Monthly Archives: February 2017

VAT – Claiming input tax on fuel. A warning

By   27 February 2017
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In the First Tier Tribunal (FTT) case of Cohens Chemist the issue was whether VAT paid on employees’ mileage expenses was recoverable.

Background

The appellant offers a delivery service of prescription medicines.  This service was undertaken by the appellants’ employees, using their own vehicles. The employees buy the fuel which is to be used in their vehicles, with their own money, and later submit claims to the appellants for the payment of a mileage allowance related to the distance covered.  The allowance includes an element of reimbursement for the fuel used.  The appellant then claim credit for the input tax included in the cost of the fuel which they have reimbursed in this way. This is permissible via VAT (Input Tax) (Reimbursement by Employers of Employees’ Business Use of Road Fuel) Regulations 2005. HMRC sought to disallow these claims on the basis that there were no supporting invoices form the petrol stations and that the detailed records kept were not sufficient to support the recovery of VAT.

Decision

Unfortunately for the taxpayer,  it was decided that the failure by to retain fuel receipts in compliance with mandatory requirement of Regulations meant that the disallowance of the input tax claims was appropriate.  This was particularly costly for Cohens Chemist as the input tax at stake here was £67,000. Additionally, the Tribunal held that there was discretion to allow alternative evidence and that this discretion was reasonably exercised to reject the claim.

Commentary 

A very simple lesson to be learned from this case:

Always obtain and retain fuel receipts!  

Failure to do so can be very costly, and it does not matter how detailed and accurate your fuel records are.  You must check your system for the VAT treatment of fuel allowances.

VAT Latest from the courts – White Goods claims by housebuilders

By   27 February 2017
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Recovery of input tax on goods included in the sale of a new house.

The recent Upper Tribunal (UT) case of Taylor Wimpey plc considered whether builders of new dwellings are able to recover input tax incurred on certain expenditure on goods supplied with the sale of a new house. We are aware that there are many cases stood behind this hearing and it is understood that the appellant’s claim amounts to circa £60 million alone. Unfortunately, the UT ruled against the appellant.

The rules

Before considering the impact of the case, I thought it worthwhile to look at the rules on this matter.

There is in place a Blocking Order (“Builders’ Block”) which prohibits recovery of input tax on goods which are not “building materials”. In most cases it is simple to determine what building materials are; bricks, mortar, timber etc, but the difficulty comes with items such as white goods (ovens, hobs, washing machines, dishwashers, refrigerators etc) carpets, and similar.  So what are the rules?

These are set out in HMRC’s VAT Notice 708 para 13.2

There are five criteria:

  • The articles are incorporated into the buildings (or its site)
  • the articles are “ordinarily” incorporated by builders into that type of building
  • other than kitchen furniture, the articles are not finished or prefabricated furniture, or materials for the construction of fitted furniture
  • with certain exceptions, the articles are not gas or electrical appliances
  • the articles are not carpets or carpeting material

To qualify as building materials, goods have to meet all of these criteria

Examples of specific goods are given at VAT Notice 708 para 13.8 

The case

Generally, Taylor Wimpey’s argument was that under the VAT law in force at the time of the claim it was entitled to recover the VAT paid on these items and the Builders’ Block did not prevent it from recovering input tax on these goods. The VAT was properly recoverable as it was attributable to the zero rated sale of the house when complete. Taylor Wimpey further contended that if the Builder’s Block did apply, it was unlawful under EU law and should therefore be disapplied.  Additionally, there was a challenge on the meaning of “incorporates … in any part of the building or its site” and the meaning of “ordinarily installed by builders as fixtures”.

The Builders’ Block which prevents housebuilders from reclaiming VAT on such goods was challenged on the basis that the UK was not allowed to extend input tax blocks, as it had done in 1984 (white goods) and 1987 (carpets).

The decision

The UT ruled that the block could be extended in relation to supplies which were zero-rated and that the block properly applied to most of appellants’ claim.  The UT held that only goods “ordinarily installed” in a house were excepted from the block, but that exception does not cover white goods and fitted carpets supplied since the appropriate rule changes.

Commentary

This ruling was not really a surprise and, unless Taylor Wimpey pursues this further it provides clarity.  It demonstrates that technology and the requirements of a modern house purchaser have moved on significantly since the 1970s and 1980s.  I doubt many houses built in the 1970s had dishwashers or extractor hoods.  The ruling does bear reading from a technical viewpoint as my summary does not go into the full reasons for the decision.  If you, or your client have a claim stood behind this case it is obviously not good news as claims for white goods are extremely limited.  If you have mistakenly claimed for white or similar goods, it would be prudent to review the position in light of this case.  The decision also affects claims via the DIY Housebuilder’s Scheme.  Details of this scheme here

The penalty regime…the dark side of VAT

By   20 February 2017
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VAT Penalties

I have made a lot of references to penalties in other articles over the years. So I thought it would be a good idea to have a closer look; what are they, when are they levied, rights of appeal, and importantly how much could they cost if a business gets it wrong?

Overview

Making mistakes…

Broadly, a penalty is levied if the incorrect amount of VAT is declared, either by understating output tax due, overclaiming input tax, or accepting an assessment which is known to be too low.

Amount of penalty

HMRC detail three categories of inaccuracy. These are significant, as each has its own range of penalty percentages. If an error is found to fall within a lower band, then a lower penalty rate will apply. Where the taxpayer has taken ‘reasonable care,’ even though an error has been made, then no penalty will apply.

  • An error, when reasonable care not taken: 30%;
  • An error which is deliberate, but not concealed: 70%;
  • An error, which is deliberate and concealed: 100%.

Reasonable care

There is no definition of ‘reasonable care’. However, HMRC have said that they would not expect the same level of knowledge or expertise from a self-employed person, as from a large multi-national.

HMRC expect that, where an issue is unclear, advice is sought, and a record maintained of that advice. They also expect that, where an error is made, it is adjusted, and HMRC notified promptly. They have specifically stated that merely to adjust a return will not constitute a full disclosure of an error. Therefore a penalty may still be applicable. We advise that, even if an error is not required to be reported independently on a form VAT652 (usually if < £10,000 of VAT) a letter is sent to HMRC disclosing that the error has been adjusted on the return. We have a standard template available for this process.

What the penalty is based on

The amount of the penalty is calculated by applying the appropriate penalty rate (above) to the ‘Potential Lost Revenue’ or PLR. This is essentially the additional amount of VAT due or payable, as a result of the inaccuracy, or the failure to notify an under-assessment. Special rules apply where there are a number of errors, and they fall into different penalty bands.

Defending a penalty 

The percentage penalty may be reduced by a range of ‘defences”.  These are:

– Telling; this includes admitting the document was inaccurate, or that there was an under-assessment, disclosing the inaccuracy in full, and explaining how and why the inaccuracies arose;

– Helping; this includes giving reasonable help in quantifying the inaccuracy, giving positive assistance rather than passive acceptance, actively engaging in work required to quantify the inaccuracy, and volunteering any relevant information;

– Giving Access; this includes providing documents, granting requests for information, allowing access to records and other documents.

Further, where there is an ‘unprompted disclosure’ of the error, HMRC have power to reduce the penalty further. This measure is designed to encourage businesses to review their own VAT returns.

A disclosure is unprompted if it is made at a time when a person had no reason to believe that HMRC have discovered or are about to discover the inaccuracy. The disclosure will be treated as unprompted even if at the time it is made, the full extent of the error is not known, as long as fuller details are provided within a reasonable time.

HMRC have included a provision whereby a penalty can be suspended for up to two years. This will occur for a careless inaccuracy, not a deliberate inaccuracy. HMRC will consider suspension of a penalty where, given the imposition of certain conditions, the business will improve its accuracy. The aim is to improve future compliance, and encourage businesses which genuinely seek to fulfil their obligations. We have noticed that HMRC is increasingly using the penalty suspension mechanism.

Appealing a penalty 

HMRC have an internal reconsideration procedure, where a business should apply to in the first instance. If the outcome is not satisfactory, the business can pursue an appeal to the First Tier Tribunal. A business can appeal on the grounds of; whether a penalty is applicable, the amount of the penalty, a decision not to suspend a penalty, and the conditions for suspension.

The normal time limit for penalties to four years. Additionally, where there is deliberate action to evade VAT, a 20 year limit applies. In particular, this applies to a loss of VAT which arises as a result of a deliberate inaccuracy in a document submitted by that person.

These are just the penalties for making “errors” on VAT returns. HMRC have plenty more for anything from late registration to issuing the wrong paperwork.

Assistance

Our advice is always to check on all aspects of a penalty and seek assistance for grounds to challenge a decision to levy a penalty. We have a very high success rate in defending businesses against inappropriate penalties.  It is always worth running a penalty past us.

VAT Latest from the courts – Reverse Charge

By   13 February 2017
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The First Tier Tribunal case of University Of Newcastle Upon Tyne is a useful reminder of the impact of the Reverse Charge.

A brief guide to the Reverse Charge is included below.

Background

As with many UK universities, Newcastle was keen to encourage applications to study from new students from overseas. This is an important form of income for the institution.  It used local (overseas) agents to recruit students. Some 40% of those students were studying as undergraduates, 40% as postgraduates on one year “taught” courses and 20% as postgraduate research students studying for doctorates.  In 2014 the University had agreements with more than 100 agents worldwide. The agents used their own resources to recruit students for universities around the world, including in the UK. The University entered into contractual arrangements with agents and paid commission to them. In 2008 the University paid agent commissions of £1.034m, rising to £2.214m in 2012.

The Tribunal was required to consider whether the services supplied by the agents were a single supply to University or separate supplies to both the University and students. If the entire supply is to the University then the Reverse Charge is applicable and, because the University is partly exempt, this would create a VAT cost to it. If the supplies are to both the students and the University, the Reverse Charge element would be less and the VAT cost reduced. (There were changes to the Place Of Supply legislation during the period under consideration, but I have tried to focus on the overall impact in this article.)

The University contended that agents made two supplies: a supply to the University of recruitment services and a supply to students of support services. The commission paid by the University should therefore be apportioned so as to reflect in part direct consideration paid by the University for supplies of services to it, and in part third party consideration for services supplied to the students. The supplies to students would not made in the UK and therefore were not subject to UK VAT.

Decision

After thorough consideration of all of the relevant material, the judge decided that the agents made a single supply of services to the University and make no supplies to students. This meant that the University must account for VAT on the full value of services received since 2010 under the Reverse Charge (although before 2010 different rules on place of supply applied).  Additionally,  it was decided the University was not entitled to recover as input tax VAT for which it is required to account by means of a Reverse Charge. There was no direct and immediate link between the commission paid to agents and any taxable output of the University or the economic activities of the University as a whole.

Commentary

It is understood that the way the University recruited students using overseas agents is common amongst most Universities in the UK, so this ruling will have a direct impact on them.  It was hardly a surprising decision, but underlines the need for all businesses to consider the impact of the application of the Reverse Charge.  Of course, the Reverse Charge will only create an actual VAT cost if a business is partly exempt, or involved in non-business activities.  The value of the Reverse Charge also counts towards the VAT registration threshold.  This means that if a fully exempt business receives Reverse Charge services from abroad, it may be required to VAT register (depending on value). Generally, this means an increased VAT cost. This situation may also affect a charity or a NFP entity.

The case also highlights the importance of contracts, documentation and website wording (should any more reminders be needed).  VAT should always be borne in mind when entering into similar arrangements. It may also be possible to structure arrangements to avoid or mitigate VAT costs if carried out at an appropriate time.

We can assist with any of the above and are happy to discuss this with you.

Guide – Reverse charge on services received from overseas
Normally, the supplier of a service is the person who must account to the tax authorities for any VAT due on the supply.  However, in certain situations, the position is reversed and it is the customer who must account for any VAT due.  This is known as the ‘Reverse Charge’ procedure.  Generally, the Reverse Charge must be applied to services which are received by a business in the UK VAT free from overseas. 
Accounting for VAT and recovery of input tax.
Where the Reverse Charge procedure applies, the recipient of the services must act as both the supplier and the recipient of the services.  On the same VAT return, the recipient must
  • account for output tax, calculated on the full value of the supply received, in Box 1;
  • (subject to partial exemption and non-business rules) include the VAT stated in box 1 as input tax in Box 4; and;
  • include the full value of the supply in both Boxes 6 and 7.
Value of supply.
The value of the deemed supply is to be taken to be the consideration in money for which the services were in fact supplied or, where the consideration did not consist or not wholly consist of money, such amount in money as is equivalent to that consideration.  The consideration payable to the overseas supplier for the services excludes UK VAT but includes any taxes levied abroad.
Time of supply.
The time of supply of such services is the date the supplies are paid for or, if the consideration is not in money, the last day of the VAT period in which the services are performed.
The outcome
The effect of the provisions is that the Reverse Charge has no net cost to the recipient if he can attribute the input tax to taxable supplies and can therefore reclaim it in full. If he cannot, the effect is to put him in the same position as if had received the supply from a UK supplier rather than from one outside the UK. Thus the charge aims to avoid cross border VAT rate shopping. It is not possible to attribute the input tax created directly to the deemed (taxable) supply. 

VAT Latest from the courts; vouchers (again)

By   13 February 2017
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The Court of Appeal (CA) case: Associated Newspapers Limited (ANL) considered the VAT treatment of free vouchers.

Business promotions are an area of VAT which continues to prove complex.  This is further exacerbated by changes to the legislation at EC and domestic level and ongoing case law.   A background to the issue of vouchers here 

And a background to the hearing of this particular case at the Upper Tribunal here

Background

The appeal concerned the VAT consequences (in respect of both input and output tax) of promotional schemes carried out by ANL in order to boost the circulation of the newspapers: Daily Mail and the Mail On Sunday.  ANL gave away Marks & Spencer vouchers to people who bought these newspapers for a minimum of three months. The questions where whether attributable (to the provision of the vouchers) input tax was recoverable, and, was there a deemed supply such that output tax was due on the vouchers.  One scheme was managed for ANL by The Hut.com Limited. The Hut received a fee for its services which was subject to VAT and which ANL sought to deduct as input tax. The Hut also purchased the retailer vouchers in batches (usually at a discount) and invoiced them to ANL at cost and also subject to VAT.  In another scheme, ANL purchased vouchers directly from Marks & Spencer.

Decision

HMRC sought to rely on  paragraph 14 of VAT Information Sheet 12/2003, viz: “Where face value vouchers are purchased by businesses for the purpose of giving them away for no consideration (e.g. to employees as ‘perks’ or under a promotion scheme) the VAT incurred is claimable as input tax subject to the normal rules. Output tax is due under the Value Added Tax (Supply of Services) Order 1993. Therefore all vouchers given away for no consideration will be liable to output tax to the extent of the input tax claimed”.

However, the CA agreed with the decisions made at the Upper Tribunal.  Although the vouchers were given away (no consideration) input tax was recoverable because there was an overarching business purpose for the expenditure (increasing sales).  Additionally, it was decided that the provision of the vouchers was not caught by the deemed supply rules so there was no output tax due when the vouchers were given away to readers. ANL also sought to reclaim input tax on vouchers purchased directly from Marks & Spencer – usually at a discount from their face value, but at a price which purported to include VAT. The CA also agreed with the UT on this point; that no VAT was charged on these retailer vouchers, and consequently, there was no input tax to recover.

Commentary

An interesting case, and one that will reward with a reading in full.  It does seem that HMRC’s views on vouchers need revising in light of this decision.  As always, if your business, or your clients’ businesses, are involved with vouchers in any way it is important to ensure that the VAT treatment is correct.  This is especially relevant in light of; previous case law, recent changes to the rules applicable to the treatment of vouchers (as set out in the link above) as well as this specific case.

Please contact us should you wish to discuss this matter.

VAT Postal claims: Zipvit update

By   6 February 2017
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A full background of this case may be found here

In summary: It was previously decided that certain supplies made by Royal Mail (RM) to its customers were taxable. This was on the basis of the TNT CJEU case. RM had treated them as exempt. HMRC was out of time to collect output tax, but claims made by recipients of RM’s services made retrospective claims. These claims were predicated on the basis that the amount paid to RM included VAT at the appropriate rate (it was embedded in the charge) and that UK VAT legislation stipulates that the “taxable amount” for any supply, is the amount paid by the customer including any VAT included in the price.

Update

We understand that Zipvit’s appeal against the decision by the Upper Tribunal that the relevant input tax was not recoverable has been listed on the Court Of Appeal’s register and is due to be heard in January 2018.

There are a lot of cases stood behind Zipvit and the amount of VAT involved is significant.  If you have an appeal stood behind this case, or act on behalf of a business which has, we recommend that a review of the position is carried out in light of the latest developments. We can assist which such a review if required.