Expert VAT Advice - Why Firms Need to Understand VAT and Challenge HMRC Decisions

TWO reports published recently have shown that UK businesses still have a detrimental lack of understanding of Value Added Tax (VAT) which could be leading to significant cash flow and competitive disadvantages.

Gemma Gower VAT manager

Gemma Gower (pictured), VAT manager at Mitchell Charlesworth, outlines how firms are missing out in the VAT recovery stakes, and why more businesses should be challenging VAT penalties and unfavourable decisions:


VAT was introduced in 1973, as a 'simple tax on the supply of goods and services'. VAT is a sales tax charged on most consumer expenditure in, as well as imports into, the UK.

Businesses with a taxable turnover in excess of £79,000 must register for VAT and charge VAT on the goods and services they supply. Generally, VAT incurred on goods and services used to make taxable supplies can be recovered.

Unfortunately, the reality is that VAT is not straightforward. VAT is widely accepted as one of the most complex taxes and can be a minefield of ever-changing regulations. A recent survey by Sage found that the combination of a lack of understanding among UK businesses and perceived complexities have led
to more than a third of SMEs (36%) failing to claim back VAT to which they are entitled. Of these taxpayers, the research by Sage revealed that more than half (52%) estimate the VAT loss at £500
per year.

Businesses can reclaim VAT on items they use to make taxable supplies, such as computers/laptops, stationery, printer ink, telephone contracts, tea/coffee/biscuits. It must be noted that there are restrictions on VAT recovery for business entertainment, and motor cars, among other things. Fuel, which can often make up a significant proportion of a firm's costs, is also eligible, even when fuel costs are incurred by, and reimbursed to, staff.

This demonstrates why it is vital that businesses develop a deeper understanding of VAT and in particular what can be claimed, in order to maximise VAT recovery and remain on a level playing field with their rivals.


In addition, businesses are reminded that they have the right to, and are urged to, appeal unfavourable HMRC decisions.

HMRC is under pressure to increase revenues for the Treasury, and targeting VAT registered businesses appears to be a popular strategy. Another recent report, published by the tax assurance commissioner, backs up the consensus among advisers that HMRC is being overaggressive in its hunt for VAT evasion and is all too quick to unfairly suggest that businesses have been negligent.

The research found that 60% of HMRC VAT penalty cases were cancelled on appeal in 2011/12 (of 30,345 appeals, HMRC's decision was overturned in 18,317 cases).

These statistics should be a refreshing reminder to businesses. However, despite the evidence, too few decisions made by HMRC are challenged. This may be due to confusion about the process, not understanding HMRC's technical jargon, or businesses being wary of 'getting a reputation with the VAT Man'.

By way of example, an HMRC decision can be appealed if: you believe that you have a 'reasonable excuse' for late submission of a VAT return; you disagree with HMRC's interpretation of the VAT liability of your products or services; or you consider that there are mitigating circumstances relating to a 'behaviour-based' penalty.

If you are in doubt, seek advice!


If you would like VAT recovery advice, or if you have recently received a VAT penalty or surcharge from HMRC, contact Mitchell Charlesworth's VAT specialist Gemma Gower for more information, and to see whether you have grounds to appeal the decision.

Gemma can be contacted on 0151 255 2300 or email her at

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