Treasures of Brazil Limited Triumphs in VAT Tribunal Case Against HMRC Miscommunication
In a win for small businesses, Treasures of Brazil Limited, a UK-based jewellery and accessories retailer, recently succeeded in a VAT tribunal appeal against HMRC. The First-Tier Tribunal ruled that Treasures of Brazil had a legitimate expectation to rely on HMRC’s advice to delay VAT collection, leading to a decision on how tax guidance should be interpreted.
The case, which was heard on July 19, 2024, via a remote video hearing, centred on HMRC’s delayed VAT registration process and ambiguous communication with the retailer.
The company applied for voluntary VAT registration in September 2022, with a requested start date of October 1, 2022. However, HMRC’s registration confirmation was not issued until December 2022. During the wait, HMRC advised the retailer not to charge VAT until the registration was confirmed—a statement Treasures of Brazil’s accountant interpreted as a directive to avoid VAT charges on all sales during that period.
By the time the VAT registration number was received in late December, Treasures of Brazil had already accrued a substantial amount of untaxed sales. When HMRC later assessed the retailer for over £6,500 in VAT, Treasures of Brazil argued that they had simply followed HMRC’s explicit guidance. The Tribunal was faced with the question: should Treasures of Brazil be liable for VAT they were told not to collect?
Tribunal Judge Frost Backs Business on Grounds of "Legitimate Expectation"
At the heart of the Tribunal's ruling was the principle of "legitimate expectation," a legal doctrine that protects businesses and individuals when they rely on government advice.
Treasures of Brazil argued they had acted in good faith on HMRC’s instruction not to charge VAT, creating an expectation that they would not be penalised for following official advice. Tribunal Judge Malcolm Frost supported this position, citing HMRC’s email, which clearly stated, “You should wait until your VAT registration is confirmed before you charge customers for VAT.”
HMRC countered, asserting that the Tribunal had no authority to consider the issue of legitimate expectation. They referenced past cases where tax tribunals were deemed to lack jurisdiction over such matters. However, recent case law developments bolstered the Tribunal’s decision to accept the taxpayer’s argument.
The Tribunal highlighted that HMRC’s own communication ambiguously instructed the company not to prepare for VAT registration until the process was complete.
Consequences for Small Businesses: HMRC Ordered to Reassess VAT Policy
The Tribunal’s decision has implications beyond this single case, potentially affecting HMRC’s broader VAT registration processes. HMRC's failure to provide clarity in its email guidance and to issue timely registration confirmations caused Treasures of Brazil to miss VAT collections they would otherwise have included in their pricing structure. For the Tribunal, this amounted to an “outrageous unfairness,” deeming HMRC's assessment invalid.
Additionally, the Tribunal declined to rescind Treasures of Brazil’s input VAT claim of £4,502, acknowledging that the business had incurred legitimate input tax during the disputed period. Allowing Treasures of Brazil to keep the VAT credit while also cancelling the output VAT charge created what the Tribunal acknowledged as a “windfall” but deemed fair given HMRC's role in creating the issue.
Key Takeaways: A Win for Small Businesses and Accountancy Practices
This case highlights the importance of clear communication from tax authorities, particularly for small businesses operating under thin profit margins. The decision offers relief to small business owners who might fear repercussions from HMRC for following official guidance, emphasising that ambiguous or delayed tax instructions must not unduly penalise honest taxpayers.
Moving forward, this ruling could compel HMRC to revise its VAT guidance, especially regarding initial VAT registration instructions for new businesses.
For UK accountancy practices and businesses alike, this case sets a precedent, showcasing the Tribunal’s willingness to defend taxpayers' rights against convoluted or delayed government communications.