VAT Disputes — Key Areas
Frequently Asked Questions
HMRC has raised a VAT assessment — what are the time limits and my options?
A VAT assessment must generally be made within 2 years of evidence of facts sufficient to justify the assessment coming to HMRC's knowledge (VATA 1994 s.77(4) — for best judgment assessments) or within 4 years of the end of the prescribed accounting period to which it relates (s.77(1)). For deliberate evasion, the limit is 20 years. A taxpayer may appeal a VAT assessment to HMRC in the first instance, request a statutory review (30-day deadline), and then appeal to the First-tier Tribunal (Tax Chamber). A solicitor analyses whether the assessment is in time, correctly calculated, and properly raised — and prepares detailed grounds of appeal.
What is MTIC (carousel) fraud and how does HMRC allege it against my business?
MTIC fraud involves a "missing trader" who collects VAT from a buyer but disappears without paying it to HMRC. The buyer claims back that input VAT, creating a fraud on the public revenue. HMRC alleges that businesses in the supply chain either knew of the fraud (Kittel — actual knowledge: HMRC refuses input tax absolutely) or should have known (constructive knowledge — Mobilx Ltd v HMRC [2010] EWCA Civ 517: HMRC must show the only reasonable explanation for the circumstances was that the business ought to have known of fraud). A solicitor challenges HMRC's analysis of the supply chain, its fraud findings, and its attribution of knowledge to your business — and represents you at the Tax Tribunal, where HMRC bears the burden of proof on all issues.
Can I reclaim VAT on costs incurred before I registered for VAT?
Yes — pre-registration input tax can be reclaimed on goods purchased within 4 years before registration (where the goods are still held at the date of registration) and on services received within 6 months before registration (VATA 1994 s.24(6); VAT Regulations 1995 reg. 111). The goods or services must have been for the purposes of the business that is now VAT-registered. A solicitor advises on the pre-registration input tax claim, challenges any HMRC refusal, and ensures the claim is correctly included in the first VAT return.
HMRC says my option to tax on a commercial property has been disapplied — what are the consequences?
If HMRC disapplies the option to tax (under VATA 1994 Sch 10 para 12 — the anti-avoidance rule, which applies where the buyer or connected person intends to use the building for exempt purposes), the supply reverts to being exempt. The supplier loses the ability to recover input tax on costs associated with the property, and may face an assessment for VAT previously recovered. A solicitor challenges the disapplication, advises on the conditions for the anti-avoidance rule, and — where the rule applies — mitigates the impact through restructuring of the transaction.
What is the partial exemption de minimis limit and why does it matter?
A partially exempt business normally cannot recover input tax directly attributable to exempt supplies, and must apportion residual input tax. The de minimis limit provides an exception: if exempt input tax is no more than £625 per month on average and no more than 50% of total input tax, the business can treat all input tax as deductible (i.e. as if it were fully taxable). A business near the de minimis limit must monitor it carefully each quarter and perform the annual adjustment. A solicitor advises on partial exemption calculations, challenges HMRC's apportionment methodology, and manages the annual partial exemption adjustment and HMRC compliance check.