Category Archives: HMRC Publications

VAT: MTD Phase 2 deferred due to coronavirus

By Marcus Ward 1 April 2020

HMRC has announced that the second phase of Making Tax Digital (MTD) for VAT, due to be introduced on 1 April 2020 has been postponed by one year until 1 April 2021.

Now, VAT registered businesses will need to be compliant from its first VAT return period starting on or after 1 April 2021.

What is MTD Phase 2?

These are key elements to Phase 2:

rigorous rules will be introduced to ensure the accurate application of digital records and the way in which businesses upload their returns (digital bookkeeping)
there must be a full end-to-end digital journey in place from the capturing of transactions to the submission of the VAT return. Transfer of data between functional compatible software, eg; invoice and accounting systems etc. must be done using digital links (digital journey). This is the end of the “cut and paste: concession allowed with the soft-landing of Phase 1
the most basic accounting software is unlikely to have the required features to provide a way to submit the financial records on transactions meaning they are likely to lose accreditation
penalties for non-compliance will be introduced (on a cumulative basis, based on the number up to 15% of VAT due)

The overall aim is to eliminate human intervention into systems, thus reducing, it is hoped, errors.

Deferral

HMRC have stated that as a consequence of the coronavirus it understands the difficulty businesses are experiencing and is committed to helping “in every way possible” those facing unprecedented challenges.

HMRC is therefore giving around 1.3 million UK VAT registered businesses more time to put in place digital links between all parts of their functional compatible software.

Comment

A welcome announcement, and one which will be appreciated, especially by the more complex, medium to larger businesses who are required to juggle with multiple accounting systems, group accounts and considerable consolidation. The deferral may also be as a result of HMRC’s staff being stretched at the current time.

VAT – Latest on the coronavirus position

By Marcus Ward 23 March 2020

Update

Clearly VAT is not high on people’s agendas at the moment, but it may be a concern if a business is struggling to pay it in these difficult times.

The government has announced that, along with other measures to reassure and assist business, an easement for paying VAT due. Taxpayers may now defer VAT payments.

Measures

The details:

the next quarter’s VAT has been deferred to the end of the tax year
no business will pay any from now until the end of June
all UK businesses are eligible
the deferral does not cover payments due under the VAT MOSS scheme
no penalties or interest will be due on the tax deferred under these measures
this represents a circa £30 billion cash boost for business
unlike some other countries, the deadline to submit returns has not been deferred – which is unfortunate given the virus’ effect on staff and administrative processes
additional resources have been allocated to deal with time to pay (TTP) applications
the regular inspection of businesses has been suspended until further notice
there has been no announcement on the temporary reduction of VAT rates – but this may happen in the near future
all proceedings in UK First Tier Tribunal (FTT) are stayed for 28 days

Access to the scheme

This is an automatic offer with no applications required. Businesses will not need to make a VAT payment during this period. Taxpayers will be given until the end of the 2020 to 2021 tax year to pay any liabilities that have accumulated during the deferral period. VAT refunds and reclaims will be paid by HMRC as normal.

Businesses who normally pay by direct debit should cancel their direct debit with their bank if they are unable to pay. This must be done in sufficient time so that HMRC do not attempt to automatically collect on receipt of a submitted VAT return.

Commentary

These are very welcome easements for business and the speed and clarity of the statements are very welcomed and should be commended.

Budget 2020 – VAT implications

By Marcus Ward 11 March 2020

A summary of how the 2020 budget changes VAT rules:

e-publications

Zero rating will apply to e-publications from 1 December 2020. This brings e-publications in line with traditional printed matter. The zero rate will apply to:

e-books
e-newspapers
e-magazines
academic e-journals

Presumably, this brings an end to HMRC’s arguments set out in the News Corp case.

Postponed Accounting

From 1 January 2021 postponed accounting will apply to all imports of goods, including those from the EU. This will provide an important boost to those VAT registered UK businesses which are integrated in international supply chains as they adapt to the UK’s position post Brexit.

Sanitary products

From 1 January 2021 the zero rate will apply to women’s sanitary products. This is calculated to save the average women £40 over her life.

Consultation

A consultation paper will be published to gather views on the potential approach to duty and tax-free goods policy post Brexit.

Cross-border goods policy

An informal consultation process will be launched in spring 2020 on the VAT and Excise treatment of goods crossing UK borders after Brexit.

Fund management

As announced on 4 March 2020 the government is legislating to clarify when fund management services are exempt from VAT.

Financial services

An industry working group will be set up to review how financial services are treated for VAT purposes. Presumably how Brexit will affect such services.

“Quick Fixes” Directive

Legislation will be introduced to simplify rules for the VAT treatment of intra-EU movements of call-off stock, allowing businesses to delay accounting for VAT until the goods are called-off.

Partial Exemption

Following the recent call for evidence on the simplification of the VAT rules on Partial Exemption and the Capital Goods Scheme, the government has said it will continue to engage with businesses in relation to their responses and will publish a response in due course.

Commentary

These proposed measures will be broadly be welcomed by business. Especially those in relation to e-publications and Postponed Accounting. It was widely expected that HMRC would lose its argument that e-publications and hard copy publications should be treated differently in any case. Postponed Accounting takes us back to the pre-1990s era. It looks very much like this means a “No-Deal” and although Postponed Accounting may be an easement for some aspects, it remains unnecessary if an agreement with the EU can be reached. However, there appears to be no political will nor appetite to reach such an agreement, so business suffers.

VAT: Extent of exemption for healthcare. The X-GmbH CJEU case

By Marcus Ward 10 March 2020

Latest from the courts

In the CJEU case of X, a German business, the issue was whether services provided by telephone could be treated as exempt. The decision is not available in English in the link above, so thanks to Google translate and very rusty schoolboy language skills!

Background

X provided a healthcare hotline to people covered by certain insurance. The types of services carried out where in respect of medical issues; medical advice, answers to queries, explanations of possible diagnoses and treatments, and patient support programmes for certain conditions. The service was provided by suitably qualified nurses, medical staff and doctors.

The issue

Was this service exempt from VAT as personal care considering it was “support” provided by telephone? He relevant legislation is Article 132(1)(c) of the VAT Directive. A separate issue was whether the staff required additional proof of their professional qualifications to qualify as an exempt service by telephone. The advice was provided via a computer assisted assessment, using targeted questions allowing X to assess the patient’s situation and to advise accordingly. Consequently, there was a degree of automation involved.

The German authorities considered that the supplies fell short of the exemption and raised assessments for output tax due on the services.

Decision

The CJEU has ruled that personal care is not dependent on where it is carried out and there is no bar to it being conducted by telephone. X contended that its services were directly connected with illness and was medical care and, as a result of its activities, the cost of subsequent treatment was reduced.

The court established that the supply was exempt if it met two tests:

it must be a service of personal care, and
it must be carried out within the framework of the exercise of the medical and paramedical professions as defined by the Member State concerned

Therefore, healthcare services carried out by telephone may fall within the exemption, but only if they meet all the conditions for applying this exemption. The test was not how the services were delivered.

Whether X’s services met the exemption conditions depended on case law and whether they were to;

diagnose, treat and cure illnesses or health anomalies
protect (including maintaining or restoring) the health of individuals.
explain diagnosis and therapies
propose modifications to treatments and medication

Such services were likely to have a ‘therapeutic purpose’. However, simply; directing patients to factsheets, providing specialists’ contact details and communicating information is insufficient to qualify for exemption and would be regarded as of a (taxable) administrational nature.

Summary

The services provided by telephone, consisting of providing advice on health and illness, were likely to be exempt, if they pursue a ‘therapeutic aim’. However, this was for the German referring court to verify. On the “additional qualifications” point, EU law does not define medical professions, so it is the responsibility of each Member State to determine the necessary qualifications. In the UK, these qualifications are set out at VAT Act 1994, Schedule 8, Group 7, item 1 (mainly; registered or enrolled as a doctor, optician, osteopath, chiropractor, nurse or midwife). It was decided that Article 132(1)(c) does not require that those X’s staff which provide telephone services to obtain additional professional qualifications.

Commentary

There is often significant uncertainty when businesses provide “healthcare”, This has mainly manifested in questions of whether staff or medical services are actually provided (and in more wide-ranging cases, whether the provision of staff is by way of agent or principal). However, with technology moving faster than ever, it is helpful to have these guidelines and the understanding that it is not just “old-fashioned” medical services which are covered by the exemption.

VAT: Interaction of Clawback and the Capital Goods Scheme – The Stichting Schoonzicht case

By Marcus Ward 10 March 2020

Latest from the courts

The difference between intended use and first actual use of an asset.

In the Dutch case of Stichting Schoonzicht (C‑791/18) the AG was asked to provide an opinion on the interaction between clawback and the Capital Goods Scheme (CGS) via Directive 2006/112/EC, Articles 185 and 187. Details of the CGS here. In the UK clawback is set out in The General Regulations 1995, Reg 108.

Background

Stichting Schoonzicht constructed a number of apartments which it intended to sell on completion. This would have been a taxable supply and afforded full input tax recovery on the costs incurred on the development. Unfortunately, due to market conditions, the business was unable to find buyers at the appropriate sale price. Therefore, a decision was made to let some of the flats on a short-term basis until the market picked up. This was done and created an exempt supply. The intention to make taxable supplies remained, but in the meantime, exempt supplies had actually been made. This could affect the original input tax claim. Details of partial exemption here.

Technical

The Dutch referring court entertained doubts about the compatibility of the ‘first-use full adjustment’ requirement provided for under Netherlands law and the CGS.

So the issue was whether the CGS (Article 187 of the VAT Directive) applied such that any required adjustments to the initial input tax claim could be made via a CGS calculation, or whether, as the Dutch authorities contended, there should be a one-off clawback of the input tax previously claimed.

Decision

In the AG’s opinion, the Dutch tax authorities could clawback 4/7 of the input tax on the construction (as four of the flats were let and three remained unoccupied). The AG decided that the CGS could co-exist with clawback and that EU Member States are allowed to adjust the initial deduction of input tax using clawback where actual use varies from intended use. A distinction was made between clawback and the CGS. The CGS is intended to adjust input tax claims as a result of fluctuations in the taxable use of capital assets over a period of time (ten years for buildings in the UK).

Commentary

In the UK, there are published easements for input tax recovery in similar circumstances: “VAT: Partial Exemption – adjustments when house builders let their dwellings”. However, this is an interesting AG opinion, is worth a read and it will be interesting to see how this develops. However, with prior planning, this situation may be avoided in the UK (where new house sales are zero rated).

VAT exemptions widened by Finance Order 2020

By Marcus Ward 4 March 2020

Finance Order 2020

The government has laid the Value Added Tax (Finance) Order 2020 (“Finance Order 2020”) on 4 March 2020 to widen the VAT exemption for the management of investment funds.

The Finance Order 2020 will come into effect on the 1^st April 2020 and will provide for exemption for the management of certain pension funds (as defined) and will also remove the current restriction on the type of assets that a close-ended collective investment undertaking can invest in for its management to qualify for exemption.

It replaces the Value Added Tax Finance (EU Exit) Order 2019 (“Finance Order 2019”) which was revoked last July, following discussion with industry about the need for certainty about the date of implementation and provide sufficient lead in time. The Finance Order 2020 will make the same changes to the legislation as the Finance Order 2019 would have made except that (1) new paragraph (k) inserted into Item 9 now refers to a ‘qualifying’ pension fund as opposed to a ‘recognised’ pension fund and (2) the changes will not apply in the case of pension funds that are established overseas (ie; outside the UK and the EU).

Should I form a VAT Group? Pros and Cons

By Marcus Ward 4 March 2020

VAT Grouping

This is a very concise summary of matters that should be considered when deciding to form or disband a VAT. Grouping is optional although HMRC have powers to refuse an application in any case where it is necessary for the protection of the revenue.

What is a VAT group?

VAT grouping is a facilitation measure by which two or more entities can be treated as a single taxable person (a single VAT registration) for VAT purposes. The measure was once restricted to “Bodies Corporate” which includes; companies of all types and limited liability partnerships. However, from 1 November 2019, grouping is additionally available for all entities, including; partnerships, sole traders and Trusts in certain cases.

It is important to recognise the difference between a corporate group and a VAT group – these are two different things and it should not be assumed that a corporate group is automatically a VAT group.

It is worth remembering that it is possible to VAT group where no taxable supplies are made outside the group.

Pros

only one VAT return per quarter – less administration
the representative member accounts for any tax due on supplies made by the group to third parties outside the group. This is particularly helpful if accounting is centralised
no VAT on supplies between VAT group members. No need to invoice etc or recognise supplies on VAT returns
usually improves the partial exemption position if exempt supplies are made between group companies
may improve input tax recovery if taxable supplies are made to a partly exempt group company
if assets are hived up or down into a group company before a company sale to a non-grouped third party, the VAT consequences of the intra-group movement may be ignored
may provide useful planning opportunities/convenience at a later date
sales invoices issued, or purchase invoices received, in the wrong company name would not require time-consuming amendment
there may be cashflow benefits in respect of intra-group charges
reduced chance of penalties on intra-group charges

Cons

all members of the group are jointly and severally liable for any VAT due
former VAT group members are also liable for any VAT debts due during the period of VAT group membership
only one partial exemption de-minimis limit for group – which decreases the ability to fully recover input tax
obtaining all relevant data to complete one return may take time thus possibly missing filing deadlines
a new VAT number is issued (previous ones are cancelled – which may lead to administration etc issues)
the representative member needs all of the necessary information to submit a VAT return for the group by the due date
via anti-avoidance provisions, assessments can be raised on the representative member relating to earlier periods when it was not the representative member and even when it was not a member of the group at that time
the limit for voluntary disclosures of errors on past returns applies to the group as a whole (rather than each company having its own limit)
the payments on account (POA) limits apply to the group as a whole. This applies to a business whose VAT liability is more than £2 million pa. This adversely affects a business’s cashflow
the cash accounting limit of £1,350,000 applies to the group as a whole (rather than each company having its own limit)
Transfers of Going Concerns (TOGCs) acquired by a partly exempt VAT group may result in an irrecoverable VAT charge as a result of a deemed self-supply
an option to tax made by a VAT group member is binding on all present and future members of the VAT group. This is so even after a company has left the VAT group

We strongly recommend that professional advice is taken when a business is either considering forming a VAT group, or when thought is being given to disbanding one. Making the wrong decision could be very expensive indeed. Specific matters that dictate VAT advice are when:

property is involved
intercompany charges are made
TOGCs are involved
costs in respect of restructuring are incurred (a current hot potato in the courts)
there is an international aspect to a group
a reverse charge applies
a company has been involved in the penalty regime
companies become insolvent
a VAT group is subject to POA
a company, or the VAT group, makes exempt supplies.

We are always happy to advise when required.

VAT overpayments – HMRC to consider changes

By Marcus Ward 24 February 2020

VAT overpayments – New direct claims?

If a recipient of a supply makes an overpayment of VAT (usually as a result of standard rated tax being charged when a supply is reduced rated, zero rated or exempt) the remedy for the customer is to go to the supplier to obtain a new invoice/VAT only credit note and. repayment of the VAT paid. However, this can cause practical problems, disputes and an actual cost if a supplier has ceased business or become insolvent. HMRC has recognised that if the supplier has paid output tax on the supply then there is an inherent unfairness.

Following the decision in PORR Építési Kft. (C 691/17) which considered the principles of; proportionality, fiscal neutrality and effectiveness, HMRC invited interested parties to discuss a direct HMRC claim process where the taxpayer has pursued a refund via its supplier for overpaid incorrectly charged VAT but where, as stated in the cases, “recovery is impossible or excessively difficult”. In such cases the taxpayer “must be able to address its application for reimbursement to the tax authority directly”. In the past, HMRC has directed that such claims from them are pursued via the High Court (or County Court if under £30,000). The meeting discussed the new route to direct claims without initial court action including guidance, time limits and claim processes.

We await the outcome eagerly as this situation is quite common, I have found it is an issue particularly in; property and construction supplies, Financial Services and cross-border transactions (place of supply issues). If HMRC are minded to introduce a “direct claim” this will bring welcome relief to taxpayers and introduce fairness for all parties and do away with windfalls received by HMRC.

A Round-Up of three new EU VAT measures

By Marcus Ward 24 February 2020

With the end of the Brexit transition period looming, the EU have announced new measures:

e-commerce VAT fraud

The first measure is the European Commission (EC) approving (this month) new measures to transmit and exchange payment data in order to fight e-commerce VAT fraud. Member States will be assisted in their fight against e-commerce VAT fraud by the launch of a Central Electronic System of Payment (CESOP) information arrangement.

CESOP will keep records of cross-border payment information within the EU, as well as payments to third countries or territories, for a period of five years. This will allow tax authorities to properly control the correct fulfilment of VAT obligations on cross-border Business to Consumer (B2C) supplies of goods and services.

The measures will be implemented on 1 January 2025.

Simplified rules for small businesses

The EC has also recently adopted simplified VAT rules applicable to small businesses. The new measures are intended to reduce the administrative burden and compliance costs for small enterprises and create a fiscal environment which will help small enterprises grow and trade across borders more efficiently.

The measures foresee that small enterprises will be able to qualify for simplified VAT compliance rules where their annual turnover remains below a threshold set by a Member State concerned, which cannot be higher than 85 000 EUR. Under certain conditions, small enterprises from other member states, which do not exceed this threshold, will also be able to benefit from the simplified scheme, if their total annual turnover in the whole of the EU does not exceed 100 000 EUR.

The new rules will apply as of 1 January 2025.

New rules for exchange of VAT payment data

In addition to the anti e-commerce fraud proposals above, new measures will enable Member States to collect, in a harmonised way, the records made electronically available by payment service providers, such as banks. These complement the VAT regulatory framework for e-commerce coming into force in January 2021 which introduced new VAT obligations for online marketplaces and simplified VAT compliance rules for online businesses.

The new measures will apply as of 1 January 2024.

How these new incentives affect UK businesses remains to be seen as our future trading relationship with the EU is, to put it diplomatically, unclear.

Brexit – Introduction of new import controls on EU goods

By Marcus Ward 17 February 2020

More red tape and delays

The government has announced new plans to introduce import controls on EU goods at the border from 1 January 2021, the day after the end of the Brexit transition period.

This will almost certainly mean additional complexity and delays at borders and will damage businesses, especially those which operate on a Just In Time (JIT) basis or import fresh food, flowers or any other goods which are subject to rapid deterioration.

It is difficult to divorce politics from commerce in these circumstances, but I have avoided commenting on this decision on a political basis, although I think it is fair to say I am not in favour.

The government commented that all UK exports and imports (currently called dispatches and acquisitions from the EU) will be treated equally. This will mean traders in the EU and GB will have to submit customs declarations and be liable to goods’ checks. It was also confirmed that the policy easements put in place for a potential No Deal Brexit will not be reintroduced as businesses have time to prepare. (HMRC have withdrawn a collection of guidance on issues including tariffs, origin, and quotas, which was prepared for a potential No Deal Brexit).

It is difficult to identify how businesses could have had time to prepare as HMRC guidance was unhelpful on this point and it was, and still is, unclear what precise arrangements a business has to prepare for. It is assumed that this a unilateral UK’ decision and it cannot be helpful for cooperation negotiations, unless these controls are what are actually wanted. In the document, it is stated that: ”Business can prepare for border controls by making sure they have an Economic Operator Registration and Identification (EORI) number, and also looking into how they want to make declarations such as using a customs agent”. That is the extent of the advice provided and repeats what has been said before.

Without wanting to amplify government propaganda, but in the interest of even-handedness, below are the reasons given for implementing import controls:

to keep our borders safe and secure so we know who’s coming in and how often, what they are bringing in, and why
to ensure we treat all partners equally as we begin to negotiate our own trading arrangements with countries around the world
to collect the right customs, VAT and excise duties
the EU has said it will enforce checks on our goods entering the Eurozone. We will likewise enforce our own rules for goods entering the UK

Also, HMRC extended the deadline for businesses to apply for customs support funding to 31 January 2021. To date, applications have been made for around £18.5 million out of a possible £26 million.

This announcement follows on from the consideration of the introduction of UK freeports here.

I hope that there are enough customs agents to go round, although the lack of any evidence that HMRC is recruiting new Customs officers suggests that perhaps it is not fully prepared itself.