Category Archives: Law

VAT: Issue of zero-rating certificate – The Westow Cricket Club case

By Marcus Ward 18 December 2019

Issue an incorrect certificate to obtain zero rated building work at your peril! Don’t get caught out – A warning.

In the First Tier Tribunal (FTT) case of Westow Cricket Club (WCC) the appeal was against a penalty levied by HMRC for issuing a certificate to a contractor erroneously under The VAT Act 1994, Section 62 (1).

Background

WCC was an entity run by volunteers but was not a charity, although it was a Community Amateur Sports Club (“CASC”). It decided to build a new pavilion and wished to take advantage of certain zero rating which was available for the construction of a building that the

“…organisation (in conjunction with any other organisation where applicable) will use the building, or the part of the building, for which zero-rating is being sought …..solely for

a relevant charitable purpose, namely by a charity in either or both of the following ways:

….(b) As a village hall or similarly in providing social or recreational facilities for a local community.”

– Public Notice 708 para 14.7.1.

To ensure that the issue of such a certificate was appropriate, the appellant wrote to HMRC giving details about the building project and seeking guidance on the zero rating of supplies to WCC in the course of the construction of the pavilion. The response was important in this case as WCC sought to rely on it as a reasonable excuse. Part or the reply stated:

“HM Revenue & Customs policy prevents this Department from providing a definitive response where we believe that the point is covered by our Public Notices or other published guidance, which, in this case, I believe it is. In view of the above, please refer to section 16 of Public Notice 708 Buildings and construction. This explains when you can issue a certificate. Section 17 includes the certificates. Furthermore, I would refer you to sub-paragraph 14.7.4 which covers what is classed as a village hall or similar building. Providing the new pavilion meets the conditions set out, and it appears to do so, the construction work will be zero-rated for VAT purposes…”

Decision

Regrettably, the FTT found that, despite HMRC’s letter expressing a ‘non definitive’ view; which was wrong, this was insufficient to provide reasonable excuse and could not be relied upon. The FTT made references to the fact that the club was not a charity and could not therefore issue the certificate. Consequently, the 100% penalty was applicable and not disproportionate (the penalty imposed is nothing more than the VAT that would have been paid by any other CASC seeking to build a pavilion incurring a vatable supply of a similar sum).

Commentary

HMRC was criticised for potentially leaving taxpayers in ‘no man’s land’ by expressing a view whilst at the same time saying that this was not a definitive response. This is a common tactic used by HMRC and one which many commentators, including myself, have criticised.

Tribunal’s unease

The judge commented that he trusted that HMRC will take note of his concerns and if this is a matter of policy to revisit it in light of the comments made in this decision. Let us hope HMRC listens. It is also an important case for charities (and others) to note when considering if they are able to obtain the construction of buildings VAT free. This is not a straightforward area, and the penalty for getting it wrong is clearly demonstrated here.

Always get proper advice – and don’t rely on vague rulings from HMRC!

VAT: The extent of exempt childcare. The RSR Sports case

By Marcus Ward 3 December 2019

Latest from the courts

In the RSR Sports Limited First Tier Tribunal (FTT) case the issue was whether the provision of holiday camps for children was exempt healthcare via VAT Act 1994, Schedule 9, Group 7, item 9 – “services… closely linked to the protection of children and young persons” and supplies of “welfare services”

Background

The Appellant traded under the name of Get Active Sports. It provided various services including the provision of school holiday camps which were the subject of the appeal.

The holiday camps were Ofsted registered and “pupils will be safe and receiving the best possible childcare”. The appellant worked with children aged 4-16 and had specially designed programmes from multi-sports and games to themed arts and crafts. The staff that provided the holiday camp services were not required to have any teaching or coaching qualifications (but needed to be DBS checked). They were just required to ensure that the children were kept busy with a variety of activities and were kept safe.

The appellant considered that these supplies constituted supplies of “ services…closely linked to the protection of children and young persons” – within the meaning of Article 132(1)(h) of Council Directive 2006/112/EEC and supplies of “welfare services” under UK legislation as above. HMRC submitted that the predominant element of that single composite supply was the provision of activities because, weighing up objectively, from the position of the parents whose children attended the holiday camps, the importance to those parents of the childcare aspects of the holiday camps in comparison to the importance to them of the various activities which were made available at the holiday camps, the latter outweighed the former. The supplies did not fall within the exemption and should have therefore properly been treated as standard-rated as the primary aim of the appellant in running the camps was to offer sports and activities to the attendees and that the childcare was simply a by-product of the activity-based courses.

Decision

It was decided that the holiday camp services involved the provision of activities in the course of caring for children during the school holidays. In other words, the holiday camp services included both an activities element and a childcare element.

Although the judge commented that; it was fair to say that this case was finely-balanced, the services provided by RSR amounted to a single composite supply of which the predominant element was childcare (as opposed to the provision of activities) and therefore they fell within the scope of the above provisions and qualified for the exemption

The FTT agreed with HMRC that one element of the holiday camp services was the provision of activities, but it did not agree with the proposition that just because the provision of activities was an element of the services, that inevitably means that the provision of those activities, as opposed to the provision of childcare, was the predominant element of its supply.

Commentary

It looks like another close call, but the Tribunal appears to have got it right. An interesting aspect was RSR considering it strange that by offering activities to the children, as opposed to sitting them down in front of a television, the appellant was to deprive itself of the ability to bring the its services within the scope of the exemption. The mere fact that the appellant was encouraging parents to choose active childcare arrangements over more passive ones should not cause the relevant services to fall outside the exemption. So a “bit” of sport was OK, but not too much…

VAT: The importance of accurate accounts – The Euro Systems case

By Marcus Ward 3 December 2019

Latest from the courts

In the First Tier Tribunal (FTT) case of Euro Systems (Scotland) Ltd (ESSL) the issue was whether the systems and controls of the appellant could be relied on, or whether an exercise carried out by HMRC which reconciled VAT declarations with unaudited accounts was to be preferred.

Background

HMRC issued an assessment which was a combination of input VAT claimed being overclaimed, and output tax being understated. This was on the basis that the inspector had concerns over the accuracy of records being kept, these were mainly spreadsheets and Sage. A comparison between annual accounts and the relevant returns was made leading to the assessed amount. ESSL had grown quickly, and HMRC considered that the record keeping had not kept pace. An additional point was; why was the business continuing in a VAT repayment situation if it was growing steadily and making profits as per the annual accounts?

The bookkeeping and other administration was carried out by an unqualified and unsupervised receptionist.

The appellant’s director said that the information used to generate the VAT returns was the same as that provided to a firm of chartered accountants to prepare the annual accounts for ESSL, additionally, it had several corruptions within the Sage system, which resulted in a loss of data.

Decision

It was accepted that the appellant had carried out a lot of work to investigate the records due to the corruption of Sage and manually listing many thousand invoices to support input tax claims. However, due to the number of errors and inaccuracies, the records could not be relied on and the figures from HMRC were to be preferred as the accounts had some inherent integrity from being based on double-entry accounting.

The assessment was consequently made in HMRC’s “best judgement”.

Best judgement is set out in the Van Boeckel test:

Van Boeckel “does not envisage that burden being placed on the commissioners of carrying out exhaustive investigations”.

“What the words “best of their judgment” envisage … is that the commissioners will fairly consider all material placed before them and, on that material, come to a decision which is one which is reasonable and not arbitrary as to the amount of tax which is due.”

Subject to an adjustment for the duplication of some figures by HMRC the appeal was dismissed.

Commentary

Similar reconciliations to the one carried out here, plus bank reconciliations and similar, are a staple in a standard VAT inspection. How these are carried out, and the weight given to them can be contentious and they are often used for more than a broad-brush credibility exercise. We have a good track record in having this type of assessment reduced or removed and, in nearly every case, it is worthwhile challenging any such assessment.

Of course, this case provides a reminder, should one be required, that accurate and timely records are vital to ensure tax compliance and, as we always say: Right Tax, Right Time!

VAT: Input tax claim – business or personal? The Taylor Pearson (Construction) Ltd case

By Marcus Ward 3 December 2019

Latest from the courts

In the Taylor Pearson (Construction) Ltd (TPCL) First Tier Tribunal (FFT) case the issue was whether input tax incurred on professional fees in respect of tax planning and the issue of new (E Class) shares to directors was for business purposes or for the benefit of the directors in their personal capacity.

Background

The overall issue in this appeal was whether the company was entitled to deduct input VAT in relation to services provided by tax advisers as to how the company might reduce its tax and NIC liabilities in rewarding its directors and reduce the income tax liabilities of the directors. There are two specific issues:

Whether the services supplied were used for the purpose of the company’s business within the meaning of VATA 1994, section 24.
Whether the services supplied do not have a direct and immediate link with taxable output supplies because they have a direct and immediate link with exempt supplies, being the issue of share capital in the company.

HMRC argued that this appeal is similar to Customs and Excise Commissioners v Rosner [1994] STC 228 and Finanzamt Köln-Nord v Becker (Case C-104/12) in which input VAT incurred in defending the sole trader or individual employees personally, in criminal proceedings entirely unconnected to the business, was held not to be deductible.

Another issue, which was dealt with fairly perfunctory, was whether the issue of new shares was a supply for VAT purposes to which an element of the input tax could be attributed. As per the Kretztechnik ECJ case and subsequent HMRC guidance – the issue of shares was not a supply and the company was entitled to recover the associated input tax to the extent that its business activities generated taxable supplies (business of making supplies of construction goods and services in TPCL’s case).

Decision

In respect of whether the expenditure was for the benefit of the business, the judge stated that “...The advice in question was provided to the company and although the directors were significant beneficiaries of the arrangements that was entirely in their capacity as directors and employees of the company and not in any personal capacity.”

Further:

“…HMRC argued that the incentivisation of employees did not have a direct and immediate link with the purposes of the business I do not consider that this argument has any merit whatsoever and do not understand why HMRC put it forward. This concerns me.”

It is no wonder that the judge commented on this. This appeal was completely on all fours with the FTT case of Doran Bros (London) which HMRC did not appeal.

Consequently, it was decided that:

the services were used for the purposes of the company’s business, and
they did not have a direct and immediate connection with the issue of share capital.

The appeal was therefore allowed.

Commentary

It was a surprising decision by HMRC to take this to FTT. Case law in respect of Kretztechnik is well established and the purpose to which the funds created by a new share issue were put appears irrelevant. I also find it difficult to see how HMRC could ignore Doran Bros which was very clear and on all fours with this case, while referencing cases in which companies defended its directors against accusations of wrongdoings. In this case, the business purpose was to reward and incentivise TPCL’s directors.

This can be a difficult area of the tax and HMRC’s approach in this case demonstrates that it is prepared take these cases as far as possible. It is nearly always the case that VAT incurred on expenditure which is designed to increase staff morale and performance is a business expense.

VAT: Place of supply of matchmaking. The Gray & Farrar case

By Marcus Ward 26 November 2019

Latest from the courts

The Gray & Farrar International LLP (G&F) First Tier Tribunal (FTT) case.

The romantic side of VAT (well…if romance comes at a cost of £15,000 a time).

The issue here was the place of supply (POS) of the services provided by G&F to clients all over the world.

Background

The Appellant ran an exclusive matchmaking business. It provides its services to clients in many jurisdictions. It argued that its supplies to non-taxable (individuals) persons who reside outside the EU where outside the scope of UK VAT because the POS was where the supply was received. HMRC formed the view that these services did not fall within the required definition of “consultancy” such that the POS was where the business belonged. As G&F belonged in the UK, the relevant services were subject to VAT. So, the issue was: whether matchmaking could be regarded as a consultancy service.

Legislation

The EU legislation is found at The Principal VAT Directive, Article 59(c) (“para(c)”) and in the UK law at The VAT Act 1994, Schedule 4A para 16(2)(d).

In the words of para (c):

“the services of consultants, engineers, consultancy firms, lawyers, accountants and other similar services, as well as data processing and the provision of information”

So, did G&F’s services fall within para (c)?

Decision

The judge stated that “… the services provided by the appellant must be compared with services “principally and habitually” provided by a consultant…and that such similarity is achieved when both types of service serve the same purpose.” And that consultancy is “advice based on a high degree of expertise” or “specialist and expert advice by someone with extensive experience/qualifications on the subject”. Was matchmaking that?

Well, the FTT decided that services would fall within para(c) if they are services of the sort which are primarily and habitually supplied by one or more of the specifically listed suppliers and that “consultants” are not limited to persons who are members of the liberal professions but to persons who are in ordinary usage “consultants” and typically act in an independent manner – that is to say are not dependent on, or integrated with, their client.

HMRC argued that what G&F were providing was the possibility of entering into a long-term happy relationship: and that was what the Appellant was selling. The FTT accepted that that dream was what the typical client would want, but saw a difference between what is provided and the reason the service is wanted. It gave the example of a school providing education, not the hope of a good job.

Further, HMRC contended that G&F’s activities went far beyond the provision of advice and information because they involved all the other elements that go into the service of matchmaking. Those activities included ascertaining and executing the needs of the client, reading the non-verbal clues, reading body language, and the inexplicable magic of applying knowledge based on intuition and experience to identify people who may be compatible. The FTT said that that was all very well but drew a distinction between the skills required by the seller and what was sold.

Split decision

A first Tribunal member concluded that the material elements of the supply consisted only of the provision of information and expert advice, and the supply fell within para (c).

Another Tribunal member considered that the actions of the liaison team in G&F promoted and helped the making of a successful relationship, but he was not persuaded that the support provided by the liaison team assisted the provision of information about a potential partner or served the supply of G&F’s MD’s advice that a particular person might be suitable. It was support in the developing of a relationship – support in addition to the use of the information and expert advice received – and was not shown to be sufficiently inconsequential to say that it was just part of those elements. The liaison team provided a form of ready-made confidante for the client with whom he or she could discuss a relationship and his or her hopes and concerns for it or for other relationships. It enabled him or her to obtain the kind of support one might obtain from a friend – a listening ear or sounding board – and informal advice.

As two members of the Tribunal disagreed on the outcome, it fell to the judge to give a casting vote; which he did in favour of dismissing the appeal.

So, in this case at least, matchmaking is not consultancy. (Although I like the definition of the service being “inexplicable magic”).

Commentary

If it easy to make assumptions about the precise nature of a type of service. In order for certain services to be UK VAT free they need to meet the relevant criteria fully. “Consultancy” is a bit of a catch all, but this case illustrates the dangers of a lack of analysis. This was a close case and I could see the decision going the other way on another day quite easily.

VAT: Property and construction – amended HMRC guidance

By Marcus Ward 15 November 2019

HMRC has issued a new Buildings and Construction VAT Notice 708.

The changes

The changes are:

paragraph 1.5 has been included to indicate ‘force of law’
paragraph 2.1.1 has been removed (and subsequent paragraphs re-numbered), because it is no longer applicable
paragraph 3.2.4 provides new information for facades
paragraph 3.3.7 has been amended to remove the Extra-Statutory Concession for connecting utilities to existing buildings
paragraphs 6, 8.3.4 and 8.4 have been reworded to improve clarification
paragraph 14.7.1 has been amended following changes in the Finance Act 2010

Help

Please contact us if you have any queries on the complex areas of; land, buildings or construction.

VAT Payment Problems – Q & As

By Marcus Ward 12 November 2019

If you can’t pay your VAT bill, please do not put your head in the sand, the problem will not go away. Here are some answers to the most commonly asked VAT payment problems.

Q: I have received a demand notice for payment of VAT. Why?

A: HMRC have not received payment of the VAT liability that is described in the demand notice. You should therefore pay the outstanding debt without delay so as to avoid further recovery action. HMRC take prompt action to recover debts.

Q: I am not able to pay the debt immediately because of a temporary cash-flow problem. What should I do?

A: You should make urgent contact with your bank or your financial adviser to explore means of overcoming these temporary financial difficulties.

Q: I have consulted the bank/financial adviser, but they are unable to help. What else can I do?

A: Without further delay contact the Regional Debt Management Unit whose address appears on the demand notice. They may be able to help you by agreeing a brief period in which to pay the debt. They are usually helpful and will consider carefully all practical options for settlement. However, if these do not produce a solution or they do not receive a response to their request for payment, they may, like other creditors, take action to recover the money they are owed.

Q: What is the Default Surcharge?

A: Default Surcharge is a civil penalty to encourage businesses to submit their VAT returns and pay the tax due on time.

Q: When will a Default Surcharge be issued?

A: A business is in default if it sends in its VAT return and or the VAT due late. No surcharge is issued the first time a business is late but a warning (a Surcharge Liability Notice) is issued. Subsequent defaults within the following twelve months (the “surcharge period”) may result in a surcharge assessment. Each time that a default occurs the surcharge period will be extended. There is no liability to a surcharge if a nil or repayment return is submitted late, or the VAT due is paid on time but the return is submitted late (although a default is still recorded).

Q: How much is it?

A: The surcharge is calculated as a percentage of the VAT that is unpaid at the due date. If no return is submitted the amount of VAT due will be assessed and the surcharge based on that amount. The rate is set at 2% for the first default following the Surcharge Liability Notice, and rises to 5%, 10% and 15% for subsequent defaults within the surcharge period. A surcharge assessment is not issued at the 2% and 5% rates if it is calculated at less than £200 but a default is still recorded and the surcharge period extended. At the 10% and 15% rates the surcharge will be the greater of the calculated amount or £30.

Q: What sort of assessments are sent out?

A: An assessment may be issued if a VAT return is not submitted by the due date. The amount may be based on previous returns. If a business does not submit its returns time after time, the assessment value will increase. An officer may also issue an assessment after a visit, if they have found errors in the amount of tax declared on previous returns. Both types are included in the taxpayers’ debt and are collected in the normal way if they are not paid promptly.

Help

There are a number of schemes available which may help cashflow or possibly reduce the amount of VAT you pay.

Cash Accounting – where you only pay VAT to HMRC when you have received payment from your customer.

Annual Accounting – where you make set monthly payments and make one return a year with an adjusting payment.

Flat Rate Scheme – where you pay a set percentage of your turnover rather than calculating output tax less input tax.

Bad Debt Relief – where you are able to reclaim VAT relief on your bad debts.

Please contact us if VAT payments are proving a problem for your business. Negotiation with HMRC is possible.

Charities and VAT

By Marcus Ward 6 November 2019

Surely charities don’t have to pay taxes?

This is a common myth, and while charities and NFPs do enjoy some VAT reliefs, they are also liable for a number of VAT charges.

Charities have a very hard time of it in terms of VAT, since not only do they have to contend with complex legislation and accounting (which other businesses, no matter how large or complicated do not) but VAT represents a real and significant cost.

By their very nature, charities carry out “non-business” activities which means that VAT is not recoverable on the expenses of carrying out these activities. Additionally, many charities are involved in exempt supplies, eg; fundraising events, property letting, and certain welfare and educational services, which also means a restriction on the ability to recover VAT on attributable costs.

These two elements are distinct and require separate calculations which are often very convoluted. The result of this is that charities bear an unfair burden of VAT, especially so since the sector carries out important work in respect of; health and welfare, poverty, education and housing etc. Although there are some specific reliefs available to charities, these are very limited and do not, by any means, compensate for the overall VAT cost charities bear.

Another issue is legal uncertainty over what constitutes “business income” for charities, especially the VAT status of grants. It is worth bearing in mind here the helpful comment in the EC case of Tolsma translated as: “…the question is whether services carried on by [a person] were carried on for the payment or simply with the payment”.

Many charities depend on donations which, due to the economic climate have fallen in value at a time when there is a greater demand on charities from struggling individuals and organisations.

What can be done?

Ensure any applicable reliefs are taken advantage of.
If significant expenditure is planned, ensure that professional advice is sought to mitigate any tax loss.
Review the VAT position to ensure that the most appropriate partial exemption methods and non-business apportionment is in place.
Review any land and property transactions. These are high value and some reliefs are available. Additionally it is possible to carry out planning to improve the VAT position of a property owning charity.
Review VAT procedures to ensure that VAT is declared correctly. Penalties for even innocent errors have increased recently and are incredibly swingeing.
Consider a VAT “healthcheck” which often identifies problems and planning opportunities.

We have considerable expertise in the not for profit sector and would be pleased to discuss any areas of concern, or advise on ways of reducing the impact of VAT on a charity.

More detail on VAT and Charities for guidance

Business activities

It is important not to confuse the term ‘trading’ as frequently used by a charity to describe its non-charitable commercial fund-raising activities (usually carried out by a trading subsidiary) with ‘business’ as used for VAT purposes. Although trading activities will invariably be business activities, ‘business’ for VAT purposes can have a much wider application and include some or all of the charity’s primary or charitable activities.

Registration and basic principles

Any business (including a charity and NFP entity or its trading subsidiary) that makes taxable supplies in excess of the VAT registration threshold must register for VAT. Taxable supplies are business transactions that are liable to VAT at the standard rate, reduced rate or zero rate.

If a charity’s income from taxable supplies is below the VAT registration threshold it can voluntarily register for VAT but a charity that makes no taxable supplies (either because it has no business activities or because its supplies or income are exempt from VAT) cannot register.

Charging VAT

Where a VAT-registered charity makes supplies of goods and services in the course of its business activities, the VAT liability of those supplies is, in general, determined in the normal way as for any other business. Even if VAT-registered, a charity should not charge VAT on any non-business supplies or income.

Reclaiming VAT

This is usually a two stage process (a combined calculation is possible but it must have written approval from HMRC – Notice 706 para 7) . The first stage in determining the amount of VAT which a VAT-registered charity can reclaim is to eliminate all the VAT incurred that relates to its non-business activities. It cannot reclaim any VAT it is charged on purchases that directly relate to non-business activities. It will also not be able to reclaim a proportion of the VAT on its general expenses (eg; telephone, IT and electricity) that relate to those non-business activities.

Once this has been done, the remaining VAT relating to the charity’s business activities is input tax.

The second stage: It can reclaim all the input tax it has been charged on purchases which directly relate to standard-rated, reduced-rated or zero-rated goods or services it supplies.

It cannot reclaim any of the input tax it has been charged on purchases that relate directly to exempt supplies.

It also cannot claim a proportion of input tax on general expenses (after adjustment for non-business activities) that relates to exempt activities unless this amount, together with the input tax relating directly to exempt supplies, is below the minimis limit.

Business and non-business activities

An organisation such as a charity that is run on a non-profit-making basis may still be regarded as carrying on a business activity for VAT purposes. This is unaffected by the fact that the activity is performed for the benefit of the community. It is therefore important for a charity to determine whether any particular transactions are ‘business’ or ‘non-business’ activities. This applies both when considering registration (if there is no business activity a charity cannot be registered and therefore cannot recover any input tax) and after registration. If registered, a charity must account for VAT on taxable supplies it makes by way of business. Income from any non-business activities is not subject to VAT and affects the amount of VAT reclaimable as input tax.

‘Business’ has a wide meaning for VAT purposes based upon Directive 2006/112/EC (which uses the term ‘economic activity’ rather than ‘business’), UK VAT legislation and decisions by the Courts and VAT Tribunals. An activity may still be business if the amount charged does no more than cover the cost to the charity of making the supply or where the charge made is less than cost. If the charity makes no charge at all the activity is unlikely to be considered business.

An area of particular difficulty for charities when considering whether their activities are in the course of business is receipt of grant funding.

Partial Exemption

The VAT a business incurs on running costs is called input tax. For most businesses this is reclaimed on VAT returns from HMRC if it relates to standard rated or zero rated sales that that business makes. However, a business which makes exempt sales may not be in a position to recover all of the input tax which it incurred. A business in this position is called partly exempt. Generally, any input tax which directly relates to exempt supplies is irrecoverable. In addition, an element of that business’ general overheads are deemed to be in part attributable to exempt supplies and a calculation must be performed to establish the element which falls to be irrecoverable.

Input tax which falls within the overheads category must be apportioned according to a so called; partial exemption method. The “Standard Method” requires a comparison between the value of taxable and exempt supplies made by the business. The calculation is; the percentage of taxable supplies of all supplies multiplied by the input tax to be apportioned which gives the element of VAT input tax which may be recovered. Other partial exemption methods (so called Special Methods) are available by specific agreement with HMRC.

My flowchart may be of use: partial exemption flowchart

De Minimis

There is however relief available for a business in the form of de minimis limits. Broadly, if the total of the irrecoverable directly attributable (to exempt suppliers) and the element of overhead input tax which has been established using a partial exemption method falls to be de minimis, all of that input tax may be recovered in the normal way. The de minimis limit is currently £7,500 per annum of input tax and one half of all input tax for the year. As a result, after using the partial exemption method, should the input tax fall below £7,500 and 50% of all input tax for a year it is recoverable in full. This calculation is required every quarter (for businesses which render returns on a quarterly basis) with a review at the year end, called an annual adjustment carried out at the end of a business’ partial exemption year. The quarterly de minimis is consequently £1,875 of exempt input tax.

Should the de minimis limits be breached, all input tax relating to exempt supplies is irrecoverable.

Summary

One may see that this is a complex area for charities and not for profit entities to deal with. Certainly a review is almost always beneficial, as are discussions regarding partial exemption methods.

Please click here for more information on our services for charities.

New VAT Group rules

By Marcus Ward 6 November 2019

Changes to VAT Group rules – an increased opportunity

From 1 November 2019 the rules for VAT grouping have changed.

What is a VAT group?

A VAT group allows two or more entities to account for VAT under a single registration number with one of the corporate bodies in the group acting as the representative member.

The group is registered in the name of that representative member, who is responsible, on behalf of all of the other members of the group, for completing VAT returns and paying and reclaiming VAT.

All supplies of goods and services made by any member of the group to a third party outside the group are treated as having been made by the representative member. Similarly, any supply of goods or services made by a third party outside the group to any member of the group is treated as having been made to the representative member.

Supplies of goods or services between group members are not subject to VAT and a single VAT return will be completed each period for the entire group, as opposed to separate businesses submitting individual returns.

The changes

Prior to 1 November, only bodies corporate were able to form a VAT group (mainly companies and LLPs). From the beginning of this month, VAT grouping is additionally available for all entities, including; partnerships, sole traders and trusts in certain cases.

Eligibility

Via existing legislation, grouping is permitted if the control tests are passed. Bodies corporate can form a VAT group if:

each is established or has a fixed establishment in the UK
they are under common control

(There are additional tests for certain ‘specified bodies’ set out in Notice 700/2 para 3.2)

‘Control’ has a specific meaning based on the definition of holding company and subsidiary in section 1159 of and Schedule 6 to the Companies Act 2006.

New changes to eligibility

Non-corporate entities such as individuals and partnerships can now join a VAT group if they meet all of the following conditions:

they are established, or have a fixed establishment in the UK
they can demonstrate that they control all of its body corporate subsidiaries in the group. The test will apply assuming the non-corporate entity would pass the test if it was a corporate body, eg; usually meaning 51% or more of share capital in the relevant company/companies
they can demonstrate that they are entitled to VAT register independently of any other business (the distinction here is that a body corporate may be included in a VAT group if it is not trading, nor intends to trade)

The current eligibility to group is set out at VAT Act 1994, Section 43A and has been updated with a new section 43AZA which includes the new changes.

VAT Group pros and cons

So, would it be beneficial to VAT group entities? I set out here the pros and cons for businesses.

Pros

only one VAT return per quarter – less administration
no VAT on supplies between VAT group members.
no need to invoice etc or recognise supplies on VAT returns
likely to improve partial exemption position if exempt supplies are made between group companies.
likely to improve input tax recovery if taxable supplies are made to partly exempt group companies
may provide useful planning opportunities/convenience at a later date.

Cons

all members of the group are jointly and severally liable for any VAT due
only one partial exemption de-minimis limit for group
obtaining all relevant data to complete one return may take time thus increasing the potential for missing filing deadlines
a new VAT number is issued
assessments can be issued to the representative member relating to earlier periods when it was not the representative member and even when it was not a member of the group at that time
the limit for voluntary disclosures of errors on past returns applies to the group as a whole (rather than each company having its own limit)
payments on account limits apply to the group as a whole. This applies to a business whose VAT liability is more than £2million pa. Please see HMRC Reference: Notice 700/60 details here
may detrimentally affect partial exemption position if a partly exempt company makes taxable supplies to a fully taxable group company

Planning

If you think that there is a potential advantage for you, or your clients’ business, in VAT grouping, please contact us to discuss the VAT position.

VAT: HMRC Requirement for security – The BPF Tanks Ltd case

By Marcus Ward 1 November 2019

Latest from the courts

The BPF Tanks Ltd First Tier Tribunal (FTT) case considered whether the imposition of a Notice Of Requirement (NOR) to provide security in respect of VAT was appropriate.

What is a NOR?

If HMRC decide that a business’s past history presents a risk to the revenue, it may issue a NOR via The VAT Act 1994, Schedule 11 para 4. Such a bond (or cash deposit) can cover a number of taxes, but if one is received for VAT it is as a result of HMRC believing that a business represents a risk of non-payment of its liability.

A NOR is commonly issued in situations where a business and/or a previous business connected to the same individual(s) has failed to meet its VAT obligations, eg; submitting returns or not paying VAT due. If no action is taken by the business in respect of the NOR, HMRC will issue a penalty and prevent the business trading until the security is paid. Continuing to trade when HMRC have prevented this via the NOR rules is a criminal offence.

Amount of security

The amount of security is be based on the estimated VAT liability of six months plus any existing arrears from a previous business. If the new business is yet to submit any VAT returns, these estimates will be based on turnover levels in the previous business.

Penalties

If a business continues to trade without settling the NOR matter, the penalty is £5,000 for every transaction carried without paying security.

Case background

The sole director of the appellant had also been a director of two previous companies in the same business. The first went into administration owing a significant amount of VAT. The second bought the assets of the first out of the administration but was wound up two years later, also owing HMRC a substantial amount of VAT. Because of the appellant’s compliance history, unsurprisingly, HMRC issued a NOR to the latest company.

The appellant essentially argued that HMRC had been ‘unreasonable’ in demanding the security and that no commissioners, properly directed, could have reached the decision to issue a NOR. He contended that it was unreasonable to require security when he had a time to pay (TTP) arrangement with HMRC and unreasonable to take into account the two previous companies.

NB: Unfortunately for the appellant, the TTP agreement was in respect of PAYE and not VAT, despite what the appellant understood.

Decision

The judge accepted that the appellant misunderstood the terms of the TTP but that misunderstanding did not mean that HMRC was unreasonable in reaching the conclusion to issue the NOR.

On the previous companies point; it was decided that it was not unreasonable for HMRC to take into account the two predecessor companies. This was because they;

were both run by the appellant
traded in the same industry
were run from the same address
traded in the same financial climate and
had the same customers

Consequently, there was sufficient links to the previous two companies to be taken into account and the history of them to be a relevant consideration when considering the risk presented by the appellant to the revenue.

For the above reasons the appeal was dismissed.

Commentary

An obvious outcome and the judge didn’t really have any other option. It does underline that to ignore the mantra; right tax, right time is a recipe for disaster and can lead to HMRC ending a business. It is worth bearing this in mind if you have clients that may be “reluctant” to meet their VAT obligations.

If you, or a client receives a NOR, the options are to:

pay the security in full
negotiate a TTP arrangement
appeal against the NOR. (This is usually a very difficult route and there must be genuine grounds to contend that HMRC’s decision either contained an error of law or was so unreasonable that no Commissioner could have reached those decisions).
cease the business

Clearly, the best thing is to avoid one in the first place!