Alternative Dispute Resolution process reduces HMRC bill from £100k+ to nil!

    Background to the case

    Abbey Tax was instructed to act in a long-running full enquiry case into a hotel/restaurant/pub business. The business had made losses in the year of enquiry, as well as earlier years and HMRC had concerns over the client’s available income. HMRC have been targeting loss making businesses in recent years and this is a key risk area when HMRC consider cases for enquiry. 

    After two and a half years, HMRC sought a further meeting to discuss the outstanding issues. At this point we considered that if there was to be a further meeting it needed to be under the banner of the Alternative Dispute Resolution (ADR) process, which crucially involves a mediator to broker an agreement between the parties, where possible.  

    HMRC set out their case in a pre-decision letter that substantial additions were required to the business profits. The suggested omitted income averaged £26,000pa over a 12 year period back to when the business started. 

    HMRC argued that the business records were incorrect and that there were additional profits, as there were higher than average ‘no sales’ transactions on the tills. We had explained that the higher no sales were part of the daily business operation and nothing more sinister. Furthermore, the client had introduced funds into the business to keep it trading over the years, which was all documented. HMRC’s view was that the no sales represented understated sales and computed the expected business income based on the average sales transaction value.  

    HMRC considered that the proposed adjustments to the profits were due to the client’s deliberate behaviour and this resulted in proposed penalties of 45% in the earlier tax years with a slightly higher penalty of 47.25% in later tax years. These proposed penalties alone amounted to approximately £40,000.

    The total liability sought in respect of the additional tax and VAT liability together with interest and penalties took the final bill to approximately £120,000.  

    Alternative Dispute Resolution 

    Following the issue of HMRC’s pre-decision letter we made a successful ADR application and arranged an ADR meeting.  

    We highlighted the fact that the client had co-operated fully with HMRC’s enquiry from the outset and pointed out that it was explained at the commencement of the enquiry that the business results had suffered over the years with a variety of factors affecting trade. We presented documentation to show that substantial personal funds had been introduced to finance the business, which undermined HMRC’s case that the business had under-declared its sales. The reality was that the client had amassed substantial personal debts in an effort to make a success of a business that had endured losses over a number of years.

    Following a full day’s open and frank discussions, during which we were able to put forward our view of the matter, agreement was eventually reached between the parties that no additional liability was due. As part of the resolution it was agreed that there would be no business losses available to carry forward against future profits. From the client’s perspective this was an excellent outcome, who prior to the meeting was faced with a huge liability and potential bankruptcy.

    ADR has proven to be an excellent tool to resolve disputes with HMRC. We have skilled negotiators who can assist with the resolution of all types of dispute, where an impasse has been reached with HMRC. The process affords the opportunity to resolve areas of dispute rather than going down the more time-consuming and costly tribunal route. 

    We have vast experience in this area and are well placed to assist you and your clients to make an ADR application through to representation at ADR meetings. We have had great success both for direct and indirect tax matters and can assist in most cases where there is an appealable decision.

    We have been involved with the ADR process since its inception and have seen the continual evolvement of ADR building up strong professional links with the ADR team. We have a proven track record of successfully representing clients within this process and have achieved great results. 

    We are happy to discuss the benefits of using the ADR process in more detail and help guide you through the process to whatever extent suits your needs.

    For more information please contact James Cordiner or Steve Price on 0345 223 2727.