Author Archives: Marcus Ward

VAT: Deductions from, and sacrifice of; salary

By Marcus Ward 4 November 2024

This has been a difficult area historically, but as a result of the CJEU Astra Zeneca case, there is more certainty, although it was not beneficial for businesses. We look at the distinction between deductions from salary and salary sacrifice below, along with the VAT treatment of specific examples.

Current position

Generally, if deductions are made from salary for goods or services provided by an employer to their employees, these are liable to VAT. The remuneration an employee forgoes is consideration for the taxable benefits provided and output VAT will be due from, and input VAT recoverable, by the employer. Please see below for some specific circumstances.

Historical position

Deduction from salary – where an amount is deducted from an employee’s pay in return for a supply of goods or services by the employer. Output tax is due on the amount deducted from the employee’s salary and is input tax recoverable.
Salary sacrifice – for VAT purposes “salary sacrifice” describes an arrangement where an employee opts to receive optional benefits provided by the employer and forgoes part of their salary in return. Employees who choose to take a benefit have their employment contracts amended to reflect the new arrangements. No output tax was due as it was not deemed to be a taxable supply.

We have come across businesses who erroneously still apply the past rules – which changed on 1 January 2012.

Valuation

In most cases the value of the benefit for VAT purposes will be the same as the salary deducted or foregone. Where the true value is not reflected, for example where benefits are supplied below what it cost to acquire them, the value should be based on the cost to the employer.

Specific staff benefits

Cycle to work scheme

Under this scheme employers purchase bicycles and safety equipment and provide them to employees. Where this is under a salary sacrifice arrangement employers must account for output tax based on the value of the salary foregone by the employee in exchange for the hire or loan of a bicycle.

Childcare and childcare vouchers

Businesses that put arrangements in place whereby their employees forego part of their salary and allocate that salary to pay for childcare provided by a third party are not making a supply of childcare. Any related costs incurred by the business, such as payroll and administration, are general overheads of the business.

Face Value Vouchers

Where vouchers, such as those available from high street retailers, are provided under a salary sacrifice arrangement, input tax may be claimed and output tax is due on the consideration paid by the employee.

Food and catering provided by employers

Employers may provide their staff with free or subsidised meals, snacks, or drinks. Where employees pay for the meal the normal VAT treatment will apply. If employees make no payment, VAT is not due, provided the benefit is available to all staff. Where employees pay for meals under a salary sacrifice arrangement, employers must account for VAT on the value of the supplies unless they are zero-rated. An employer may claim the input tax incurred on related purchases, subject to the normal rules.

Cars

Most businesses are prevented from recovering VAT in full on the purchase and leasing of company cars. The input tax block on cars, generally: 100% on purchases, and 50% on leasing, means that employers do not account for output tax when cars are made available to employees. Where an employer suffers no input tax restriction, output tax is due.

A VAT did you know?

By Marcus Ward 25 October 2024

If you buy a flapjack* from a vending machine in the corridor at work it is VAT free. However, if you buy the same product from a machine in the staff canteen it will be standard rated.

* Of course, zero rating only applies to a “traditional” flapjack and not cereal or energy/sports nutrition bars…

HMRC internal manual: VAT Assessments and Error Correction update

By Marcus Ward 21 October 2024

HMRC’s manual VAT Assessments and Error Correction was updated on 15 October 2024.

This internal guidance is for HMRC inspectors (but is equally useful for advisers) covers assessments and error correction. The amendments apply mainly to General assessment procedures: Importance of avoiding delay.

The manual covers:

It also refers to for the most up-to-date guidance on reasonable excuse CH160000.as a defence against penalties and interest.

VAT: Split payments and e-invoicing

By Marcus Ward 15 October 2024

The recent announcement of an e-invoicing consultation means that businesses should consider the impacts of the intended introduction now.

When this is published (potentially in the Budget on 30 October) it is be anticipated it will cover the intended effective date, how it will affect types of taxpayer, eg; B2B and B2C, how it will be implemented, and its range.

This raises further questions “down the line”, so here we look a step further and consider “split payments” as there has been a lot of conversation and media coverage on this subject.

What are split payments (sometimes known as “real-time extraction”)?

Split payments use card payment technology to collect VAT on online sales and transfer it directly to HMRC rather than the seller collecting it from the buyer along with the payment for the supply, and then declaring it to HMRC on a return in the usual way.

Clearly, HMRC is very keen to introduce such a system, but there are significant hurdles, the biggest being the complexity for online sellers, payment processors, input tax systems, agents, advisers and HMRC itself.

Where are we on split payments?

HMRC has previously published a Prior Information Notice (PIN) and associated Request for Information (RFI), seeking views on the outline requirements and proposed procurement process split payments. This should, inter alia, assist HMRC in:

identifying where it is intended that the purchased goods or services are to be delivered and/or consumed
the possibility to apply a split only above or below a certain value threshold
the feasibility for the splitting mechanism to calculate a composite VAT total across a mixed basket of goods and/ or services, each potentially with a different rate of VAT.

This builds on previous information gathering/consultations/discussions carried out some years ago.

Background

The expansion of the online shopping market has brought unprecedented levels of transactions. The results of digitalisation have also brought challenges for tax systems. Jurisdictions all over the world are currently grappling with the question of how to prevent large VAT losses, which can arise from cross-border online sales. This happens when consumers buy goods from outside their jurisdiction from sellers who, through fraud or ignorance, do not comply with their tax obligations. It is costing the UK tax authorities an estimated £1 billion to £1.5 billion (figures for 2015-16) a year. The UK government believes that intercepting VAT through intermediaries in the payment cycle, split payment potentially offers a powerful means of enforcing VAT compliance on sellers who are outside the UK’s jurisdiction.

Fraud

The fraud carried out by online sellers is not particularly sophisticated but is difficult to combat. Simply, sellers either use a fake VAT number to collect VAT without declaring it, or even more basically, collect the VAT and disappear.

Proposed spilt payment methods

The way in which payments are split represent difficult technical VAT issues, particularly when sales are at different VAT rates. The three proposals are:

Standard rate split. This assumes that all sales are liable to the standard rate VAT and does not recognise any input tax deduction. Extraction of 20% of tax, regardless of the actual liability (potentially, 5%, or zero) appears unfair and would be very difficult to impose. Cashflow would be negatively affected too.
Flat Rate Scheme (FRS). This is a proposal by HMRC to insist that online sellers overseas to use the FRS using a specific new rate for this purpose. The FRS threshold of £150,000 pa could be increased for overseas businesses, but this would potentially give overseas sellers an advantage over UK businesses, so politically, if nothing else, would prove to be a hard sell.
Net effective rate. This would mean an overseas business calculating its own exact net effective rate, based on its outputs and inputs from the previous year’s transactions (similar to TOMS).
Composite rate. A composite VAT total across a mixed range of goods or services, each potentially with a different rate of VAT. The mechanism for carrying this calculation out is unclear.

There may be more proposals forthcoming, but none of the above proposals appear reasonable and the complexity they would bring would seem to rule them out as matters stand – although this has not previously stopped HMRC introducing certain measures and the obvious benefits to the authorities cannot be ignored.

Overall

The technology for split payments currently exists and is being used in some Latin American countries (and Poland). The concept is part of a larger movement towards real-time taxation and MTD. Our view is that split payments are coming, but we do not know in which form or when.

This article is based on one first published by MWCL on 9 January 2023.

VAT Business/Non-Business HMRC Internal Manual updated

By Marcus Ward 14 October 2024

HMRC internal guidance manual has been updated on 9 October 2024.

This is likely to affect; charities and similar bodies, NFP, clubs, associations, philanthropic organisations, galleries and museums, “hobby” activities, amongst other persons.

Business or Non-Business (N-B) is very important in VAT as it determines, inter alia, whether a supplier is

liable to register
liable to account for output tax
able to recover (all, some, or no) input tax

The definition of business and N-B here.

Legislation: The I Act 1994 Section 24(5).

Further reading

I have written about this issue many times, as it is a fundamental issue in the tax.

The following articles consider case law and other relevant business/N-B issues:

Lajvér Meliorációs Nonprofit Kft. And Lajvér Csapadékvízrendezési Nonprofit Kft

Healthwatch Hampshire CIC

Pertempts Limited

Northumbria Healthcare

What the Guidance Manual covers:

an overview of the meaning of business for VAT purposes
general principles
meaning of N-B
- the term ‘business activity’ (economic activity)
- the concept of ‘business’ for VAT purposes
- the meaning of business
- the purpose of activity
- N-B activities
- persons with both business and N-B activities
- outside the scope income
- N-B activities which result in payment
determination procedures to establish whether an activity is business N-B
the relevant UK law and caselaw (per above amongst other cases)
the general approach for inspectors on business/N-B
factors to consider when determining if an activity is business or not
the link between supplies and consideration
methods of apportionment of input tax and approval of apportionment methods
formal procedures and work systems
clubs and associations
specific issues
legal history
HMRC policy background

This is the main reference material for HMRC inspectors and other employees, so it is very helpful for advisers to understand HMRC’s likely approach to a potential VAT issue.

VAT: Second-hand goods scheme and best judgement – The Ancient & Modern Jewellers Limited case

By Marcus Ward 7 October 2024

Latest from the courts

The second-hands of time.

In the First-tier Tribunal (FTT) case, the issue was whether the second-hand goods margin scheme (margin scheme) was applicable and whether HMRC’s assessments for £5,474,249 (later reduced to £5,004,595) of underdeclared of output tax were issued in best judgement.

Background

The Ancient & Modern Jewellers Limited (A&M) sold second-hand wristwatches with the majority of the sales properly accounted for via the margin scheme. However, from information obtained from Italian tax authorities in respect of supply chain fraud, HMRC issued the assessments on the basis that supplies of certain goods did not meet the conditions of the margin scheme so that output tax was due on the full value of the watches rather than the difference between the purchase and sale values. HMRC decided to penalise A&M because the errors were deliberate and prompted and subsequently to issue a PLN on the basis that such conduct was attributable to the director. A&M is a “High Value Dealer” for anti-money laundering purposes.

Contentions

Appellant

The appellant claimed that HMRC did not use best judgement on the grounds that:

the inspector did not impartially consider the evidence
HMRC lacked sufficient evidence to raise an assessment thereby failing to meet the Van Boeckel test
the calculated amounts were no more than unreasonable and random guesses
the inspector did not approach the investigation with an open mind to such an extent that it could not be said that the assessments and penalties were the product of the reasonable behaviours of HMRC
put in terms of the case law: HMRC had acted in a way which no reasonable body of commissioners could have acted or, put another way, had been vindictive, dishonest or capricious

so the assessments and penalties were invalid.

Whilst accepting that a best judgment challenge is a high bar A&M contended that the conduct and mindset of HMRC’s investigating and assessing officer was so unreasonable that it vitiated the whole assessment.

Respondent

HMRC contended that the assessments were based on best judgement and that its focus was not on the supply chain fraud claims (as claimed by A&M). Additionally, a previous inspection in 2014 had raised prior concerns which provided adequate grounds for the assessments. Moreover, A&M was aware of the terms of operation of the second-hand margin scheme and considered that A&M had wilfully misused the scheme in several regards. The scheme had been incorrectly used for goods purchased by way of intracommunity supplies – which had been imported with the appellant claiming input tax on the imports and then including them in the margin scheme. A&M wilfully failed to carry out due diligence on its suppliers.

Best Judgement

It may be helpful if we consider what the words “best judgement” mean. This was best described by Woolf J in Van Boeckel v CEC [1981] STC 290

“What the words ‘best of their judgement’ envisage, in my view, is that the commissioners will fairly consider all material before them and, on that material, come to a decision which is one which is reasonable and not arbitrary as to the amount of tax which is due. As long as there is some material on which the commissioners can reasonably act, then they are not required to carry out investigations which may or may not result in further material being placed before them.”

Technical

The second-hand margin scheme is provided for under The VAT Act 1994, Section 50A, The Value Added Tax (Special Provisions) Order 1995 and certain paragraphs of VAT Notice 718 which have force of law.

Decision

The appeal was dismissed. It was found that A&M deliberately rendered inaccurate VAT returns. The director of the company was aware both of how the margin scheme worked and that the terms of the scheme had to be complied with if a supply was to be taxed under the it. A&M was found to have acted deliberately in misusing the scheme by including ineligible supplies. A&M had been lax in the completion of its stock book, and it had not met the record-keeping requirements necessary to use the scheme for the relevant transactions. Additionally, some of its EU suppliers were not registered for VAT, a fact A&M did not take steps to discover, and so related purchases could not qualify for the scheme. Also, it was likely that some of the purchases were of new watches which made them ineligible for the margin scheme.

Re, evidence; the FTT found much of the A&M director’s evidence to have been self-serving and, in parts, evasive and that it did not consider that the integrity of HMRC could be impugned. The court determined that; the inspector was diligent and thorough, HMRC had legitimate concerns regarding A&M’s use of the margin scheme generally and specifically and there was a wider concern that the company was a participant in fraudulent supply chains. The FTT considered that the investigation was proportionately carried out considering these concerns and the assessments raised in exercise of best judgment.

Penalties and PLN

The case further considered penalties: whether the appellant’s conduct was deliberate (yes – appeal dismissed). Whether the Personal Liability Notice (PLN) [Finance Act 2007, Schedule 24, 19(1)] was appropriate for the conduct attributed to the director – whether his conduct led to penalty (yes – appeal dismissed).

Commentary

This case is a long read, but worthwhile for comments on; the margin scheme use, HMRC’s inspection methods, best judgement, evidence and MTIC amongst other matters.

VAT: Updated guidance for public bodies

By Marcus Ward 7 October 2024

HMRC has updated its guidance on VAT refunds for public bodies.

Certain public bodies (known as “Section 33 bodies” per The VAT Act 1994, section 33) such as; local authorities, fire and rescue authorities, police authorities and the BBC which carry on non-business activities are nevertheless entitled to input tax recovery despite the normal non-business rules. Similar rules apply to certain museums and galleries.

The method for doing this is not on VAT returns, but by submission of Form VAT126 (for entities not registered for VAT). This form has been updated so that it can be completed and submitted digitally for first claims.

VAT Notice 998 (VAT Refund Scheme for museums and galleries) and VAT Notice 749 (Local authorities and similar bodies) have also been updated to set out how to claim VAT refunds.

VAT: Pre-registration activities

By Marcus Ward 2 October 2024

This article looks at the period of activity before a business VAT registers: How to deal with sales and what input tax may be recovered.

VAT Registration

The obligation to VAT register here and the pros and cons of voluntary registration here.

Sales

Between application and receiving a VAT number:

During the wait, a business cannot charge or show VAT on its invoices until it receives a VAT number. However, it will still be required to pay the VAT to HMRC for this period. Usually, a business will increase its prices to allow for this and tell its customers why. Once a VAT number is received, the business can then reissue the relevant invoices showing VAT.

Purchases

Purchases made before registration:

Only the legal entity which actually purchased the goods or services and has applied to VAT register is entitled to input tax recovery.

There are time limits for backdating claims for input tax incurred before registration. These are:

four years for goods on hand at the time of the Effective Date of Registration (EDR), or that were used to make other goods on hand at the EDR. This includes both stock for resale or fixed assets
six months for services

Input tax can only be reclaimed if the pre-registration expenditure related to the taxable supplies made, or to be made, by the newly VAT registered business (whether these supplies are subject to subsequent output tax or whether they were made pre-registration but would have been taxable if the business was VAT registered).

The only VAT return on which such input tax is recoverable is the first.

Tip

When a business applies for registration, there is an opportunity to backdate the EDR. The provision for taxpayers to negotiate an earlier date is contained in The VAT Act 1994, Schedule 1, 9. This option should be considered if there is additional VAT that would become recoverable. This will mean that the first return will be longer than the normal quarterly or monthly returns.

The limit for backdating EDR is four years.

Irrecoverable VAT

Input tax cannot be reclaimed on:

goods that have been completely consumed before registration, eg; fuel, electricity or gas
goods that have been sold before registration
goods or services which relate to exempt supplies made, or to be made, by the registered business (see below)
services which related to goods disposed of before registration

NB: Businesses are not required to reduce the VAT deducted in respect of pre-registration use of fixed assets. Eg; input tax incurred on a van purchased three years before registration and used before and after registration would be recoverable in full.

The “usual” rules for input tax also apply to pre-registration claims; that is, some VAT is never reclaimable, see here.

Specific circumstances

There are special rules for partially exempt businesses and for businesses that have non-business income and for the purchase of certain items (see below) covered by the Capital Goods Scheme (CGS).

Included in the CGS are:

taxable land, property purchases of £250,000 or over
refurbishment or civil engineering works costing £250,000 or over
computer hardware costing £50,000 or over (single items, not networks)
aircraft, ships, and other vessels costing £50,000 or more

NB: The partial exemption de minimis limit does not apply to input tax incurred pre-registration.

Pre-incorporation

A limited company cannot register for VAT until it is formally incorporated. Goods or services may have been supplied to the directors or employees setting up the company before then.

A company can claim input tax on those goods and services if the it relates directly to the taxable business to be carried on by it following incorporation and registration for VAT. The six-month (services) four-year (goods) limits also apply to pre-incorporation claims.

Documentation

Any claim must be supported by a valid VAT invoice for each item. If this documentation is not available, there is a possibility that HMRC will accept alternative evidence.

Legislation

The right to deduct input tax as above is covered by The VAT general Regulations 1995, reg 111.

UK e-invoicing initiative and consultation

By Marcus Ward 30 September 2024

The future for e-invoicing

On 23 September 2024, the Government announced plans to encourage an increased use of e-invoicing among businesses and government departments to reduce administrative burdens, enhance cash flow, boost productivity, and minimise tax filing errors.

E-invoicing is a long-accepted form of commercial data exchange and is becoming important for regulatory authorities.

HMRC will initiate a consultation process to gather feedback on fostering investment in e-invoicing. The consultation date has not yet been specified, but we recommend that businesses should prepare for potential mandatory e-invoicing. This consultation will seek input from businesses on how HMRC can support investment in and uptake of e-invoicing.

The initiative reflects global trend towards e-invoicing and HMRC’s focus on digital transformation.

Further information on, and a glossary for, e-invoicing here.

Change of bank details for HMRC

By Marcus Ward 30 September 2024

HMRC has announced that its bank accounts have changed

The bank details for the following tax regimes have changed:

Plastic Packaging Tax
Biofuels or gas for road use — Fuel Duty
Economic Crime Levy
Soft Drinks Industry Levy
Trust Registration Penalty

These details have changed to allow HMRC to future proof our accounts in the event of migrating its banking services to another bank. The new bank details are now permanent and will not change.

All taxpayers who are making payments for the above-mentioned regimes by Faster Payments, Bacs or CHAPS should use the following details:

sort code — 08 32 10
account number — 12529599
account name — HMRC General Business Tax Receipts

Taxpayers who have this banking information stored on their banking apps will need to change the details to reflect the new sort code, account number and account name.

Any customers who pay by Direct Debit do not need to take any action as the changes will be made automatically.