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Steve Allen, Director of VAT Advisers Ltd, laments an unfortunate consequence of the tax appeal reform. 

Far reaching effects

TaxationWeb visitors should remember that on 31 March 2009, the existing VAT & Duties Tribunal structure will cease.  Instead, from 1 April 2009, a new two-tier Tribunal structure will begin, that will also incorporate the former General Commissioners and Special Commissioners from direct taxes.

Although there are some plus points to the new structure, one of the changes coming with the new structure will have far-reaching effects in the world of VAT and duty appeals. Under the current structure, if a taxpayer appeals a VAT assessment or ruling and is successful at Tribunal, he is entitled to claim back his or her costs. Only fair and reasonable you may think, as taxpayers should not be out of pocket when challenging an incorrect assessment by HMRC. Curiously, this ability to award appeal costs has never been available to direct tax cases, and, unfortunately, under the new structure from 1 April, it will no longer be available to VAT cases either. 

Advisers need to get their appeals in by 31 March, to benefit from the old regime!

In our experience, small businesses often get inaccurate VAT assessments for relatively small sums (e.g., under £10K) and have appealed them on the understanding that they will get their costs back if successful. This will no longer be the case, and will surely result in many small businesses deciding that it is not cost effective to appeal, and simply paying the assessment – even where it can be seen to be clearly incorrect.  It remains to be seen whether any unscrupulous VAT officers get wind of this important change, and start issuing questionable assessments safe in the knowledge that they won’t be appealed on cost grounds.

The knock-on effect of deciding not to appeal is that the advisers of the business will not be asked to handle the appeal either, given the additional irrecoverable fees that this would inevitably involve. Given the ineffectiveness of the current reconsideration process, some businesses might try to defend the assessments themselves, with much reduced chances of success. So, in this brave, new world of spirit of fairness and equality for all, only large well-off businesses would actually have adequate recourse to the legal process!

Get insured

Given the likelihood of low-value VAT assessments no longer being cost-effective to appeal, it is more important than ever for businesses to ensure that they have insurance in place which will cover the costs of tax investigations and appeals. Alternatively, you and/or your clients may wish to contact their MP directly.

For further information on this issue, see also Andrew Needham's previous article: The Government's Proposed Changes to the VAT Tribunal Structure Attacks Small Business Ability to Challenge Assessments

For further information on the new Tribunals System generally, see Mark McLaughlin's article Goodbye To The Commissioners - Ed