Monthly Archives: March 2014

Alternative Dispute Resolution (ADR) – What is it? How does it work?

By   31 March 2014
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ADR is the involvement of a third party (a facilitator) to help resolve disputes between HMRC and taxpayers.  It is mainly used by SMEs and individuals for VAT purposes.  Its aim is to reduce costs for both parties (the taxpayer and HMRC) when disputes occur and to reduce the number of cases that reach statutory review and/or Tribunal.

Practically, a typical process is; HMRC officials and the facilitator meet with the taxpayer and adviser in a room, and agree on what the disputes are.  They then retire to two separate, private rooms, and the facilitator goes between the two parties and mediates on a resolution.

ADR is a free service from HMRC and the only costs the taxpayer will incur are fees from their advisers on preparation and any representation they require on the day.

Taking a case to Tribunal is often an expensive, complicated and time consuming option, but until recently, it has been the only option open to a taxpayer to challenge a decision made to HMRC.  From personal experience, the number of cases from which HMRC withdraw “on the steps of the court” illustrate a weakness in their legal procedures and possibly a lack of confidence in presenting their cases. This is very frustrating for our clients as they have already incurred costs and invested time when HMRC could have pulled out a lot earlier.  Of course, our clients cannot apply for costs.  The sheer number of cases going through the Tribunal process means that there are often very long and frustrating delays getting an appeal heard.

Therefore, should we welcome ADR as a watered down version of a Tribunal hearing?  Or is it actually something else entirely?

HMRC say that “ADR provides an excellent opportunity for Local Compliance to handle disputes in a modern and collaborative way.  It is not intended to replace statutory internal review which is an already established process aimed at resolving disputes without a tribunal hearing. Review looks at legal challenges to decisions whereas ADR is more suitable for disputes where there might be more than one tenable legal outcome”.

After a two-year pilot which shaped the final programme, and was guided by a Working Together group that included CIOT, AAT, ICAEW and legal representatives HMRC concluded that “ADR has shown that many disputes, where an impasse has been reached, can be resolved quickly without having to go to tribunal.” And “ADR is a fair and even-handed way of resolving tax disputes between HMRC and its customers and helps save time and costs for everyone.”  Ignoring the dreadful use of the word “customers”… what has the profession made of the scheme?

Hui Ling McCarthy – Barrister has reported “HMRC’s ADR pilot studies have produced extremely encouraging and positive results – owing in large part to HMRC’s willingness to engage with taxpayers, advisers and the professional bodies and vice versa. Taxpayers involved in a dispute with HMRC would be well-advised to take advantage of ADR wherever appropriate”.

So what was the outcome of the two year scheme?  The headline is that 58% of cases were successfully resolved, 8% were partially resolved and 34% were unresolved.

Of the fully resolved facilitations –

  • 33% were resolved by educating the taxpayer/agent about the correct tax position.
  • 24% were resolved due to the facilitator obtaining further evidence.
  • 23% were resolved by educating the HMRC decision maker about the correct tax position.
  • 20% were resolved through facilitators restoring communication between both parties.

These figures are encouraging and the conclusion that; well planned, constructive meetings, with the intervention of an HMRC facilitator, do increase the chances of dispute resolution – appear to be well founded.

Further, the fact that the project team saw no evidence of any demand from HMRC, taxpayers or their agents for access to external mediators and that there is also conclusive evidence from taxpayers that HMRC facilitators have acted in a fair and even-handed manner add to the feeling that ADR is a useful new tool.

Features of ADR:

  • Without prejudice discussions – “anything said or documents produced during the ADR process cannot be used in future proceedings without the express consent of both parties subject to the obligations placed on the parties by the operation of English law”
  • Appropriate place for ADR in the lifecycle of a compliance check – Evidence is that ADR can work for both VAT and Direct Taxes disputes both before and after an appealable decision or assessment has been made. However, ADR for VAT disputes is more suited to post appealable decision and assessments.
  • Memorandum of Understanding (MOU) and a Code of Conduct – a MOU is created to commit customers/agents to the requirements of the ADR process. The project team are exploring the introduction of a Code of Conduct for HMRC staff.
  • Elapsed time – The average elapsed time for all closed ADR cases is 61 days. This figure is from application to resolution or the papers being returned to either the caseworker or the review team.  The average elapsed time for VAT it is 53 days.
  • The average age of VAT disputes entering the project was 8 months.
  • At the time of writing there have been 334 applications in both stages. Excluding applications currently in process, the ADR Panel has rejected fewer than 30% of applications.
  • ADR Panel – An ADR Panel has been created to accept or reject applications for ADR. This is in order to strengthen procedures and reduce dependency on the project manager. It screens all applications and not just those where ADR was thought to be inappropriate.
  • Customer / Agent Questionnaire Summary – Findings from customers and agents included:
    • An appreciation of the personal interaction that the ADR process allowed.
    • Facilitators were even handed and impartial in all cases and kept the taxpayer well informed
    • ADR was particularly well suited to resolution of long standing disputes.

Conclusion of the HMRC pilot scheme:

  • Project objectives have been met.
  • HMRC facilitators have proven to be objective and even-handed for all types of taxpayers.
  • External stakeholders strongly support the project and its roll-out to business as usual.
  • Successful facilitations have ensured that the right amount of tax has been identified and secured with less delay for both parties.
  • A better understanding of disputes has been gained.
  • Resource savings have been identified.

The commentary from HMRC on ADR is (probably understandable) positive.  However, reactions from the profession and taxpayers who have gone through the process are equally generous on ADR as a mechanism for settling disputes.

My view is that any alternative to a Tribunal hearing is welcome and even if ADR works half as well as reports conclude then it should certainly be explored.  It should definitely be considered as an alternative to simply accepting a decision from HMRC with which a taxpayer disagrees.

VAT – Changes to the treatment of electronically-supplied services from 2015

By   24 March 2014
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Although it seems some time away, these changes, which come into effect on 1 January 2015, will have a significant impact on any business which provides e-services (wherever in the EC it is based). It is important for suppliers to understand and plan for the new rules; the sooner the better.

What are e-services for VAT purposes? – Broadly these are services usually obtained via the internet and may comprise; films, music, information, software for which the supplier makes a charge.

Are all of these services affected? – No, only B2C services (where the recipients are not in business, eg; an individual). The rules for B2B supplies will not change.

What are the changes? At present, suppliers based in the EC charge VAT at the rate applicable in the EC Member State in which the business is located. Currently, therefore, VAT planning insists that technology companies locate in countries with low VAT rates. However, to combat this, the EC will introduce a rule whereby the place of supply (where VAT is due) changes to where the customer is located (not where the supplier belongs). Consequently, a company currently based in Luxembourg supplying a service which is downloaded by an individual in the UK will charge VAT at 15% (the rate in Luxembourg). From 1 January 2015, the UK recipient will pay VAT at 20% (the UK rate).

Businesses will need to introduce these changes and manage budgets and forecasts to recognise what, on the whole, will be a significant increase in VAT payable. This will, for most businesses result in a reduction in profits or an increase in prices for customers.

As may be seen, this will add considerable complexity for businesses to deal with and with the current penalty regime care must be taken to avoid even further costs. Businesses affected must start to plan for these changes as soon as possible.

Are there any easements available? The new rules change would require EC suppliers to register and account for VAT in every EC Member State where their services are downloaded by non-business customers. In order to avoid this burden a “mini one stop shop” (MOSS) is also being introduced. This will allow suppliers to register just once in their own EU Member State. This single registration will then allow them to account for VAT due in other Member states. HMRC has indicated that businesses will be able to register under the MOSS from October 2014. How this will actually work in practice remains to be seen.

Good luck everybody!

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Agent or principal? Latest from The Supreme Court

By   13 March 2014
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There is a very important distinction in VAT terms between agent and principal as it dictates whether output tax is due on the entire amount received by a “middle-man” or just the amount which the middle-man retains (usually a commission). It is common for the relationship between parties to be open to interpretation and thus create VAT uncertainty in many transactions. It appears to me that this uncertainty has increased as a result of the increasing amount of on-line sales and different parties being involved in a single sale.

A very helpful recent case; Secret Hotels 2 Ltd (formerly Med Hotels) heard at the Supreme Court, has clarified some grey areas in agent/principal relationships.

Very broadly, in this case which the taxpayer won, the judgement tips the balance back into the favour of common law as opposed to civil law principles for UK taxpayers and that the nature of a supply is to be determined by the construction of the contract – unless it is a ‘sham’.

This Supreme Court Judgment helpfully indicates that we must place far greater emphasis on the form of the arrangement (contract) as opposed to the economic substance (as often argued by HMRC).

The full decision is available here: http://www.supremecourt.uk/decided-cases/docs/UKSC_2013_0036_PressSummary.pdf

Although there will always be disputes over agent/principal relationships, this decision goes some way to clarifying the analysis and demonstrating the importance of the contract over what HMRC describe as “economic reality”.

Please contact us if you are, or have been, in dispute with HMRC on this point as it provides additional ammunition for the taxpayer.

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Treatment of transactions using Bitcoin and other similar cryptocurrencies

By   13 March 2014
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HMRC have issued Revenue & Customs Brief 09/14 here: http://www.hmrc.gov.uk/briefs/vat/brief0914.htm
This provides guidance on the direct tax and VAT treatment of income received from, and charges made in connection with, activities involving Bitcoin and other similar cryptocurrencies. Bitcoin operates via a peer to peer network, independent of any central authority or bank. All functions such as issue, transaction processing and verification are managed collectively by this network.

The advent of cryptocurrencies such as Bitcoin is a new and evolving area. Bitcoin may be held as an investment (i.e. for trading with recognised currencies) or used to pay for goods or services at merchants where it is accepted. In the UK, there are already a number of outlets, including pubs, restaurants and internet retailers, that accept payment by Bitcoin.

In summary, the VAT treatment of Bitcoin activities will generally either be outside the scope of VAT or exempt from VAT (under Article 135(1)(d) of the VAT Directive), depending on the specific transaction involved. However, VAT will be due in the normal way on transactions involving any goods or services sold in exchange for Bitcoin or other similar cryptocurrency.

In the UK, as is the case with any other currency, the value of the supply of goods or services on which VAT is due will be the £sterling value of the cryptocurrency at the point the transaction takes place.

Please contact us if you would like more specific advice.

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