As any tax professional will know, in recent years, HMRC has made no secret that it receives more information, from more sources, than ever before. As the saying goes, information is power. However, as we recently proved, information is only powerful if it is accurate.

Damned by data

This case concerned an individual, Mrs K, who had been operating a small dog-breeding business as a sole trader, before incorporating and trading as a limited company. During a very brief investigation, HMRC revealed that it had received information from a pet insurer, which suggested that sales had been understated by 600% over a three year period. Despite Mrs K denying this, and refuting the accuracy of the information, HMRC raised tax and ‘deliberate’ penalty assessments. Facing a total liability of more than £150,000, and financial ruin, Mrs K appointed us to help her challenge HMRC’s assessments, which she considered to bear absolutely no resemblance to her true trading profits.

HMRC’s assessments were calculated by multiplying the number of puppies the insurer had said Mrs K had sold, by the average sale price in Mrs K’s own records. For the insurance company’s data to be reliable, Mrs K would need to be capable of holding a ‘stock’ of up to 20 dogs at any one time. However, during a meeting with Mrs K, HMRC had acknowledged that Mrs K did not have the facilities to do so.

Testing the accuracy

Given HMRC’s allegations, we felt it was appropriate to issue a Subject Access Request to the pet insurer, requesting the recordings of all Mrs K’s telephone calls to register the puppies. It was clear from listening to the phone calls that Mrs K had not registered the number of dogs that the insurer had alleged. We wrote to HMRC, appealing the assessments and providing evidence to demonstrate that they were excessive.

Appeal – strike out

The appeal proceeded to the First-tier Tax Tribunal (FTT). However, HMRC’s Solicitor’s Office countered by applying to the FTT requesting that Mrs K’s appeal be struck out, on the basis that it was fanciful with no realistic prospect of success.

In front of a FTT Judge, HMRC claimed that the information it had received from the insurer was irrefutable and, therefore, the assessments should be allowed to stand. Thankfully, common sense prevailed. The FTT Judge disagreed with HMRC, and stated that Buzzacott’s analytical work, evidence and oral representations suggested that there were potential flaws in the data that HMRC was so reliant on. Mrs K’s appeal was allowed to continue, and we applied to enter into HMRC’s Alternative Dispute Resolution (ADR) facility.

ADR mediation

ADR is a mediation process where both parties come together to discuss the points that are in dispute. HMRC appoints a trained mediator, with no prior knowledge of the case, to help facilitate discussions and enable both parties to recognise the merits in one another’s viewpoints. At Buzzacott, we insist on the presence of our own accredited mediator to work alongside HMRC’s. This provides our clients with the assurance that at all times, HMRC’s position will come under just as much scrutiny as their own. In this case, that proved crucial.

Despite the FTT judge having indicated there were inaccuracies in the data held by HMRC, HMRC continued to hold an entrenched position throughout the opening exchanges of ADR, both in terms of the tax assessments and the behaviour of the client. However, as an Accredited Mediator, I challenged HMRC asserting that Mrs K’s lifestyle did not resemble someone with the level of omissions HMRC were alleging. HMRC then revealed a cash flow test it had performed that indicated Mrs K’s sales, while still being understated, were significantly lower than shown in the data provided by the pet insurer. With HMRC’s consent, this information was then relayed to Buzzacott for the very first time.

Settlement Success

At this point, our Tax Investigations and Disputes Resolution Partner, Mark Taylor, was able to negotiate a revised settlement with HMRC, based on the findings of HMRC’s own cash flow test. This led to a significant reduction in the tax liability and HMRC agreed that the errors in Mrs K’s tax returns had not been deliberate. Mrs K ended up paying less than 10% of the amount HMRC had sought in its original assessments.

HMRC’s approach in this case was most disappointing. HMRC states that it is committed to collecting the right amount of tax at the right time. In this case, the assessments it raised indicate a desire to collect the most amount of tax that was arithmetically possible. To compound matters, HMRC then attempted to deny Mrs K of her right to appeal, in spite of knowing that its assessments were not supported by its own business economics analysis.

“ Thank you for your kindness, knowledge, and patience. We could not have succeeded without you” - Mrs K