Weekly VAT Update – 22 August 2017
Promoter of tax avoidance schemes can recover input tax on barrister fees
The appellant in this case was a promoter of tax avoidance schemes; HMRC had previously issued press releases stating that it had protected more than £900 million of revenue through its tenth win against NT Advisers. However, HMRC continued its campaign against the business by denying them input tax recovery on fees paid to three barristers at Pump Court tax chambers. The fees payable consisted of non-contingent upfront fees, plus contingent success fees. For various reasons, there was a transfer of the business from one partnership to another. On the first VAT return of the acquiring partnership there was no sales or output tax, but £34,775.01 of input tax on purchases of £173,875, which were barrister fees for tax opinions and related advice. HMRC sought to disallow input tax recovery of the VAT on the legal fees, as the invoices were made out to the predecessor partnership, and would only allow a deduction if they were provided with evidence showing that the letters of engagement had been novated to the new partnership.
The former partnership was wholly taxable, and the Tribunal concluded that, had it been a question of deductibility by the old partnership, it would have concluded that it did have such a right. However, the question in this case was whether or not the new partnership had such a right. The Tribunal looked at what was actually transferred to the new partnership and concluded that, without doubt, the benefit and burden of the business contacts were transferred, including the customer and supplier contracts, and that it followed that the right to any success fees was transferred. Even though no success fees may be generated, it still had the right to receive them. The Tribunal therefore allowed the appeal and decided that the input tax was recoverable.
Personal Liability of Senior Accounting Officer
Finance Act 2009 introduced legislation that required the Senior Accounting Officer (SAO), of companies with turnover of at least £200 million, or balance sheets of at least £2 billion, to ensure that the company has taken reasonable steps to maintain appropriate tax accounting arrangements. This case involved two penalties of £5,000 assessed on a particular SAO – the first, I believe, to be heard under the legislation.
Briefly, the SAO had given clean SAO certificates, but the company subsequently made a voluntary disclosure of VAT errors totalling £1.3 million, after the individual had ceased to be employed by the company. The legislation requires HMRC to demonstrate that the individual had failed to take “reasonable steps” to ensure that tax accounting procedures were appropriate, and that this would be judged by the civil standard of proof i.e. on the balance of probability. The Tribunal identified a number of positive steps that the individual had taken.
At the hearing, HMRC incorrectly focused on whether the individual had a “reasonable excuse”, which has nothing to do with this penalty regime, but later accepted that the issue was whether or not he had failed to comply with his duty, and whether he took “reasonable steps”. The Tribunal found that the individual had:
- Made a number of improvements in processes and controls;
- Despite limited resources, set up a team of two, including a tax manager to prepare and review VAT returns;
- Established a training regime, including using the services of KPMG to support the tax team;
- Made gradual improvements in the systems, despite limited resources, and had made a number of requests for additional resource.
The Tribunal therefore allowed the appeal.
SAOs should consider their own personal risk and how their CV might be impacted if they are successfully penalised under the Finance Act 2009 SAO legislation.