Backdated VAT bill crisis

JeanGray

My apologies for delay posting on here, I’ve been unwell again and not been on line for a few days. Thank you so much for all your replies and support, I really appreciate this.

I was a sole trader the whole time I was in business. The VAT office enquired throughout 2007 (this was the ‘Hidden Economy Team’) were happy and I never heard anything again till April 2013 last year (from local compliance), no assessments, no communication whatsoever since the enquiry in 2007. If they can only go back 4 years, is there an actual written policy or any written rules they have that states this anywhere?

They had no issues in 2007 except for they stated “it did appear that insufficient signs were displayed to explain to customers entering the salon that the stylist working there had their own works stations and they were independent contractors”.
I rectified this immediately by putting up signs in reception & waiting areas, putting a notice on the website, creating a complaints policy to reflect this and adding individuals names on stations and beauty room doors, and I informed the VAT office that I had done all this. All the self employed independent contractors had agreements which much of mirrored the guidelines of the National Hairdressers Federation statement of practice. Some of the independent contractors actually had their own separate rooms enclosed off from the rest of the salon, they all had their own keys to the premises, pricing structures and could refuse/accept clients as they wished.

The person I am in communication with from HMRC is an “Officer of Revenue & Customs”. Each letter HMRC has sent starts with “Routine VAT registration enquiry”. They are saying “HMRC maintain the income from chair renters is a supply of services and therefor any income would be subject to VAT”. They keep trying to get me to complete and sign a VAT 600FRS form for arrears to be calculated under the Flat Rate Scheme and they will then issue an assessment for £75,932.48. I have not completed or signed this form or sent anything back to them to say I accept this as of course I don’t and I have been trying to argue my side of things. I have sent many letters disputing what they say I owe and I have been going back to them each time with more reasons as to why I don’t think I owe it. They seem to just ignore this and keep arguing there side with pretty much the same response each time. They have said that they are not going to charge interest and that they will take my health into consideration when looking at penalties.

They are saying if I decide to have the assessment based on the Flat Rate Scheme and return to them the completed VAT600FRS the details of my VAT liability will be forwarded to their Debt Management Team (I am not involved with the Debt Management Team yet). They have not issued a demand yet as I think I have managed to delay things by keeping going back to them with questions and reasons why I don’t think I owe the amount, however once they have issued the demand they are saying I have 30 days to pay!

As to ‘how’ the selling of the business took place, it was taken over and I was given only an amount that was not what it was worth. This was paid by instalments weekly and I think on the paperwork the instalments were in return for the fixtures and fittings and stock. The lease was transferred to the people that took over (they were not family or friends) and when they took over they decided the run the business differently to how I did, they went VAT registered, brought in some of their own staff, changed many of the services offered and brought in with them a lot of their own existing clients, I believe they made all their staff PAYE, so no self employed independent contractors.

I can’t remember if it was called a Transfer of an Ongoing concern, the term doesn’t sound familiar to me, I will try to find the paperwork from at the time. As it is HMRC seem to have no interest in the takeover or its process whatsoever and are focussed on the time I was actually trading myself from 2007-2011.
As far as I am concerned and the way things were set up was that the self employed independent contractors supplied their services directly to the customer, they had to deal with their own complaints etc.

I believe my accountant treated the chair/space rent was exempt from VAT and not treated as taxable turnover. I had an accountant deal with all the tax and any PAYE, he is no longer working though since 2012.

In one of the letters from October just gone the VAT Officer that has been writing to me even says “it is my role to ensure that traders are registered for VAT at the correct time”. It makes me wonder that surely the VAT Officer from 2007 would have held the same responsibility?

CKhalvashi

You need to find out how this is calculated, when it's calculated for, and why they believe you owe this money.

Unfortunately (and I've been involved with the taxi game for number of years, where it's the same) cash businesses face this often.

I don't have the experience to help, but someone will be along later to assist, but if you don't owe it, there's a 99.9% chance with the correct advice you won't have to pay it.

antonic

Please see my points in RED

JeanGray wrote: »

My apologies for delay posting on here, I’ve been unwell again and not been on line for a few days. Thank you so much for all your replies and support, I really appreciate this.

I was a sole trader the whole time I was in business. The VAT office enquired throughout 2007 (this was the ‘Hidden Economy Team’) were happy and I never heard anything again till April 2013 last year (from local compliance), no assessments, no communication whatsoever since the enquiry in 2007. If they can only go back 4 years, is there an actual written policy or any written rules they have that states this anywhere?

If they suspect that you should have registered for VAT when you breached the VAT threshold, they will go back to then, even if it exceeds 4 years.

They had no issues in 2007 except for they stated “it did appear that insufficient signs were displayed to explain to customers entering the salon that the stylist working there had their own works stations and they were independent contractors”.
I rectified this immediately by putting up signs in reception & waiting areas, putting a notice on the website, creating a complaints policy to reflect this and adding individuals names on stations and beauty room doors, and I informed the VAT office that I had done all this. All the self employed independent contractors had agreements which much of mirrored the guidelines of the National Hairdressers Federation statement of practice. Some of the independent contractors actually had their own separate rooms enclosed off from the rest of the salon, they all had their own keys to the premises, pricing structures and could refuse/accept clients as they wished.

Have you got this in writing , from the Hidden Economy Team, that they were happy with the situation ?

The person I am in communication with from HMRC is an “Officer of Revenue & Customs”. Each letter HMRC has sent starts with “Routine VAT registration enquiry”. They are saying “HMRC maintain the income from chair renters is a supply of services and therefor any income would be subject to VAT”. They keep trying to get me to complete and sign a VAT 600FRS form for arrears to be calculated under the Flat Rate Scheme and they will then issue an assessment for £75,932.48. I have not completed or signed this form or sent anything back to them to say I accept this as of course I don’t and I have been trying to argue my side of things. I have sent many letters disputing what they say I owe and I have been going back to them each time with more reasons as to why I don’t think I owe it. They seem to just ignore this and keep arguing there side with pretty much the same response each time. They have said that they are not going to charge interest and that they will take my health into consideration when looking at penalties.

If you dont agree to the Assessment, in the end the Officer CAN issue the Assessment and argue that it has been issued in their best judgment

They are saying if I decide to have the assessment based on the Flat Rate Scheme and return to them the completed VAT600FRS the details of my VAT liability will be forwarded to their Debt Management Team (I am not involved with the Debt Management Team yet). They have not issued a demand yet as I think I have managed to delay things by keeping going back to them with questions and reasons why I don’t think I owe the amount, however once they have issued the demand they are saying I have 30 days to pay!

Once the Assessment is issued it becomes legally due & collectible 30 days after the date of issue , and will be pursued by the Debt Management Team.

As to ‘how’ the selling of the business took place, it was taken over and I was given only an amount that was not what it was worth. This was paid by instalments weekly and I think on the paperwork the instalments were in return for the fixtures and fittings and stock. The lease was transferred to the people that took over (they were not family or friends) and when they took over they decided the run the business differently to how I did, they went VAT registered, brought in some of their own staff, changed many of the services offered and brought in with them a lot of their own existing clients, I believe they made all their staff PAYE, so no self employed independent contractors.

I can’t remember if it was called a Transfer of an Ongoing concern, the term doesn’t sound familiar to me, I will try to find the paperwork from at the time. As it is HMRC seem to have no interest in the takeover or its process whatsoever and are focussed on the time I was actually trading myself from 2007-2011.
As far as I am concerned and the way things were set up was that the self employed independent contractors supplied their services directly to the customer, they had to deal with their own complaints etc.

When you sold the business, the new owners couldnt have completed a VAT 1 VAT Registration Form or a VAT 68 Transfer of Going Concern because you werent VAT registered - hence the interest of the Hidden Economy Team.

I believe my accountant treated the chair/space rent was exempt from VAT and not treated as taxable turnover. I had an accountant deal with all the tax and any PAYE, he is no longer working though since 2012.

The problem is that as you have discovered, your liable for the debt NOT your accountant

In one of the letters from October just gone the VAT Officer that has been writing to me even says “it is my role to ensure that traders are registered for VAT at the correct time”. It makes me wonder that surely the VAT Officer from 2007 would have held the same responsibility?

Yes , you should have been compulsorily registered for VAT, you need to ask why you werent.

For what time period does the debt in question cover ? - is it from when they say you exceeded the limits to when you sold the business ?

Zaurak

JeanGray wrote: »

If they can only go back 4 years, is there an actual written policy or any written rules they have that states this anywhere?

Although 4 years is the usual limit it is based on 4 years from the date of the return. With a failure to register, the return will be a single return from the date when the person should have registered to a current date (even if the business ceased some time ago). As it is a current date, that will be less than 4 years, so it is always in time.

JeanGray wrote: »

They had no issues in 2007 except for they stated “it did appear that insufficient signs were displayed to explain to customers entering the salon that the stylist working there had their own works stations and they were independent contractors”.

I rectified this immediately by putting up signs in reception & waiting areas, putting a notice on the website, creating a complaints policy to reflect this and adding individuals names on stations and beauty room doors, and I informed the VAT office that I had done all this. All the self employed independent contractors had agreements which much of mirrored the guidelines of the National Hairdressers Federation statement of practice. Some of the independent contractors actually had their own separate rooms enclosed off from the rest of the salon, they all had their own keys to the premises, pricing structures and could refuse/accept clients as they wished.

This is the first point I mentioned in my earlier post, about whether the self-employed people supplied their services direct to the customer, or they supplied them to you, so you could provide a hairdressing service to all the customers coming into the salon.

It seems clear that HMRC considered that they had insufficient evidence in 2007 that the the self-employed people supplied their services to you.

Have they now indicated that they have changed their minds, and if so, why?

JeanGray wrote: »

I believe my accountant treated the chair/space rent was exempt from VAT and not treated as taxable turnover.

JeanGray wrote: »

They are saying “HMRC maintain the income from chair renters is a supply of services and therefor any income would be subject to VAT”.

This is the second point I mentioned, the VAT liability of the chair/space you rented to the self-employed people.

Clearly HMRC disagree with the view of your accountant that the chair/room rental was exempt. Did HMRC consider this aspect in 2007, and if so, did they mention it in any correspondence?

JeanGray wrote: »

HMRC seem to have no interest in the takeover or its process whatsoever and are focussed on the time I was actually trading myself from 2007-2011.

By limiting themselves to 2007 onwards, HMRC appear to accept that the chair/room rent was exempt prior to 2007 when they previously looked at your business.

Now either this is because something changed in your business from 2007 onwards, or because HMRC failed to consider this point in 2007 when they focused on the services supplied by the self-employed staff.

I will repeat, YOU MUST GET PROFESSIONAL ADVICE, and do so IMMEDIATELY.

chrismac1

Having read through this post carefully again, I think if you get a decent accountant HMRC might end up going away PDQ. (Well PDQ in terms of HMRC which means about 6 to 9 months to the rest of us.)

These VAT changes on rent a chair came in on 1 October 2012, before that it was generally accepted that "rent a chair" was rent of property space and hence not within VAT. In fact depending on how things are set up in a given salon, rent of property is still justifiable in some cases. For example, one local salon has separate rooms. If I were her accountant I would advise her that she could rent the rooms for whatever purpose she wished and that would be rent and non-VAT unless she "opted to tax".

So unless I am missing something, anything in your case pre October 12 is at the very least an attempt to move the goalposts. This might just be an over-enthusiastic HMRC person.

Two enquiries I have had in the past 4 years went like this:

1. Enquiry into false self-employment in the dancing sector. I rang up and said "Do you know all 23 instructors are PAYE and we paid you £17k last year in PAYE and NI?" HMRC person: "Did you?" End of enquiry once she had checked that out.

2. Backdated VAT registration of dancing school for £70k. I rang up to question this as my client is a sole trader. HMRC "It is not exempt as it is not taught in a school or university." Me: "Read the VAT Act carefully, it says ORDINARILY taught in school or university and that word makes all the difference." HMRC: "We'll look into this". All quiet on the Western Front since then, sooner or later the bad guys will come out with their hands up.

Zaurak

chrismac1 wrote: »

Backdated VAT registration of dancing school for £70k. I rang up to question this as my client is a sole trader. HMRC "It is not exempt as it is not taught in a school or university." Me: "Read the VAT Act carefully, it says ORDINARILY taught in school or university and that word makes all the difference."

I hope it is not belly dancing they are teaching.

chrismac1

No it is Association of American Dancing. I suspect and hope that it is simply that the VAT officer does not know her VAT Act, not an extension of the belly dancer case into other areas of dance.

In my client's case she regularly gets pupils with good grades in A level dance, and into stage schools and so on. Quite a few are now dance teachers. If it turns out to be an attempted extension of the belly dancer case, then as well as the tax insurance folks we'll enlist the AAD to fight our corner. Numerous AAD teachers would be affected including another client of mine.

longforgotten

Just out of interest about filling in a self assessment form and sorry if its a dull question but.....


Would the income from the chair space be included in rental income section, presumably along with any expenses related to it, or all included in the self employment section.


Did they just pick on OP because of the trade or how the return was filled in ?

londonTiger

Seems unreasonably harsh. I presume you weren't a ltd comapny - if you were the hmrc can't get you for diddly squat now that company is closed.

I can understand their position on this. If all hairdressers were freelancers but you had one till and took all payments via that till then all revenue passed through your company and was then payed to freelancers as a businss expense.

If the freelancers were effectily tenants in the salon and had their own tills, clients and paid rent to you then they should truly be accounted for seperately.

I guess HMRC feels the former is the case.

But they shouldn't be able to retroactively go back 4 years over a recent rule change. that is harsh.

Zaurak

londonTiger wrote: »

I can understand their position on this. If all hairdressers were freelancers but you had one till and took all payments via that till then all revenue passed through your company and was then payed to freelancers as a businss expense.

If the freelancers were effectily tenants in the salon and had their own tills, clients and paid rent to you then they should truly be accounted for seperately.

I guess HMRC feels the former is the case.

That does not appear to be the situation here.

The issue here appears to be not who the self-employed stylists were supplying there services to, but what was the liability of the chair rent.

The OP was treating the chair rent as exempt, which did not count towards the VAT registration threshold, but HMRC consider that it was a taxable supply of services, that did count towards the registration threshold.

The OP had a similar misunderstanding, which was why I recommended that they seek professional advice.

londonTiger wrote: »

But they shouldn't be able to retroactively go back 4 years over a recent rule change. that is harsh.

If it was a rule change, then HMRC would not be able to go back at all, and the change would only apply going forward.

Prior to 2012 HMRC's view was that in the majority of cases, chair rent was a taxable supply of services not an exempt supply of rent. Naturally the majority of hairdressers thought that their chair/room rent fell into the exception, so lots of arguments. To remove the arguments, the law was changed so effectively all chair rent is taxable.

In this case it would appear that HMRC consider that the supply was not exempt even prior to the change in the law, but the OP needs to establish why this issue was not raised in 2007, which is why they should seek professional advice.

In a case of failure to notify, then HMRC are able to go back as far as 1st April 1973. I have actually seen this occur in one case, and it led to a 35 year long first VAT return. This would apply even if it was an "innocent" error, which is why anyone in business needs proper professional advice.