Category Archives: HMRC Publications

HMRC publish annual report and accounts 2023 to 2024

By   12 August 2024
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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.

By   12 August 2024
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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.

VAT: Carousel fraud – How to recognise it and how to avoid been caught in it

By   8 August 2024
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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.

How to pay duties and VAT on imports – updated guidance

By   22 July 2024
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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:

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

By   18 July 2024
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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.

New HMRC VAT Registration Estimator tool

By   15 July 2024
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HMRC has gone live with a new digital tool which estimates what registering for VAT might mean for a business.

A business must VAT register if its turnover exceeds £90,000 in any 12 month rolling period. However, a business may register for  VAT if its taxable turnover is less than £90,000, this is known as voluntary registration.

This new tool can be used to estimate what VAT might be owed or reclaimed by a business when it registers for VAT. It can also be used  multiple times to compare different situations that could apply to a business in the future.

As usual for VAT, there are penalties for failure to VAT register, or registering late. Not only must a business pay the VAT due from when it should have registered, it will receive a penalty depending on how much it owes and how late the registration is. The rates based on the VAT due are:

  • up to 9 months late – 5%
  • between 9 and 18 months – 10%
  • over 18 months = 15%.

NAO issues scathing attack on HMRC customer service

By   25 June 2024
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The National Audit Office (NAO) has issued a report: Value for money which covers HMRC’s and Specifically, the department’s support of its “customers” (although I maintain the word should be; Taxpayers) through services provided online, through written correspondence and over the telephone.

(My) Summary

HMRC is awful and services are getting worse.

Some extract quotes:

“In 2022-23, HMRC spent £881 million on customer service. Performance has been below expected levels for telephone and correspondence for almost all of the last five years”.

“HMRC’s telephone and correspondence services have been falling below the expected service levels for too long, and HMRC has not achieved planned efficiencies. To achieve value for money HMRC must provide a timely and effective service for customers needing help with their tax or benefits, even as it attempts to reduce costs”.

“HMRC’s strategy to replace traditional forms of contact with digital services makes sense in many ways. Digital transactions can be easier and faster for many customers to access and submit information. However, they do not currently allow customers to resolve more complex queries”.

“… digital services have not had the effect HMRC hoped for…”  “While many of HMRC’s digital services work well, they have not made enough of a difference to customer contact levels” and  “they do not currently allow customers to resolve more complex queries”.

“HMRC has been unable to cope with telephone demand and consequently fallen short in processing correspondence and dealing with telephone calls according to procedures, creating further service pressures. HMRC felt it had no choice but to close phone lines to catch up and compel people to use digital services. It has had to reverse this approach in the face of stakeholder opposition”.

“There are opportunities to reduce unnecessary levels of contact and improve efficiency. HMRC must demonstrate it understands how to make these gains, and form more realistic plans for how to deliver these, while ensuring it maintains service levels.”

This performance is simply unacceptable – as anyone who has had dealings with HMRC will know.

VAT: Mind the gap – HMRC latest figures

By   24 June 2024
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GOV.UK has published details of the most recent measurement of the tax gap for 2022-20223.

What is the tax gap?

The tax gap is measured by comparing the net tax total theoretical liability with tax actually paid. This is comparing the amount of tax HMRC expected to receive in the UK and the amount HMRC actually received.

The figures

The tax gap is estimated to be 4.8% of total theoretical tax liabilities, or £39.8 billion in absolute terms, in the 2022 to 2023 tax year.

Total theoretical tax liabilities for the year were £823.8 billion.

There has been a long-term reduction in the tax gap as a proportion of theoretical liabilities: the tax gap reduced from 7.4% in the tax year 2005 to 2006 to 4.8% in the tax year 2022 to 2023.

While most of the components follow a downward trend, with the largest proportionate fall between 2005 to 2006 and 2022 to 2023 in the VAT gap, falling from 13.7% to 4.9%, the Corporation Tax gap estimate has increased from 11.4% in 2005 to 2006 to 13.9% in 2022 to 2023.

The Corporation Tax gap share has increased from 17% of the overall tax gap in 2018 to 2019 to 34% in 2022 to 2023, while the share of the tax gap from VAT has fallen from 28% of the overall tax gap in 2018 to 2019 to 20% in 2022 to 2023. The Income Tax, NICs and Capital Gains Tax gap share decreased from 39% to 34% over the last 5 years.

The tax gap from small businesses is the largest component of the tax gap by customer group at a 60% share in 2022 to 2023; the tax gap from wealthy and individuals each make up a low proportion of the tax gap at 5% each in 2022 to 2023

The VAT gap

VAT represents 20% of the overall tax gap.

The VAT tax gap is 4.9%.

There are several approaches to measuring tax gaps. VAT and excise duties gaps are mainly estimated using a ‘top-down’ approach, by comparing the implied tax due from consumer expenditure data with tax receipts. Most other components are estimated using a ‘bottom-up’ approach, based on HMRC’s operational data and management information.

A top-down approach uses independent, external data on consumption to estimate the tax base. The tax base is used to calculate a theoretical value of tax that should be paid. The actual amount of tax paid is subtracted from this theoretical value to estimate the tax gap.

VAT: What is an exempt supply, and what does it mean?

By   17 June 2024
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VAT Basics

Exemption generally

Some services are exempt from VAT. If all the services a business provides are exempt, it will not be able to register for VAT, which means it cannot reclaim any input tax incurred on its purchases or expenses.

If a business is VAT registered it may make both taxable and exempt supplies (it will need to make at least some taxable supplies to be registered). Such a business is classed as partly exempt and it may be able to recover some input tax, but usually not all (Please see de minimis below).

Types of supply which may be exempt

Examples are:

The above list is not exhaustive.

* Most businesses which do not routinely make exempt supplies usually encounter exemption in the area of land and property and it is an easy trap to fall into not to consider VAT when involved in property transactions. This is one area where VAT planning may be of assistance as it is possible in most situations to deliberately choose to add VAT to an exempt supply to avoid a loss of input tax.  This is known as the option to tax, and it is considered in more detail here.

The legislation covering exemption is found at The VAT Act 1994, Schedule 9. 

What does exemption mean?

 An entity only making exempt supplies cannot register for VAT and consequently has no VAT responsibilities or obligations. While this may seem attractive, exemption is often a burden rather than a relief. This is because any VAT it incurs on any expenditure is irrecoverable and represents an additional cost.  This often affects charities, although there are some limited reliefs.

Exempt supplies are completely different to non-business activities, although the VAT outcome is often similar.

 Partial exemption de-minimis

A partly exempt business cannot usually recover all of the input tax it incurs. However, there is a relief called de minimis. Broadly, if VAT bearing expenditure is below certain limits in may be recovered in full. These are provisional calculations and are subject to a Partial Exemption Annual Adjustment.

Further information on terms used in partial exemption here.