Minority groups fight HMRC's online VAT stance

THE RECENT consultation document from HM Revenue & Customs on online VAT filing is part of a government-wide move to encourage electronic registration for public services. For government departments that are required to make efficiency savings, the move to online provision seems an obvious step.

The condoc proposes that online VAT filing, currently mandatory for all businesses with a turnover of more than £100,000, will be mandatory for all VAT registrations and tax returns from 1 April 2012. HMRC says it will initially save £60m a year, rising to £90m from the initiative.

At first glance, this seems sensible. But there is a groundswell of opinion against this. For HMRC’s position goes further than other government departments and, because of this, it finds itself facing a legal challenge.

Cabinet Office minister Francis Maude earlier this year made a speech pushing the move to online services. He referenced student loans applications, Jobseekers Allowance (JSA) and the registration of businesses through Companies House.

The Student Loans Company and the Department for Work & Pensions, who administer JSA, have both said that they are strongly encouraging electronic registration but there will be provision for people who are unable to use online services. Companies House was originally planning to make online registration compulsory, but recently scrapped the policy over concerns about small businesses that were unable to access online services.

Two online exemptions

However, HMRC’s condoc allows only two exemptions to its mandatory filing: insolvent businesses – because of the complexities involved when a company goes into administration – and religious groups “whose beliefs are incompatible with the use of electronic communications”, such as the Plymouth Brethren. Those vulnerable groups identified by HMRC’s fellow government bodies have no such exemption.

Needless to say, it is not because vulnerable businesses owners do not exist. Indeed, three such individuals – who are already subject to compulsory online filing because their businesses exceed £100,000 turnover – have brought a case against the taxman.

Test cases

One of these test cases involves John Bishop, who owns an electronic company that he took over from his father. His wheelchair-bound mother does his filing. He has hydrocephalus and sight problems. His business supports him and his mother and in 2009 it made £25,000 between them.

The company has always paid its taxes on time. It cannot afford computers, which it would only use to file VAT returns, Bishop says. HMRC sent letters to Bishop informing him that he needed to file online, “like a naughty child”, he says. He phoned the VAT helpline, but nobody picked up. If the appeal is unsuccessful, he adds, he will “possibly have to shut up shop”.

The other test cases are on similar lines – arthritis, in one case, no broadband access in the area in the other. They have in common a belief that compulsory online filing equate to expenses their businesses cannot bear.

The three individuals, backed by the Low Incomes Tax Reform Group (LITRG) and BDO, which is working pro bono on this, put their cases in front of a judge in a pre-tribunal hearing in November 2010. The judge ruled that the businesses must be able to continue to use paper filing until there is a tribunal ruling or a settlement between the parties. Three days before the tribunal was due to start, HMRC invited the appellants to open discussions.

The taxman offered two options: one, for the appellants to use an advisor to file returns; and two, to phone in their tax returns. It has since rolled these options out to other people in similar positions.

No paper trail

Conspicuous by its absence is the option of paper returns. There are problems with this approach. In Bishop’s case, the small firm he uses would have to set up a client account with a bank and gain FSA approval, which the accountant said would prove too expensive. As for phoning in his tax return, he points out: “If HMRC sends me a piece of paper telling me to ring someone for them to file my VAT online, they might as well send me the VAT form”.

Robin Williamson, LITRG’s technical director, cites another wider problem with the telephone method; there is a grey area of responsibility if the return is later found to be wrong. In addition, HMRC’s problems with telephone communications – highlighted in depth by the Treasury select committee – do not inspire confidence in this method.

The Treasury Select Committee was emphatic in its belief that paper services should be available to those who need them most. HMRC has been successful at enabling taxpayers to pay taxes online, the committee’s report on the administration of the tax system stated.

“However, requiring online filing prematurely runs the risks of excluding those without reliable high-speed internet access, dissuading those who are not computer literate from being tax compliant and overloading systems that have not had time to bed in,” it said. “HMRC should always ensure it has robust, well-advertised alternatives in place for those who cannot submit online and publish a statement of its commitment to continue to provide a robust free filing service for basic tax return filing.”

Digital by Default

There is another unlikely supporter of continued provision of the paper option – HMRC itself.

In its Digital by Default consultation document, released on the same day as its online VAT proposals, it quotes Maude’s speech in which he says the government “will not abandon groups less likely to access the internet: we recognise we must not leave anyone behind”. Even more damning, it states with regards to corporation tax: “the paper alternative should be the channel of last resort where the customer is unable to use the online channel”; and for self-assessment “a paper alternative will inevitably have to exist”, clarifying only “as a last resort”.

So where from here? Nigel Eastaway, a partner at BDO, states that the proposals and offer from HMRC as they stand are unacceptable. HMRC says it is bound by 2009 VAT regulations to insist on online filing, or the ‘phoning-through’ method. So the impasse is likely to be decided through the tribunal.

Until then, the three appellants are in limbo, as are others in their situation – allowed to send paper returns until a tribunal, ironically brought about by them, rules otherwise. If the appeal does not go their way, they might just be well advised to join the Plymouth Brethren.