Monthly Archives: September 2019

Tax – Why do people pay it?

By Marcus Ward 16 September 2019

This seems a rather pointless question to ask, and I suspect many people will reply “because we have to”. But is it as simple as that?

An Organisation for Economic Co-operation and Development (OECD) report this month looks at the willingness of individuals and businesses to voluntarily pay tax and how it can be improved through better understanding of the complex interlinkages between enforcement, trust in government and the ease of compliance.

The report called ‘Tax Morale: What Drives People and Businesses to Pay Tax?‘ is interesting to read for tax advisers and taxpayers alike. It considers the drivers behind compliance with tax obligations and focuses on developing countries where compliance rates are low.

Many developing countries face a range of challenges in increasing revenue domestically. These challenges include:

a small tax base
a large informal sector
weak governance and administrative capacity
low per capita income
low levels of domestic savings and investment
tax avoidance and evasion by firms and elites.

As a result, two-thirds of least developed countries still struggle to raise taxes equivalent to more than 15% of GDP, the widely accepted minimum to enable an effective state. In comparison, OECD member countries raise taxes, on average, close to 35% of GDP.

Apparently, compliance is not determined solely by tax rates or the threat of penalties, but rather by a wide range of socio-economic and institutional factors that vary across regions and populations.

Improving tax morale can contribute to efforts to overhaul the international tax rules and improve compliance by multinational enterprises and it may also improve the efforts to counter banking secrecy and tax evasion.

Tax morale is composed of several, interlinked, elements. A theory set out in the report posits that trust is driven by the degree to which the tax system, including the approach to facilitation and enforcement, is characterised as:

fair
equitable
reciprocal
accountable

As such, strengthening tax compliance is not only about improving tax enforcement and enforced compliance, but also about pursuing “quasi-voluntary compliance” through building trust and facilitating payments.

Why is this important?

The report states that a better understanding of what motivates taxpayers to participate in, and comply with, a tax system is valuable for all countries and stakeholders. Tax administrations can benefit from increased compliance and higher revenues, taxpayers (both businesses and individuals) are better served by tax systems that understand and are responsive to their needs, while increased data and discussion can help researchers deepen their understanding.

So…

In terms of VAT, what are our experiences of HMRC? Is it fair, equitable, reciprocal and accountable? Having discussed this at most client meetings where businesses have been challenged, and my experience in the department and advising businesses is: It used to be a lot better, there was a feeling that they were “trying to get things right”, however, this sense has been declining and trust is increasingly and rapidly being lost. Is this nostalgia, or does HMRC increasingly rely on bullying, ignoring contentions, misunderstanding or misapplying legislation or not being concerned with taxpayers?

All I would say here is that the fact that HMRC can issue a written ruling, but then go back on it if it suits them, is hardly fair or equitable. See here – no more “Sheldon Statement” protection for taxpayers.

VAT: Disaggregation – The Caton case

By Marcus Ward 12 September 2019

Latest from the courts.

In the Charles John Caton First Tier tribunal (FTT) case the issue was whether HMRC were correct in deciding that a business was artificially split to avoid VAT registration (so called disaggregation, details here).

Background

The appellant ran a café known as The Commonwealth for a number of years. Subsequently, his wife opened a restaurant in adjoining premises. HMRC decided that this was a single business and required a backdated VAT registration. This resulted in a retrospective VAT return and associated penalties for late registration.

HMRC pointed to the leases, the liability insurance and the alcohol licence, which are all in Mr Caton’s name, together with the fact he signed a questionnaire stating that he was sole proprietor of the restaurant, and the fact that the washing up area is shared, and say that these show that there was only one business. They also said that the fact that Mrs Caton did not have a bank account and therefore card takings from the restaurant went into Mr Caton’s bank account further bolsters their case.

The appellant proffered the following facts to support the contention that there were two separate businesses: There were separate staff in the restaurant and the café. Those for the cafe were hired by Mr Caton, and are his responsibility, and those for the restaurant were hired by Mrs Caton and are her responsibility. The cooking is done completely separately, by different people using different cooking areas. The menus are completely different, and when the café sells the restaurant ‘specials’ they are rung up on the till with a marker that shows they are restaurant sales. Although the majority of the food is ordered from the same place, there are separate orders (even though these orders are placed at the same time and paid for using Mr Caton’s bank account). Mrs Caton decides on the menu for the restaurant and the prices. She keeps the cash generated from the sales in the cafe, and this is not banked in Mr Caton’s account. Depending on the ratio of cash sales to card sales in any given month, she may need to pay some of it to Mr Caton for the rent, rates etc, but any surplus she keeps.There were two tills, one for the restaurant and one for the cafe.

The Law

The VAT Act 1994, Schedule 1 para 1A provides that:

(1) Paragraph 2 below is for the purpose of preventing the maintenance or creation of any artificial separation of business activities carried on by two or more persons from resulting in an avoidance of VAT.

(2) In determining for the purposes of sub-paragraph (1) above whether any separation of business activities is artificial, regard shall be had to the extent to which the different persons carrying on those activities are closely bound to one another by financial, economic and organisational links.

VAT Act 1994, Schedule 1 para 2 provides that:

(1)… if the Commissioners make a direction under this paragraph, the persons named in the direction shall be treated as a single taxable person carrying on the activities of a business described in the direction…

Decision

The judge decided that she considered the facts that point to the businesses being run and owned as two separate operations were significantly stronger that facts that point to a joint ownership. And the appeal was allowed.

Commentary

These types of cases are decided on the precise facts. I think that this one must have been a close call. It appears the fact that may have swung it was that the judge commented “We find it extremely surprising, in this case, that HMRC have never met with Mrs Caton or, in correspondence, asked her for any details. Mr Caton and HMRC have both told us that he has consistently maintained from the first meeting the fact that Mrs Caton runs the restaurant. We find it impossible that HMRC could be in possession of facts sufficient to make a reasonable decision on this case without hearing from Mrs Caton.” That approach by HMRC is never going to play well in court. It strikes me that this type of approach is increasing in the department. Whether this is down to lack of training, resources or simple corner cutting to save time I cannot say.

If HMRC issue a direction under VAT Act 1994, Schedule 1 para 2 that two or more businesses should be treated as one, it is always worth having that decision reviewed. This is especially relevant in cases such as this where customers are the final consumers making the VAT sticking tax.

VAT DIY Housebuilders’ Scheme – useful information

By Marcus Ward 9 September 2019

The DIY Housebuilders’ Scheme is a tax refund scheme for people who build, or arrange to have built, a house they intend to live in. It also applies to converting commercial property into a house(s). Details here.

However, there are often uncertainties and disputes over precisely what tax may be claimed on various expenditure. To this end, HMRC has published a comprehensive list of items, sorted alphabetically, which should avoid a lot of potential disagreements on claims.

It should be noted that a claim for services can only be made for conversions (at the reduced rate of 5%) as any services in respect of a new build property should be zero rated.

What else can a housebuilder not claim for?

There is no claim available for:

building projects outside the UK
materials or services that are not subject to VAT, eg; are zero-rated or exempt or provided by a non VAT-registered supplier
professional or supervisory fees, eg; architects and surveyors
the hire of plant, tools and equipment, eg; generators, scaffolding and skips
building materials that aren’t permanently attached to or, part of, the building itself
some fitted furniture, electrical and gas appliances, carpets or garden ornaments
supplies for which you do not have a VAT invoice.

If you would like assistance with making a claim, please contact us.

VAT: Exempt medical treatment – The Skin Rich case

By Marcus Ward 9 September 2019

Latest from the courts

In the Skin Rich Ltd [2019] TC 07310 First Tier Tribunal (FTT) case, the issue was whether Botox and nail treatments could be exempt as health and welfare services: “The supply of services consisting in the provision of medical care” by a “registered person” (principally, doctors, opticians, osteopaths, chiropractors and nurses).

Background

Skin Rich Ltd operated a skin culture and aesthetics clinic offering a range of specialist skin treatments including, but not limited to, Botox and dermal filler treatments or ‘Injectables’ and fungal nail treatments it contended were exempt from VAT.

The appellant employed several medical professionals to administer the injectables arguing it was a medical procedure and exempt under VATA 1994, Sch. 9, Grp. 7, items 1 and 2. It was not enough, however, that the services were provided by persons registered as appropriate, they had to be providing “medical care” in order to meet the terms of the exemption. Their principal purpose had to be the protection, including the maintenance or restoration of health. Whilst it was conceded a cosmetic benefit would not preclude a treatment having a primary purpose to protect, restore or maintain the health of an individual.

Decision

The FTT dismissed the appeal that Botox services and fungal nail treatment supplied by them were exempt under VATA 1994, Sch. 9, Grp. 7, items 1 and 2, or alternatively item 4. Consequently, output tax was due on the full value of these supplies. The FTT was not persuaded the services were principally to protect, restore or maintain the health of an individual. They did not, therefore, meet the definition of medical care established by the relevant case law. Furthermore, they did not consider the taxpayer to be “state regulated” as required by item 4.

Commentary

This can be a difficult area of the tax. I have dealt with a number of cases where apparent cosmetic surgery (breast augmentation and liposuction etc) were argued to have beneficial mental health outcomes. Case law on this matter is sometimes conflicting. Care should be taken when determining the VAT liability of certain procedures. The tests are more than something being “sort of medical”.

This was not an unexpected outcome, but presumably the appellant thought that, for the tax involved, it was worth going to court.

VAT: Domestic Reverse Charge for builders – introduction delayed

By Marcus Ward 9 September 2019

As you were…

The UK Government has announced that it is to delay the introduction of the VAT Domestic Reverse Charge (DRC) for construction businesses by a year after a coalition of trade bodies and organisations highlighted its potentially damaging consequences. Details of DRC here

The DRC was due to come into force from 1st October this year, but it has been announced via Revenue and Customs Brief 10 (2019): domestic reverse charge VAT for construction services – delay in implementation that it has been deferred for a year. The new implementation date will be 1 October 2020 unless there are further delays.

The move has been welcomed by all parties affected by the rules and HMRC said that it was committed to working closely with the sector to raise awareness and provide additional guidance to make sure all businesses will be ready for the new implementation date.

Invoices etc

HMRC have also recognised that some businesses have already put changes in place to anticipate the original introduction date and appreciate that it may not be possible to reverse these changes before 1 October 2019. Where “genuine errors” have occurred, HMRC has stated that it will take into account the late change in its implementation date.

Comments

The Chief Executive of the Federation of Master Builders said “I’m pleased that the government has made this sensible and pragmatic decision to delay reverse charge VAT until a time when it will have less of a negative impact on the tens of thousands of construction companies across the UK. To plough on with the October 2019 implementation could have been disastrous given that the changes were due to be made just before the UK is expected to leave the EU, quite possibly on ‘no-deal’ terms.” The situation hasn’t been helped by the poor communication and guidance produced by HMRC. Despite the best efforts of construction trade associations to communicate the changes to their members, it’s concerning that so few employers have even heard of reverse charge VAT.”

It has been stated by certain trade bodies that more than two-thirds of construction firms had not heard of the VAT changes and of those who had, around the same number had not prepared for them. My own experience backs this up and talking to other tax people and building businesses it is clear that this is not an issue which has been publicised widely and despite accountancy firms doing their best to bring it to the attention of relevant clients and contacts, many remain unaware.

Commentary

Discussions over Brexit (obviously!) have been blamed for the situation, although there is no word about why HMRC waited until a month before the intended implication to decide to delay the DRC. A lot of work has been carried out on this matter, and changes to documentation, processing and systems have taken place which will need to be reversed before 1 October 2019. At least the delay will provide HMRC with a new chance to let affected parties know next time and gives them time to identify why so many building businesses were unaware of the reverse charge.

Whether the DRC IS introduced next year remains to be seen. To my mind, it does not deal with the major sources of tax leakage in the construction industry and, as usual, complaint business will play by the book and those that do not will find a way round the rules. To exclude labour only services appears to be a folly. Perhaps they will be amended before next year.

VAT EU Gap Report

By Marcus Ward 5 September 2019

Mind the gap

EU countries lost €137 billion in VAT revenues in 2017 according to a study released by the EC on 5 September 2019. The VAT Gap has slightly reduced compared to previous years but remains very high.

This gap represents a loss of 11.2% of the total expected VAT revenue.

During 2017, collected VAT revenues increased at a faster rate of 4.1% than the 2.8% increase of VAT Total Tax Liability (VTTL). As a result, the overall VAT Gap in the EU Member States saw a decrease in absolute values of about EUR 8 billion or 11.2% in percentage terms.

Member States in the EU are losing billions of Euros in VAT revenues because of tax fraud and inadequate tax collection systems according to the latest report. The VAT Gap, which is the difference between expected VAT revenues and VAT actually collected, provides an estimate of revenue loss due to tax fraud, tax evasion and tax avoidance, but also due to bankruptcies, financial insolvencies or miscalculations.

In 2017, Member States’ VAT Gaps ranged from 0.6% in Cyprus, 0.7% in Luxembourg, and 1.5% in Sweden to 35.5% in Romania and 33.6% in Greece. Half of EU-28 MS recorded a Gap above 10.1%.

Overall, the VAT Gap as percentage of the VTTL decreased in 25 Member States, with the largest improvements noted in Malta, Poland, and Cyprus and increased in three – namely Greece, Latvia, and Germany.

The variations of VAT Gaps between the Member States reflect the existing differences in terms of; tax compliance, fraud, avoidance, bankruptcies, insolvencies and tax administration. Other circumstances could also have an impact on the size of the VAT Gap such as economic developments and the quality of national statistics.

The UK

In the year 2017, in the UK the VTTL was £158421 millions of which £141590 millions was actually collected. This leaves a VAT gap for the UK of £16831 millions which represents 11% of the amount which is estimated was due to HMRC. About a mid-table performance compared to other Member States.

VAT Reliefs for Charities. A brief guide.

By Marcus Ward 3 September 2019

Charity and Not For Profit entities – a list of VAT reliefs

Unfortunately, charities have to contend with VAT in much the same way as any business. However, because of the nature of a charity’s activities, VAT is not usually “neutral” and becomes an additional cost. VAT for charities often creates complex and time consuming technical issues which a “normal” business does not have to consider.

There are only a relatively limited number of reliefs specifically for charities and not for profit bodies, so it is important that these are taken advantage of. These are broadly:

- Advertising services received by charities;
- Purchase of qualifying goods for medical research, treatment or diagnosis;
- New buildings constructed for residential or non-business charitable activities;
- Self-contained annexes constructed for non-business charitable activities;
- Building work to provide disabled access in certain circumstances;
- Building work to provide washrooms and lavatories for disabled persons;
- Supplies of certain equipment designed to provide relief for disabled or chronically sick persons

There are also special exemptions available for charities:

- Income from fundraising events;
- Admissions to certain cultural events and premises;
- Relief from “Options to Tax” on the lease and acquisition of buildings put to non-business use.
- Membership subscriptions to certain public interest bodies and philanthropic associations;
- Sports facilities provided by non-profit making bodies;

The reduced VAT rate (5%) is also available for charities in certain circumstances:

- Gas and electricity in premises used for residential or non-business use by a charity;
- Renovation work on dwellings that have been unoccupied for over two years;
- Conversion work on dwellings to create new dwellings or change the number of dwellings in a building;
- Installation of mobility aids for persons aged over 60.

Although treating certain income as exempt from VAT may seem attractive to a charity, it nearly always creates an additional cost as a result of the amount of input tax which may be claimed being restricted. Partial exemption is a complex area of the tax, as are calculations on business/non-business activities which fundamentally affect a charity’s VAT position. I strongly advise that any charity seeks assistance on dealing with VAT to ensure that no more tax than necessary is paid. Charities have an important role in the world, and it is unfair that VAT should represent such a burden and cost to them.