Deliberate VAT Errors Can Be Investigated Going Back 20 Years, Tribunal Confirms |

Deliberate VAT Errors Can Be Investigated Going Back 20 Years, Tribunal Confirms

A recent First-tier Tribunal decision is a useful reminder of just how far HMRC can go back when it believes a business has deliberately got its VAT wrong. In this case, a construction company's zero rating of a hotel extension was found to be deliberate rather than a genuine mistake, opening the door to a 20-year assessment window instead of the usual four years.

In this guide, we look at what happened in the case, why the tribunal ruled the way it did, and what it means for businesses making VAT liability decisions on construction projects.

What Was the Case About?

The taxpayer, a construction company, had treated its supplies on a hotel construction project as zero rated. The company's director argued that the work involved creating new dwellings, which can qualify for zero rating under the VAT rules.

HMRC disagreed. It concluded that the project was actually an extension to an existing hotel, meaning the work related to a commercial building and should have been standard rated rather than zero rated.

The director eventually accepted that the works "ultimately formed part of a commercial development." However, he appealed against HMRC's finding of "deliberate conduct." This mattered because a finding of deliberate conduct gives HMRC the power to correct errors going back 20 years, rather than the standard four-year time limit that applies to ordinary mistakes.

The Arguments Put Forward

The director maintained that the company had only ever worked on residential properties. As evidence, he pointed to a Google Earth image of the site showing a trampoline in the gardens next to the building, which he said indicated residential use. He also argued that building plans often change during a project, and that this was exactly what had happened here.

What the Tribunal Decided

The tribunal was not persuaded. It concluded that the director knew the true commercial nature of the project, which was intended to create 15 additional bedrooms and a store room for the hotel. On that basis, zero rating had been applied deliberately, not in error.

The judge acknowledged that the director "made his points clearly and eloquently," but found that his focus on points of "marginal relevance" suggested he "doth protest too much." Planning applications, the tribunal noted, clearly showed that an extension to the hotel was being constructed. The argument that the company had only ever worked on residential projects was dismissed as a "red herring," given that this development was in fact the company's first project.

On timing, the tribunal agreed that HMRC did not have sufficient evidence to justify raising an assessment until June 2024. As the assessment was issued on 5 September 2024, it comfortably met the one-year deadline set out in VATA 1994, s73 and s77.

The taxpayer's appeal was dismissed.

The Key Takeaway

This case is a clear illustration of how important it is to get the VAT liability of construction projects right from the outset, particularly where a development could be classed as either residential or commercial. Getting this wrong isn't just a matter of adjusting figures later on. If HMRC can show that an error was deliberate, the usual four-year correction window no longer applies, and historic liabilities can stretch back two decades.

How We Can Help

If you're involved in a construction or property development project and are unsure how VAT should be applied, it's worth getting advice before submitting returns rather than after. Our team can help you: