Category Archives: HMRC Publications

VAT: Mind the gap

By   28 March 2022
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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”.

Making Tax Digital for VAT – extra revenue calculated

By   21 March 2022
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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: Avoiding a Default Surcharge. Reasonable Excuse – Update

By   14 March 2022
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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:

  • “your partner or another close relative died shortly before the tax return or payment deadline
  • you had an unexpected stay in hospital that prevented you from dealing with your tax affairs
  • you had a serious or life-threatening illness
  • your computer or software failed just before or while you were preparing your online return
  • service issues with HMRC online services
  • a fire, flood or theft prevented you from completing your tax return
  • postal delays that you could not have predicted
  • delays related to a disability (including mental health) you have”

This list is not exhaustive.

What is NOT a reasonable excuse

Statute identifies two specific situations that are not a reasonable excuse:

  • lack of funds to pay any VAT due, or
  • reliance on any other person to perform a task, where there has been a delay or inaccuracy on that person’s part.

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:

  • pressure of work
  • lack of information
  • lack of a reminder from HMRC

Facts

HMRC will establish what facts the business believes gave rise to a Reasonable Excuse. The facts may include:

  • the taxpayer’s beliefs
  • the taxpayer’s own experiences and relevant attributes
  • the situation of the taxpayer at any relevant time
  • acts carried out by the taxpayer or someone else
  • acts that the taxpayer or someone else should have carried out but did not.

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:

  1. establish what facts the taxpayer asserts give rise to a reasonable excuse
  2. decide which of those facts are proven
  3. if those proven facts amount to an objectively reasonable excuse for the default
  4. having decided when any reasonable excuse ceased, decide whether the taxpayer remedied the failure without unreasonable delay after that time

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:

  • ask HMRC to review your case (A Statutory Review)
  • have your case heard by the Tax Tribunal

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.

VAT Grouping: Latest from HMRC

By   4 March 2022
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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:

  • an automated assessment letter
  • letters asking for payment of any automated assessments
  • notification of a default surcharge because you have not filed your tax return

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.




VAT: Late payment and repayment interest rates

By   21 February 2022
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The current late payment and repayment interest rates applied to the main taxes and duties that HMRC currently charges and pays interest on are:

  • Late payment interest rate — 3.0% from 21 February 2022
  • Repayment interest rate — 0.5% from 29 September 2009

Interest rates for all other taxes here.

Details of default surcharge here.

VAT: Fulfilment House Due Diligence Scheme registered businesses list

By   16 February 2022
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HMRC has issued updated guidance for businesses which need to check whether an entity which stores goods in the UK on its behalf is registered with the Fulfilment House Due Diligence Scheme (FHDDS).

The published list is alphabetical order by company name.

The list should be used if you are a business that is not established in the EU to see if the business that stores your goods in the UK is registered with the FHDDS.

If your business is outsourcing or considering outsourcing its fulfilment operations, then the fulfilment house you are using or intending to use of must be legally accredited by HMRC to do so.

Businesses that must be registered

Businesses are required to be registered if it stores any goods where all of the following apply:

  • the goods were imported from a country outside the EU
  • the goods are owned by, or stored on behalf of, someone established outside the EU
  • the goods are being offered for sale and have not been sold in the UK before

It is illegal to operate outside of the scheme and any fulfilment company found doing so will be prevented operating a fulfilment business and may be subject to a £10,000 penalty and a criminal conviction.

VAT: Latest on early termination and compensation payments

By   8 February 2022
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HMRC has published a new Revenue and Customs Brief 2(2022) which replaces Revenue and Customs Brief 12 (2020): VAT early termination fees and compensation payments.

It introduces a revised policy on early termination payments and compensation fees. Following representations from industry the Brief issued in September 2020 was suspended in January 2021. HMRC has reviewed the policy in the light of those representations and is adopting a revised policy which will take effect from 1 April 2022. The new policy will result in fewer early termination payments being subject to VAT than in the 2020 guidance.

The new Brief also advises businesses that adopted the treatment outlined in Brief 12 (2020) on what action they should now take.

Background

Whether a payment is for a VAT supply depends on whether anything is being done in return for a consideration. Where a party agrees to do something in return for a fee there is a supply. How that fee is described does not affect whether there is a supply for VAT. What matters is whether something is done and if there is a direct link between what is done and the payment received, and reciprocity between the supplier and the customer (see VATSC05100).

Previous HMRC guidance stated that when customers are charged to withdraw from agreements to receive goods or services, these charges were not generally for a supply and were outside the scope of VAT.

Following the Court of Justice of the European Union (CJEU) judgments in Meo (C-295/17) and most recently in Vodafone Portugal (C-43/19), it is evident that some of these charges are additional consideration for the supply of goods or services. Most early termination fees and some cancellation fees are therefore liable for VAT if the goods or services for which the fees have been paid are liable for VAT, even if they are described as compensation or damages.

The main impact of the revised policy is that fees charged when customers terminate a contract early will be regarded as further consideration for the contracted supply. For example, if a customer is charged a fee for exiting a mobile phone contract early, or if they terminate a car hire contract early, it will be liable for VAT.

The new guidance can be found at VATSC05910, VATSC05920 and VATSC05930.

Is room hire subject to VAT? – The Errol Willy Salons case

By   24 January 2022
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Latest from the courts

In the First Tier Tribunal (FTT) case of Errol Willy Salons Ltd (2022) TC 08370 the issue was whether the rent of two rooms were an exempt right over land, or the standard rated supply of facilities.

Background

Room hire is usually exempt from VAT unless it is subject to an option to tax. However, it can be subsumed into a different rated another supply if something more than a “bare” room is provided. In such cases, it would follow the VAT treatment of the composite supply.

The Issue

In the Errol Willy Salons case, HMRC formed the view that what was being supplied was facilities (the room occupation being a minor part of the supply) and therefore subject to VAT. In its opinion the economic and social reality was that the beauticians were provided with a licence to trade from the premises. The appellant occupied the ground floor – operating a hairdressing business. The rooms over the saloon were rented to third party beauticians. The occupants furnished the rooms themselves, provided their own equipment, set their own pricing and opening hours. They did have use of certain services and facilities; a receptionist and toilets, but it was understood that the services were rarely used. Unsurprisingly, the appellant disagreed and contended that the other services were incidental or subsidiary to the exempt supply of the room rental.

The decision

The Tribunal allowed the appeal against the assessment. It found that “non-rent” services provided to the beauticians were limited in nature and not essential to the beauticians’ businesses Consequently, the arrangements amounted to a supply of property (a licence to occupy the rooms) rather than a supply of taxable facilities and was therefore exempt.

Commentary

This is the latest in a long line of issues on composite/separate supplies and room hire/facilities disputes, especially in relation to weddings. It is important to establish precisely what is being provided to establish the correct VAT treatment and advice should be ought if there is any doubt about the VAT liability.

The CIOT has long advocated that it is not the case that every package of supplies involving room hire and other things must be a composite supply of something other than an exempt letting of land.

NB: This case is different to hairdresser chair rentals which remain standard rated.

VAT: New penalty regime delayed

By   17 January 2022
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The new system for the way penalties and interest is charged due to be introduced on 1 April this year has been deferred to 1 January 2023.

The new points-based regime has been delayed to allow HMRC to implement the necessary IT changes.

I wonder if that represents a reasonable excuse for HMRC being late…