There have been a number of VAT Tribunal cases recently that emphasise that businesses can lose out if they do not keep the relevant business records.
It is likely that HM Revenue & Customs (HMRC) will use these cases to justify raising significant assessments for businesses that do not comply with their record-keeping requirements.
One case was in respect of the Second-Hand Margin Scheme (a simplification that allows businesses to account for VAT on the margin made rather than the full selling price of second-hand goods).
HMRC publish VAT Notices in respect of the scheme. The parts of the notices which set out the records that must be kept have force of law.
Admittedly, the case involved a business that had incorrectly avoided being VAT registered and when found out tried to use the scheme to reduce the amount of back tax that it owed.
However, the Tribunal agreed with HMRC that as the business had not kept a stock book, it owed VAT on the full selling price of its cars.
However, the case is likely to mean that HMRC will scrutinise businesses that are using the Scheme to see if there are any record-keeping deficiencies that would allow them to argue that VAT is due on the full selling price of second-hand goods.
In another case, a VAT-registered business had sought to recover VAT without having retained invoices as evidence of the expenditure.
The VAT legislation allows HMRC discretion to accept alternative evidence to enable the recovery of VAT on expenditure.
However, the important point is that this is at HMRC’s discretion and cannot be relied upon.
The Tribunal agreed with HMRC’s warning that:
“The operation of the VAT system is not a game to be played by taxpayers… Where the taxpayer refuses a lawful and reasonable request [to produce a valid VAT invoice], it puts itself in a position whereby the claim to input tax deduction is then a matter for the discretion of HMRC.”
The ruling makes it clear that for certainty businesses must have proper VAT invoices at the time that they make their Input Tax claim. In the case mentioned, producing the invoices at a later stage was not acceptable.
HMRC may feel emboldened by these cases to make assessments where in the past a level of pragmatism may have been applied.
Businesses should ensure that they are comfortable that they are complying with their record-keeping requirements – particularly in areas where this can be difficult such as importing and exporting goods. If businesses are concerned that they are not keeping the relevant records they should seek advice.