When VAT records are lost – Beware of personal liability notices 

It’s a requirement of VAT registration to maintain appropriate VAT records for at least 6 years. As all VAT registered businesses are now also required to comply with Making Tax Digital requirements, all businesses should now be operating some sort of digital accounting/record keeping.

Background to recent tribunal case

The business, Aizio Associated Limited were assessed for £21,400 of VAT penalties which was reduced to £10,251 at the conclusion of this tribunal case.  However, these penalties were applied to the Directors personally, and not the business. HMRC has this power, to assess individual Directors for failing their fiduciary duty, the penalties are referred to as PLN’s (Personal Liability Notices) and are usually for 100% of the VAT in dispute.

HMRC are using PLN’s more often nowadays and it’s important to understand that VAT liabilities can be turned into personal liabilities.

There were two Directors (Billard and Campbell), Billard left the business in 2019.  Before leaving, he handed over documents relating to tax/VAT to Campbell who scanned everything onto his laptop and destroyed the paper copies. 

The 02/20 VAT return was filed on the 01^{st of} March 2020 (one day after the period ended) and was for a refund of £4,433 and this triggered a VAT inspection and HMRC wanted to review earlier years (the ones on the laptop).

Campbell had driven to Slovakia earlier in March 2020 and the work laptop was in his car. Lockdown was announced 23 March 2020 and he returned home by aircraft, leaving his car and all of his belongings in the car, including the laptop.  The car and contents were stolen and never recovered.

Unable to reach agreement with the taxpayer, HMRC raised a best judgement output tax assessment for period 08/19, 11/19 and 01/20 and denied input tax reclaims for periods 11/18, 05/19, 12/19, 02/20 and 03/20 totalling £37,155.

The First Tier Tribunal (FTT)

The focus was on the application of the penalties (PLNs) and whether they were valid.

The conclusion was that the 08/19, 11/19 and 01/20 returns which were for refunds with no output tax declarations contained inaccuracies, but the FTT allowed that the taxpayers returns for periods 11/18, 05/19, 12/19 and 02/20 were accurate/not subject to penalty.

What can we learn from this Tribunal case?

• A previous Director remained personally liable for historical inaccuracies in VAT returns they had filed whilst they were a Director of the business.  HMRC pursued a PLN course which meant the Director was personally liable for errors which came to light after they had left the business.
• The historical errors were brought to light because post departure, the remaining Director had made some errors and then lost the historical accounting records which brought the previous Director into the equation and the nature of the missing records caused HMRC to make the penalties personal to the Director(s) and not the business.
• There is no excuse for records to be lost.  Having no digital backup is a high risk strategy, to retain all of your company records on a single laptop which only one person has access to and which could be stolen, lost or destroyed, taking with it the business records.
• A VAT registration requires the business to maintain appropriate accounting records for a minimum number of years. With MTD now being a mandatory requirement, there is no getting away from the fact that accounting records will be digital, (whether it be an Excel spreadsheet or cloud software), the point being, those records must be retained regardless of the excuse. The lack of records opens the business to accusations of deliberate mis-statements, which then opens the door for PLN’s.

Why Rayner Essex

HMRC can issue PLN’s where they believe there are deliberate errors, which may have repercussions of shifting any VAT loss/liability onto individual Directors, past or present, depending on the circumstances.

In this particular case, the personal liabilities were split between the former and current Directors on a proportional basis and the majority of the penalties went to the previous Director.

Get in touch

Our VAT experts have a deep understanding of VAT and have first-hand experience in dealing with HMRC on many VAT matters and FTT outcomes, knowing their stance on various issues, and are well placed to advise you as to whether your dispute has any chance of success, and whether it is viable and can represent you if required. Whatever your HMRC query or concern is, our VAT team is always on hand to advise and assist you. So feel free to get in touch to discuss your  specific VAT matters and requirements.

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