The Irish Supreme Court ruled that the bread sold by the restaurant chain Subway was too sweet to be classified as bread and that the high sugar content meant that it could not be zero rated.
Category Archives: Compliance
VAT: Museums and galleries – updated guidance
The HMRC guidance for galleries and museums Notice 998 has been updated to reflect changes to the VAT (Refund of Tax to Museums and Galleries) (Amendment) Order 2024.
The Notice applies to those museums or galleries that offer free admission to the public and which are eligible for refunds of VAT under the museums and galleries VAT Refund Scheme. It can be used to find out which museums or galleries offering free admission are eligible for refunds under the scheme. The VAT Act 1994, section 33A, sets out how the scheme works, but generally:
Museums and galleries offering free access are not in business in relation to this activity (their supplies are “non-business“). They may, of course, have other activities that in their own right which are business activities, eg; catering, sales of books and gifts and exhibitions for which there is a charge.
Normally, it is not possible to recover the VAT incurred on goods and services purchased to support non-business activities. Thus, VAT incurred in connection with the free admission of the public is not normally recoverable and represents a cost to these organisations.
However, HMRC will reimburse this otherwise irrecoverable VAT. For this to be the case, the provisions of section 33A of the VAT Act 1994 must apply, and the museum or gallery must be named in an Order made by HM Treasury.
HMRC publish annual report and accounts 2023 to 2024
HMRC has publish its latest report and accounts.
Headlines
- £843.4 billion total tax revenues collected which is a 3.6% increase on 2022 to 2023
- VAT – gross revenue was £277.7 billion, less: revenue repayable of £112.2 billion – net revenue was £165.5 billion
- £41.8 billion tax “protected” by tackling avoidance, evasion and error – including £13.7 billion by promoting compliance and preventing non-compliance before it occurs
- 83.1% taxpayers satisfied or very satisfied with its online services
- HMRC app received 88.5 million logins by 3.8 million unique users, a growth rate of over 64% compared with the previous year
- 40 tax avoidance schemes, 39 promoters and 24 connected persons publicly named
- 430 new criminal cases and more than 10,200 civil investigations into suspected fraud
- 3,629 anti-money laundering interventions
- 1.5 billion suspicious or malicious events blocked by cyber security team every month
- £1.9 billion tax revenue protected through enhanced repayment and identity verification controls
- “Customer” satisfaction has decreased to 78.6% from the previous period and missed the low 80% target
- The percentage of customer correspondence cleared within 15 working was 76.3% and again, the 80% target was missed
- The telephony adviser attempts handled was a very poor 66.4% and significantly missed the 85% target
- Total debt balance reduced to £44.6 billion from £45.9 billion at the end 2023.
- Tax debt as a proportion of total tax revenue fell from 5.4% in 2023, to 5.1% in 2024
- Tax losses were £5.6 billion, of which £5.0 billion is write-offs and the remainder remissions. ‘Remissions’ is a term used describe money owed to HMRC which it has decided not to pursue
- Overall service levels on telephony and correspondence remained below service standards and it was recognised that this “caused real difficulties for some customers and agents”
- Individuals’ rating of trust in HMRC has decreased since 2022 and it has continued to decrease amongst agents and small businesses since 2021
You don’t have to read all 324 pages now!
VAT: HMRC updated interest rates.
On 1 August 2024, the Bank of England reduced the rate from 5.25% to 5%. HMRC interest rates are linked to the Bank of England base rate, and consequently, it has published updated its interest rate tables which recognises the .25% decrease. This interest applies to late VAT payments and repayments.
These changes will come into effect on:
- 12 August 2024 for quarterly instalment payments
- 20 August 2024 for non-quarterly instalments payments.
What VAT CAN’T you claim?
Blocked VAT claims – an overview
- No supporting evidence
In most cases this evidence will be an invoice (or as the rules state “a proper tax invoice”) although it may be import, self-billing or other documentation in specific circumstances. A claim is invalid without the correct paperwork. HMRC mayaccept alternative evidence, however, they are not duty bound to do so (and rarely do unless the amount is minimal). So ensure that you always obtain and retain the correct documentation.
- Incorrect supporting evidence
Usually this is an invalid invoice, or using a delivery note/statement/pro forma in place of a proper tax invoice. To support a claim an invoice must show all the information set out in the legislation. HMRC are within their rights to disallow a claim if any of the details are missing.
- Input tax relating to exempt supplies
Broadly speaking, if a business incurs VAT in respect of exempt supplies it cannot recover it. If a business makes only exempt supplies it cannot even register for VAT. There is a certain easement called de minimis which provide for recovery if the input tax is below certain prescribed limits. Input tax which relates to both exempt and taxable activities must be apportioned. More details of partial exemption may be found here.
- Input tax relating to non-business activities
If a charity or NFP entity incurs input tax in connection with non-business activities this cannot be recovered and there is no de minimis relief. Input tax which relates to both business and non-business activities must be apportioned. Business versus non-business apportionment must be carried out first and then any partial exemption calculation for the business element if appropriate. More details here
- Time barred
If input tax is not reclaimed within four years of it being incurred, the capping provisions apply and any claim will be rejected by HMRC.
- VAT incurred on business entertainment
This is always irrecoverable unless the client or customer being entertained belongs overseas. The input tax incurred on staff entertainment costs is however recoverable. A flowchart for recoverability in this area here.
- Car purchase
In most cases the VAT incurred on the purchase of a car is blocked. The only exceptions are for when the car; is part of the stock in trade of a motor manufacturer or dealer, or is used primarily for the purposes of taxi hire; self-drive hire or driving instruction; or is used exclusively for a business purpose and is not made available for private use. This last category is notoriously difficult to prove to HMRC and the evidence to support this must be very good.
- Car leasing
If a business leases a car for business purposes it will normally be unable to recover 50% of the VAT charged. The 50% block is to cover the private use of the car.
- Fuel costs
The element of fuel costs used for personal use is blocked. There are three ways to treat input tax on fuel:
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- claim 100% of the VAT charged. This is possible if fuel is bought for business motoring only or for both business and private motoring and the appropriate road fuel scale charge is applied on the value of supplies of fuel for private use
- use detailed mileage records to separate business mileage from private mileage and only claim for the business element
- claim no input tax
- A business using certain schemes
For instance, a business using the Flat Rate Scheme cannot recover input tax except for certain large capital purchases, also there are certain blocks for recovery on for Tour Operators’ Margin Scheme (TOMS) users
- VAT charged in error
Even if a business obtains an invoice purporting to show a VAT amount, this cannot be recovered if the VAT was charged in error; either completely inappropriately or at the wrong rate. A business’ recourse is with the supplier and not HMRC.
- Goods and services not used for a business
Even if a business has an invoice addressed to it and the services or goods are paid for by the business, the input tax on the purchase is blocked if the supply is not for that business’ use. This may be because the purchase is for personal use, or by another business or for purposes not related to the claimant business.
- VAT paid on goods and services obtained before VAT registration
This is not input tax and therefore is not claimable. However, there are exceptions for goods on hand at registration and which were purchased within four years of registration, and services received within six months of registration if certain conditions are met.
- VAT incurred by property developers
Input tax incurred on certain articles that are installed in buildings which are sold or leased at the zero rate is blocked.
- Second hand goods
Goods sold to a business under one of the VAT second-hand schemes will not show a separate VAT charge and no input tax is recoverable on these goods.
- Transfer of a going concern (TOGC)
Assets of a business transferred to you as a going concern are not deemed to be a supply for VAT purposes and consequently, there is no VAT chargeable and therefore no input tax to recover.
- Disbursements
A business cannot reclaim VAT when it pays for goods or services to be supplied directly to its client. However, in this situation the VAT may be claimable by the client if they are VAT registered. For more on disbursements see here.
- VAT incurred overseas
A business cannot reclaim VAT charged on goods or services that it has bought from suppliers in other EU States. Only UK VAT may be claimed on a UK VAT return. There is however, a mechanism available to claim this VAT back from the relevant authorities in those States. Details here. However, in most cases, supplies received from overseas suppliers are VAT free, so it is usually worth checking whether any VAT has been charged correctly.
- Business assets of £50,000 and more
There are special rules for reclaiming input tax using the Capital Goods Scheme, which means a business must spread the initial VAT claimed over a number of years.
VAT: Carousel fraud – How to recognise it and how to avoid been caught in it
VAT carousel fraud, also known as missing trader fraud or missing trader intra-community (MTIC) fraud, is a complex and highly sophisticated process used by organised criminals which involves defrauding governments of money that should be paid in VAT. It involves a series of transactions where goods are repeatedly bought and sold across borders, with the criminal acquiring goods free of VAT (exports of goods are tax free) and then reselling them with VAT added. The fraudster then does not pay output tax to the relevant authority, usually disappearing or closing the business without doing so. It mainly takes place in Europe, but also increasingly in South East Asia.
Round and round
If the goods are not sold to consumers (B2C) but rather, the transactions pass through a series of businesses. To perpetuate a carousel fraud, companies often create a number of sham shell companies to conceal the nature of the transactions in a complex web. The shell companies continue to trade with each other, and the transactions go round and round like a carousel. This can be almost endless. It is possible for the same goods to be traded many times between companies within the carousel fraud scheme network. Often, these transactions do not actually occur – the goods do not actually move from one party to another, but false invoices are issued.
It is common for these criminals to use the fraudulent money they have illegitimately obtained from other large scale illegal activities.
Innocent participants
Unfortunately, carousel fraud can involve innocent businesses. This often mean that these businesses suffer a VAT cost because HMRC will refuse to repay an input tax claim as the matching output tax was not paid by the missing trader. HMRC do this on the basis that the claimant knew, or should have known, that (s)he was involved in a VAT fraud (so perhaps not always so innocent).
Refusal to repay an input tax claim
This option is available to governments using the “Kittel” principle. This refers to a Court of Justice of the European Union (CJEU) case – Axel Kittel & Recolta Recycling SPRL (C-439/04 and C-440/04) where it was held a taxable person must forego his right to reclaim input tax where “it is ascertained, having regard to objective factors, that the taxable person knew or should have known that, by his purchase, he was participating in a transaction connected with fraudulent evasion of VAT”.
The right of input tax deduction may also be denied where the taxpayer could/should have guessed that their transactions involved VAT fraud.
Due diligence
It is crucial that businesses carry out comprehensive due diligence/risk assessment to avoid buying goods that have been subject to carousel fraud anywhere along the supply chain. It is not enough to avoid a refusal to repay input tax to say to HMRC that a business just “didn’t know” about a previous fraud. The scope of verification of a transaction will depend on its size, value, and the type of business, eg; whether it is a new or existing business partner. Transactions with regular suppliers should also be verified, although there should be be a lower risk of VAT fraud.
HMRC sets out in its internal manuals guidance on due diligence and risk assessment which is helpful. The following quote sets out the authorities’ overview:
“The important thing to remember is that merely making enquiries is not enough. The taxable person must take appropriate action based on the results of those enquiries. Therefore, for example, if the taxable person has undertaken effective due diligence/risk assessment on its supplier and that due diligence/risk assessment shows one or more of the following results in relation to the supplier:
- only been trading for a very short period of time,
- managed to achieve a large income in that short period of time,
- a poor credit rating,
- returned only partly completed application or trading forms,
- contacted the taxable person out-of-the-blue etc,
and yet the taxable person still goes ahead and trades without making any further enquiries, this could lead to the conclusion that the due diligence/risk assessment was casually undertaken and of no value”.
Carousel VAT fraud investigations
HMRC carries out serious VAT investigations via the procedures set out in Public Notice 160 in cases where they have reason to believe dishonest conduct has taken place. These are often cases where larger amounts of VAT are involved and/or where HMRC suspect fraudulent behaviour. If a business is under investigation for carousel VAT fraud it will receive a letter from HMRC. The consequences of a carousel VAT fraud conviction are serious, and a recipient of such a letter is strongly advised to contact a specialist carousel fraud barrister immediately to provide expert legal guidance.
The Reverse charge (RC) mechanism
Governments take the threat of carousel VAT fraud very seriously and are continually implementing new measures to deter the schemes. The UK has introduced changes to the way that VAT is charged on mobile telephones, computer chips and emissions allowances to help prevent crime (it was common to use these goods and services in carousel fraud).
The RC mechanism requires the purchaser, rather than the supplier, to account for VAT on the supply via a self-supply. Therefore, the supplier does not collect VAT, so it cannot defraud the government.
The future
VAT policy is consistently updated, so businesses must be aware of these changes to ensure compliance. Technology is being progressively used to fight fraud, and again, businesses need to be aware of this and the obligation to upgrade their own technology to comply with, say; real time reporting, eInvoicing, and other innovations. Compliance technology is increasingly employed to detect inconsistent transactions which means that a business must be compliant, because if it isn’t it will be easier for the tax authorities to detect. Even if non-compliance is unintentional the exposure to penalties and interest is increased.
What is a VAT Loan? – Business finance
Although, ideally, a business puts aside the VAT it collects from its customers (output tax charged) to pay its monthly, quarterly, or annual VAT bill, cashflow management can be difficult, especially for small or seasonal businesses with limited cash reserves. There are some things a business can do to mitigate the impact of VAT and one of these is a VAT loan.
Failure to pay VAT on time can lead to penalties and interest which could add to a business’ financial woes.
A VAT loan is a product which provides a short-term financing option to pay VAT on time. The loan covers the VAT amount due during each payment period, which allows a business to spread the VAT cost over a longer time instead of paying it up front in one hit.
Furthermore, there is no need to use up an existing bank facility. A VAT Loan gives a business an alternate financial option to utilise.
How it works
A business can apply for a VAT loan from a bank or other lender. It is usually deemed to be a secured business loan so assets must be put up as security. Once approved, the lender will pay it directly to HMRC. Repayment periods are typically between three months and a year.
The whole process does not usually take long as it is designed to be more streamlined than a standard loan. The money is usually paid to HMRC within days. Evidence of turnover and good credit history will be required, along with usual proof of ID and bank statements etc. Sometimes additional arrangement charges are made along with the interest.
Eligibility
A business must:
- be VAT registered
- have been trading for over 12 months
- have a taxable turnover exceeding £90,000
VAT bridging loans
There are generally two types of VAT loan: a standard VAT loan and VAT bridging loans. VAT bridging loans differ in that they are specifically a short-term option to assist a business bridge its cashflow gap between making a VAT payment, eg; for a significant purchase, usually property, and recovering this amount from HMRC as a repayment, which can take months (depending when the purchase was made in a VAT quarter and how quickly HMRC make the refund).
Finding a lender
It is usually advisable to look for a lender who offers VAT loans specifically and compare interest rates, terms, fees etc.
A quick Google produces many VAT loan products to compare.
Downsides
As VAT loans are short term, the interest rates are often higher than other business loans. Additionally, the loan repayments and fees increase strains on a business’ financial commitments.
This is a brief overview on the mechanism and does not constitute financial advice. Businesses should seek their own financial counsel. Before signing any loan agreements, you should seek independent financial advice to better understand if a VAT loan you are considering is the right one for you.
VAT: Tax point of telecommunications – The Lycamobile case
Latest from the courts
In the Lycamobile UK Ltd First-Tier Tribunal (FTT) case, the issue was whether VAT was chargeable on the supply of a “Plan Bundle” at the time when it was sold and by reference to the whole of the consideration that was paid for it, or whether VAT was instead chargeable only when, and only to the extent that, the allowances in the Plan Bundle were actually used. The time of supply (tax point) was important because not only would it dictate when output tax was due, but more importantly here, if the appeal succeeded, there would be no supply of the element of the bundle which was not used, so no output tax would be due on it.
Background
The Plan Bundles comprised rights to future telecommunication services; telephone calls, text messages and data (together, “Allowances”). There were hundreds of different Plan Bundles sold by the Appellant and the precise composition of those Plan Bundles varied.
Contentions
Lycamobile considered that that the services contained within each Plan Bundle were supplied only as and when the Allowances were used, so that the consideration which was received for each Plan Bundle would be recognised for VAT purposes only to the extent that the Plan Bundle was actually used. In the alternative, these supplies could be considered as multi-purpose vouchers such that output tax was not due when they were issued, but when the service was used. Very briefly, the contention was that it was possible that not all of the use would be standard rated in the UK.
Unsurprisingly, HMRC argued that that those services were supplied when the relevant Plan Bundle was sold (up-front) and output tax was due on the amount paid, regardless of usage.
Decision
The Tribunal placed emphasis on “the legal and economic context” and “the purpose of the customers in paying their consideration”.
It decided that the terms of the Plan Bundle created a legal relationship between Lycamobile and the customer. The Bundle was itself the provision of telecommunication services when sold. The customers were aware that they were entitled to use their Allowances and could decide whether to, or not. As a consequence, consumption was aligned with payment and created a tax point at the time of that payment. There was a direct link between those services and the consideration paid by the customer.
The Tribunal also considered the vouchers point. There were significant changes to the rules for Face Value Vouchers on 1 January 2019 (the supplies spanned this date), but the FTT found that the Plan Bundles were not monetary entitlements for future services under either set of rules, so the tax point rules for vouchers did not apply here.
The appeal was dismissed and HMRC assessments totalling over £51 million were upheld.
Commentary
Not an unexpected result, but an illustration of the importance of; tax points, legal and economic realities, and what customers think they are paying for. All important aspects in analysing what is being provided, and when.
How to pay duties and VAT on imports – updated guidance
HMRC has updated its guidance on how to pay Customs Duty, Excise Duties and VAT on imports from outside the UK.
The document covers, inter alia:
- using a duty deferment account
- setting up cash accounting
- use of a general guarantee account
- authorising someone to use your deferment, cash or guarantee account
- making immediate payments
- using postponed VAT accounting
- obtaining an import VAT certificate
The update includes the removal of references to the Customs Handling of Import and Export Freight (CHIEF) system, as all import declarations must now be made through the Customs Declaration Service.
VAT: Fulfilment House Due Diligence Scheme registered businesses list updated
HMRC has updated its tool to check if businesses that stores third party goods in the UK is registered with the Fulfilment House Due Diligence Scheme for traders based outside of the UK.
The scheme applies to a business which stores any goods that:
- were imported from a country outside the UK
- are owned by, or stored on behalf of, someone established outside the UK
- are being offered for sale and have not been sold in the UK before
If the scheme applies, failure to apply means a business:
- will not be allowed to trade as a fulfilment business
- will risk a £10,000 penalty and a criminal conviction
To apply
Apply online for the Fulfilment House Due Diligence Scheme.
A business cannot use an agent to apply on its behalf.