Category Archives: Disputes

VAT: More on agent/principal – Latest from the courts

By Marcus Ward 3 July 2017

Lowcost Holidays Ltd

There is a very important distinction in VAT terms between agent and principal as it dictates whether output tax is due on the entire amount received by a “middle-man” or just the amount which the middle-man retains (usually a commission). It is common for the relationship between parties to be open to interpretation and thus create VAT uncertainty in many transactions.

It appears to me that this uncertainty has increased as a result of the growing amount of on-line sales and different parties being involved in a single sale.

By way of background, I looked at this issue at the end of last year here

The case

On a similar theme, the First Tier Tribunal (FTT) case of Lowcost Holidays Ltd the issue was whether the Tour Operators’ Margin Scheme (TOMS) applied to Lowcost’s activities.

Background

Lowcost was a travel agent offering holiday accommodation in ten other EU Member States, and other countries outside the EU, for the most part to customers based in the UK. The issue between the parties is whether Lowcost provided holiday accommodation to customers as a principal, dealing in its own name, under article 306 of Directive 2006/112, the Principal VAT Directive and therefore came within TOMS or whether it acted solely as an intermediary or agent (in which case TOMS would not apply and the general Place Of Supply rules apply).

Decision

The FTT found in favour of the appellant. HMRC had argued that Lowcost was buying and selling travel and accommodation as principal, however, the FTT decided that the contracts which Lowcost entered into with; hotels, transport providers and holidaymakers were clear that the arrangement was for the appellant acting as agent. The helpful Supreme Court case of SecretHotels2 (which I commented on here) was applied in this case. The main point being that the nature of a supply is to be determined by the construction of the contract – unless it is a ‘sham’ and great weight was given to the terms of Lowcost’s contracts rather than what HMRC often call the “economic reality”. Specifically highlighted to the court was the fact that Lowcost set the prices for the holidays, which HMRC pointed out would be inconsistent with an agency arrangement. The FTT decided that this was outweighed by the actual terms of the contracts.

Consequently, as Lowcost acted as agent (for the providers of the services not the holidaymaker) the Place Of Supply was determined by reference to where the supply was received under the general rule. In this case, this is VAT free when the services were received by principals located outside the UK.

As with all TOMS and agent/principal matters it really does pay to obtain professional advice.

VAT – Extent of healthcare exemption. Latest from the courts

By Marcus Ward 26 June 2017

In the First Tier Tribunal (FTT) the case of The Learning Centre (Romford) Ltd (TLC) the exemption for healthcare was considered.

Background

The appellant provides day-care to vulnerable adults with learning difficulties (referred to as students). Both directors have relevant qualifications and a great deal of experience in providing the care which the company provides. The taxpayer provided their students with education, activities, and entertainment during working hours Monday to Friday, providing meals and, where required, assistance with eating, administering medication, and personal care. They also provided the transport to bring the students to and from their homes and the facility. The education provided was geared towards teaching the students independent living.

While HMRC accepted that what the appellant provided was ‘welfare services’ within the meaning of the Value Added Tax Act 1994, Schedule 9, Group 7 Item 9 and Note (6), exemption applied only where it was supplied by a specified type of entity. Those entities are:

1) A charity

2) A state-regulated private welfare institution or agency, or

3) A public body.

The appellant was not a charity: it was a company which ran the business for profit. As a privately owned company, it was not a public body either. The only possible category for the appellant was ‘a state-regulated private welfare institution or agency’ and HMRC did not accept that the appellant fell within that category. Day-care is not regulated in England and as a consequence HMRC decided it is not covered by the exemption.

Decision

The FTT found for the appellant. It was noted that day-care is regulated in Scotland and it would be a breach of fiscal neutrality if the VAT treatment of day-care was different North and South of the border. TLC could rely on the direct effect of the Principal VAT Directive and, as a consequence, could treat its supplies as exempt and deregister from VAT.

Commentary

It was a logical decision, however, logic does not always play a part in VAT…. It sought to level a playing field that was far from that. If the decision had been in favour of HMRC the VAT treatment would have been different if the supply had been made:

in other areas of the UK
by the Local Authority
by a charity

contrary to EC law.

There are many businesses which provide similar services and it is imperative that they review their VAT position immediately. We can assist with this.

VAT: Is the card game bridge a sport?

By Marcus Ward 21 June 2017

Latest from the courts: Advocate General’s (AG) opinion* on the English Bridge Union (EBU) case.

Certain supplies of services closely connected to sport are exempt from VAT. Consequently the EBU (a non‐profit making membership‐ funded organisation committed to promoting the game of duplicate bridge) appealed to the ECJ wanting certain fees paid to it to be exempt. HMRC consider that contract bridge is not a sport so that output tax was due on the supply. This view was supported by the First Tier and Upper Tribunals. So, the simple question is: Is bridge a sport? The ECJ hearing has come about due to a referral from the British courts in reference to how it should be applied to bridge.

The AG has looked at how the term “sport” should be defined. As a starting point, it is clear that games such as football, cricket, tennis and squash are sport. However, this does not mean that activities which are less strenuous cannot be a sport, and the examples of archery and badminton were given. The AG was also of the view that sport does not need to include any physical element, meaning that any activity which is characterised by:

competition
an effort to overcome a challenge or obstacle
results in physical or mental wellbeing

may qualify as a sport.

In connection with contract bridge; as a card game it:

is dependent on skill and training rather than luck
requires considerable mental effort and training to compete at an international level
is recognised by the International Olympic Committee as a sport

such that the AG concluded that bridge can indeed be defined as a sport.

This, if followed by the ECJ, means that the EBU will be due a refund of output tax declared on competition entry fees charged to its members.

The EBU has always maintained that bridge is a sport and point to the UK Charity Commission which recognises bridge as a sport. It adopted Parliament’s most recent definition in the Charities Act, updated by Parliament in 2011, which specifically included Mind Sports in the definition of ‘sport’, stating that sports are “activities which promote health or wellbeing through physical or mental skill or exertion”. Additionally, bridge is seen as an excellent way of improving mental acuity and delaying the onset of dementia, and the social and partnership aspects of bridge are of great benefit to those who may otherwise become isolated.

We now await the court’s decision on whether one needs to wear shorts and get sweaty to be participating in sport.

* The most important work performed by the Advocates General is to deliver a written Opinion, named “reasoned submission”. The role of the Advocate General is to propose an independent legal solution. It is important to note that the Court is not obligated to follow the Opinion delivered by the Advocate General. Even though the Opinion does not bind the Court it has an impact on the decision in many cases, and in fact, in most cases the ECJ follows it.

VAT – Are overpayments subject to output tax?

By Marcus Ward 19 June 2017

This was the question considered by the Upper Tribunal (UT) in the case of National Car Parks Limited

Latest from the courts

We’ve all been there. We’ve found a NCP pay and display car park and want to park for one hour. We find a free space and go to the pay and display ticket machine. In this example, the prices stated on the tariff board next to the pay and display ticket machine are: Parking for up to one hour – £1.40. Parking for up to three hours – £2.10. The pay and display ticket machine states that change is not given but overpayments are accepted.

Guess what? As usual, we find that we don’t have the right money and only have a pound and a fifty pence piece, so we have to put them both in the machine. The machine meter records the coins as they are fed into the machine, starting with the pound coin. When the fifty pence piece has been inserted and accepted by the machine, the machine flashes up ‘press green button for ticket’ which we customer do. The amount paid is printed on her ticket, as is the expiry time of one hour later and we wander off to attend our business.

So, is VAT due on the overpayment of 10p?

The First Tier Tribunal (FTT) said “yes”. It held that the excess payments made by the customer to NCP were not voluntary because the customer was required to pay at least the amount specified in order to park their vehicle and, if the customer did not have the correct change, the customer was required to pay an additional amount in order to obtain the right to park. The only sense in which the payment could be said to be “voluntary” is that the customer could decide not to buy a ticket which would mean not parking the car and having to go elsewhere. The taxpayer then appealed to the UT.

Law

Article 2(1)(c) of the Principal VAT Directive (PVD) provides that supplies of services for consideration within the territory of a Member State by a taxable person acting as such are subject to VAT. Article 73 of the PVD provides: “In respect of the supply of goods or services… the taxable amount shall include everything which constitutes consideration obtained or to be obtained by the supplier, in return for the supply, from the customer or a third party, including subsidies directly linked to the price of the supply.” The provisions of the PVD have been implemented in UK law by the Value Added Tax Act 1994. Section 5(2)(a) of the VAT Act 1994 defines ‘supply’ to include all forms of supply but not anything done otherwise than for a consideration and section 19(4) provides: “Where a supply of any goods or services is not the only matter to which a consideration in money relates, the supply shall be deemed to be for such part of the consideration as is properly attributable to it.”

Decision

The UT agreed with the FTT, and so the taxpayer’s appeal was dismissed. A distinction was made between these overpayments and optional payments such as tips (which are VAT free). It was stated that the PVD seeks to identify what consideration was received by NCP, not whether the customer could have obtained the same service for less. NCP retained the £1.50 in return for providing the car parking and this was consequently the value of the service provided.

Commentary

We have recently dealt with a number of cases which dealt with the topic of valuation and have been successful in obtaining a refund of overpaid VAT. Unfortunately for the appellant in this case, it seems that there was little chance of success and they didn’t get to keep all of value of the overpayments. All those 10ps add up…

VAT: Latest from the courts – are services by a CIC business?

By Marcus Ward 19 May 2017

This case considers the perpetual difficulty of deciding whether activities represent a business… or not.

In the First Tier Tribunal (FTT) case of Healthwatch Hampshire CIC (HH) here the issue was whether HH made taxable supplies by way of business to a Local Authority – Hampshire County Council (HCC)

Background

Under certain prescribed new arrangements, local authorities, including HCC, were required to enter into contractual arrangements with a body corporate, which was required to be a social enterprise and a Community Interest Company (CIC) for the provision of various services.

These services comprised, inter alia:

Promoting, and supporting, the involvement of local people in the commissioning, provision and scrutiny of local care services
Information, signposting and advice
Advocacy services

HH is a company limited by guarantee but is not a charity. It is however non-profit making in its objectives, and any profits which do arise can only be spent for the benefit of the local community. HH was formed by a consortium comprising; three organisations all of which are charities. These charities effectively carried out the work via a sub-contract arrangement and charged HH with the addition of VAT. The issue is the VAT treatment of HH’s charge to HCC. Was this a business activity on which VAT is charged? Or, as HMRC contended, was the money paid to HH was outside the scope of VAT because it represented something which was not consideration for taxable supplies and thus non-business.

This was important as if the services provided by the CIC are deemed to be non-business, the VAT charged to HH by the three consortium members would represent an absolute VAT cost as it could not be VAT registered and therefore not able to recover the input tax.

Technical Note

Because of the special VAT rules which apply to local authorities, input tax incurred by them may be recovered if it relates to their non-business activities (their statutory activities). This is via VAT Act 1994, s33 and this legislation turns “normal” VAT rules on their head. In this particular case, if HH charged HCC VAT, HCC would be in a position to recover it meaning that VAT would be neutral for all parties.

Decision

The matter of whether HH’s activities amounted to a business was considered with significant references to the Longridge On The Thames. Case commentary here

As a starting point, the judge commented on previous CJEU cases that it “…would seem to be a clear demonstration that simply because an activity is normally carried on by the state does not automatically mean that, per se, it cannot be economic activity”. It was also decided that “we have come to the conclusion that HH is not a body governed by public law.” So this strand of HMRC’s argument did not lead anywhere.

The court decided in the taxpayer’s favour; which appears to be common sense all round. The supplies were by way of business despite the arrangements having features which may not necessarily be found in a more commercial environment (including the fact that LAs were legally required to outsource certain of its functions) . Ultimately, consideration was flowing in both directions; HCC paid for supplies which it required and those were supplied by a third party such that VAT was properly chargeable. The fact that HCC met its statutory obligations in structuring transactions in this way did not preclude them being an economic activity.

Action

This case (and Longbridge) demonstrates that where charities, LAs, CICs, NFP entities and similar bodies are concerned, it is crucial to review all agreements from a VAT perspective. It is insufficient to assume the correct VAT treatment is how it is desired and slight differences in arrangements can, and do, produce different VAT outcomes. After Longbridge HMRC are looking more closely at similar arrangements (not limited to LAs) and we expect more of these types of cases to be heard in the future.

For more on the EC aspect of business/non-business please see here

VAT: Latest from the courts – Brockenhurst College

By Marcus Ward 19 May 2017

The Court of Justice of the European Union (CJEU) has released its decision in Brockenhurst College here

Unusually, it has gone against the Advocate General (AG) Kokott’s opinion (here) and concurs with previous decisions reached by the UK courts. This is good news for the taxpayer and other providers of educational services. The decision has been referred back to the Court of Appeal (CoA) for it to consider points such as the distortion of competition and the fulfilment of a separate function, however, it is likely that this will not affect the decision by the CJEU and HMRC’s appeal will be dismissed.

Background

The case considered two types of supply made by Brockenhurst College:

The supplies made from its restaurant, used for training chefs, restaurant managers and hospitality students. The claim was made on the basis that these were exempt supplies of education and not standard rated supplies of catering
Tickets for concerts and other live performances put on by students as part of their educational courses. These were similarly claimed to be exempt.

Students were enrolled in performing arts and catering and hospitality courses. As part of their course of study they were required to run a restaurant and stage live performances. Persons not enrolled on the relevant courses would pay for and attend these events. The services were usually supplied to a limited public including; parents, siblings, friends etc, and were supplied at a reduced cost as part of the practical element of the students’ education. The appellant argued that the experience was invaluable to their studies and should be regarded as ‘closely related’ to the principal supply of education. HMRC considered that the services in question were supplied to third parties in return for payment. Consequently, the services, whilst of benefit and practical experience to the students were separate VATable supplies made to third parties and the supplies cannot, therefore, be closely related to the supply of education to the student.

The First Tier Tribunal (FTT) concluded that the supplies in question were exempt as being closely linked to education because:

the College was an eligible body and so its principal supplies were exempt supplies of education
the supplies were integral and essential to those principal exempt supplies
the supplies were made at less than their cost
the supplies were not advertised to the general public. Instead, there was a database of local groups and individuals who might wish to attend the restaurant or performances
the supplies were not intended to create an additional source of income for the College

HMRC disagreed with the conclusion on the basis that the supplies were outside the education exemption because the students were not the beneficiaries of the supplies in question, but only benefitted from making them. HMRC appealed to the Upper Tribunal (UT).

The UT rejected HMRC’s argument and agreed with the FTT. It held that the supplies were closely related to the exempt supplies of education because they enabled the students to enjoy better education. The requirement in the domestic law for the supplies to be for the direct use of the student was met because they were of direct benefit to him.

HMRC subsequently appealed to the CoA which referred it to the CJEU.

The AG’s opinion was that closely related transactions are to be regarded as independent supplies to the principal supply, but do not include the supply of restaurant or training services supplied to third parties who are not themselves receiving the principal supply of training. The third parties pay for their own consumption (of either the catering or performance) and do not pay for the provision of education. It is very rare that the CJEU makes a decision that goes against the AG’s opinion.

CJEU Decision

The CJEU ruled that activities consisting of students of a higher education establishment supplying, for consideration and as part of their education, restaurant and entertainment services to third parties, may be regarded as supplies closely related to the principal supply of education and accordingly be exempt from VAT – provided that those services are essential to the students’ education and that their basic purpose is not to obtain additional income for that establishment by carrying out transactions which are in direct competition with those of commercial enterprises liable for VAT, which it is for the national court to determine.

Action

We understand that there are a number of cases stood behind Brockenhurst. Any other colleges, FE, universities or other eligible bodies carrying out similar activities to Brockenhurst need to consider their tax position. It is possible that retrospective claims may be made, depending on specific circumstances. Treating such supplies as exempt may also impact on a body’s partial exemption position and could create business/non-business implications. This may also impact on activities like hairdressing, motor maintenance and beauty treatments which colleges provide on a similar basis to the activities in this instant case.

We are happy to discuss the implications of this case with you.

VAT: Hardship applications

By Marcus Ward 15 May 2017

The recent case of Elbrook (Cash & Carry) Ltd here brings into focus the concept of “hardship”. In this case Elbrook successfully appealed to the Upper Tribunal (UT) against HMRC decision that the appellant should seek additional finance to pay the VAT said to be due rather than allow the case to be heard without that payment on the grounds of hardship.

So what is the process and what is “hardship”?

Background

If a taxpayer wishes to appeal to the Tribunal against a decision made by HMRC he must pay any disputed VAT before the case can be heard. The reason for this is understandable, without this rule taxpayers could make an appeal merely to delay the payment of tax and it is a difficult test to satisfy. However, if the applicant is able to demonstrate that payment of the VAT would cause financial hardship the rule may be waived by HMRC. This decision is an appealable matter. (NB: There is no requirement to pay interest or penalties before appealing but interest will continue to accumulate on an assessment). If a business believes that paying the amount it wishes to appeal against would cause it hardship it can ask HMRC not to collect the payment due until the appeal has been considered by the tribunal. It will need to:

write to the officer who made the original decision
explain how paying this amount before the appeal hearing would cause the business hardship

Depending on the size of the business, the explanation should include detailed evidence of its financial position and the impact of paying the disputed tax. I have seen many applications fail as a result of incomplete evidence, or general statements that are not evidenced by documentation. It pays to put a comprehensive application together and have this reviewed by an adviser before it is submitted.

HMRC will write and tell you whether or not they agree with delaying the payment. If they do not, the business can go to Tribunal

The law

The rules where applicable are set out in the VAT Act 1994, section 84(3)

“Where the appeal is against a decision… it shall not be entertained unless—

“(a) the amount which the Commissioners have determined to be payable as VAT has been paid or deposited; or

(b) on being satisfied that the appellant would otherwise suffer hardship the Commissioners agree or the tribunal decides that it should be entertained notwithstanding that that amount has not been so paid or deposited.”

Section 84(3) is intended to strike a balance between, on the one hand, the desire to prevent abuse of the appeal mechanism by employing it to delay payment of the disputed tax, and on the other to provide relief from the stricture of an appellant having to pay or deposit the disputed sum as the price for entering the appeal process, where to do so would cause hardship.

Hardship

Unhelpfully, this term is not defined in the legislation, nor in HMRC guidance. Consequently, we must look at case law. The following comments in the “original” Elbrook case – (2016) UKFTT 0191 (citing various previous cases, mainly “ToTel 1 and 2”) assist in understanding a hardship appeal:

Decisions on hardship should not stifle meritorious appeals
The test is one of capacity to pay without financial hardship, not just capacity to pay
The time at which the question is to be asked is the time of the hearing. This may be qualified if the appellant has put themselves in a current position of hardship deliberately (eg; by extraction of funds otherwise readily available from a company by way of dividend), or if there is significant delay on the part of the appellant
The question should be capable of decision promptly from readily available material
The enquiry should be directed to the ability of an appellant to pay from resources which are immediately or readily available (a business is not expected to seek funding outside its normal sources, nor sell assets)
The test is all or nothing. The ability to pay part of the VAT without hardship does not matter
If the Tribunal has fixed a cut off point for the admission of material, it is not an error of law for the Tribunal to ignore any later furnished evidence
The absence of contemporaneous accounting information is a justification for the Tribunal to conclude that it can place little if any weight on the appellant’s assertion that it is unable to afford to pay

The onus of proof in such cases is on the taxpayer to demonstrate hardship and without persuasive evidence such applications are unlikely to succeed.

Action

If your business, or your client’s business is the subject of a disputed decision, it should review its financial position and consider appealing against the decision even if paying the disputed amount would cause hardship. A business should not be put off appealing just because it would suffer hardship. We are able to assist in any review required.

VAT – Input tax recovery by holding companies

By Marcus Ward 10 May 2017

HMRC has published updated guidance on the recovery of input tax incurred by holding companies.

The guidance may be found here

It is important for holding companies and/or their advisers to read and understand the changes to the VAT recovery rules as costs are often significant. The changes are a result of various UK and CJEU case law which, in general, considered; the definition of economic activity, the direct and immediate link to taxable supplies made by a holding company, the contractual and payment arrangements and the use of the input tax.

Key Points

The guidance considers:

When a shareholding is used as part of an economic activity
Is the Holding Company the recipient of the supply?
Is the Holding Company undertaking economic activity for VAT purposes?
Shareholding acquired as a direct, continuous and necessary extension
Intention to make taxable supplies
Contingent consideration for management services
The effect of a holding company joining a VAT Group
Stewardship costs
Mixed economic and non-economic activities

Generally

In order to recover the relevant input tax, it must be incurred by a taxable person in the course of an economic activity and have a direct and immediate link to taxable supplies made by that person. This has been a long settled definition and the guidance seeks to apply these tests to holding companies. This means that, in order to receive a supply, a holding company must;

Contract for it
Use it
Be invoiced for it
Pay for it

Specifically

The publication considers previously disputed situations such as:

Services provided on contingent terms are not an economic activity because the necessary reciprocity between the obligations of the holding company and of the subsidiary is absent
How input tax incurred by holding companies which make taxable supplies to some subsidiaries and not to others and those that make taxable supplies and exempt loans should be dealt with
If a shareholding is acquired as a direct, continuous and necessary extension of a taxable economic activity of the holding company the input tax incurred on acquisition costs may be deducted even if management charges are not made
A holding company joining a VAT group cannot change a non-economic activity into an economic one or create an automatic link between holding company costs and the taxable outputs of other group members (For VAT to be deductible, the holding company must provide management services to the companies acquired in the VAT group, or earn interest from loans granted to them, and these must support taxable supplies made by the VAT group)
If a member of a VAT group incurs costs for non-economic (“business”) activity, the supplies are treated as being used by the representative member for non-economic purposes
Stewardship costs (group audit, legal, brand defence, bid defence etc) are costs for the purposes of the VAT group as a whole rather than for the purposes of the holding company activities

Action

The previous input tax position of holding companies should be reviewed in light of the above guidance and adjustments made as necessary. In some cases, the guidance may provide additional opportunities to reclaim input tax which was previously thought to be barred, and conversely, it is possible that VAT claimed as a result of the understanding of the position at the time may need to be repaid.

We can assist in reviewing the input tax position of holding companies and advising on structures for future intended acquisitions. The four year cap applies to such adjustments of input tax, so the clock is ticking for past transactions.

Image: company stamps

VAT Inspections …and how to survive them

By Marcus Ward 5 May 2017

VAT Inspections

The first point to make is that inspections are usually quite standard and routine and generally there is nothing to worry about. They are hardly enjoyable occasions, but with planning they can be made to go as smoothly as possible. As an inspector in my previous life, I am in a good position to look at the process from “both sides”. If you are concerned that the inspection is not routine (for any reason) please contact us immediately.

Background

Typically, the initial meeting will begin with an interview with the business owner (and/or adviser) to go through the basic facts. The inspector will seek to understand the business and how it operates and will usually assess the answers with specific tests (further tests will be applied to the records). After the interview the inspector(s) will examine the records and will usually have further queries on these. More often than not they will carry out; bank reconciliations, cash reconciliations, mark-up exercises, and often “references” which are the testing of transactions using information obtained from suppliers and customers. There are many other exercises that may be carried out depending on the type of business. Larger businesses have more regular inspections where one part of the business is looked at each meeting. The largest businesses have more or less perpetual inspections (as one would expect). The length of the inspection usually depends on:

Size of the business
Complexity of the business
Type of business (HMRC often target; cash businesses, the construction industry, property investment, partially exempt businesses, charities and NFP entities, cross-border transactions and financial services providers amongst others)
Compliance history
Associated/past businesses
Intelligence received
Errors found
Credibility of the business owner and records

The above measurements will also dictate how often a business is inspected.

More details on certain inspections/investigations here

The initial inspection may be followed by subsequent meetings if required, although HMRC state that they aim is to conclude matters at the time of the first meeting.

The inspection – how to prepare

Ensure that both the person who completes the VAT returns and the person who signs the VAT returns will be available for all of the day(s) selected
Arrange with your adviser, to be available to you and the inspector on the days of the inspection
Thoroughly review your VAT declarations and have ready, if relevant, any disclosures or other declarations you consider you need to make to HMRC at the start of the inspection (this should avoid penalties)
Have available all VAT returns and working papers for the last four years or the period since you were registered for VAT including:
- Annual accounts
- The VAT account and all related working papers
- All books and accounts, cashbook, petty cashbook, sales and purchases day books
- Sales and purchase invoices
- All supporting documentation, eg; contracts, correspondence, etc.
- Bank statements
- VAT certificate and certificate of registration
- Any other documentation relating to “taxable supplies”
Have available the full VAT correspondence files ensuring that they are fully up-to-date
Ensure you have full information on any; one-off, unusual or particularly high value transactions

The inspection – during the visit

Ask the inspector(s) to identify themselves by name on arrival (they carry identity cards)
Be polite, friendly and hospitable as far as possible
Make a desk or space available for them to work near to you – in this way you can oversee/overlook what they do
Only allow access to the files that form part of your “VAT Records”
Enable the VAT inspector, if they ask, to inspect your business premises (and have someone accompany them)
Be cautious with your answers to seemingly “innocent” questions and comments. If in doubt ask for time to check, or that the question be put in writing (never guess or provide an answer which you think HMRC want)
If something inconsistent is found (or suggested) ask for full details and take note of all of the documentation to which the query relates – this will enable you to provide necessary information to your adviser

The inspection – at the end of the visit

The inspector should:

Explain the main work they have done. For example which VAT accounting periods they reviewed
Explain any areas of concern they have, discuss them and seek to agree any future action that needs to be taken; and
Illustrate as fully as possible the size and reason for any adjustment to the VAT payable, and describe how the adjustment will be made

You should:

Obtain a summary of the inspection from HMRC (not always an easy task)
Ask the inspector to put all of HMRC’s concerns about your business to you in writing
Confirm with the inspector all time limits for providing additional information to HMRC

After the inspection

HMRC will write to you confirming:

Any issues identified
Further information required
Improvements required to record keeping
Any corrections required
Whether VAT has been over or under paid
Any penalties and interest which will be levied
Deadlines for payment.

On a final point: Never simply assume that the inspector is correct in his/her decision. It always pays to seek advice and challenge the decision where possible. Even if it is clear that an error has been made, mitigation may be possible.

We can provide a pre-inspection review as well as attending inspections if required. It is quite often the case that many HMRC enquiries may be nipped in the bud at the time of the inspection rather than becoming long drawn out sagas. We can also act as negotiator with HMRC and handle disputes on your behalf.

VAT evasion by non-EU online sellers

By Marcus Ward 26 April 2017

Investigation by The National Audit Office (NAO) into overseas sellers failing to charge VAT on online sales.

The NAO have investigated concerns that online sellers outside the EU are avoiding charging VAT. Full report here

The NAO has published the findings from its investigation into the concern that online sellers based outside the EU are not charging VAT on goods located in the UK when sold to UK customers. Online sales accounted for 14.5% of all UK retail sales in 2016, just over half of these were non-store sales, mainly through online marketplaces.

VAT rules require that all traders based outside the EU selling goods online to customers in the UK should charge VAT if their goods are already in the UK at the point of sale. In these cases, sellers should pay import VAT and customs duties when the goods are imported into the UK and charge their customers VAT on the final selling price. The sellers should also be registered with HMRC and are required to submit regular VAT returns.

Some of the key findings of the investigation are as follows:

HMRC estimates that online VAT fraud and error cost between £1 billion and £1.5 billion in lost tax revenue in 2015-16 but this estimate is subject to a high level of uncertainty. This estimate represents between 8% and 12% of the total VAT gap (The VAT gap is the difference between the amount of VAT that should, in theory, be collected by HMRC, against what is actually collected) of £12.2 billion in 2015-16. UK trader groups believe the problem is widespread, and that some of the biggest online sellers of particular products are not charging VAT. These estimates exclude wider impacts of this problem such as the distortion of the competitive market landscape.

HMRC recognised online VAT fraud and error as a priority in 2014, although the potential risk from online trading generally was raised before this. In 2013 the NAO reported that HMRC had not yet produced a comprehensive plan to react to the emerging threat to the VAT system posed by online trading. The report found HMRC had developed tools to identify internet-based traders and launched campaigns to encourage compliance but had shown less urgency in developing its operational response. Trader groups claim that online VAT fraud has been a problem as early as 2009, which has got significantly worse in the past five years. The Chartered Trading Standards Institute shares this view. Based on the emergence of the fulfilment house (a warehouse where goods can be stored before delivery to the customer) model, HMRC recognised online VAT fraud and error as one of its key risks in 2014 and began to increase resources in this area in 2015.

HMRC’s assessment is that online VAT losses are due to a range of non-compliant behaviours, but has not yet been able to assess how much is due to lack of awareness, error or deliberate fraud. Amazon and eBay consider that lack of awareness of the VAT rules is a major element of the problem. Amazon and eBay have focused on educating overseas sellers and providing tools to assist with VAT reporting and compliance. HMRC’s strategic threat assessment, carried out in 2014, concluded it was highly likely that both organised criminal groups based in the UK and overseas sellers in China were using fulfilment houses to facilitate the transit of undervalued or misclassified goods, or both, from China to the UK for sale online.

HMRC introduced new legal powers to tackle online VAT fraud and error in September 2016. The new joint and several liability power gives HMRC a new way to tackle suspected non-compliance, and is the first time any country has introduced such a power for this purpose. The new powers include making online marketplaces potentially jointly and severally liable for non-payment of VAT when HMRC has informed them of an issue with a seller, and they do not subsequently take appropriate action.

Conclusion

Online VAT fraud and error causes substantial losses to the UK Exchequer and undermines the competitiveness of UK businesses. Compliance with the VAT rules is a legal requirement. Not knowing about the rules does not excuse non-compliance. The UK trader groups who raised the issue report having experienced the impact of this problem through progressively fewer sales. They consider HMRC has been slow in reacting to the emerging problem of online VAT fraud and error and that there do not seem to be penalties of sufficient severity to act as a substantial deterrent.

It is too soon to conclude on the effectiveness and impact of HMRC’s new powers and whether the resources devoted by HMRC to using them match the scale of the problem. We recognise that HMRC must consider effort and efficiency in collecting VAT but its enforcement approach to online trade appears likely to continue the existing unfair advantage as perceived by UK trader groups. This is contrary to HMRC’s policy of encouraging voluntary compliance and it does not take account of the powerful effect that HMRC’s enforcement approach has on the operation of the online market as a whole. We intend to return to this subject in the future.

Further to the above, this article suggests that HMRC should have acted even earlier.