TAX CASES - 27.01.2022

Flat rate scheme errors: can HMRC assessment be struck out due to poor customer service?

The case. The taxpayer (SDC) used the flat rate scheme (FRS) and the 14% rate for management consultants, reduced to 13% in its first year of using the scheme. The director made two basic errors in her calculations: she accounted for FRS tax by applying the 13% and 14% rates to her net rather than gross sales. She also claimed two amounts of input tax for £24 and £39 on separate returns. HMRC issued an assessment for £8,474 to correct the errors.

The law. The relevant FRS percentage is always applied to VAT-inclusive sales. It is also applied to zero-rated and exempt income but not income that is outside the scope of VAT, e.g. most services supplied to overseas business customers. No input tax can be claimed by scheme users unless it relates to capital expenditure goods costing more than £2,000 including VAT.

The decision. The director’s main argument was that HMRC should have been “more vigilant in checking the returns” and its “advice and guidance should have been clearer” . She also complained about the stress that had been caused by HMRC’s enquiry, which she had found “very upsetting” .

The appeal was partly allowed - the assessment was reduced by £39 because the second input tax claim had already been corrected by an earlier adjustment made by HMRC. But the judge only had power to review the accuracy of the assessment and not HMRC’s conduct, so tax of £8,435 was due.

Key points. This case shows that you should not appeal against an HMRC assessment on the basis that an officer has provided “an imperfect customer service” and given you unwanted stress. The judge commented that HMRC was right to acknowledge its poor service, but the tribunal does not have power to consider the conduct of HMRC when reviewing assessments.