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VAT Voice by Steve Allen

Customs missed an error in your vat records on a previous visit, but find it on the next one and want to assess you for it - what should you do? Asks Steve Allen, Director of VAT Solutions (UK) LtdCustoms visit businesses every few years, and go through the accounting records. They may or may not find any errors but when they are finished most businesses assume that, even where a mistake is, everything else is OK.

This is not always the case. If Customs missed some minor error, in theory, they can go through the same records again (but only go back three years) and assess you for it. More usually, they will not go back past the last visit.

Major omissions

But what happens when Customs visit and misses something major? In an example from one of our clients, this is just what happened. Our client made narrowboats and misunderstood the requirements for zero-rating narrowboats used as houseboats. Based on this misinterpretation of the law, he had zero-rated nearly half the boats he had made. Customs came to visit and found a couple of missed motoring scale charges, but otherwise, made no assessment. The letter received shortly after the visit detailed the motoring scale charge errors, and said that no other errors had been identified.

A couple of years later, our subscriber had another visit from Customs, who immediately spotted that he had been incorrectly zero-rating the sale of half his narrowboats. Our client pointed out that the previous Officer had looked at the same thing and had not queried the zero-rating, and as it accounted for nearly half his turnover, how could it have been missed? Our friendly VAT Officer was not interested, and said he would still issue an assessment.

Misdirection by omission

Our client contacted his tax advisor who immediately wrote to Customs stating that this was such a basic part of our client’s business that no competent Officer could have failed to notice that nearly half the sales had been zero-rated. He quoted what is known as ‘misdirection by omission’. What this basically means is that when an Officer has visited you and missed an error so basic that he would have been expected to have spotted it and did not draw it to your attention, he has effectively led you to believe that it was the correct treatment. Therefore, he has ‘misdirected you by omission’.

This is all part of an Extra-Statutory Concession (Notice 48) which states:

“If a Customs and Excise officer, with the full facts before him, has given a clear and unequivocal ruling on VAT in writing or, knowing the full facts, has misled a registered person to his detriment, any assessment of VAT due will be based on the correct ruling from the date the error was brought to the registered person's attention.”

This extends to when Customs fails to spot a basic error and point it out. The effect of this is that when this extra-statutory concession is applied, Customs will only be able to issue a ruling from a current date, and will not be able to go back and assess for the past error.

Good news for our client who avoided a large VAT assessment that could well have put him out of business.

March 2005

Steve Allen
Director, VAT Solutions (UK) Ltd
Email: steveallen@vatsolutions-uk.com

VAT Solutions (UK) Ltd
11 Winmarleigh Street,
Warrington,
WA1 1NB

(T) 01925 242497
(F) 01925 242498
(M) 07810 433927
(W) www.vatsolutions-uk.com

VAT Solutions (UK) Limited is an established independent firm of Chartered Tax Advisers, formed by Andrew Needham and Steve Allen. The company has a cross-section of clients from multi-national companies through to medium-sized and numerous smaller regional firms of accountants and solicitors. They produce a regular publication 'VAT Voice', which can be downloaded directly from the Internet via the following address: www.vatsolutions-uk.com/newsletter.doc