Croner Taxwise have become increasingly aware of a campaign HMRC are currently running, both for income tax and VAT involving dog and cat breeders and their use of Petplan to insure puppies and kittens prior to their sales.
HMRC’s use of third party data to establish ‘undeclared’ or ‘off-record sales’ is nothing new. Usually for those in the takeaway business, companies such as ‘Just Eat’ are often approached by HMRC and requested to give a total account breakdown of all the takeaway’s sales made through their platform for that particular business. This data is combined with merchant acquirer data (card sales) to establish a starting point for sales made by the company. This is cross-referenced against total sales declared, and if the combined Just Eat and Card data exceed total sales declared, then HMRC have strong evidence, along with solid figures, that the client is suppressing sales. The result is often hefty tax and VAT assessments.
In the case of animal breeders, HMRC is taking a slightly different stance. Unlike restaurants and takeaway businesses which would usually involve the above process, coupled with unannounced visits by HMRC, animal breeders are facing huge assessments based purely on their policy summary with Petplan
The process looks something like this: HMRC approach Petplan and ask for a complete breakdown of the taxpayer’s account, often going back several years; the breakdown shows the date policies were taken out, the accompanying dog or kitten’s breed, the date of birth, and finally the sale value; HMRC compare the total sales declared to the total value of the policies in each tax year, and assess for any shortfall.
The process is simple, effective and requires very little work on HMRC’s part. The problem is, the client will have a multitude of reasons as to why the total policy values do not match the total sales declared. However, HMRC’s response to the client is to simply ‘prove it’.
The breeder then tries to go back to Petplan and get a breakdown of the new owners’ names to which the policies were taken out of. This would tell them if more than one policy has clearly been duplicated, as a breeder tends to only sell one pup or kitten to each customer. GDPR prevents Petplan from releasing this information so the breeder returns to HMRC and advises of the difficulties they are having in verifying the sales from Petplan, but HMRC, unfortunately, couldn’t care less.
This leaves the client stuck between a rock and a hard place. With no immediate way of refuting Petplan’s data, the client concedes and huge assessments follow. The assessments are often large enough to push the client above the VAT threshold for the years in question, which results in another round of assessments.
What are some of the reasons for duplicated policies?
As mentioned earlier, there is a multitude of reasons as to why the Petplan data would have more policies on the system compared to the sales declared. As it costs nothing to the breeder to take the policies out, whilst at the same time the more policies that are taken out the more points the breeder accumulates which can be redeemed for high street vouchers, the breeder can take very little care in maintaining the account.
The lack of a charge to the breeder means that the account is often made available to friends, family, and other acquaintances who have an interest in breeding but only on an ad hoc basis. This can create policies on the system which have nothing to do with the breeder, but the client is often hesitant to tell HMRC this, possibly because it may impact the policy terms. However, this information is invaluable when trying to refute the data and the client often needs a little nudge to come forward with this.
Secondly, the Petplan platform can apparently be quite temperamental, which often results in the client not knowing whether a policy has been successfully submitted or not. Due to there being no charge, the client simply inputs the information again until they are sure a policy has been successfully created. Naturally, this results in duplicate policies.
Thirdly, the policies are usually taken out in advance of the puppy or kitten being collected. Therefore, when a customer pulls out of the sale, another policy has to be taken out for the actual new owner. Again this results in duplicated policies.
Fourthly, anyone who gets involved in this inquiry will quickly see the laziness of HMRC’s approach and reliance solely on Petlan. When one analyses the data, it often takes little effort to identify the same breed of puppy or kitten has had more policies taken out than the animal could have possibly given birth to.
Finally, there is, of course, the issue of money. HMRC in their assessments obviously focus on the tax, but it is, of course, the undeclared turnover HMRC are effectively accusing the client of pocketing. When this information is thrown back at HMRC there is often no explanation as to where they think the money has gone. Indeed, going back to the laziness aspect of their approach, one quickly discovers that HMRC has not bothered to look at the client’s bank statements and as a result have no evidence apart from Petplan of off record sales.
So, what can be done?
As with a lot of suppression cases, we need to think outside the box. A basic analysis of the data itself can quickly show duplications, but anybody who has looked at the data will also see how messy it can be, with the date of births often relating to the date of sale more than when the animal was born.
Years ago, HMRC would conduct detailed business economics tests which would lend credibility to their assessments, but today this is rarely done. There are a multitude of tribunal cases which rule that HMRC can only work with the information before them and it is not for HMRC to reconstruct the records of the taxpayer. In other words, the Petplan data is enough unless the taxpayer has evidence to the contrary. Herein lies the most common reason for appeals being rejected.
Often the client and their accountant present many reason why they feel the assessments are unfair or not representative, but they often fall short of backing up those statements with solid facts. As I have told clients in the past, it is far better to have a few good points with the accompanying evidence, rather than a list as long as your arm of reasons why they feel the investigation is biased, misleading or not representative.
Some of the more compelling pieces of evidence comes from third parties. Going back to our breeders, you may wish to consider vet bills relating to microchipping or the first round of vaccinations. Most breeders worth their salt sell a puppy or kitten vaccinated and with a microchip. If you can show vet fees itemising each microchip or each round of vaccinations, this will serve as strong evidence legitimising the client’s declared sales.
If, like me, you have clients who operate on a larger scale, resulting in them doing their own vaccinations and microchipping, then this idea may not help. In this case, it is now for us to do our own business economics tests. Rolling up our sleeves and getting stuck in to the figures behind the business may be one of the only ways to furnish HMRC with satisfactory evidence.
In one of my cases I have had to calculate how many pups my client’s business could actually physically produce. This was achieved by taking the amount of whelping rooms used and then taking averages from credible vet or dog breeder websites to see how many pups a bitch has on average. Take the time the pup needs to be with its mother for, which is usually eight weeks before it can be sold, and you should be able to work out a credible figure.
As HMRC’s assessments are often massively inflated, you can then, based on your results, show how long it would take the client to produce the amount of pups or kittens HMRC are claiming. In my case, this showed HMRC’s figures would take one and a half years to produce if the business was operating at full capacity throughout the year.
How can we help?
If you have a client who is subject to the same or a similar inquiry, and you are struggling to get the upper hand, please do not hesitate to contact us.
Every case needs to be looked at on its own merits, but where one strategy may work for one client, another may need to be implemented for someone else. There are countless ways of approaching suppression cases and we can be as creative with our approach as HMRC are with their figures. Please share this article with your clients
If you have a consultancy query, why not contact the Consultancy Team on 0844 728 0120 to discuss it. Our team of experts have a wealth of experience and can also provide a written consultancy service at competitive rates.