Category Archives: HMRC Publications

Professional Conduct in relation to Tax

By Marcus Ward 4 November 2016

A note on “aggressive” tax planning

Such tax planning is often viewed as tax avoidance by HMRC. We do not involve ourselves in such activities, and details of our attitude to aggressive planning are set out here and may be summarised as “Marcus Ward Consultancy Ltd does not market, advise on, or advocate aggressive schemes…“

However, it is worth highlighting a recent announcement made jointly by several professional bodies. The main bodies are; Chartered Institute of Taxation, Association of Taxation Technicians, Association of Chartered Certified Accountants, and Institute of Chartered Accountants in England and Wales. They have issued a revised version of Professional and Ethical standards for tax advisers. The salient new standard is that Members

i) must not create, encourage or promote tax planning arrangements or structures that set out to achieve results that are contrary to the clear intention of Parliament in enacting relevant legislation, and/or

ii) are highly artificial or highly contrived and seek to exploit shortcomings within the relevant legislation.

Breaching this new requirement may result in disciplinary action. The new guidance has been endorsed by HMRC here and full details from our Institute here

You may rest assured that we already refuse to advocate these schemes and are pleased to see the introduction of these new standards.

Please contact us if you have any questions on this matter.

VAT – Intended penalty for participating in fraud

By Marcus Ward 3 October 2016

Consultation

A consultation was proposed in the 2016 Budget on the introduction of a new penalty for businesses that participate in VAT fraud. Now HMRC has announced that views are sought on; whether there is a case for a new penalty, its structure and to whom it should apply. The intended changes will require amendment to Schedule 24 of the Finance Act 2007. The main target of these proposed new measures is MTIC (Missing Trader Intra-Community) fraud.

Full details of the consultation paper here

Penalty principles

It may be worth reviewing HMRC’s view on the principles of applying a penalty, which they state are;

The penalty regime should be designed from the customer perspective, primarily to encourage compliance and prevent non-compliance. Penalties are not to be applied with the objective of raising revenues.

Penalties should be proportionate to the offence and may take into account past behaviour.

Penalties must be applied fairly, ensuring that compliant customers are (and are seen to be) in a better position than the non-compliant.

Penalties must provide a credible threat. If there is a penalty, we must have the operational capability and capacity to raise it accurately, and if we raise it, we must be able to collect it in a cost-efficient manner.

Customers should see a consistent and standardised approach. Variations will be those necessary to take into account customer behaviours and particular taxes.

Consultation Process

It may be an appropriate time to look at what the consultation process is and how it works. This may helpfully be summarised (by HMRC) as:

There are 5 stages to tax policy development:

Stage 1 Setting out objectives and identifying options.

Stage 2 Determining the best option and developing a framework for implementation including detailed policy design.

Stage 3 Drafting legislation to effect the proposed change.

Stage 4 Implementing and monitoring the change.

Stage 5 Reviewing and evaluating the change.

The closing date for comments on this consultation is 11 November 2016.

Comment

Putting to one side the minor irritation of taxpayers being called customers (a bête noire of mine I’m afraid) it is difficult to argue with the above principles and any attempt to prevent or deter VAT fraud is to be welcomed, as long as it does not impact on innocent parties and HMRC apply any such penalty in an even-handed manner. As a taxpayer in a personal and business capacity, I welcome any measures that may result in my tax bill being increased to cover revenue lost to fraud!

Action

Of course, please respond to HMRC should you feel that you should make your views known. The consultation is open to businesses, individuals, legal firms, accountants, and other interested parties.

We occasionally come across situations where innocent parties have been inadvertently been caught up in fraudulent supply chains. Please contact us for advice on planning that may be put in place to avoid this position and how we can assist if HMRC are making enquiries. As always in VAT, it always pays to be proactive to ensure that processes and structures in place are robust and are demonstrably so.

Bad Debt Relief (BDR) – Avoiding the VAT burden

By Marcus Ward 20 September 2016

VAT Basics

Anything which can relieve the burden of VAT is to be welcomed. BDR is a useful tool if a business is aware of it and understand when it may be claimed.

It is at the very least frustrating when a client does not pay, and in some cases this situation can lead to the end of a business. At least the VAT charged to the client should not become a cost to a supplier. The BDR mechanism goes some way to protect a business from payment defaulters.

Under the normal rules of VAT, a supplier is required to account for output tax, even if the supply has not been paid for (however, the use of cash accounting or certain retail schemes removes the problem of VAT on bad debts from the supplier).

There is specific relief however:

Conditions for claiming BDR

The supplier must have supplied goods or services for a consideration in money, and must have accounted for and paid VAT on the supply. All or part of the consideration must have been written off as a bad debt by making the appropriate entry in the business’ records (this does not have to be a “formal” procedure). At least six months (but not more than three years and six months) must have elapsed since the later of the date of supply or the due date for payment.

Records required

Various records and evidence must be kept (for four years from the date of claim), in particular to identify:

• The time and nature of the supply, the purchaser, and the consideration
• The amount of VAT chargeable on the supply
• The accounting period when this VAT was accounted for and paid to HMRC
• Any payment received for the supply
• Entries in the refund for bad debts account
• The accounting period in which the claim is made.

Procedure for claiming BDR

The claim is made by including the amount of the refund in Box 4 of the VAT Return for the period in which the debt becomes over six months old.

Repayment of refund

Repayment of VAT refunded is required where payment is subsequently received or where the above conditions have not been complied with.

Refund of input tax to debtor

Businesses are required to monitor the time they take to pay their suppliers, and repay input tax claimed if they have not paid the supplier within six months. Subsequent payment of all or part of the debt will allow a corresponding reclaim of input tax. This is an easy assessment for HMRC to make at inspections, so businesses should make reviewing this matter this a regular exercise.

Finally, there is tax point planning available to defer a tax point until payment is received for providers of continuous supplies of services. Please see here

VAT liability of a dwelling formed from more than one building

By Marcus Ward 6 September 2016

HMRC has issued a policy paper: Revenue and Customs Brief 13(2016)

This brief explains the change in policy relating to the treatment of dwellings that have been formed from either the construction of new buildings, or from the conversion of non-residential buildings into a dwelling. HMRC now accepts that single dwellings can be formed from more than one building.

Please contact us if this change affects you in relation to current, or past developments.

VAT Schemes Guide – Alternative ways of accounting for tax

By Marcus Ward 1 June 2016

There are a number of VAT Schemes which are designed to simplify accounting for the tax. They may save a business money, reduce complexity, avoid the need for certain documentation and reduce the time needed to deal with VAT. Some schemes may be used in combination with others, although I recommend that checks should be made first.

It is important to compare the use of each scheme to standard VAT accounting to establish whether a business will benefit. Some schemes are compulsory and there are particular pitfalls for certain businesses using certain schemes.

I thought that it would be useful to consider the schemes all in one place and look at their features and pros and cons.

These schemes reviewed here are:

Cash Accounting Scheme
Annual Accounting Scheme
Flat Rate Scheme
Margin schemes for second-hand goods
Global Accounting
VAT schemes for retailers
Tour Operators’ Margin Scheme

Cash Accounting Scheme

Normally, VAT returns are based on the tax point (usually the VAT invoice date) for sales and purchases. This may mean a business having to pay HMRC the VAT due on sales that its customers have not yet paid for.

The VAT cash accounting scheme instead bases reporting on payment dates, both for purchases and sales. A business will need to ensure its records include payment dates.

A business is only eligible for the Cash Accounting Scheme if its estimated taxable turnover is no more than £1.35m, and can then remain in the scheme as long as it remains below £1.6m.

Advantages

Usually beneficial for cash flow especially if its customers are slow paying
Output tax is not payable at all if a business has a bad debt

Disadvantages

Is generally not beneficial for a repayment business (one which reclaims more VAT than it pays, eg; an exporter or supplier of zero rated goods or services)
Not usually beneficial if a business purchases significant amounts of goods or services on credit

Annual Accounting Scheme

The Annual Accounting Scheme allows a business to pay VAT on account, in either nine monthly or three quarterly payments. These instalments are based on VAT paid in the previous year. It is then required to complete a single, annual VAT return which is used to calculate any balance owed by the business or due from HMRC.

A business is eligible for the scheme if its estimated taxable turnover is no more than £1.35m and is permitted to remain in the scheme as long as it remains below £1.6m.

Advantages

Reduces paperwork as only the need to complete one return instead of four (Although it does not remove the requirement to keep all the normal VAT records and accounts)
Improves management of cash flow

Disadvantages

Not suitable for repayment businesses as they would only receive one repayment at the end of the year
If turnover decreases, the interim payments may be higher than under standard accounting

Flat Rate Scheme

The Flat Rate Scheme is designed to assist smaller businesses reduce the amount of time and complexity required for VAT accounting. The Flat Rate Scheme removes the need to calculate the VAT on every transaction. Instead, a business pays a flat rate percentage of its VAT inclusive turnover. The percentage paid is less than the standard VAT rate because it recognises the fact that no input tax can be claimed on purchases. The flat rate percentage used is dependent on a business’ trade sector.

A business is eligible for this scheme if its estimated taxable turnover in the next year will not exceed £150,000. Once using the scheme, a business is permitted to continue using it until its income exceeds £230,000.

If eligible, a business may combine the Flat Rate Scheme with the Annual Accounting Schemes, additionally, there is an option to effectively use a cash basis so there is no need to use the Cash Accounting Scheme. There has been recent case law on the percentage certain businesses’ use for the FRS, so it is worth checking closely. There is a one percent discount for a business in its first year of trading.

Advantages

Depending on trade sector and circumstances may result in a real VAT saving
Simplified record keeping; no requirement to separate out gross, VAT and net in accounts
Fewer rules; no issues with input tax a business can and cannot recover on purchases
Certainty of knowing how much of income is payable to HMRC

Disadvantages

No reclaim of input tax incurred on purchases
If you buy a significant amount from VAT registered businesses, it is likely to result in more VAT due
Likely to be unattractive for businesses making zero-rated or exempt sales because output tax would also apply to this hitherto VAT free income
Low turnover limit

Margin Scheme for Second Hand Goods

A business normally accounts for output tax on the full value of its taxable supplies and reclaims input tax on its purchases. However, if a business deals in second-hand goods, works of art, antiques or collectibles it may use a Margin Scheme. This scheme enables a business to account for VAT only on the difference between the purchase and selling price of an item; the margin. It is not possible to reclaim input tax on the purchase of an item and there will be no output tax if no profit is achieved. There is a special margin schemes for auctioneers. A variation of the Margin Scheme is considered below.

Advantages

Usually beneficial if buying from (non-VAT registered) members of the public
Applies to EC cross-border sales
Purchaser will not see a VAT charge
Although no input tax claimable on purchases of scheme items, VAT may be claimed in the usual way on overheads and other fees etc

Disadvantages

Record keeping requirements are demanding and closely checked, eg; stock records and invoices which are required for both purchases and sales
Cannot be used for items purchased on a VAT invoice
Can be complex and create a cost if goods exported
Although no VAT due on sales if a loss is made, there is no set-off of the loss

Global Accounting

The problem with the Second Hand Goods Scheme is that full details of each individual item purchased and sold has to be recorded. Global Accounting is an optional, simplified variation of the Second Hand Margin Scheme. It differs from the standard Margin Scheme in that rather than accounting for the margin achieved on the sale of each individual item, output tax is calculated on the margin achieved between the total purchases and total sales in a particular accounting period.

Advantages

Simplified version of the Margin Scheme
Record keeping requirements reduced
Losses made on sales reduce VAT payable
Beneficial for businesses which buy and sell bulk volume, low value eligible goods

Disadvantages

Cannot be used for; aircraft, boats, caravans, horses or motor vehicles
Similar to Margin Scheme disadvantages apart from loss set off

VAT Schemes for Retailers

It is usually difficult for retailers to issue an invoice for each sale made, so various retail schemes have been designed to simplify VAT. The appropriate scheme for a business depends on whether its retail turnover (excluding VAT) is; below £1m, between £1m and £130m and higher.

Smaller businesses may be able to use a retail scheme with Cash Accounting and Annual Accounting but it cannot combine a Retail Scheme with the Flat Rate Scheme. However, retailers may choose to use the Flat Rate Scheme instead of a Retail Scheme.

Using standard VAT accounting, a VAT registered business must record the VAT on each sale. However, via a Retail Scheme, it calculates the value of its total VAT taxable sales for a period, eg; a day, and the proportions of that total that are taxable at different rates of VAT; standard, reduced and zero.

According to the scheme a business uses it then applies the appropriate VAT fraction to that sales figure to calculate the output tax due. A business may only use the Retail Scheme for retail sales and must use the standard accounting procedures for other supplies. It must still issue a VAT invoice to any VAT registered customer who requests one. It is a requirement of any scheme choice that HMRC must consider it fair and reasonable.

Examples of Retail Schemes

Apportionment
Direct calculation
The point of sale scheme

There are special arrangements for caterers, retail pharmacists and florists.

Advantages

No requirement to issue an invoice for each sale
Most schemes are relatively simple to administer once set up. Technology assists in a helpful way with EPOS systems
Simplifies record keeping

Disadvantages

It is usual for each line sold to need to be coded correctly for VAT liability
Smaller businesses without state of the art technology may be at a disadvantage
Time and resources required to set up and maintain systems
In some cases the calculation depends on staff “pressing the right button”

Tour Operators Margin Scheme (TOMS)

This simplifies cross-border supplies by fixing the place of supply where the tour operator is located (rather than applying the usual place of supply rules). Tour operators often buy goods and services from businesses in overseas countries and often cannot reclaim the associated input tax. The TOMS resolves this issue by permitting tour operators to calculate the VAT solely on the value they add. This is, in theory, similar to the Margin Scheme above. The scheme applies to any business that buys in and re-sells; travel, accommodation and certain other services as a principal. It not only affects the normal High Street travel companies, but entities such as; schools, hospitality companies, organisers of events etc. TOMS is compulsory and it applies to supplies made to/in in the UK as well as overseas.

Advantages

Avoids the need for the tour operator to VAT register in every country it makes supplies to/in
Effectively gives credit for input tax incurred overseas as well as the UK
No VAT shown on documents issued to clients

Disadvantages

Often complex calculations and record keeping
Very precise and complicated rules
Lack of understanding by a number of inspectors
Complexity increases the risk of misdeclaration

Overall

As may be seen, there are a lot of choices for a business to consider, especially a start-up. Choosing a scheme which is inappropriate may result in VAT overpayment and a lot of unneeded record keeping and administration. There are real savings to be made by using a beneficial scheme, both in terms of VAT payable and staff time.

We are happy to review a business’ circumstances and calculate what schemes would produce the best outcome.

Please contact us if you require further information.

 Marcus Ward Consultancy Ltd 2016

VAT – New company car fuel rates

By Marcus Ward 31 May 2016

Advisory fuel rates from 1 June 2016

HMRC have published the new rates which apply from 1 June 2016. These rates apply to employees using a company car and HMRC will also accept them for VAT purposes.

Engine size	Petrol – amount per mile	LPG – amount per mile
1400cc or less	10 pence	7 pence
1401cc to 2000cc	13 pence	9 pence
Over 2000cc	20 pence	13 pence

Engine size	Diesel – amount per mile
1600cc or less	9 pence
1601cc to 2000cc	10 pence
Over 2000cc	12 pence

Hybrid cars are treated as either petrol or diesel cars for this purpose.

HMRC website here

VAT – Liability of works carried out under Permitted Development Rights

By Marcus Ward 10 May 2016

HMRC has clarified its views on the zero and reduced rating of conversion construction work carried out under Permitted Development Rights (PDRs).

Who is affected?

Builders and developers who convert non-residential buildings into dwellings for which individual statutory planning consent is not required because the development is covered by PDRs. Additionally, it applies to any person carrying out a similar conversion who will be making a claim for a refund of VAT under the DIY Housebuilders’ Scheme.

What are PDRs?

PDRs are a national grant of planning permission for particular types of development. They are intended to streamline the planning process by removing the need for a full planning application, therefore reducing the amount of information required.

What has changed?

To zero-rate the sale of all newly converted dwellings (from non-residential buildings) or to make a valid claim under the DIY Housebuilders’ Scheme, the converted building must meet the requirements of a building “designed as a dwelling”. One of these conditions is that the developer, builder or DIY Housebuilders’ Scheme claimant must be able to demonstrate that statutory planning consent has been granted for a dwelling and that its construction has been carried out in accordance with that consent. In addition, part of the conditions for some supplies of construction services to be eligible for the reduced rate of VAT of 5% for the conversion of a non-residential building into a dwelling requires individual statutory planning consent.

HMRC have announced that following the introduction of PDRs, individual statutory planning consent will no longer be required for some developments making the meeting of this condition difficult.

HMRC Brief 9 (2016) sets out that when certain conditions are met, zero rating and/or reduced rating where applicable is additionally available when converting non-residential buildings to dwellings when work is carried out under a PDR. This is in contrast to work undertaken via planning consent.

Relevant parties will still be required to provide evidence that the work has been undertaken legally and that it qualifies as a permitted development.

The full guidance is here

The VAT gap for 2014-15

By Marcus Ward 6 April 2016

What is the 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. The ‘VAT total theoretical liability’ (VTTL) represents the VAT that should be paid if all businesses complied with both the letter of the law and HMRC’s interpretation of the intention of Parliament in setting law (referred to as the spirit of the law).

In other words, VTTL – VAT receipts = VAT gap.

This is HMRC’s second estimate of the VAT gap for 2014-15 (£ billion) and may be summarised as:

Net VTTL £124.9

Net VAT receipts £111.4

VAT gap £13.5

VAT gap 10.8%

The previous year’s figures (2013-2014) estimated the VAT gap at £13.1 billion (11.1% of the VTTL).

The consumer expenditure data accounts for around two thirds of the VTTL. The remaining one third of the VTTL is comprised of government and housing expenditure data, and businesses making exempt supplies.

For those of a statistical nature, the methodology behind the figures is here

VAT – Latest from the courts: Frank A Smart & Son Limited

By Marcus Ward 4 April 2016

Recovery of input tax incurred on the purchase of Single Farm Payment Entitlement (SFPE) units.

HMRC often reject claims for input tax as they consider that they relate to non-business activities, or more nebulously the costs are not reflected in the prices of supplies made by the claimant (the so called “cost component” approach). This very helpful Upper Tribunal (UT) case provides insight into the logic applied by HMRC in reaching a decision to disallow a claim for VAT incurred.

This was a company which farmed land and also paid VAT on the purchase of SFPE units. These units entitled the company to receive benefits via the EC Single Farm Payment Scheme. HMRC contended that the receipt of the SFPE payments was non-business, or in the alternative, they were not a cost component of any taxable supply made by the farming company.

The UT refused HMRC’s appeal against the initial FT-T decision in favour of the appellant. It found that there was sufficient evidence that the purchase of the SFPE units (and the income which resulted in the acquisition of them) was not a separate activity to the farming supplies so the non-business argument did not apply. Further, the Chairman stated that “…it is unnecessary for the company to prove that the cost in question was actually built into the price charged for the supply”. Therefore the cost component contention put forward by HMRC also failed.

The Chairman’s comments appear to go against HMRC’s published guidance on “direct and immediate link with the taxable person’s business”, particularly in respect of holding companies.

If you are aware of any situation where HMRC have disallowed claims for input tax for either non-business or non-cost component reasons please contact us as this case may be of benefit.

Full decision here

VAT Self-billing. What is it? The pros and cons

By Marcus Ward 24 March 2016

Self-billing is an arrangement between a supplier and a customer. Both customer and supplier must be VAT registered. Rather than the supplier issuing a tax invoice in the normal way, the recipient of the supply raises a self-billing document. The customer prepares the supplier’s invoice and forwards a copy to the supplier with the payment.

If a business wants to put a self-billing arrangement in place it does not have to tell HMRC or get approval from them, but it does have to get its supplier or customer to agree to the arrangement and meet certain conditions.

The main advantage of self-billing is that it usually makes invoicing easier if the customer (rather than the supplier) determines the value of the purchase after the goods have been delivered or the services supplied. This could apply more in certain areas such as; royalties, the construction industry, Feed-In-Tariff, and scrap metal. A further benefit is that accounting staff will be working with uniform purchase documentation.

However, there is a high risk of errors, significant confusion and audit trail weaknesses. The wrong rate of VAT may easily be applied, documents can go missing, invoices may be raised as well as self-billing documents, the conditions for using self-billing may easily be breached (a common example is a supplier deregistering from VAT) and essential communication between the parties can be overlooked. As the Tribunal chairman in UDL Construction Plc observed: “I regard the self-billing procedure as a gross violation of the integrity of the VAT system. It permits a customer to originate a document which enables him to recover input tax and obliges his supplier to account for output tax. It goes without saying that such a dangerous procedure should be strictly controlled and policed.”

The rules

For the customer

You can set up self-billing arrangements with your suppliers as long as you can meet certain conditions, you’ll need to:

Enter into an agreement with each supplier
Review agreements with suppliers at regular intervals
Keep records of each of the suppliers who let you self-bill them
Make sure invoices contain the right information and are correctly issued. This means including all of the details that make up a full VAT invoice – details here

If a supplier stops being registered for VAT then you can continue to self-bill them, but you can’t issue them with VAT invoices (and you cannot claim any input tax). Your self-billing arrangement with that supplier is no longer covered by the VAT regulations.

The Agreement

A self-billing arrangement is only valid if your supplier agrees to put one in place. If you don’t have an agreement with your supplier your self-billed invoices won’t be valid VAT invoices – and you won’t be able to reclaim the input tax shown on them.

You’ll both need to sign a formal self-billing agreement. This is a legally binding document. The agreement must contain:

Your supplier’s agreement that you, as the self-biller, can issue invoices on your supplier’s behalf
Your supplier’s confirmation that they won’t issue VAT invoices for goods or services covered by the agreement
An expiry date – usually for 12 months’ time but it could be the date that any business contract you have with your supplier ends
Your supplier’s agreement that they’ll let you know if they stop being registered for VAT, get a new VAT registration number or transfer their business as a going concern
Details of any third party you intend to outsource the self-billing process to.

An example of an agreement here

Reviewing self-billing agreements

Self-billing agreements usually last for 12 months. At the end of this you’ll need to review the agreement to make sure you can prove to HMRC that your supplier agrees to accept the self-billing invoices you issue on their behalf. It’s very important that you don’t self-bill a supplier when you don’t have their written agreement to do so.

Records

If you are a self-biller you’ll need to keep certain additional records:

Copies of the agreements you make with your suppliers
The names, addresses and VAT registration numbers of the suppliers who have agreed that you can self-bill them

If you don’t keep the required records, then the self-billed invoices you issue won’t be proper VAT invoices.

Invoices

Once a self-billing agreement is in place with a supplier, you must issue self-billed invoices for all the transactions with them during the period of the agreement.

As well as all the details that must go on a full VAT invoice you will also need to include your supplier’s:

name
address
VAT registration number

All self-billed invoices must include the statement “The VAT shown is your output tax due to HMRC” and you must clearly mark each self-billed invoice you raise with the reference: ‘Self Billing’ (This rule has the force of law). Details required on invoice here

Input tax

You’ll only be able to reclaim the input tax shown on self-billed invoices if you meet all the record keeping requirements. When you can reclaim the input tax depends on the date when the supply of the goods or services takes place for VAT purposes. This is known as the the tax point, details here

For the supplier

If one of your customers wants to set up a self-billing arrangement with you, they will be required to agree to this with you in writing. If you agree, they’ll give you a self-billing agreement to sign.

The terms of the agreement are a matter between you and your customer, but there are certain conditions you’ll both have to meet to make sure you comply with VAT regulations:

Sign and keep a copy of the self-billing agreement
Agree not to issue any sales invoices to your customer for any transaction during the period of the agreement
Agree to accept the self-billing invoices that your customer issues
Tell your customer at once if you change your VAT registration number, deregister from VAT, or transfer your business as a going concern.

Accounting for output tax

The VAT figure on the self-billed invoice your customer sends you is your output tax.

You are accountable to HMRC for output tax on the supplies you make to your customer, so you should check that your customer is applying the correct rate of VAT on the invoices they send you. If there has been a VAT rate change, you will need to check that the correct rate has been used.

Tips

As a supplier, take care not to treat self-billed invoices as purchase invoices and reclaim the VAT shown as input tax
As a customer, carry out an instant check of VAT registration numbers here
As a supplier or customer regularly check that the conditions for self-billing continue to be met and ensure good communications
As a supplier or customer ensure that the documentation accurately reflects the relevant transactions and the correct VAT rate is applied
As a supplier or customer ensure that there is a clear audit trial and that all documentation is available for HMRC inspection
It is possible to use self-billing cross-border intra-EC, but additional rules apply.