of VAT claimed from HMRC. As those repayments are not made until the checks are completed, taxpayers are denied the right to recover VAT they have already paid for extended periods with obvious impacts on cashflow.
  3. That impact is increased further by the fact that HMRC pay interest on delayed repayments at less than the Bank of England base rate.

Policy on tax due to the taxpayer

  1. Even when a compliance check is finally concluded that is not necessarily the end of the expense. Setting aside costs incurred in the inevitable disputes as to the correct interpretation of VAT legislation, we understand that it is now HMRC’s policy not to repay any additional VAT which they identify as being due to the taxpayer during those checks.
  2. Instead, taxpayers are advised that they will need to submit a claim for that tax even if HMRC are issuing an assessment to recover VAT due from the taxpayer. This not only results in additional costs for the taxpayer but must also increase costs for HMRC in processing and verifying a claim of which they are already aware and, in many instances, have calculated themselves.
  3. Whilst we have been unable to find any publicly available confirmation of this policy it has been implemented to by several different officers and confirmed by HMRC’s review team.

Litigation 

  1. Disagreements on the correct interpretation of legislation are a natural and, in many instances, constructive part of the tax system.
  2. This does however require both parties to be transparent as to their own interpretation of the legislation. Unfortunately, it appears to be increasingly common for HMRC to change the basis of their interpretation whilst maintaining a constant view on the actual value of tax in dispute.
  3. In such circumstances it is difficult not to conclude that HMRC have started from a tax value which they consider to be acceptable and then sought to find a legislative justification for that position.
  4. In the absence of any such legislative justification, HMRC rely upon their own policy position even if that policy has never been publicised and is contrary to the guidance they have published.
  5. This not only leads to inevitable delays in cases being heard by the courts but also increases the already significant costs of appointing counsel and expert witnesses.
  6. As taxpayers are usually required to pay any VAT under dispute before lodging an appeal, there is little incentive for HMRC to avoid delay in these cases.

Clearance Requests

  1. Whilst we have concentrated upon the additional costs resulting from inefficiencies in compliance activity so far, delay is not restricted solely to that area.
  2. For example, we requested HMRC clearance in respect of an uncertain tax position in August 2023; we have not yet received any response other than confirmation that the request has been received and allocated to an officer. HMRC’s published timescale for dealing with such requests is 12 weeks.

System errors

  1. In addition to the time spent dealing with HMRC delays, the time spent correcting errors which result from “problems” with their computer systems must also be recognised.
  2. In the last six weeks alone, we have had two clients who submitted VAT returns by the due date but for which HMRC did not take payment of the VAT due. Whilst HMRC accepted that this was their error and corrected the position, this was only after the clients had already spent time trying to resolve the issue themselves before contacting us.
  3. Whilst the immediate issue with these returns was resolved, this did not prevent late payment penalties and interest also being charged by HMRC which required further time to resolve.
  4. In other instances, HMRC have “mislaid” payments made on account. Given that such payments are made by the largest taxpayers even a single payment going astray is a cause of considerable concern, particularly if the missing payment is not located by the time the balancing payment is due on submission of the return.
  5. In the most recent instance of this, HMRC were unable to locate half a million pounds for a full month. The payment was eventually traced and correctly allocated but only as a result of constant chasing of HMRC and the provision of additional information.

Conclusion

  1. Most taxpayers accept the additional costs inherent in the tax system and, following a period of familiarisation and implementation, these costs are usually manageable.
  2. However, the unknown, and often entirely avoidable, costs which result from HMRC actions are less acceptable and place an unreasonable burden on taxpayers.
  3. In providing this evidence we have concentrated on the costs in the system as it stands at present. Before concluding we should pause to consider the longer-term effects on the cost of the tax system.
  4. In our experience there is a growing feeling amongst taxpayers that the system is becoming increasingly burdensome and even unfair.
  5. In such circumstances the extent of voluntary compliance with the system almost inevitably diminishes.
  6. It would be natural to assume that HMRC require additional resources to tackle that decreased compliance, however, if those additional resources are employed in perpetuating the current system rather than addressing the legitimate concerns of taxpayers, this will merely lead to an increase in dissatisfaction with the system and a further decrease in voluntary compliance.
  7. This downward spiral can only be detrimental to both the economy and the vast majority of taxpayers who want to pay the right tax at the right time at the least cost.

February 2025