Category Archives: HMRC Publications

VAT: Electronic Sales Suppression (ESS)

By   3 January 2024
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HMRC has published new guidance on ESS and information on how to make a disclosure.

What is ESS?

ESS is also known as till fraud or till manipulation. It is where a business manipulates their till systems to hide or reduce the true value or number of sales. This is carried out through the use of ESS tools such as misusing built in till functions or installing software specifically designed to suppress sales. HMRC call this sales suppression and it is done either at, or after, the point of sale (POS). The records then appear to be correct and complete.

Businesses do this to reduce their turnover so that they pay less tax. They also do this to try to appear compliant.

Misusing a till system reduces the recorded turnover of the business and the amount of VAT payable, whilst providing what appears to be an accurate and complete record.

ESS is tax fraud. You are involved with ESS if you have made, supplied, promoted, possess or have access to an ESS tool.

You are also involved in ESS if:

  • you own an ESS tool
  • have access to an ESS tool
  • have tried to access an ESS tool

What is an ESS tool?

An ESS tool is a piece of software, computer code script or hardware. It allows a business to hide or reduce the value of individual transactions on its electronic sales records. This includes using and/or configuring a till, or point of sale system, in a way that suppresses sales.

You do not have to have used an ESS tool to suppress sales or pay less VAT for HMRC to charge a penalty for being involved in ESS, it is fraud regardless. 

HMRC powers

Finance Act 2022, Schedule 14 allows HMRC to issue an information notice for ESS. This means HMRC can ask for certain information that only applies to ESS. It allows the issue of a Notice to a ‘relevant person’ for a ‘relevant purpose’.

Who is a ‘relevant person’

A ‘relevant person’ is any person who HMRC think it might be able to charge a penalty for being involved in ESS.

What is a ‘relevant purpose’

A ‘relevant purpose’ is the reason that HMRC is asking for information about ESS and ESS Tools. The law allows HMRC to do this in three types of situations which are to help it:

  • decide whether a relevant person has made, supplied, promoted, or possesses an ESS tool — HMRC would be able to charge this person a penalty
  • understand how an ESS tool works
  • identify any other person who has made, supplied, promoted, or possesses the ESS tool

Disclosure

HMRC is offering an opportunity for those involved in ESS to make a disclosure. Early voluntary disclosure could lead to a reduction in financial penalties. Use the ‘Make a disclosure about misusing your till system’ form to tell HMRC that you have been using your till system to reduce your tax bill.

Further reading and more detailed information on penalties here.

Annual UK VAT statistics 2022 to 2023

By   4 December 2023
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HMRC has published VAT statistics for 2022 to 2023. This is an overview of VAT statistics, covering receipts information and the characteristics of the VAT trader population in the UK.

The Headlines

  • total VAT receipts in the financial year 2022-23 increased by 1% to £160 billion compared to £158 billion in 2021-22.
  • during 2022-23, the VAT population was 2,392,790. There were 2,464,109 live traders as at March 2023, with 277,441 new registrations and 397,675 deregistrations in-year.
  • total net Home VAT liability in 2022-23 was £156.76 billion.
  • the Wholesale and Retail sector was the largest contributor to net Home VAT liability (32%) with a total of £50 billion.
  • 75% of total net Home VAT liability (£117 billion) was paid by traders with an annual turnover of greater than £10 million.

Receipts dropped significantly between March 2020 and June 2020 due to the VAT payment deferment policy. Further reductions in receipts across the April 2020 to March 2021 financial year can be attributed to economic impacts of the Covid-19 pandemic as well as the temporary reduced rate of 5% for hospitality, holiday accommodation and attractions.

VAT: Changes to the DIY Housebuilders’ Scheme

By   20 November 2023
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The DIY Housebuilders’ Scheme  is a tax refund mechanism for people who build, or arrange to have built, a house they intend to live in. It also applies to converting commercial property into a house(s). This puts a person who constructs their own home on equal footing with commercial housebuilders. There is no need to be VAT registered in order to make the claim.

The Scheme can be complex, but here is our Top Ten Tips for claimants. 

The Changes

From 5 December 2023, the follow changes apply:

  • claimants will be allowed to submit claims electronically
  • the deadline for making claims will be extended to six months (from three)
  • the list of documents required to support a claim has been amended
  • a new requirement for additional evidence when a derelict building has been converted into dwelling(s) – to be made on a specific form

These changes are set out in The Value Added Tax (Refunds to “Do-It-Yourself” Builders) (Amendment of Method and Time for Making Claims) Regulations 2023 and guidance is provided by HMRC here.

The new deadline applies to claims made on, or after 5 December 2023. The deadline, broadly, begins when a dwelling is complete. There is sometimes a dispute on the completion date, so this case and commentary may be of assistance.

VAT: Best judgement; what is it, and why is it important?

By   13 November 2023
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If HMRC carry out an inspection and decide that VAT has been underdeclared (eg: either by understating sales, applying the incorrect VAT rate, or overclaiming input tax) an inspector has the power to issue an assessment to recover VAT that it is considered underdeclared. This is set out in The VAT Act 73(1)

“Where a person has failed to make any returns … or where it appears to the Commissioners that such returns are incomplete or incorrect, they may assess the amount of VAT from him to the best of their judgment and notify it to him”.

So, the law requires that when an inspector makes an assessment (s)he must ensure that the assessment is made to the best of their judgement, otherwise it is invalid and will not stand.

Guidance to surviving a VAT inspection here.

HMRC’s methods of assessing cash businesses here.

Definition of best judgment

Per Van Boeckel vs HMCE (1981) the judge set out three tests:

  1. HMRC must make a value judgment on the material set before it honestly and bona fide and not knowingly set an inflated figure and then expect the taxpayer to disprove it on appeal
  2. there must be material available
  3. HMRC is not expected to do the work of the taxpayer but instead fairly interpret the material before it and come to a reasonable conclusion rather than an arbitrary one

If any of these three tests are failed, then best judgement has not been employed. However, the onus is on the appellant to disprove the assessment.

There were further comments on the matter:

“There are…obligations placed on the Commissioners to properly come to a view on the amount of tax that was due to the best of their judgement. In particular:

  • a value judgement must be made on the material put before them
  • they must perform their function honestly
  • there must be material on which to base their judgement
  • but they should not be required to do the job of the taxpayer, or carry out extensive investigations

This means that the assessing inspector must fairly consider all material placed before them and, on that material, come to a decision that is reasonable and not arbitrary, taking into account the circumstances of the business. In some cases, some “guesswork” may be required, but it should be honestly made based on the information available and should not be spurious, but HMRC must be permitted a margin of discretion.

Experience insists that it is usually more successful if the quantum of a best judgement assessment is challenged.

Where a business successfully disputes the amount of an assessment and the assessment is reduced, it will rarely fail the best judgement test.

In the case of MH Rahman (Khayam Restaurant) CO 2329/97 the High Court recognised the practice whereby the tribunal adopts a two-step approach, looking initially at the question of best judgement and then at the amount of the assessment. The message of the High Court appeared to be that the Tribunal should concern itself more with the amount of an assessment rather than best judgement.

Arguments which may be employed to reduce a best judgement assessment are, inter alia:

  • period of calculation is unrepresentative
  • wastage
  • discounts
  • staff use
  • theft
  • seasonal trends
  • competition
  • sales
  • opening hours
  • client base, etc

HMRC’s guidance to its own officers states that: Any assessments made must satisfy the best judgement criteria. This means that given a set of conditions or circumstances, “you must take any necessary action and produce a result that is deemed to be reasonable and not arbitrary”.

In other words, best judgement is not the equivalent of the best result or the most favourable conclusion. It is a reasonable process by which an assessment is successfully reached.

In the case of CA McCourtie LON/92/191 the Tribunal considered the principles set out in Van Boeckel and put forward three further propositions:

  • the facts should be objectively gathered and intelligently interpreted
  • the calculations should be arithmetically sound, and
  • any sampling technique should be representative

Tribunals will not treat an assessment as invalid merely because they disagree as to how the judgement should have been exercised. It is possible that a Tribunal may substitute its own judgement for HMRC’s in respect of the amount of the assessment. However, this does not necessarily mean that because a different quantum for the assessment was arrived at that the assessment failed the best judgement test.

Further, it is not the function of the Tribunal to engage in a process that looks afresh at the totality of the evidential material before it (M & A Georgiou t/a Mario’s Chippery, QB October 1995 [1995] STC 1101).

It should be also noted that even if one aspect of an assessment is found not to be made to best judgement this should not automatically invalidate the whole assessment – Pegasus Birds [2004] EWCA Civ1015.

Summary

There are significant difficulties in arguing that an inspector did not use best judgement and it is a high bar to get over.

In order to succeed on appeal, it would be required to be demonstrated, to the judge’s satisfaction, that the assessment was raised:

  • dishonestly
  • vindictively
  • capriciously
  • arbitrarily
  • spuriously
  • via an estimate or a guess in which all elements or best judgement are absent
  • wholly unreasonably

and that this action applies to the assessment in its entirety.

VAT: Updated guidance on zero-rated exports

By   7 November 2023
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has been updated. The Notice sets out how and when a business can apply zero-rate exported goods.

Information on the types of fuel that the Extra Statutory Concession 9.2 does not apply to, and when you cannot zero rate the export of a motor vehicle has been updated.

And: Information on evidence relating to zero rating and direct exports – paragraphs 6.1, 6.5, 7.3 and 7.4.

VAT: Revoke an option to tax after 20 years have passed – update

By   6 November 2023
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HMRC’s Form VAT1614J has been updated. This form is used to revoke an option to tax (OTT) land or buildings for VAT purposes after 20 years have passed. There is a new address to which the form and supporting documents are sent:

BT VAT

HM Revenue and Customs

BX9 1WR

Scanned copies of the form can be emailed to: optiontotaxnationalunit@hmrc.gov.uk

 

Background: Revoking an option where more than 20 years have elapsed since it first had effect.

A business may revoke an OTT without prior permission from HMRC where more than 20 years have elapsed since the option first had effect. This is done by submitting the Form VAT1614J.

When the OTT first has effect: An OTT first had effect on the day it was exercised, or any later day that was specified when opting to tax.

Who can revoke: The relevant guidance VAT Notice 742A – which has the force of law here states that the ‘Taxpayer’ can revoke the OTT. The taxpayer is defined as the person who exercised the option to tax or is treated as making that option by virtue of a real estate election.

When the revocation will take effect: The revocation will take effect from the day that the taxpayer specifies when HMRC is notified, but this cannot be any earlier than the day on which the taxpayer notifies HMRC.

Outcomes of revoking an Option To Tax

  • any income (rent or sale) relating to the property becomes exempt
  • any input tax relating to the property is not recoverable (subject to the de minimis rules)
  • if no other taxable supplies are made a business must deregister

Revocation of option: The VAT Act 1994, Schedule 10, 25(1)(a).

VAT reliefs for charities – A brief guide

By   24 October 2023
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Charities and Not For Profit (NFP) entities – A list of VAT reliefs in one place

Unfortunately, there is no “general” rule that charities are relieved of the burden of VAT.

In fact, charities have to contend with VAT in much the same way as any business. However, because of the nature of a charity’s activities, VAT is not usually neutral and often becomes an additional cost. VAT for charities often creates complex and time consuming technical issues which a “normal” business does not have to consider.

There are only a relatively limited number of zero rated reliefs specifically for charities and not for profit bodies, so it is important that these are taken advantage of. These are broadly:

  • advertising services* received by charities
  • purchase of qualifying goods for medical research, treatment or diagnosis
  • new buildings constructed for residential or non-business charitable activities
  • self-contained annexes constructed for non-business charitable activities
  • building work to provide disabled access in certain circumstances
  • building work to provide washrooms and lavatories for disabled persons
  • supplies of certain equipment designed to provide relief for disabled or chronically sick persons

* HMRC have set out its views on digital/online advertising in Revenue and Customs Brief 13 (2020): VAT charity digital advertising relief. 

There are also special exemptions applicable to supplies made by charities:

  • income from fundraising events
  • admissions to certain cultural events and premises
  • relief from “Options to Tax” on the lease and acquisition of buildings put to non-business use
  • membership subscriptions to certain public interest bodies and philanthropic associations
  • sports facilities provided by non-profit making bodies

Although treating certain income as exempt from VAT may seem attractive to a charity, it nearly always creates an additional cost as a result of the amount of input tax which may be claimed being restricted. Partial exemption is a complex area of the tax, as are calculations on business/non-business activities which fundamentally affect a charity’s VAT position.

The reduced VAT rate (5%) is also available for charities in certain circumstances:

  • gas and electricity in premises used for residential or non-business use by a charity
  • renovation work on dwellings that have been unoccupied for over two years
  • conversion work on dwellings to create new dwellings or change the number of dwellings in a building
  • installation of mobility aids for persons aged over 60

Additionally, there are certain Extra Statutory Concessions (*ESCs) which benefit charities. These zero rate supplies made to charities, these are:

  • certain printed stationery used for appeals
  • collection boxes and receptacles
  • lapel stickers and similar tokens, eg; remembrance day poppies

* ESCs are formal, published concessions but have no legal force.

We strongly advise that any charity seeks assistance on dealing with VAT to ensure that no more tax than necessary is paid and that penalties are avoided. Charities have an important role in the world, and it is unfair that VAT should represent such a burden and cost to them.

VAT: Partial exemption – updated HMRC guidance

By   17 October 2023
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HMRC has published updated partial exemption guidance in Manual PE21500.

The main changes are in respect of updated case law, including the Royal Opera House Court of Appeal case dealing with the attribution of input tax.

In that case the CoA considered: the test of direct and immediate link, economic necessity, business/non-business, and chains of transactions.

Goodbye paper VAT registration applications

By   9 October 2023
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From November 2023 HMRC is removing the paper version of the VAT 1 Form – applying for VAT registration.

Around 95% of applicants (or their agents) currently use the online registration service: How to register for VAT and in order to improve processing time HMRC is removing the paper VAT 1 Form.

From November only a very limited number of businesses will be able to use the Form VAT 1 and these will only be available by specific request from the VAT Helpline. Those businesses are:

  • those exempt from Making Tax Digital
  • businesses applying for a registration exception
  • businesses joining the agricultural flat rate scheme
  • overseas partnerships
  • certain entities without a Unique Taxpayer Reference