Engineering firm wins VAT case over confusing guidance

An engineering business has won its case against HMRC after it disputed the legality of official guidance on a flat-rate VAT scheme for small businesses and refused to pay a VAT bill of nearly £9,000

The case revolved around the VAT status of the business and how the business was defined under the HMRC VAT guidance.

When it was first registered for VAT in 2009, Neil Harris, owner of Cumbrian-based engineering business Idess, applied for the flat-rate VAT scheme as none of the categories on the list supplied by HMRC appeared to be relevant to his business.

After taking advice from his accountant, Trevor Morris of TaxAssist in Whitehaven, Harris, a mechanical engineer, registered under ‘Any other activity not listed elsewhere’, with a flat rate of 12%.

Following a VAT inspection three years later, HMRC ordered that he should have registered in the category ‘Architect, civil and structural engineer or surveyor’. HMRC’s case cited its own flat-rate scheme guidance leaflet, which placed ‘engineering consultants and designers’ in the 14.5% VAT category.

It demanded arrears of £8,891 plus a 35% penalty, later reduced on review to 15%.

Harris and his accountant challenged the decision on the grounds that a mechanical engineer is not a civil or structural engineer. The challenge was successfully upheld following the intervention of Wolters Kluwer VAT consultant Glyn Edwards, who defended the case.

HMRC was unable to argue its case; the guidance leaflet had no legal standing and the tribunal ruled in Harris’s favour. He walked away with nothing to pay and, as he had fee protection insurance with CCH, his accountant’s fees and the cost of Glyn Edwards’ time were also covered.

‘The key to the whole issue was that the guidance notes had no backing in law,’ says Harris. ‘I wouldn’t have known that, but Glyn did. I would have lost the case on my own.’

Edwards said: ‘Although there was a relatively small amount of tax at stake, this could have caused the collapse of Mr Harris’s business. This has been a successful outcome and establishes an important principle.

‘But I do wonder how many other engineers have been misled by the VAT guidance notes from HMRC into using a category that is only intended for structural and civil engineers.’

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