Contractors, relief from HMRC is available by paying a disputed tax bill the hardship way

It’s the scenario every contractor dreads and it happened very recently to one limited company ABA Motors Ltd – and it’s this: getting on the wrong side of HMRC, staying there, and then being forced into paying the tax bill in dispute before getting to appeal, writes Nick Hood, consultant for Opus Business Advisory. 

Time, expense, and extreme faff

The frustration is difficult to imagine, let alone outline. But here goes -- HMRC starts a tax enquiry into your PSC and let’s assume that they believe you, the contractor, owes them a large sum of VAT. The enquiry drags on for what seems like ever, maybe well over a year (as was the case for ABA). 

Despite what the contractor and their accountant tells HMRC, a decision is reached, and a whacking great VAT assessment is raised by the Revenue. The contractor disagrees and challenges the decision through the various mechanisms open to them. That means having to provide additional information to the decision-making officer at HMRC, and then submitting further representations as part of an independent review and finally, participating in some form of alternative dispute resolution. So far, ABA would relate to much of this ordeal!

Let’s say the ensuing struggle related to the above takes another nine months. But still HMRC refuses to back down and re-confirms both its decision and the whopping great assessment – in ABA’s case, it was looking at a VAT demand of more than £110,000.

The Kafka-esque world of VAT

Then, you the contractor is forced down the only remaining route left -- taking the dispute to a VAT tribunal. That’s fine in theory, but as ABA will attest, it comes with one very serious practical reservation. Under Section 84, VATA 1994, the party in receipt of the HMRC demand has to pay the disputed assessment BEFORE it can be appealed!

Despite how manifestly unfair such a pay-what-is-in-dispute situation is, we can say as business turnaround specialists that, sadly, it is a regular occurrence within the Kafka-esque world of VAT! 

Hardship application

Is the contractor snookered? Fortunately not, or at least there is a get-out-of-financial-jail card available. It comes in the form of a ‘hardship application’. If this is granted, there will be no need to pay the debt before the appeal can be heard. The application can either be made to HMRC itself but more often it is presented to the VAT tribunal for consideration after HMRC have bounced it first. 

The grounds for a hardship application are detailed, highly technical and seriously dense, making professional, tailored advice strongly worthwhile. In essence, the contractor must show that paying the disputed VAT assessment before the appeal is heard will cause the business significant hardship taking into account the cash and other resources ‘immediately or readily available.’ See section 5(4) of ABA’s judgment for reference. What does this mean for you as a limited company director? Put simply, you don’t necessarily have to rush out and borrow shedloads of new money to pay the assessment, nor should you have to sell assets to raise the necessary cash if either route would potentially damage your contractor business. 

Throw everything you can at HMRC from the start (evidence-wise)

In the end with ABA, the tribunal granted a hardship application. The application was granted despite the tribunal saying that the business contributed to its predicament, by failing to give HMRC every shred of relevant information initially, as that shred it held onto might have persuaded the Revenue to drop the disputed liability entirely!  

However, the facts of the ABA Motors case are pretty unique and shouldn’t be relied on by contractors. Still, the moral of this story is to fight incorrect VAT and other tax assessments from the very start -- by throwing every piece of information and evidence possible at HMRC, to talk them out of their claim. 

Lastly, think long and hard about having nobody in your corner…

Another clear takeaway from ABA’s case? Get expert professional assistance. Understanding and interpreting the minutiae of VAT and other tax legislation and then appealing a tax-related HMRC decision to a tribunal can be a daunting prospect for a contractor, almost regardless of the financial extent of the dispute. Our latest experience is that HMRC are taking a tougher and tougher line with taxpayers, so contractors will need all the help and support they can get.