HMRC picks its tribunal battles

A DISPUTE over the VAT classification of roller blinds may sound farcical, but a recent ruling against the taxman offers a glimpse into the compromises that follow many tax tribunal rulings.

Last month, the First Tier tax tribunal ruled in favour of John Price that roller blinds were building materials as defined by a section of the VAT Act 1994,  and that Price was entitled to recover the VAT on the cost of the purchase of blinds from HMRC.

HMRC, however, has said it disagrees with the ruling, although it will not appeal the decision because of the small amount of VAT involved.

Earlier this week, HMRC reiterated that it will continue its policy of excluding roller blinds and other “window furniture” from the zero rate of VAT applied to building materials.

Stand-offs between the taxman and the tax tribunal – part of the Tribunals Service, an executive agency of the Ministry of Justice – are quite common, according to tax experts.

This is because decisions made by the First Tier Tribunal – which hears appeals made by taxpayers against HMRC on topics, including income tax and VAT to inheritance tax and national insurance contributions – are not legally binding.

Legally binding decisions are made by the Upper Tribunal (tax and chancery), which hears appeals from the First Tier for tax or charity cases, and people wishing to refer matters relating to certain decisions of the Financial Services Authority and the Pensions Regulator.

Tax cases heard by the tribunals range from the small – disputes over hundreds of pounds, to multi-billion pound disputes with multinationals. The tax tribunals often deal with complex parts of the tax system that are considered too specialist for mainstream courts.

Tribunal judges are often barristers or solicitors who have specialised in tax, according to Jason Collins, head of tax disputes at law firm McGrigors.

Appealing against a decision in the junior tribunal is a gamble for the taxman. If the upper tribunal upholds the decision of the First Tier HMRC risks having to change its tax policy.

“HMRC will pick its battles,” said Daniel Lyons, VAT partner at Deloitte. He adds that if HMRC loses an appeal in the upper tribunal it could “open the floodgate” to appeals from other taxpayers on the tax issue under dispute.

Many disputes now don’t reach the tax tribunal due to HMRC’s new internal review process for complaints.

Over half (56%) of all penalties and decisions issued by HMRC to taxpayers on technical matters or for late or inaccurate VAT returns are overturned by the taxman’s internal review process, according to data obtained by UHY Hacker Young.

Data obtained by the accounting firm under the Freedom of Information Act shows that over the last 18 months HMRC completed 28,912 reviews of technical decisions and VAT penalties imposed on businesses, of which 16,270 were subsequently ruled incorrect.

The figures come from HMRC’s internal review process, which was introduced in April 2009. The purpose of the internal review process is to resolve tax disputes quickly and inexpensively, thereby reducing the number of disputes which go to Tax Tribunal. Reviews typically take 45 days, and taxpayers who disagree with the outcome can then take the dispute to a Tax Tribunal.