Category Archives: Law

VAT in the Digital Age (ViDA)

By Marcus Ward 16 December 2024

EU Member States (MS) recently agreed the much-discussed ViDA package. Since Brexit, this does not directly affect the UK, however, it is an important pointer to the future and where we are all heading, so it will impact the UK in some ways.

The ViDA package (or a version of the finalised package) was first discussed in 2022 and has gone through a tortuous process before all MS agreed it.

What is ViDA?

ViDA aims to tackle what have been identified as three main challenges:

Real-time digital reporting

The new system introduces real-time digital reporting for cross-border trade, based on e-invoicing. It will give MS the information they need to increase the fight against VAT fraud, especially carousel fraud. The VAT Gap – the difference between expected and actual VAT revenue, has been widening across the EU over a number of years.

It is said that the move to e-invoicing will help reduce VAT fraud by up to €11 billion a year and bring down administrative and compliance costs for EU businesses by over €4.1 billion per year over the next ten years. It should ensure that existing national systems converge across the EU, and this should pave the way for EU countries that wish to introduce national digital reporting systems for domestic trade.

VAT: Personal Liability Notices

By Marcus Ward 16 December 2024

A Personal Liability Notice (PLN) can be issued by HMRC to a company’s director(s) to transfer the liability to pay VAT or a VAT penalty from the company to an individual. A PLN can also be issued to a member of an LLP.

When a PLN is issued

An officer or officers of a company may be personally liable to pay all or part of the company penalty where:

a company is liable to a penalty for a deliberate wrongdoing and
the wrongdoing is attributable to the deliberate action of an officer or officers of the company

Additionally, one of the two circumstances below must also apply

the officer gained or attempted to gain personally from the wrongdoing, or
the company is insolvent or likely to become insolvent

Any grounds for suspicion that the company may become insolvent should to be supported by evidence, for example, where there are cash flow problems, insufficient assets to cover liabilities, or evidence of phoenixism.

An officer’s liability to pay a penalty also applies to inaccuracy penalties.

Liable persons

The company officers are known in HMRC guidance as “liable officers”. These include:

elected officers
managers
directors
company secretary
any other person managing or purporting to manage any of the company’s affairs.

LLP officers are members.

A PLN’s power gives HMRC the right to recover all or part of the penalty from the liable officer rather than the company/LLP itself.

Where there is more than one deliberate wrongdoing, each deliberate wrongdoing must be considered separately for the purpose of establishing whether it should be attributed to an officer or officers.

Wrongdoings

There are four types of wrongdoings:

the issue of an invoice showing VAT by an unauthorised person
misuse of a product so that it attracts a higher rate of excise duty
the handling of goods on which payment of excise duty is outstanding
knowingly disposing of, or causing or permitting the disposal of, material at an unauthorised waste site

The wrongdoing must arise from the deliberate action of an officer of the company.

Personal gain

Once HMRC has attributed the deliberate wrongdoing to one or more company officers it must consider whether any of the officers, by fact or implication, have gained or attempted to gain personally from the wrongdoing. It is sufficient to show that each officer has gained or attempted to gain. It will not however always be possible to establish the full extent to which each officer has gained or attempted to gain, in which case HMRC would issue the PLN based on best judgment of the amount they attempted to gain personally, eg:

the officer may accept that there was an actual or attempted personal gain from a deliberate wrongdoing that can be attributed to them, or
it may be clear from business records or the officer’s lifestyle that they gained or attempted to gain personally from the results of the deliberate wrongdoing

Appeals

A liable officer can appeal against

a decision to pursue them for all or part of the penalty assessed on the company, as set out in the PLN, including whether the penalty is attributable to them, and
the amount of the penalty HMRC has allocated to them
They cannot however appeal against a decision that they have gained or attempted to gain personally from the deliberate wrongdoing, or that the company is likely to go into liquidation

PLNs are subject to the same procedures as company penalties.

Legislation

Finance Act 2008, Schedule 41: Penalties: failure to notify and certain VAT and Excise wrongdoing.

New Levy on gambling operators from 2025

By Marcus Ward 2 December 2024

The government has announced the introduction of a statutory levy on gambling operators.

The statutory levy is anticipated to generate £100 million for the research, prevention and treatment of gambling harms and is the first step to strengthening harmful gambling protections.

The Department for Culture, Media and Sport said that “The Levy will be paid by operators and collected and administered by the Gambling Commission (GC) under the strategic direction of the Government”.

The levy will be charged at a set rate for holders of GC operating licences, depending on the sector and nature of the gambling activity. The rate will range from 1.1% for online operators, to 0.1% of Gross Gambling Yield (GGY).

The relevant regulations will be laid before Parliament shortly, and it is intended that the levy will come into force on 6 April 2025. The government has also confirmed that it will implement online slot stake limits of £5 per spin for adults aged 25 years and older, and £2 for 18 to 24 year olds.

Society lottery operators will pay the levy as a proportion of proceeds retained after good causes and prizes paid out.

The system will be reviewed within five years with the first formal review expected by 2030.

A VAT did you know?

By Marcus Ward 26 November 2024

Children’s clothes are zero-rated. These include; hats, caps, braces, belts, garters and scarves, but not earmuffs – which are standard rated even if they are for children.

VAT: New Annual Accounting Scheme guidance published

By Marcus Ward 25 November 2024

HMRC have issued new guidance on the Annual Accounting Scheme.

A business can use form VAT600AA if it is already registered for VAT and wants to join the Annual Accounting Scheme.

VAT: DIY Housebuilders’ Scheme – The Brian Lawton case

By Marcus Ward 25 November 2024

Latest from the courts

In the First-Tier Tribunal (FTT) case of Brian Lawton the issue was whether a second claim under the DIY Housebuilders’ Scheme was valid.

Background

Mr Lawton appealed against the refusal of HMRC to pay a claim submitted in respect of the conversion of a barn into a dwelling and subsequent extensions. Unfortunately, the project faced delays and increased costs due to the Covid-19 pandemic. He claimed a refund of VAT in June 2021, which HMRC repaid. The appellant submitted a second planning application for an extension, which was approved, and the work was completed in October 2022. He then made a second VAT claim October 2022 which HMRC refused.

The issue

Whether it was possible to make more than one single VAT refund claim via the scheme when the project was split into two specific phases. Planning permission was granted for two developments, the:

first permission was for the conversion of a barn to a dwelling
second permission was for an extension to existing barn conversion for two bedrooms

– whether the second claim was ineligible for a refund as an extension to an existing dwelling and whether decision to disallow claim for a VAT refund was correct.

Arguments

Lawton contended that it was possible to make two separate claims due to the distinct nature of the projects, and that his first claim had been erroneous since the barn conversion was uninhabitable.

HMRC’s view was that the second claim related to an extension to a dwelling and not the actual conversion and was consequently ineligible.

Decision

Despite the FTT being sympathetic to BL’s predicament in progressing the first application development at the time of the Covid pandemic and the lockdown with the financial and economic challenges these brought about, the appeal was dismissed.

The Tribunal considered that HMRC were entitled to insist that only one claim was made under the scheme in circumstances where there has been no repayment in error or invoices and works carried out before the claim was submitted and left out of account in error or invoices issued late by a contractor.

It considered that the first claim was the only one which could be made and was restricted to the stage of development that Lawton had submitted and was covered by the completion certificate of March 2021, being “the conversion of a barn to a dwelling”.

The court emphasised that completion for VAT purposes must align with original planning permissions and agreed with HMRC’s position that extensions to existing dwellings do not qualify for refunds under the scheme.

Legislation

The VAT Act 1994, Section 35.

Commentary

This case highlights how important both timing and adhering precisely to the rules of the scheme are. The cost of a self-build can be significant and recovering any VAT incurred is important to ensure budgets are met as far as possible.

Further reading

Background to the scheme here, ten top tips here and further information and other cases on the scheme:

VAT: Zero-rated exports. The Procurement International case

By Marcus Ward 7 November 2024

Latest from the courts

In the First-Tier Tribunal (FTT) case of Procurement International Ltd (PIL) the issue was whether the movement of goods constituted a zero-rated export.

Background

Both parties essentially agreed the facts: The Appellant’s business is that of a reward recognition programme fulfiller. The Appellant had a catalogue of available products, and it maintained a stock of the most ordered items in its warehouse. PIL supplied these goods to customers who run reward recognition programmes on behalf of their customers who, in turn, want to reward to their customers and/or employees (reward recipients – RR). The reward programme operators (RPOs) provide a platform through which those entitled to receive rewards can such rewards. The RPO will then place orders PIL for the goods.

A shipper collected the goods from PIL in the UK and shipped them directly to the RR (wherever located). The shipper provided the services of delivery including relevant customs clearances etc. on behalf of the Appellant. PIL had zero-rated the supply of goods sent to RRs located overseas. All goods delivered to RRs outside the UK are delivered duty paid (DDP) or delivered at place (DAP). As may be seen by Incoterms the Appellant remained at risk in respect of the goods and liable for all carriage costs and is responsible for performing or contracting for the performance of all customs (export and import) obligations. The Appellant was responsible for all fees, duties, tariffs, and taxes. Accordingly, the Appellant is responsible for, and at risk until, the goods are delivered “by placing them at the disposal of the buyer at the agreed point, if any, or at the named place of destination or by procuring that the goods are so delivered”.

Contentions

HMRC argued that in situations where the RPO was UK VAT registered, the appellant was making a supply of goods to the RPO at a time when the goods were physically located in the UK, and consequently there was a standard-rated supply. It issued an assessment to recover the output tax considered to be underdeclared.

PIL contended that there was a supply of delivered goods which were zero-rated when the goods were removed to a location outside the UK. It was responsible (via contracts which were accepted to reflect the reality of the transactions) for arranging the transport of the goods.

Decision

The FTT held that there was a single composite supplies of delivered goods, and these were a zero-rated supply of exported goods by PIL. The supplies were not made on terms that the RPOs collected or arranged for collection of the goods to remove them from the UK. The Tribunal found that the RPOs took title to the goods at the time they were delivered to the RR, and not before such that it was PIL and not the RPOs who was the exporter. This meant that the RPOs would be regarded as making their supplies outside the UK and would be responsible for overseas VAT as the Place Of Supply (POS) would be in the country in which it took title to the goods (but that was not an issue in this case).

The appeal was allowed, and the assessment was withdrawn.

Legislation

Domestic legislation relevant here is The VAT Act 1994:

Section 6(2) which fixes the time of supply of goods involving removal as the time they are removed
Section 7 VATA sets out the basis on which the place of supply is determined. Section 7(2) states that: “if the supply of any goods does not involve their removal from or to the United Kingdom they shall be treated as supplied in the United Kingdom if they are in the United Kingdom and otherwise shall be treated as supplied outside the United Kingdom”.
Section 30(6) VATA provides that a supply of goods is zero-rated where such supply is made in the UK and HMRC are satisfied that the person supplying the goods has exported them
For completeness, VAT Regulations 1995, regulation 129 provides the framework for the zero-rating goods removed from the UK by and on behalf of the purchaser of the goods.

Some paragraphs of VAT Notice 703 have the force of law which applies here, namely the sections on:

direct and indirect exports
conditions which must be met in full for goods to be zero-rated as exports
definition of an exporter
the appointment of a freight forwarder or other party to manage the export transactions and declarations on behalf of the supplier of exporter.
the conditions and time limits for zero rating
a situation in which there are multiple transactions leading to one movement of goods

Commentary

The Incoterms set out in the relevant contracts were vital in demonstrating the responsibilities of the parties and consequently, who actually exported the goods. It is crucial when analysing the VAT treatment of transactions to recognise each party’s responsibilities, and importantly, when (and therefore where) the change in possession of the goods takes place.

VAT Schemes Guide – Alternative ways of accounting for tax

By Marcus Ward 5 November 2024

VAT Basics

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 are 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 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

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 on sales which customers have not yet paid for.

The VAT cash accounting scheme (CAS) 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 CAS 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 to pay
output tax is not payable at all if a business has a bad debt (other bad debt relief here)

Disadvantages

it 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)
it is 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 (FRS) is designed to assist smaller businesses reduce the amount of time and complexity required for VAT accounting. The FRS 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 FRS with the Annual Accounting Scheme, additionally, there is an option to effectively use a cash basis so there is no need to use CAS. Unfortunately, changes to the scheme rules regarding ” limited cost traders” mean that the scheme has become less attractive.

Advantages

depending on trade sector and circumstances, may result in a real VAT saving
simplified record keeping; no requirement to separate 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
limited cost traders impact
if a business buys 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 (however, if an item is sold for less than the purchase price, a business cannot offset losses against the profits of other items to reduce the overall VAT liability).

There is a special margin schemes for auctioneers and a variation of the Margin Scheme (Global Accounting) is considered below.

Advantages

usually beneficial if buying from (non-VAT registered) members of the public
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 CAS and Annual Accounting but it cannot combine a Retail Scheme with the FRS. However, retailers may choose to use the FRS 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. A business must still issue a VAT invoice to any customer who requests one. It is a requirement of any scheme choice that HMRC must consider it fair and reasonable.

A business can join a retail scheme at the beginning of any VAT period and HMRC does not need to be notified.

Examples of Retail Schemes

Apportionment
Direct calculation
The point of sale scheme

The required calculations vary for each scheme.

NB: 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”
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. There are also some schemes which are compulsory, like the Tour Operators’ Margin Scheme (TOMS).

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.

A VAT did you know?

By Marcus Ward 25 October 2024

If you buy a flapjack* from a vending machine in the corridor at work it is VAT free. However, if you buy the same product from a machine in the staff canteen it will be standard rated.

* Of course, zero rating only applies to a “traditional” flapjack and not cereal or energy/sports nutrition bars…

VAT Business/Non-Business HMRC Internal Manual updated

By Marcus Ward 14 October 2024

HMRC internal guidance manual has been updated on 9 October 2024.

This is likely to affect; charities and similar bodies, NFP, clubs, associations, philanthropic organisations, galleries and museums, “hobby” activities, amongst other persons.

Business or Non-Business (N-B) is very important in VAT as it determines, inter alia, whether a supplier is

liable to register
liable to account for output tax
able to recover (all, some, or no) input tax

The definition of business and N-B here.

Legislation: The I Act 1994 Section 24(5).

Further reading

I have written about this issue many times, as it is a fundamental issue in the tax.

The following articles consider case law and other relevant business/N-B issues:

Lajvér Meliorációs Nonprofit Kft. And Lajvér Csapadékvízrendezési Nonprofit Kft

Healthwatch Hampshire CIC

Pertempts Limited

Northumbria Healthcare

What the Guidance Manual covers:

an overview of the meaning of business for VAT purposes
general principles
meaning of N-B
- the term ‘business activity’ (economic activity)
- the concept of ‘business’ for VAT purposes
- the meaning of business
- the purpose of activity
- N-B activities
- persons with both business and N-B activities
- outside the scope income
- N-B activities which result in payment
determination procedures to establish whether an activity is business N-B
the relevant UK law and caselaw (per above amongst other cases)
the general approach for inspectors on business/N-B
factors to consider when determining if an activity is business or not
the link between supplies and consideration
methods of apportionment of input tax and approval of apportionment methods
formal procedures and work systems
clubs and associations
specific issues
legal history
HMRC policy background

This is the main reference material for HMRC inspectors and other employees, so it is very helpful for advisers to understand HMRC’s likely approach to a potential VAT issue.