If your shop is burgled, it’s best to let the robbers take your stock. Goods lost to theft are not subject to VAT, but if cash (which customers have paid for goods) is taken from the till a VATable supply has still been made and output tax is due on it.
HMRC has published two new policy papers covering their position on VAT debts.
The first covers HMRC’s approach to tax debt and covers:
The second provides guidance on HMRC’s support for taxpayers with tax debt and includes:
Interestingly (well, it is all relevant I suppose!) HMRC say that it typically has more than half a million TTP arrangements in place at any one time, and nine out of ten are completed successfully.
Planning
There are a number of schemes and methods to legitimately defer or reduce VAT payable. These include the Flat Rate Scheme, Cash Accounting, margin schemes, global accounting. Other basic planning may involve; tax point planning, invoice timing, ad use of Bad Debt Relief (BDR).
Advice
Our advice is always to contact HMRC as soon as possible if a business has tax payment problems. In some cases, the department is surprisingly helpful. As the statistics demonstrate TTP arrangements are, on the whole, a very successful method for both sides to deal with tax debt.
Reminders
These policy papers provide helpful guidance and explanation of HMRC’s approach, especially in these difficult economic times as a result of COVID 19 and Brexit.
Latest from the courts
In the San Domenico Vetraria SpA CJEU case the issue was the treatment of the secondment of staff by an Italian parent company to its subsidiary and the reimbursement by the subsidiary company of the costs incurred. Was there a VAtable supply?
Background
The issue was whether the relevant payment represented a supply of services ‘for consideration’. The parent company seconded one of its directors to its subsidiary and a charge was made based solely on a reimbursement of actual costs. The Italian domestic court ruled that the transaction was outside the scope of VAT on the basis that there was no consideration paid or received and therefore no supply of services.
Decision
The court ruled that despite the fact that the value of the payment to the parent company was limited to the parent company’s costs this did not mean that consideration for the director’s secondment was absent. Therefore, as consideration flowed in both directions, a taxable supply took place such that VAT was due, the claim of input tax made by the subsidiary was correct and the Italian authorities were incorrect to deny credit for it.
The President of the Chamber stated in the ruling that “The amount of the consideration, in particular the fact that it is equal to, greater or less than, the costs which the taxable person incurred in providing his service, is irrelevant in that regard”. It was immaterial that no profit was made, and the absence of such profit did not affect the VAT treatment.
There was a legal relationship between the provider of the service and the recipient pursuant to which there is reciprocal performance, the remuneration received by the provider of the service constituting the value actually given in return for the service supplied to the recipient.
Commentary
This is a useful clarification/confirmation. The supply was not a disbursement (details here) so it was a supply by the parent company. More on inter-company charges here.
Planning
If the recipient company was partly exempt or unable to reclaim the input tax for any reason, the VAT would have represented a real cost. So, would there be a way to avoid this charge? The answer (in the UK at least) is yes. If the director had a joint contract of employment with both companies, there would be no supply. Also, if the two companies were part of the same VAT group, the “supply” would be disregarded, so there would be no VAT cost for the subsidiary.
Why? How? Where? When? What? Who?
Why?
It is impossible for any business to do such a basic thing as set its prices properly unless it understands its VAT position and ensures that this is reflected in those prices, terms and contract terms etc. The aims of tax planning are:
How?
The “How?” is dependent on the specific business and its needs. We offer a flexible and tailored service from start-ups to multi-national companies. We offer:
The VAT planning process – “The four As”
More details of this approach here.
Where?
VAT, or its derivations applies in most countries around the world. So, the answer is probably “everywhere”. This is particularly relevant with cross-border transactions. A common issue is the “Place Of Supply” (POS) rules which dictate where a supply takes place and thus the VAT liability of it.
When?
Planning needs to be done in advance of transactions. Once a contract has been entered into without thought for the VAT consequences, the damage may have already been done.
Where there is a one-off transaction (eg; sale of premises, sale of know-how, issue of shares), this is, by definition, something of which the business has little experience. It is an occasion to assume that advice is needed, rather than to assume that the most obvious treatment is correct.
Since the impact of a change in the pattern of a business’ activities will continue down the years, rather than being restricted to a single occasion, it is doubly important to ensure that the correct treatment is identified from the outset.
Periodic reviews are a good time to look, not only at the future, but also at the past, to see whether developments in case law reveal past overpayments which may be reclaimed. This is particularly important since repayments are subject to the four-year capping provisions.
The essential step is to have some means of becoming aware of changes and monitoring these with VAT in mind. The means to be adopted are various and will depend on the size and type of the business.
What?
“Right tax, right time”. This means compliance with the relevant legislation but not paying any more VAT than is necessary. As one wag once said; “You must pay taxes. But there’s no law that says you have to leave a tip.”
Since VAT is a transaction-based tax, timing is often crucial and the objective is to legitimately defer payment to HMRC until the latest time possible, thus improving cash flow and retaining the use of VAT monies for as long as possible. The converse of this of course, is to obtain any repayments of VAT due from HMRC as soon as possible. We must also consider avoiding VAT representing an actual cost and taking advantage of any beneficial UK and EC legislation, determinations, guidance, case law and Business Briefs etc available.
VAT Planning objectives
Who?
Marcus Ward Consultancy of course!
In very welcome good news from the Charity Tax Group (CTG) the zero rating for charity advertising has been extended to previously standard rated supplies
Background
Certain (“traditional”) advertising services received by a charity have always been zero rated. However, the zero rating did not cover advertising that was ‘selected” or targeted”. HMRC has always been of the view that websites which use cookies which target certain potential donors fall within the exemption such that standard rating applied which commonly represented an additional cost to a charity.
Changes
However, the CTG has announced that lengthy ongoing discussions with HMRC have finally borne fruit. HMRC have indicated that they have “relaxed“ their position and now agree that supplies of digital advertising to a charity may qualify for zero rating, even if cookies are used. This is not a blanket policy, but it does broaden the availability of zero rating which will mean an absolute saving for most charities.
Exceptions
Advertising which is sent to a social media personal accounts, or where the recipient has paid a subscription for the site, continues to be standard rated.
Action
Charities should review their advertising activity for the last four years to establish whether they have a retrospective claim. Measures should also be put in place to ensure that VAT is not overpaid in the future. We can assist with making claims if required.
Latest from the courts
In the Y4 Express Ltd (Y4) First Tier Tax Tribunal (FTT) case the issue was whether an individual was in business such that he was entitled to be VAT registered.
Background
Y4 imported goods from China on behalf of UK customers. This entailed collecting the goods from the airport, storing them and then arranging delivery of them to the final customers. Y4 had an arrangement with Royal Mail (RM) for a discounted delivery rate. RM subsequently withdrew this discount resulting in Y4 incurring increased delivery costs. In order to mitigate this, Y4 put a structure in place using an individual (Mr Man) to contract with RM for the discount and letting Y4 use the account to take advantage of the reduced rates: RM invoiced Mr Man and Y4 would arrange payment from its own funds via direct debit. Y4 dealt with Mr Man’s VAT compliance and raised self-billing documents to itself on which it recovered input tax. It was reported that Mr Man considered this as a favour to a friend rather than as a business venture with a view to making a profit, and indeed, the charges made by RM were not marked up. Mr Man was not involved with the arrangement of deliveries of Y4 carried out by RM.
HMRC disallowed the input tax claimed as it considered that the individual was not in business, so no VAT was due on the charge made to Y4. This was on the basis that the individual was not carrying on an ‘economic activity’.
Decision
The FTT agreed with the respondent and upheld the decision to disallow Y4’s claim for input tax. This was on the basis that Mr Man was not in business so could not make supplies to Y4, which in turn meant that there was no input tax for Y4 to claim.
Commentary
The issue of whether an entity is “in business” goes back to the earliest days of VAT. I have considered the issue and recent case law here here here here and here. HMRC relied heavily on the age-old (well, 1981) tests in the Lord Fisher case:
The judge found that the tests were not met by Mr Man and, even if they were, the evidence; the self-billing documents, were insufficient. It was also found that a penalty was due, although the quantum was reduced to reflect the cooperation of the taxpayer during the enquiries.
This appeal further demonstrates the ambiguity that often surrounds the definition of a business, and/or an economic activity (the EU legal definition). This is often an issue for charities and NFP bodies, but can extend to other areas such as in this case.
HMRC has published guidance: Revenue and Customs Brief 11 (2020) on how some arrangements between landlords and tenants affect VAT (and Stamp Duty Land Tax). HMRC recognises that such changes have become more frequent as a result of the COVID-19 pandemic.
As a result of the current pandemic, many tenants are suffering a loss of income and want to vary the terms of their lease with their landlord. The brief provides guidance on the appropriate VAT treatment of the most common lease variations, specifically those:
As always with VAT, the correct treatment will depend on the actual agreements which the landlord and tenant enter into.
Examples
Examples of lease variations are:
In the guidance HMRC give examples of four examples of lease variations, but the main issue in all of them is what the tenant does in return for the variation; if anything.
VAT Treatment
Generally speaking, if a tenant makes no payment there is no supply, and so no change in the tax liability of the supply made by the landlord to the tenant. However, in cases where the tenant does something in return for a reduction in rent (which equates to consideration, albeit non-monetary) this is usually a supply by the tenant to the landlord. An example of this is; if the tenant agrees to carry out work to the building for the landlord’s benefit.
In such cases the rent reduction is equal to the value of that supply and the landlord must account for the VAT as though the rent was still being paid (if they have opted to tax the property).
Value of landlord’s supply
If the tenant does nothing in return for a reduction in the rent payable, output tax is only due on the reduced or deferred amount of rent received by the landlord- assuming an option to tax is in place.
Invoices
If both supplies are taxable at the standard rate, the amounts of VAT due on each supply are likely to be similar and the landlord and tenant will need to issue VAT invoices to each other. The input tax claimable is dependent on the overall partial exemption status of the parties. It is not possible to “net-off” the value of the supplies.
Commentary
There have been no changes to legislation or HMRC’s approach in these cases, but the guidance id a helpful reminder that VAT (and SDLT) must be considered in any lease variations.