So that’s what it’s called….. From HMRC guidance – “For the purposes of establishing the place of supply of services, stallion nominations (The right to nominate a mare to be covered by a stallion in one breeding season) and the covering of mares is treated as ‘work carried out on goods’.”
New 64-8 agent authorisation form
HMRC has issued a notice which states that, from 31 March 2022, businesses taking on new clients will need them to complete a new form 64-8 to give authorisation for them to deal with HMRC on their client’s behalf.
Existing clients do not need to re-authorise their current relationship.
Access
The new form will be available from 31 March 2022 and may be downloaded by searching for “Tax agents and advisers; authorising your agent” on GOV.UK. There is no direct link yet.
The new form is said to improve data protection and allows taxpayers to state which tax regime they want you to access. The form also includes new guidance for taxpayers and what data they are agreeing to share with their agent.
HMRC has published details of the VAT gap for 2020 – 2021.
The VAT Gap
The VAT gap is measured by comparing the net VAT total theoretical liability with tax actually paid. This is comparing the amount of VAT HMRC expected to receive in the UK and the VAT HMRC actually received.
The figures
The net VAT theoretical liability £129 billion
Net VAT received £101.7 billion
Net VAT receipts related to net VAT total theoretical liability £120.4 billion
VAT gap £8.6 billion
The VAT gap is therefore 6.7%.
Notes
The 2020 to 2021 net receipts figure in the VAT gap includes an adjustment for payments that were deferred in 2020 under the VAT Payments Deferral Scheme in response to Covid-19. They also reflect reduced VAT rates for the hospitality sector, holiday accommodation and attractions, and zero rate for personal protective equipment.
Methodology
Information on the method used to estimate the VAT gap is here for those interested (I don’t imagine that there will be that many…).
Reduction
The estimate of the VAT gap for 2020 to 2021 £8.6 billion shows a reduction compared with the estimate of the VAT gap for 2019 to 2020 which was £12.3 billion.
Previous year’s VAT gap figures for comparison here.
This seems to be an awful amount of tax which has “gone missing”.
HMRC has published research which evaluates the impact of the introduction of Making Tax Digital (MTD) for VAT.
The report sets out that an additional circa £185 million of tax has been collected, according to its data. This is compared to the original estimate which was that an additional amount of £115 million of VAT would be received by the department.
For businesses above the registration threshold, the estimated additional tax revenue due to MTD is an average of £57 per business. This represents a 0.9% increase from the average amount estimated had the businesses not used MTD. HMRC says that this research provides “strong evidence that Making Tax Digital is achieving its objective of reducing the tax gap by reducing the amount of errors made when filing tax returns”.
MTD background
MTD aims to reduce the tax gap by helping businesses pay the right amount of tax. The tax gap is the difference between the theoretical amount of tax that should be paid and the actual tax receipts. The difference is caused by several reasons including avoidance, evasion, and calculation errors or failure to take reasonable care when filing returns.
MTD is intended to tackle the part of the tax gap which is caused by error and failure to take reasonable care. Businesses are required to keep records in digital form and file their VAT returns using software that directly extracts information from these digital records. This should improve accuracy and remove opportunities to make certain types of mistakes in preparing and submitting tax returns, particularly arithmetical and transposition errors.
Downside
All is not sweetness and light though. HMRC has been slammed by The House of Lords Economic Affairs Committee which published a report that said that MTD for VAT cost far more than was predicted in HMRC’s impact assessments. The Committee also criticised HMRC, saying it “inadequately considered the needs and concerns of smaller businesses” and that HMRC has neglected its duty to support small businesses through the implementation of the controversial measures, suggesting it “will make life even more difficult” for them. In addition, the Committee said it “remained unconvinced” of the government’s logic used to justify the speed and rigidity with which the programme was being introduced.
VAT Basics
Consideration – background
There is no definition of consideration in legislation. The meaning was originally taken from contract law, but after the European Court of Justice ruled that the term is to be given the Community meaning and is not to be variously interpreted by Member States the UK adopted that approach.
The expression “consideration” means everything received in return for the supply of goods or the provision of services, including incidental expenses (packing, transport, insurance etc). Consideration is a payment for the supply of goods or services. It is usually a payment in money, but can also be of a “non-monetary” nature, such as goods or services supplied in return.
The phrase “in return for the supply” is interpreted to mean that there must be a direct link between the supply and the consideration.
Therefore, in order that a supply for a consideration can be made, there must be at least two parties and a written or oral agreement between them under which something is done or supplied for the consideration. There is a direct link between the supply and the consideration because the supplier expects something in return for his supply and would not fulfil his obligation unless he thought that payment would be forthcoming.
Profit
It is important to recognise that the concept of consideration and profit are wholly different, and the fact that a business makes no profit on a supply does not mean that there is no consideration for it. Whether payment yields a profit or loss is immaterial and has no bearing on whether or not it is consideration for VAT purposes.
Importance
If consideration is not recognised, or undervalued, a business can expect HMRC assessments and penalties. Overstating consideration will result in an overpayment of tax.
if there is no consideration, there is no supply.
Consideration hallmarks
Consequently, if the provision of goods or services is incapable of being expressed in money, it is not consideration and is outside the scope of VAT.
Indicators of no consideration
Valuation of consideration
This may seem obvious, but as the amount of case law demonstrates, this is not always the case. The starting point is:
Monetary consideration
Monetary consideration includes cash and payment by cheque, credit card, bank transfer, contactless payment, deduction from pay, etc. This is set out in The VAT Act 1994, section 19(2).
Non-monetary consideration
Non-monetary consideration includes goods or services supplied as payment, for example in a “barter” (including part exchange) agreement. Services provided include the giving up of a right, refraining from doing something, agreeing to suffer some loss etc in return for the supply. At first sight these may appear to be merely conditions of an agreement, but are in fact consideration for a supply. If the supply is for a consideration not consisting or not wholly consisting of money, its value shall be taken to be such amount in money as, with the addition of the VAT chargeable, is equivalent to the consideration. Where a supply of any goods or services is not the only matter to which a consideration in money relates, the supply is deemed to be for such part of the consideration as is properly attributable to it.
In determining the taxable amount, the only advantages received by a supplier that are relevant are those obtained in return for making the supply should be recognised. Non-monetary consideration has the value of the alternative monetary payment that would normally have been given for the supply.
What is not consideration
Donations
If a monetary donation is freely given, it is not consideration for any supply and so is outside the scope of VAT. In this situation, the donation has to be unconditional, and the following points dictate whether this is the case.
Donations must be contrasted to sponsorship.
It is necessary to distinguish between donations and sponsorship payments. Whereas a donation means the donor does not expect anything in return, sponsorship involves the sponsor receiving identifiable benefits. These benefits may include advertising, publicity or use of facilities and any sponsorship payment is within the scope of VAT.
Open Market Value
The VAT Act 1994, section 19 (5) states that “…the open market value of a supply of goods or services shall be taken to be the amount that would fall to be taken as its value …if the supply were for such consideration in money as would be payable by a person standing in no such relationship with any person as would affect that consideration”.
Difficult areas
Commonly, areas which give rise to VAT consideration problems include, but are not limited to:
Further reading
For purposes of research or interest, the following cases on consideration are worth reading:
Staatssecretaries van Financien v Cooperatieve Aardapplenbewarr-plaats ((1981) ECR 445; (1981) – The Dutch Potato case for ease!
BAZ Bausystem Gmbh v Finanzamt Munchen Fur Korperschaften
Apple & Pear Development Council (APDC), (ECJ (1988) STC 221; (1988)2 CMLR 394)
Tolsma C-16/93 (1994 STC 509)
I have looked at the Default Surcharge regime in detail here but as statistics show more business to be in default (which is probably accurately attributable, inter alia, to the pandemic) I consider how a penalty may be mitigated, by the provision of a “Reasonable Excuse”. HMRC has updated its internal guidance on Reasonable Excuse this month.
Specifically: HMRC state that “…where a person has not been able to meet an obligation on time due to the impact of COVID-19, HMRC will usually accept that they will have a reasonable excuse.”
What is a Default Surcharge?
The Default Surcharge is a civil penalty issued by HMRC to encourage businesses to submit their VAT returns and pay the tax due on time.
A default occurs if HMRC has not received your return and all the VAT due by the due date. The relevant date is the date that cleared funds reach HMRC’s bank account. If the due date is not a working day, payment must be received on the last preceding working day.
More on late returns here and on late payments here.
New rules forthcoming
It is noted that there is a new regime for penalties, details here although these changes have been delayed until 1 January 2023
Reasonable Excuse
If a business has a reasonable excuse for failing to pay on time, and it remedies this failure without unreasonable delay after the excuse ends, it will not be liable to a surcharge. The onus is on a business to satisfy HMRC that it has a Reasonable Excuse.
Definition
There’s no statutory definition of Reasonable Excuse and it will depend on the particular circumstances of a case. A Reasonable Excuse is something that prevented the business meeting a tax obligation on time which it took reasonable care to meet. There is a great deal of case law on this particular issue. Please contact us should there be doubt about a Reasonable Excuse.
What may count as a Reasonable Excuse?
HMRC give the following examples:
This list is not exhaustive.
What is NOT a reasonable excuse
Statute identifies two specific situations that are not a reasonable excuse:
There can be exceptions to these two exclusions. For example, an insufficiency of funds may be a reasonable excuse where the insufficiency is a result of events outside the person’s control.
HMRC also states that these situations would not normally be accepted, on their own, as a reasonable excuse:
Facts
HMRC will establish what facts the business believes gave rise to a Reasonable Excuse. The facts may include:
Case Law
Although not a VAT issue, in the Upper Tribunal (UT) case of Christine Perrin [2018] UKUT 156 [TC], the judge provided guidance on how the Tribunal should approach a Reasonable Excuse defence. There are four steps:
Appeal
If HMRC refuse to accept an advance of a Reasonable Excuse and the Default Surcharge is maintained, there are two potential remedies:
If a business disagrees with a decision that it is liable to a surcharge or how the amount of surcharge has been calculated, it is possible to:
If you ask for a review of a case, a business will be required to write to HMRC within 30 days of the date the Surcharge Liability Notice Extension (SLNE) was sent. The letter should give the reasons why a business disagrees with the decision.
We are able to assist with all disputes with HMRC and have an enviable record of succeeding in having Default Surcharges removed.
A number of people have been surprised to find that crime does pay tax, thank you very much. It seems bad enough that the police should chase and catch you, put you in the dock and send you to prison, without finding that your first visitor is HMRC…. Let’s look at some examples:
Dodgy perfume?
Goodwin & Unstead were in business selling counterfeit perfume. They were also up-front about what they were doing. Unstead claimed that “Everything I can carry in my vehicle, everything I trade in and sell, is a complete copy of the real thing. I do not sell goods as the real thing. In fact I sell my goods for a quarter of the original price. I am not out to defraud or con the public. I only appeal to the poseurs in life.”
The real manufacturers might have sued these men for passing off the product of their chemistry experiments in trademarked bottles, but it was HMRC who sent them to jail – for failing to register and pay VAT on their sales. The amount they should have collected was estimated at £750,000, which shows that they must have appealed to a great many poseurs.
If they had paid the VAT, Customs would have had no problem with them. Their customers must have been reasonably satisfied – if your counterfeit perfume smells something like the real thing, why worry?
They tried to get out of jail with an ingenious argument – if the sale of the perfume was illegal, surely there shouldn’t be VAT on it. It wasn’t legitimate business activity, so it wasn’t something that ought to be taxable. The European Court had no time for this. They pointed out that it would give lawbreakers an advantage over lawful businesses; they wouldn’t have to charge VAT. The judges suggested that maybe people would even deliberately break the law so they could get out of tax; in this case, the only thing that made the trade illegal was treading on someone’s trademark rights, and that was something that might happen at any time in legitimate businesses. The judges said that VAT would apply to any trade which competed in a legal marketplace, even if the particular sales broke the law for some reason. Counterfeit perfume is VATable because real perfume is too. Of course, Customs have traditionally had two main roles – looking for drug smugglers, and dealing with VAT-registered traders. They have generally treated both with much the same suspicion, but the ECJ made it clear in this case that the two sets of customers are completely separate.
“Personal” services?
Customers paid the escort £130, of which £30 was paid to the agency. VAT on £130 or VAT on £30?
The first hearing before the Tribunal went something like this (this may be using artistic licence, but the published summary implies it was so):
HMRC: “We think the VAT should be on £130 because the escorts are acting as agents of the escort business.”
Trader: “No, it’s just £30, the £100 belongs to the escort and is nothing to do with me.”
Tribunal chairman: “All right, tell me a bit about how the business operates.”
Customs: “No.”
Tribunal chairman: “What?”
Customs: “You don’t want to know.”
Tribunal chairman: “How can I decide whether the escorts are acting as agent or principals without knowing how the business operates?”
Customs: “Don’t go there, just give us a decision.”
Tribunal chairman: “Trader, you tell me how the business operates.”
Trader: “I agree with him, you don’t want to know.”
The Tribunal seems to have been a bit baffled by this. They were aware that Customs had a great deal more evidence which had been collected during the course of a thorough investigation, and they asked the parties to go away and decide whether they might let the Tribunal see a bit more of it so they could make a judgement rather than a guess.
What about drugs then?
It’s well-known that you are allowed to smoke dope in some establishments in Amsterdam, although the Dutch authorities are thinking about restricting this to Netherlands’ residents. They may find that such a rule contravenes the European Law on freedom of movement – under the EU treaty, you can’t be meaner to foreigners than you are to your own people just because they are foreign. That’s a nice idea, but individuals and governments keep trying it on. Anyway, the Coffeeshop Siberie rented space to drug dealers who would sell cannabis at tables for people to take advantage of the relaxed atmosphere. Presumably they are preparing to examine passports or local utility bills before making the sale, if only the Dutch are to be allowed to get stoned. Anyway, the Dutch authorities asked the coffee shop’s owners for VAT on the rent paid by the dealers, and the owners appealed to the ECJ. This time, surely, it was sufficiently illegal. Although the consumption of drugs was tolerated, it was still against the law, and it must therefore be not VATable.
The judges pointed out that the coffee shop was not actually selling drugs. They were just providing the space for other people to sell drugs. Although selling drugs was completely illegal, and there was no legitimate market in cannabis, renting space was a normal business activity. Renting space to someone who did something illegal with it was in the same category as the dodgy perfume sales in Goodwin & Unstead: it was a bit illegal, but not illegal enough. The VAT was still due.
Counterfeiting?
In a German case, the ECJ ruled that the importation of counterfeit money was outside the scope of VAT. The Advocate-General observed that a line must be drawn between, on the one hand, transactions that lie so clearly outside the sphere of legitimate economic activity that, instead of being taxed, they can only be the subject of criminal prosecution, and, on the other hand, transactions which though unlawful must nonetheless be taxed, if only for ensuring in the name of fiscal neutrality, that the criminal is not treated more favourably than the legitimate trader’.
So, there you have it, if you are of a criminal disposition, and you want to avoid VAT, funny money is the way to go. Please note, this does not constitute advice…..
HMRC has updated its VAT Notice 700/2 on VAT Group registrations. This is as a result of the unacceptable delays in dealing with applications to set up or amend VAT groups. The update adds Section 2.17 which is reproduced below:
Details on VAT groups here and here.
2.17 What to do while you wait for a response to your application
If you are waiting for a response to your VAT grouping application, you should treat the application as provisionally accepted on the day it is received by HMRC and account for VAT accordingly. For more information on accounting for VAT in a VAT group see section 5. The date of receipt should be treated as, if submitted online the date it was submitted, or if it was posted the date it should be received by HMRC through the ordinary course of post.
If you have not been issued with a group VAT registration number, you cannot charge or show VAT on your invoices until it has been assigned. However, you’ll still have to pay VAT to HMRC for this period. You should increase your prices to allow for this and tell your customers why. Once you’ve got your VAT number you can then reissue the invoice showing the VAT. Further guidance on this can be found in Who should register for VAT (VAT Notice 700/1) section 5.1.
If you had a VAT registration number prior to your grouping application you should not submit returns under this number, and should follow this guidance.
While you are waiting to receive your VAT grouping registration number, you may receive:
If you do, you will not be required to take any action in response to any of these notices because HMRC will automatically cancel them once your application is fully processed. HMRC will not take recovery action for any debts which come about as a result of you following this guidance, though other VAT debts may still subject to recovery actions.