In this article, we share how we helped our clients successfully defeat HMRC before the First Tier Tribunal (FTT), addressing the challenges they faced, and the importance of finding an adviser you can trust.

We were initially approached by two business owners who export designer clothes to customers in China, following HMRC’s decision to issue assessments of £442,872 (later reduced to £320,599) because it believed their business was not complying with the requirements for reclaiming VAT on goods exported outside of the EU, as set out in VAT Notice 703.

Under this Notice, for a business to reclaim VAT on its exports, it must be possible to prove goods of the value stated in the VAT return were delivered to a customer outside of the EU.

HMRC had carried out an inspection in 2016 to inspect the client’s books and records to ensure they were compliant with the VAT Notice 703 and were entitled to the VAT claimed. Despite our clients having retained copies of the purchase receipts and having records of the goods sent in each parcel, and the payment received from their customer, HMRC had taken the view the business did not hold satisfactory evidence of export and, therefore, raised assessments to recover the VAT claimed.

HMRC’s decision was due to the absence of invoices, a ‘vague’ description of the goods (usually personal effects/clothes) and a value of £100 having been entered on every Parcelforce form (to reduce the risk of theft). This was despite previous inspections being carried out by a different inspector who found no issues or failings previously based on the same facts. Due to the nature of the business, the VAT reclaimed represented the entirety of the profit received by our clients, therefore, if upheld, HMRC’s assessments would result in a total loss of the income earned over the last three years.

In addition, HMRC considered the omissions to be deliberate and looked to impose a penalty of at least 35%.

Alternative Dispute Resolution mediation

Having been appointed after initial challenges had been refuted by HMRC, we advised our clients to take part in a mediation, to enable both parties to come together and discuss the points in dispute and attempt to reach an agreement.

While we did not achieve a settlement at mediation, mainly due to HMRC imposing a policy of disallowing claims where the value of goods entered on export documentation did not match the actual value; ultimately, the mediation was still beneficial.

Buzzacott was able to demonstrate, and HMRC agreed, invoices had been produced and issued by our clients to their customers. One of the pillars of HMRC’s assessments was, therefore, removed, leaving only the value and description of goods to be addressed before the Tribunal.

Tribunal

Buzzacott engaged the services of Laurent Sykes QC to help prepare for, and ultimately represent the clients before the Tribunal. Together, we produced a bundle of documents to show every stage of the process, from purchase of the goods to sale, export, and receipt of payment from China. Importantly, all this information was available, or could have been made available, to HMRC at the time of the inspection.

From those documents, and evidence given by the client, it was submitted to the Judge that every requirement of VAT Notice 703 had been met. It was clear the goods upon which VAT had been reclaimed were sent to China, and as the client had copies of UK purchase receipts, and bank statements showing payments received from their customer, it was also clear what those goods were, and what they were worth.

Laurent Sykes QC then made legal arguments to demonstrate the use of an incorrect value on export documentation was irrelevant in the context of the information retained by the client, and available to HMRC, which clearly showed the correct value. HMRC did make some arguments, including trying to question whether invoices had been issued, despite having agreed in mediation that they were, but ultimately the case law makes it clear the evidence needs to be considered as a whole. The evidence available, along with the legal arguments and client testimony, was too strong and, after an investigation lasting over four years, the Judge found in our client’s favour.

Being under HMRC investigation

Being under an HMRC tax investigation can be very stressful and many people often feel anxious, helpless, and misunderstood. This case is no different. Our clients had to live with unresolved assessments of over £320,000 for four years. In addition, HMRC’s insistence it contact our client’s customer, caused that customer to cease working with them, leaving them with no income for a significant period until a new customer could be found.

While this is an extreme case, being under HMRC investigation will often lead to financial struggles, which will exacerbate the stress and strain of dealing with an investigation. However, when you engage Buzzacott’s Tax Investigations & Dispute Resolutions team, you will always have someone there to support you and fight your corner throughout the whole process.

We are there for our clients when it matters most, helping them choose the right course of action at difficult times, and helping shoulder the burden of such a stressful situation.

In this case, our expertise and relationship with leading tax counsel ensured that the VAT assessment were withdrawn. Without specialist advice, our clients could have felt pressured by HMRC to give up the fight, and either settle the £320,599 assessment or face bankruptcy.