Mr Noor appealed against a decision by HMRC to reduce the amount of input tax claimed on his first tax return, as this related to a supply of services. VAT legislation permits a taxpayer to reclaim certain costs incurred prior to registration ‘as if it were input tax’. Input tax incurred in the six months prior to registration in respect of services is treated as incurred at the start of the first period of registration. In the case of input tax incurred on the purchase of goods the time limit was three years, increased to four years from 1 April 2009.
The taxpayer had problems with a builder during the construction of a small commercial property. It resulted in legal action and adjudication prior to the completion of the property. Mr Noor received three invoices from the solicitors on 24 August 2007, 16 October 2007 and 29 February 2008 and an invoice from the adjudicator on 3 December 2007. He visited the tax office to seek advice as to whether he should register for VAT in order to reclaim the input tax in respect of the costs incurred on the construction. He was directed to a phone on the wall of the office from which he could contact HMRC’s National Advice Service.
The National Advice Service told him he should keep all the invoices ‘as he could claim VAT under the option to tax within three years’.
On 25 September 2009 HMRC received Mr Noor’s application to register for VAT from 1 July 2009 as a voluntary registration. On 1 November 2009 the taxpayer submitted his first VAT return for the period to 31 October 2009, claiming input tax of £28,971.91 and no output tax. An officer visited on 6 November to examine the claim and found that four invoices on which the VAT amounted to £3,628.39 related to services provided more than six months prior to registration and disallowed the claim to that extent. On 18 November 2009, Mr Noor appealed to the Tribunal.
The fact that the tax on services must be claimed within six months would normally have disposed of the matter, but the case of Oxfam v HMRC [2010] raised the question of legitimate expectation. In order to have a legitimate expectation of the deductibility of input tax, Mr Noor must have stated exactly what the expectation was and received clear unequivocal advice. The Tribunal found that, when he visited the tax office, Mr Noor went there with the express intention of finding out when he needed to register in order to reclaim the input tax. Had he been told that he could only reclaim inputs on services within six months, he would have registered earlier. He was entitled to rely on the advice received from HMRC, regardless of the fact that it was incorrect and had not been given in writing. The appeal was allowed.
This is consistent with the approach taken in the case of Thames Valley Renovations (TC 0947).
A case where the taxpayer succeeded was Ithell and another (TC1029). HMRC carried out a compliance review and, as a result, decided to revoke the company’s gross payment status. The company had made a profit in 2007 and, on the advice of their accountant, had issued a cheque to HMRC which paid the 2007/8 liability and also part of the 2008/9 liability. Unfortunately, the cheque was both unsigned and inadequate to meet the liability.
HMRC considered that, as two years’ liability was involved, they had two failures to make payments. They contended that the taxpayers had failed the construction scheme compliance test on four occasions and cancelled their gross payment status from August.
The contractors claimed that they had never received the notice and it was only when one of their sub-contractors notified them that they were aware of the cancellation.
They appealed; they accepted their errors but claimed that they were given wrong advice and had made innocent mistakes.
The Tribunal found that they had probably not received the notice, HMRC had not met their obligations to notify and the Tribunal allowed the appeal.
Another construction business which was successful in their appeal was Alan Kinkaid, trading as AK Construction Company (TC1090). He appealed against HMRC’s decision to cancel his registration for gross payment under the construction industry scheme. Under the scheme, sub-contractors can receive gross payments from contractors without deduction of the 20% levy, provided they have met their compliance obligations.
HMRC claimed that AK had not met these obligations as one payment was 332 days late and another 189 days late.
AK argued that he had done his best to avoid late payment but insufficiency of funds had prevented meeting the due date. Insufficiency of funds is not normally a reasonable excuse, but AK’s problems were caused by an earlier decision to remove the gross payment status, which had subsequently been overturned. It was therefore unreasonable for HMRC to assume that he would be non-compliant in future.
The Tribunal agreed and allowed the appeal.
This is in contrast with section 71 VATA1994 which states that insufficiency of funds is not a reasonable excuse, although the Tribunal did look at the circumstances surrounding the insufficiency of funds.
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