An overview of the Domestic Reverse Charge (DRC) here.
HMRC has published amended guidance on the DRC. The main change involves the supply of scaffolding on zero-rated new build housing. The guidance confirms the change to HMRC’s previous policy and that there will be transitional period up to 1 February 2023 where businesses can use either reverse charge accounting or normal VAT rules.
HMRC has published updated guidance for agents registering business for VAT. Broadly, the new document covers what information agents require, which may be summarised as:
Limited companies
If an agent is registering a limited company client, they must have a Company Registration Number and a Corporation Tax Unique Taxpayer Reference (UTR) to complete the VAT registration process.
Individuals and partnerships
These applications do not need to have a Self-Assessment UTR to register for VAT, but if they do, it must be supplied.
An agent will be asked to verify the entity it is registering, therefore it is prudent to obtain the basic history and background of the applicant’s business before starting the process. Cleary this is good practice generally!
Well, it is nearly Christmas…. and at Christmas tradition dictates that you repeat the same nonsense every year….
Dear Marcus
My business, if that is what it is, has become large enough for me to fear that HMRC might take an interest in my activities. May I explain what I do and then you can write to me with your advice? If you think a face to face meeting would be better, I can be found in most decent sized department stores from mid-September to 24 December.
First of all, I am based in Greenland, but I do bring a stock of goods, mainly toys, to the UK and I distribute them. Where do I belong? Am I making supplies in the UK? Do I pay Customs Duty?
If I do this for philanthropic reasons, am I a charity, and if so, does that mean I do not pay VAT?
I have heard that giving vouchers can be complicated, I think I will need help with these gifts.
The toys are of course mainly for children and I wonder if zero rating might apply? I have heard that small T shirts are zero rated so what about a train set – it is small and intended for children. Does it matter if adults play with it? My friend Rudolph has told me that there is a peculiar rule about gifts. He says that if I give them away regularly or they cost more than £50 I might have to account for output tax. Is that right?
My next question concerns barter transactions. Fathers often leave me a food item such as a mince pie and a drink and there is an unwritten rule that I should then leave something in return. If I’m given Sainsbury’s own brand sherry, I will leave polyester underpants but if I’m left a glass of Glenfiddich I will be more generous and leave best woollen socks. Have I made a supply and what is the value please? My feeling is that the food items are not solicited so VAT might not be due and, in any event; isn’t food zero-rated, or does it count as catering? Oh, and what if the food is hot?
Transport is a big worry for me. Lots of children ask me for a ride on my airborne transport. I suppose I could manage to fit twelve passengers in. Does that mean my services are zero-rated? If I do this free of charge will I need to charge Air Passenger Duty? Does it matter if I stay within the UK, or the EU or the rest of the world? What if I travel to every country? My transport is the equivalent of six horsepower and if I refuel with fodder in the UK will I be liable for fuel scale charges? After dropping the passengers off I suppose I will be accused of using fuel for the private journey back home – is this non-business? Somebody has told me that if I buy hay labelled as animal food I can avoid VAT but if I buy the much cheaper bedding hay I will need to pay tax. Please comment.
May I also ask about VAT registration? I know the limit is £85,000 per annum but do blips count? If I do make supplies at all, I do nothing for 364 days and then, in one day (well, night really) I blast through the limit and then drop back to nil turnover. May I be excused from registration? If I do need to register should I use AnNOEL Accounting? At least I can get only one penalty per annum if I get the sums wrong.
I would like to make a claim for input tax on clothing. I feel that my red clothing not only protects me from the extreme cold, but it is akin to a uniform and should be allowable. These are not clothes that I would choose to wear except for my fairly unusual job. If lady barristers can claim for black skirts, I think I should be able to claim for red dress. And what about my annual haircut? That costs a fortune. I only let my hair grow that long because it is expected of me.
Insurance worries me too. You know that I carry some very expensive goods on my transport. Play Stations, mountain bikes, i-Pads and Accrington Stanley replica shirts for example. My parent company in Greenland takes out insurance there and they make a charge to me. If I am required to register for VAT in England will I need to apply the Reverse Charge? This seems to be a daft idea if I understand it correctly. Does it mean I have to charge myself VAT on something that is not VATable and then claim it back again?
And what about Brexit? I know the UK has already left the EU, but does this affect me? What about distance selling? How do I account for supplies to and from the EU? Will there be Tariffs? Do I have to queue at Dover?
Next, you’ll be telling me that Father Christmas isn’t real……….
HAPPY CHRISTMAS EVERYBODY!
Colouring books are zero rated unless they contain swear words, nudity or theft – in which case they are standard rated.
With news that HMRC is testing a new electronic submission portal – the Secure Data Exchange Service (SDES) system for overseas businesses to recover VAT incurred in the UK, I thought it timely to look at the process. Especially as the deadline is 31 December 2022 for VAT incurred between 1 July 2021 and 30 June 2022.
The SDES is currently being tested. However, it is available to businesses to make claims, but during the testing period a claimant will need to email HMRC to request access.
Access to SDES request
Claimants wishing to use SDES, are required to email newcastle.oru@hmrc.gov.uk and should include:
HMRC says it will contact the requestor within 15 calendar days to start the registration process and provide registration guidance.
Any queries on the registration process, may be addressed to the Overseas Repayment Unit on 0300 322 9279
If it goes wonky
HMRC states that during testing there may be times when SDES be stopped without notice. If it is stopped, claimants will be told by HMRC updating its online guidance. Further: If the service is stopped, it will not affect the claims that have already been submitted through it.
The alternative to claiming during testing is the good old-fashioned paper claims.
Claims in the UK
A non-UK based business may make a claim for recovery of VAT incurred in the UK. Typically, these are costs such as; employee travel and subsistence, service charges, exhibition costs, tooling, imports of goods, training, purchases of goods in the UK, and clinical trials etc.
Who can claim?
The scheme is available for any businesses that are:
What cannot be claimed?
The usual rules that apply to UK business claiming input tax also apply to claims from overseas. Consequently, the likes of; business entertainment, car purchase, non-business use and supplies used for exempt activities are usually barred.
Amount
There is no maximum claim amount, but for most periods of less than twelve months a minimum of £130 of VAT must be claimed. For annual claims or for periods less than three months ending on 30 June, the VAT must be at least £16.
Process
The business must obtain a Certificate Of Status (CoS) from its local tax or government department to accompany a claim.
The CoS must be the original and contain the:
The CoS is only valid for twelve months. Once it has expired you will need to submit a new CoS.
HMRC has previously announced (RCB 12 – 2018) that it is taken a firmer stance on what constitutes an acceptable CoS.
Claim form
The application form is a VAT65A and is available here Original invoices which show the VAT charged must be submitted with the claim form and CoS. Applications without a certificate, or certificates and claim forms received after the deadline are not accepted by HMRC. It is possible for a business to appoint an agent to register to enable them to make refund applications on behalf of that business.
Deadline
Claim periods run annually up to 30 June and must be submitted by 31 December of the same year. With the usual Christmas rush and distractions, it may be easy to overlook this deadline and some claims may be significant. Unfortunately, this is not a rapid process and even if claims are accurate and the supporting documents are in all in order the claim often takes some time to be repaid. Although the deadline is the end of the year HMRC say that it will allow an additional three months for submission of a CoS (only).
Payment
Refunds are made within six months of a “satisfactory application”.
Further information is available here HMRC guidance.
HMRC has announced a useful new tool for speeding up repayment payments.
When a business submits a repayment return (when input tax exceeds output tax) HMRC may carry out a “pre-cred” (pre-credibility check) inspection or queries. This is to ensure that a claim is valid before money is released.
If not subject to a visit, a business is likely to be asked for information to support a claim. Such requests are more common if a business normally submits payment returns or it is a first return. The requested information is usually in the form of copy purchase invoices or import documentation.
Prior to the changes, HMRC sent a letter by snail mail and the information would also be returned by post. This was often subject to delays and “misunderstandings”.
From this month, HMRC has launched an online form so that a claimant, or an agent, can upload documents to support the claim via the Government Gateway. It is hoped that this will result in businesses receiving a repayment in shorter order.
HMRC require:
Depending on circumstances, HMRC may also need:
HMRC aim to look at this information within seven working days and will contact the claimant or agent when a decision is made, or if any further information is required.
Let us hope that speeds up the process.
HMRC Notice 701/19 has been updated to cover payments under the Energy Bill Relief Scheme.
What is the scheme?
This scheme provides a price reduction to help protect all non-domestic customers in Great Britain from excessively high bills.
All non-domestic customers in Great Britain are eligible for this scheme. This includes businesses, voluntary, and public sector organisations (such as charities, schools, and hospitals).
The scheme administrator will compensate suppliers for the reduced prices that they are charging non-domestic customers and there is no need to take action or apply to the scheme as the price reduction will be applied to bills automatically.
The scheme applies to energy usage from 1 October 2022 up to and including 31 March 2023 with savings first seen in October bills.
VAT Treatment
Payments made to suppliers under the scheme are grant payments and outside the scope of VAT. VAT is only due on the amount suppliers actually charge their customers for energy supplied.
Any VAT incurred by suppliers in relation to the operation of the scheme relates to the taxable supply of energy and is therefore recoverable, subject to normal rules.
If changes are made to the scheme in the future, VAT liability may change.
Further to my article on the introduction of changes to penalties for late filing and payments of VAT and follow up guidance, the forthcoming introduction on 1 January 2023 has focussed attention on how they will impact certain businesses.
Late returns
Many businesses who have had to deal with the “old” default surcharge regime realised that it could be disproportionate and create unfair outcomes. The new penalties are, in my view, fairer, and, the changes bring some welcome features and some which are less so.
The good news is that the introduction of the new rules mean that businesses will start with a clean slate, regardless of their position under the default surcharge mechanism – there is no carry over form one set of rules to another.
However, for the first time, late rendering of returns can incur penalties and interest if the returns are either:
In the previous regime when “non-payment” returns were filed late, this did not trigger a default.
Nil returns
Businesses which did not carry out any activity in the prescribed period, eg; intending traders, businesses temporary closed, or at the end of their life will have to recognise that a late nil return will now trigger points.
Repayment returns
Again, businesses which typically submit repayment returns, such as; new build constructors, exporters, and any business supplying zero rated goods or services will have to recognise tardy submissions will now affect them.
We understand that HMRC is aware of the impact on this sector and is planning to communicate with these businesses to make them aware of the new changes.
An additional point; from 1 March 2021 the Domestic Reverse Charge was introduced for the construction industry. As a result, an increased number of builders found themselves in a repayment position and will now need to ensure timely returns to avoid penalties.
Late payments – penalties and interest
The new late payment penalties regime will replace the default surcharge, which served as a combined late submission and late payment sanction.
Under the new rules, there will be two separate late payment penalties.
The first penalty has two separate elements:
The second penalty is triggered from day 31. This is charged daily and is based on an annual rate of 4% of any outstanding amount.
If all outstanding VAT is paid within 15 days of the due date, no late-payment penalty will arise. Although here will however still be late payment interest.
Interest
From 1 January 2023, HMRC will charge late-payment interest from the day a VAT payment is overdue to the day the VAT is paid, calculated at the Bank of England base rate plus 2.5%.
Time-to-Pay arrangements
HMRC offers the option of requesting a Time To Pay arrangement. This will enable a business to stop a penalty from accruing any further by approaching HMRC and agreeing a schedule for paying their outstanding tax.
Period of familiarisation
HMRC say that to give businesses time to get used to the changes, it will not be charging a first late payment penalty for the first year from 1 January 2023 until 31 December 2023, if the tax is paid in full within 30 days of the payment due date.
Appeals
It is anticipated that the number of appeals against late filing/payments will be reduced because of the more proportional approach of the new rules. However, it is still possible to appeal if a taxpayer considers the imposition of penalties and interest is unfair. An appellant needs a reasonable excuse to succeed.
Action
Advisers should ensure that clients affected by the new rules, specifically repayment business and those submitting nil returns, are aware of the impact. I know that a lot of these are habitual late filers and some “save up” returns for when they need a cash injection.
It will also be prudent for advisers to monitor penalty points accrued. We understand that HMRC is looking at how this information could be made available to agents and taxpayers. We expect more details about this in the coming months, including how software can be used to display points.
Repayment supplement
The new system may be fairer, however, the withdrawal of the repayment supplement is not! More details here. (I am still quite cross!)
If any of the following details of a business’ registration changes, HMRC must be notified on form VAT484:
The relevant guidance has been updated to reflect the new requirement that such changes must be notified within 30 days of the change taking place. Failure to do so will result in penalties.
Other changes
HMRC must be notified at least 14 days in advance if a business changes its bank details.
A person must tell HMRC within 21 days if they take over the VAT responsibilities of someone who has died or is ill and unable to manage their own affairs. Use form VAT484 and post it to the address on the form.
If you join or leave a VAT group, you must first cancel your VAT registration. You will need to use the group’s VAT number once you’ve joined it. The VAT group should tell HMRC about the new member.
You need to tell HMRC if the structure of the business changes, eg; incorporation or a Transfer Of a Going Concern.
If a business has overdeclared output tax on past returns then it seems reasonable that this should be corrected, either by adjusting a current return or submitting a form VAT652 if the “error” is over £10,000 net.
If it is a genuine adjustment, surely HMRC must recognise the correction and either make a repayment or offset the overdeclaration against a current amount of VAT due.
The answer is yes, but… “unjust enrichment”…
Unjust enrichment
HMRC has a defence of unjust enrichment via The VAT Act 1994, sect 80(3)
“It shall be a defence, in relation to a claim under this section by virtue of subsection (1) or (1A) above, that the crediting of an amount would unjustly enrich the claimant.”
This means that HMRC can refuse to repay a claim if they can show that it would unjustly enrich the taxpayer.
It should always be borne in mind that if a claimant absorbed the burden of the wrongly charged VAT himself then unjust enrichment cannot be used as a defence against refusal to repay the claim. Loss or damage to a business due to overpaid VAT is considered in detail here.
Meaning
A refusal to repay a VAT claim using the unjust enrichment contention is to prevent a business becoming enriched at the expense of other entities who actually bore the cost of the incorrectly charged VAT. The authorities consider that a taxpayer should not be put into a better position by recovering the VAT than if VAT had not been charged at all. HMRC regard it as appropriate for unjust enrichment to be considered every time a claim is made.
The recipients of the corrected supply may be final consumers but can also be businesses, charities, etc, who were unable to deduct the overcharged VAT as input tax.
The salient point being whether the VAT was added to the price charged by the claimant or whether the claimant would have charged less had he known that his supplies were not liable to VAT.
HMRC consider that the process of establishing whether a claimant will be unjustly enriched by payment of his claim is two-stage procedure.
First stage
Whether the burden of the overdeclared VAT being claimed was passed on to the claimant’s customers, that is, whether the claimant charged the market rate* plus VAT. This is done on the basis of an economic analysis of the market in which the claimant is operating see; Berkshire Golf Club [2015] UKFTT 627 (TC).
If the customer deducted the wrongly invoiced output tax as input tax, HMRC is entitled to assume that the supplier passed the economic burden of the tax charge on to its customers. In this case, the VAT wrongly accounted for is a cost neither to the supplier nor to the customer.
Second stage
This stage occurs if the claimant accepts that he passed the burden of the tax charge on to his customers but argues that doing that caused loss or damage to his business, for example, by loss of customers or of profits, ie; has the taxpayer been economically damaged by having to bear the VAT cost?
The burden of proof of establishing that there is unjust enrichment falls upon HMRC. The standard of proof is the civil standard of proof; on a balance of probabilities.
HMRC will require the claimant to provide all of the relevant information on; pricing, policy and any other relevant documentation that establishes the pricing strategy**. It is to the taxpayer’s advantage to demonstrate that their margins have been depressed, as they have been required to charge VAT incorrectly.
Factors that HMRC consider:
The reimbursement scheme
This is an undertaking to comply with certain reimbursement arrangements. The full text of the required undertaking is set out here.
This scheme applies where a business accepts, or HMRC prove, that by receiving a refund of sums incorrectly accounted for as output tax the business would be unjustly enriched at its customers’ expense and it wishes to refund the money they overpaid. If a customer was able to deduct all of the mistaken VAT charge as input tax HMRC will not regard them as having borne the burden of the charge.
In such cases HMRC will only make a refund of overpaid VAT if the taxpayer agrees to reimburse those customers in accordance with the terms of the scheme. More details Notice 700/45.
If HMRC repay a claim and the claimant is unable or unwilling to reimburse its customers (who bore the cost) with any amounts paid to him by HMRC then unjust enrichment will always apply. See The Deluxe High Court case.
Prices after a claim
It is worth bearing in mind that where a claimant has kept prices the same after he has found out that no VAT was due on the supplies in question, courts are likely to assume that that is because the business was charging the market rate. That assumption is made on the basis that, if the market rate were less, he would be compelled to reduce his prices. HMRC often check any post-claim price changes (or lack thereof).
Case law (summary)
The salient points from European Court of Justice case law may be summarised as:
* The case law of the European Court of Justice and of the courts in the UK begin with the assumption that in a free market economy (and probably even in a managed economy) a business will charge the market rate and account for any VAT out of his profit margin.
** A pricing strategy is a business’s approach to determining the price at which it offers goods or services to the market. Pricing policies ensure businesses remain profitable and they give them the flexibility to price separate products differently.
Pricing policies refer to the processes and methodologies a businesses uses to set prices for their supplies. There are various pricing strategies that may be used, but some of the more common ones include: