Monthly Archives: May 2018

VAT: How long do I have to keep records?

By Marcus Ward 24 May 2018

Time limits for keeping records

Record keeping is a rather dry subject, but it is important not to destroy records which HMRC may later insist on seeing!

I have looked at what VAT records a business is required to keep here, but how long must they be kept for?

This is seemingly a straightforward question, but as is usual with VAT there are some ifs and buts.

The basic starting point

The usual answer is that VAT records must be kept for six years. However, there are circumstances where that limit is extended and also times when it may be reduced. Although the basic limit is six years, unless fraud is suspected, HMRC can only go back four years to issue assessments, penalties and interest.

Variations to the six year rule

Mini One Stop Shop (MOSS)

If a business is required to use the MOSS then its records must be retained for ten years (and they should be able to be sent to HMRC electronically if asked).

Capital Goods Scheme (CGS)

If a business has assets covered by the CGS, eg; certain property, computers, aircraft and ships then adjustments will be required up to a ten year period. Consequently, records will have to be retained for at least ten years in order to demonstrate that the scheme has been applied correctly.

Land and buildings

In the case of land and buildings you might need to keep documents for 20 years. We advise that records are kept this long in any event as land and buildings tend to be high value and complex from a VAT perspective, However, it is necessary in connection with the option to tax as it is possible to revoke an option after 20 years.

Transfer Of a Going Concern (TOGC)

This is more of a ‘who” rather than a what or a how long. When a business is sold as a going concern, in most circumstances the seller of the business will retain the business records. When this happens, the seller must make available to the buyer any information the buyer needs to comply with his VAT obligations. However, in cases where the buyer takes on the seller’s VAT registration number, the seller must transfer all of the VAT the records to the buyer unless there is an agreement with HMRC for the seller to retain the records. If necessary, HMRC may disclose to the buyer information it holds on the transferred business. HMRC do this to allow the buyer to meet his legal obligations. But HMRC will always consult the seller first, to ensure that it does not disclose confidential information.

How can a business cut the time limits for record keeping?

It is possible to write to HMRC and request a concession to the usual time limits. HMRC generally treat such a request sympathetically, but will not grant a concession automatically. If a concession is granted there is still a minimum allowance period of preservation which is in line with a business’ commercial practice. Examples of the recommended minimum periods of preservation for certain types of manual records are:

	Type of record	Minimum period of preservation
	Sales or service dockets (mainly used by large organisations especially those involved mainly in retail trading e.g. mail order houses).	No restriction
	Copies of orders, delivery notes, dispatch notes, goods returned notes, invoices for expenses incurred by employees.	1 year
	Production records, stock records (except those for second hand schemes), job cards, appointment books, diaries, business letters.	1 year
	Import, export and delivery from warehouse documents.	3 years
	Daybooks, ledgers, cashbooks, second hand scheme stock books.	3 years
	Purchase invoices, copy sales invoices, credit notes, debit notes, authenticated receipts.	4 years
	Daily gross takings records, records related to retail scheme calculations, catering estimates.	4 years
	Bank statements and paying in books, management accounts, annual accounts.	5 years
	Electronic Cash Registers (ECR) and Electronic Point of Sale (EPOS) equipment	4 years
	Any record containing the VAT account	No concession

Computer produced records

Records produced by a computer system do not necessarily conform to the patterns of manual systems. However, HMRC usually applies the time periods in the table above. This is as long as an inspector is able to determine the documentation necessary to provide a satisfactory audit trail. Where records are stored in an electronic form, a business must be able to ensure the records’ integrity, eg; that the data has not changed, and the legibility throughout the required storage period. If the integrity and legibility of the stored electronic records depends on a specific technology, then the original technology or an equivalent that provides backwards compatibility for the whole of the required storage period must also be retained.

How to keep records

HMRC state that VAT records may be kept on paper, electronically or as part of a software program (eg; bookkeeping software). All records must be accurate, complete and readable.

Other taxes

This article considers the record keeping deadline rules for VAT. Many records kept for VAT purposes will overlap with records for other taxes, and the detailed rules as well as the retention periods may differ.

Information on the record keeping requirements for other taxes is available in the following publications:

a Guide to Corporation Tax Self Assessment for Tax Practitioners and Inland Revenue staff
a general guide to Corporation Tax Self Assessment CTSA/BK4
a general guide to keeping records for your tax return

These are available on the HMRC website

Penalties

If a business’ records are inadequate it may have to pay a record-keeping penalty. If at an inspection HMRC find that records have deliberately been destroyed your they will apply a penalty of £3,000 (this may be reduced to £1,500 if only some of your records are destroyed). In addition, there will be questions about why they have been destroyed.

Finally, it should be remembered for wrongdoing, there is no limitation period on debts to the Crown. You can always be pursued for tax and VAT with no time limit.

Please contact us if you have any queries, or if retaining aged records creates a problem.

VAT – Hard or soft? Stiff or floppy?

By Marcus Ward 18 May 2018

Sssh at the back, this is important…

Whether cakes and biscuits go hard or soft when stale helps to determine whether they are indeed cakes or biscuits (cakes go hard, biscuits go soft). This is the difference between VAT at 20% and zero rating for some products.

Whether printed matter is stiff or floppy can also result in either 20% or zero rated treatment. In this case, for single sheet products, eg; leaflets; limp is good and hard can result in the VAT hit.

What did you think I was talking about? Stop making up your own jokes…

VAT: No such thing as a free meal (or drink) – The M&S case

By Marcus Ward 14 May 2018

Latest from the courts – Marks & Spencer First Tier Tribunal (FTT) case; what is the value of a “free” bottle of wine?

Background

I shall do this without the seductive TV ad voiceover… Like many retailers M&S has and does run various promotions designed to improve its financial performance. A number of those promotions are based on the proposition that a customer who buys certain products from M&S will receive something “free”. In this instant case, M&S sells a combination meal known as a “Dine In”. This comprises; a main course, a side dish and a pudding, along with a bottle of wine which is advertised as free: “Dine In for £10 with Free Wine”. I’m sure many have sampled these offers. The commercial rationale for the promotion involved M&S taking a calculated risk. It reached a decision to lower its aggregate profit margin on the separate items in the offer compared to their retail sales price in the expectation that this will be more than compensated for by changes in customer behaviour as a result of the promotion.

It is interesting to note that M&S anticipated the benefits could arise in a number of ways. Sales of the items included in the promotion might increase, which would improve turnover and put the retailer in a stronger negotiating position with its suppliers of those items. More casual customers might take up the promotion, increasing footfall. In doing so, they and other customers might take the opportunity to add other items to their shopping basket, the so-called “halo effect”. In a less tangible sense, the M&S’s brand might be generally enhanced.

In M&S’s online T&Cs the following narrative appears “For the avoidance of doubt, as the value attributed to the free wine in this deal is £0.00, if returned, no refund will be due…”

The aggregate shelf price of the three food items in the Dine In promotion, if bought separately, varied considerably but would always have been at least £10, and in most cases more.

The VAT issue

Should output tax be accounted for on the whole supply? Or, assuming that the food was zero rated, what, if any, output tax should be declared on the wine? Or should the entire supply be VAT free?

The contentions

M&S’s first contention was that the wine was free so no output tax was due. The reason why the wine was provided free was for M&S to receive certain benefits (set out above). Secondly, the Dine In Promotion is in fact two promotions. The first is an offer of three food items for £10. The second promotion, conditional on the first, is an offer of free wine. The former offer makes commercial sense both for M&S and the customer on its own terms. The food offer is complete in its own right, and the supply of wine for no consideration is a separate transaction. Thirdly, this is a multiple supply. The Dine In Promotion results in three or four separate supplies for VAT purposes, namely the three food items and the wine. This is not a case of what would otherwise be a single supply being artificially broken down. There are separate transactions, entitled to be valued separately for VAT. A further argument was that there is no separate or allocable consideration for the wine element of the Dine In Promotion. The free wine is an inducement, and is conditional on the food offer, but does not generate any separate identifiable consideration for VAT purposes.

Clearly HMRC disagreed and argued that the Dine In deal represented the sale of four items for £10. There was no free gift of the wine and consequently, an element of the £10 should be allocated to the value of the wine. Or put another way, it was a single promotional deal and is not a sale of food items for £10 plus a supply of wine for nil consideration. HMRC further contended that the duty to account for output tax and the right to deduct input tax form an “inseparable whole”. M&S’s position, if correct, would result in a failure to impose a charge to tax on the ultimate consumer, and untaxed (or, in effect, zero rated) consumption of standard rated goods and that militates very strongly against M&S’s position.

It was agreed that, by purchase value, the wine represented the most expensive part of the meal deal. HMRC proposed a value of output tax of 70 pence per meal deal was appropriate.

Decision

The judge agreed with HMRC and that output tax was due on the element of the £10 price attributable to the wine. Contractually, the meal deal was a single offer with a conditional element, ie; the provision of the wine was conditional on the customer paying £10 for the purchase of the food items. Although the customer may perceive the wine to be free (presumably as a result of the way in which the meal deal was held out and advertised) however, for VAT purposes, the customer paid £10 for all four elements of the deal. The Dine In promotion was a single offer, with all four items supplied simultaneously and in the same till transaction for consumption on the payment of £10. Receipt of the wine was conditional on payment of the £10 and the purchase of the food items. The wine was not provided unconditionally and with no strings attached.

Commentary

This was hardly a surprising decision. Similar retail offers have been considered in the past and the outcomes were broadly similar to this decision. The FTT distinguished Hartwell, Lex, Kuwait Petroleum, and Tesco plc cases in this respect which the appellants put forward to support their arguments. As always with VAT, promotions and offers can create valuation issues. It is important to consider VAT when marketing offers are provided.

UPDATE

July 2019

Via the Upper Tribunal (UT) case Marks and Spencer plc v Revenue and Customs Commissioners [2019] BVC 514 the UT upheld the FTT decision and dismissed M&S’s appeal.

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

By Marcus Ward 14 May 2018

ADR and VAT

What is ADR?

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, although it is not limited to these entities. 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.

The process

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 and the only costs the taxpayer will incur are fees from their advisers on preparation and any representation they require on the day.

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
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 taxpayers/agents to the requirements of the ADR process
The average time for all completed ADR cases is 61 days. This figure is from application to resolution. The average elapsed time for VAT it is 53 days
The average age of VAT disputes is eight months
An ADR Panel has been created to accept or reject applications for ADR. 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.

Is Tribunal preferable?

Taking a case to Tribunal is often an expensive, complicated and time consuming option, but used to be 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.

A true alternative?

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”.

Results so far

After an initial 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 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”.

Outcome

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.

Conclusion

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.

Commentary

The comments 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 – The Partial Exemption Annual Adjustment

By Marcus Ward 8 May 2018

What is the annual adjustment? Why is it required?

An annual adjustment is a method used by a business to determine how much input tax it may reclaim.

Even though a partly exempt business must undertake a partial exemption calculation each quarter or month, once a year it will have to make an annual adjustment as well.

An annual adjustment is needed because each tax period can be affected by factors such as seasonal variations either in the value supplies made or in the amount of input tax incurred.

The adjustment has two purposes:

to reconsider the use of goods and services over the longer period; and
to re-evaluate exempt input tax under the de minimis rules.

A MWCL explanation of the Value Added Tax Partial Exemption rules is available here

Throughout the year

When a business makes exempt supplies it will be carrying out a partial exemption calculation at the end of each VAT period. Some periods it may be within the de minimis limits and, therefore, able to claim back all of its VAT and in others there may be some restriction in the amount of VAT that can be reclaimed. Once a year the business will also have to recalculate the figures to see if it has claimed back too much or too little VAT overall. This is known as the partial exemption annual adjustment. Legally, the quarterly/monthly partial exemption calculations are only provisional, and do not crystallise the final VAT liability. That is done via the annual adjustment.

The first stage in the process of recovering input tax is to directly attribute the costs associated with making taxable and exempt supplies as far as possible. The VAT associated with making taxable supplies can be recovered in the normal way while there is no automatic right of deduction for any VAT attributable to making exempt supplies.

The balance of the input tax cannot normally be directly attributed, and so will be the subject of the partial exemption calculation. This will include general overheads such as heating, lighting and telephone and also items such as building maintenance and refurbishments.

The calculation

Using the partial exemption standard method the calculation is based on the formula:

Total taxable supplies (excluding VAT) / Total taxable (excluding VAT) and exempt supplies x 100 = %

This gives the percentage of non-attributable input VAT that can be recovered. The figure calculated is always rounded up to the nearest whole percentage, so, for example, 49.1 becomes 50%. This percentage is then applied to the non-attributable input VAT to give the actual amount that can be recovered.

Once a year

Depending on a businesses’ VAT return quarters, its partial exemption year ends in either March, April, or May. The business has to recalculate the figures during the VAT period following the end of its partial exemption year and any adjustment goes on the return for that period. So, the adjustment will appear on the returns ending in either June, July, or August. If a business is newly registered for VAT its partial exemption “year” runs from when it is first registered to either March, April or May depending on its quarter ends.

Special methods

The majority of businesses use what is known as “the standard method”. However, use of the standard method is not mandatory and a business can use a “special method” that suits a business’ activities better. Any special method has to be “fair and reasonable” and it has to be agreed with HMRC in advance. When using a special method no rounding of the percentage is permitted and it has to be applied to two decimal places.

Commonly used special methods include those based on staff numbers, floor space, purchases or transaction counts, or a combination of these or other methods.

However, even if a business uses a special method it will still have to undertake an annual adjustment calculation once a year using its agreed special method.

De minimis limits

If a business incurs exempt input tax within certain limits it can be treated as fully taxable and all of its VAT can be recovered. If it exceeds these limits none of its exempt input tax can be recovered. The limits are:

£625 per month on average (£1,875 per quarter or £7,500 per annum) and;
50% of the total input VAT (the VAT on purchases relating to taxable supplies should always be greater than the VAT on exempt supplies to pass this test)

The partial exemption annual adjustments are not errors and so do not have to be disclosed under the voluntary disclosure procedure. They are just another entry for the VAT return to be made in the appropriate VAT period.

Conclusion

If a business fails to carry out its partial exemption annual adjustment it may be losing out on some input VAT that it could have claimed. Conversely, it may also show that it has over-claimed input tax. When an HMRC inspector comes to visit he will check that a business has completed the annual adjustment. If it hasn’t, and this has resulted in an over-claim of input VAT, (s)he will assess for the error, charge interest, and if appropriate, raise a penalty. It is fair to say that partly exempt businesses tend to receive more inspections than fully taxable businesses.

VAT: Latest from the courts – Are loan administration services exempt?

By Marcus Ward 1 May 2018

In the First Tier Tribunal (FTT) case of Target Group Limited (Target) the appeal was against a decision by HMRC that loan administration services supplied by Target to a UK bank, Shawbrook Bank Limited (Shawbrook) were standard rated.

Background

Target contracted with Shawbrook to provide services related to loans provided by Shawbrook to its customers in the course of its lending business. Target’s description of its services was “loan account administration services” which amounted to Shawbrook outsourcing the management of the loans to Target. The services that Target provided covered the entire lifecycle of the loans, apart from the making of the initial loan. Target established loan accounts using its own systems, communicates with borrowers as an undisclosed agent of Shawbrook, and dealt with payments by borrowers and all administrative issues that arose. Target had limited discretion. The terms of the loans, including interest rates, were set by Shawbrook. Although Target is involved in dealing with arrears, any enforcement action would be a decision for Shawbrook. Specifically, the contract described Target as being “a provider of loan origination and account operation services” which “performs activities including the functions of: payment processing and servicing and portfolio management services”

Issue

It was accepted that Shawbrook made the loans (not Target) and that the services provided by Target were to Shawbrook and comprised a single (composite) supply for VAT purposes, rather than multiple supplies. Details of the definition between the two types of supply have been hot news in the VAT world for some time. My commentary on relevant recent case law here here here here here and here

The issue was the precise nature of the supplies and whether they qualified for exemption. The areas of dispute included whether Target’s supplies were excluded from exemption as debt collection, and whether the loan accounts fall to be treated as current accounts.

Target’s case was that the principal supply it made to Shawbrook related to payments and transfers in the same way as in the Electronic Data Services Ltd (EDS) case, which related to similar customer-facing loan administration services. (EDS provided loan arrangement and execution services to banks in relation to the granting of personal loans. The services included the provision of a staffed call centre, the printing and despatch of loan agreement documentation, the transfer of funds via the BACS system on the release of loans and the administrative work related to handling loan accounts and repayments). In the alternative, the principal or core supply relates to the operation of accounts (specifically, current accounts), or amounts to transactions concerning debts.

Technical

Article 135(1)(d) of the Council Directive 2006/112/EC (the Principal VAT Directive, or “PVD”) requires Member States to exempt the following transactions: “transactions, including negotiation, concerning deposit and current accounts, payments, transfers, debts, cheques and other negotiable instruments, but excluding debt collection;”

This is transposed into UK legislation via VAT Act 1994, Schedule 9, Group 5, items 1 and 8:

“Item 1. The issue, transfer or receipt of, or any dealing with, money, any security for money or any note or order for the payment of money. …

Item 8. The operation of any current, deposit, or savings account.”

Decision

It was decided that Target’s supplies did not qualify for exemption and they therefore fell to be standard rated. What was fatal to the appellant’s case was the fact that there was an absence of any involvement in the initial loan. Consequently, although it was possible to view the services as “transactions concerning payments” they fell within the debt collection definition and accordingly were not exempt. The judge also ruled that the supplies may be loan accounts, these did not qualify as an exempt operation of a current account.

Commentary

Of course, this decision was important for the recipient of the supply (Shawbrook) as well as Target. Because its supplies were exempt, the VAT on the outsourcing expenditure would be irrecoverable thus creating an extra 20% cost.

This case once again demonstrates that even the smallest variation of facts can produce an unexpected VAT outcome. Care must be taken to analyse precisely what is being provided. Financial Services is a minefield for VAT and it is certainly one area that assumptions of the VAT treatment should be avoided and timely advice sought.

Picture: A loan arranger (apologies)