How to Challenge an HMRC Assessment Ruling

Picture the meeting: you or your client have received a VAT assessment or a decision from HM Revenue & Customs concerning how a business accounts for VAT, which threatens to have an adverse impact on the business, cost money and possibly also impact on how it deals with its customers.

As HMRC administers VAT, surely the assessment must be correct? Sadly, this is not always the case; VAT inspectors and HMRC's policy unit have been found to be incorrect on a number of occasions, which is why HMRC has a review system in place to make it possible for those on the receiving end of incorrect decisions to challenge them.

However, the procedure to follow when challenging a VAT assessment or a decision regarding a VAT matter is not always correctly understood. As such, if you or your business are seeking a review of a VAT assessment, it is important to get the right advice on how the process works.

When is an assessment review necessary?

HMRC can sometimes make mistakes in the way it assesses a company’s VAT obligations, or can apply the rules in a way that are open to interpretation or disagreement. When this happens, the business in question may wish to request an assessment review.

When making a decision on tax obligations, HMRC is expected to write a letter to the affected organisation and explain the reason for a decision, but there are many instances where assessments have been issued without a written reason being provided.

This can cause obvious problems when the business does not understand HMRC's reason for the decision, or when it is believed that the assessment may be issued based on a misunderstanding of the facts by HMRC. At The VAT People, we have seen numerous examples of this, including:

• One VAT assessment we dealt with was issued on the basis that certain costs had been incurred for the benefit of another business, as the costs did not (according to HMRC) relate to products that the business supplied, and were instead sold by the other company. In actual fact, both businesses sold the same products but to different markets, so HMRC's decision was found to be based on incorrect information
• In another case, a VAT inspector's calculation of the amount of VAT due on sales made by a cash business used an estimation based on takings monitored by HMRC over a very limited time period. This resulting estimate was simply incorrect and massively overstated, leading to the assessment being withdrawn in full.

How can I request an assessment review from HMRC?

A business has 30 days to request a review of an HMRC decision, or alternatively it can appoint an advisor to do so on its behalf. This is seen as different to making a formal VAT appeal.

It is also possible to gain a review of the assessment outside of the 30-day period if additional information can be provided, or in the event that HMRC has got the facts wrong. HMRC will then have 45 days to review the decision unless they require additional time; although not made clear in the official guidance, if a business refuses HMRC this additional time to carry out a review, their original decision will simply be upheld.

Additionally, it is sometimes possible to secure an assessment review beyond the 30-day time limit, but only with the agreement of the tribunal chairman and HMRC. As such, it is always best to launch an appeal before this deadline.

What alternatives are there to a VAT assessment review?

The main alternative to a formal appeal is HMRC's alternative dispute resolution (ADR) service, which may be a good option where the source of the dispute is something that is open to discussion, such as the amount of VAT at stake on an estimated assessment.

It is also useful to consider ADR when it appears that HMRC has misinterpreted or misunderstood the facts of a case. However, its use may be more limited for issues that relate to HMRC's interpretation of the law.

Finally, if HMRC’s decision is upheld even after a review process, it is possible to appeal to the First Tier Tribunal (Tax), or indeed to skip the review process entirely and go straight to the tribunal stage.

Generally, appeals are only heard if the VAT at stake is paid in advance. However, if it can be proven that payment would cause the business to suffer adversely, then the appeal can proceed with the disputed tax remaining unpaid.