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…
HMRC’s manual VAT Assessments and Error Correction was updated on 15 October 2024.
This internal guidance is for HMRC inspectors (but is equally useful for advisers) covers assessments and error correction. The amendments apply mainly to General assessment procedures: Importance of avoiding delay.
The manual covers:
It also refers to for the most up-to-date guidance on reasonable excuse CH160000.as a defence against penalties and interest.
More on:
Disclosure of Avoidance Schemes – new rules
New HMRC guidance on error reporting
New online service for error correction
Error Disclosure under £10,000 – Draft Letter To HMRC
The recent announcement of an e-invoicing consultation means that businesses should consider the impacts of the intended introduction now.
When this is published (potentially in the Budget on 30 October) it is be anticipated it will cover the intended effective date, how it will affect types of taxpayer, eg; B2B and B2C, how it will be implemented, and its range.
This raises further questions “down the line”, so here we look a step further and consider “split payments” as there has been a lot of conversation and media coverage on this subject.
What are split payments (sometimes known as “real-time extraction”)?
Split payments use card payment technology to collect VAT on online sales and transfer it directly to HMRC rather than the seller collecting it from the buyer along with the payment for the supply, and then declaring it to HMRC on a return in the usual way.
Clearly, HMRC is very keen to introduce such a system, but there are significant hurdles, the biggest being the complexity for online sellers, payment processors, input tax systems, agents, advisers and HMRC itself.
Where are we on split payments?
HMRC has previously published a Prior Information Notice (PIN) and associated Request for Information (RFI), seeking views on the outline requirements and proposed procurement process split payments. This should, inter alia, assist HMRC in:
This builds on previous information gathering/consultations/discussions carried out some years ago.
Background
The expansion of the online shopping market has brought unprecedented levels of transactions. The results of digitalisation have also brought challenges for tax systems. Jurisdictions all over the world are currently grappling with the question of how to prevent large VAT losses, which can arise from cross-border online sales. This happens when consumers buy goods from outside their jurisdiction from sellers who, through fraud or ignorance, do not comply with their tax obligations. It is costing the UK tax authorities an estimated £1 billion to £1.5 billion (figures for 2015-16) a year. The UK government believes that intercepting VAT through intermediaries in the payment cycle, split payment potentially offers a powerful means of enforcing VAT compliance on sellers who are outside the UK’s jurisdiction.
Fraud
The fraud carried out by online sellers is not particularly sophisticated but is difficult to combat. Simply, sellers either use a fake VAT number to collect VAT without declaring it, or even more basically, collect the VAT and disappear.
Proposed spilt payment methods
The way in which payments are split represent difficult technical VAT issues, particularly when sales are at different VAT rates. The three proposals are:
There may be more proposals forthcoming, but none of the above proposals appear reasonable and the complexity they would bring would seem to rule them out as matters stand – although this has not previously stopped HMRC introducing certain measures and the obvious benefits to the authorities cannot be ignored.
Overall
The technology for split payments currently exists and is being used in some Latin American countries (and Poland). The concept is part of a larger movement towards real-time taxation and MTD. Our view is that split payments are coming, but we do not know in which form or when.
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
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
What the Guidance Manual covers:
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.
Latest from the courts
The second-hands of time.
In the First-tier Tribunal (FTT) case, the issue was whether the second-hand goods margin scheme (margin scheme) was applicable and whether HMRC’s assessments for £5,474,249 (later reduced to £5,004,595) of underdeclared of output tax were issued in best judgement.
Background
The Ancient & Modern Jewellers Limited (A&M) sold second-hand wristwatches with the majority of the sales properly accounted for via the margin scheme. However, from information obtained from Italian tax authorities in respect of supply chain fraud, HMRC issued the assessments on the basis that supplies of certain goods did not meet the conditions of the margin scheme so that output tax was due on the full value of the watches rather than the difference between the purchase and sale values. HMRC decided to penalise A&M because the errors were deliberate and prompted and subsequently to issue a PLN on the basis that such conduct was attributable to the director. A&M is a “High Value Dealer” for anti-money laundering purposes.
Contentions
Appellant
The appellant claimed that HMRC did not use best judgement on the grounds that:
so the assessments and penalties were invalid.
Whilst accepting that a best judgment challenge is a high bar A&M contended that the conduct and mindset of HMRC’s investigating and assessing officer was so unreasonable that it vitiated the whole assessment.
Respondent
HMRC contended that the assessments were based on best judgement and that its focus was not on the supply chain fraud claims (as claimed by A&M). Additionally, a previous inspection in 2014 had raised prior concerns which provided adequate grounds for the assessments. Moreover, A&M was aware of the terms of operation of the second-hand margin scheme and considered that A&M had wilfully misused the scheme in several regards. The scheme had been incorrectly used for goods purchased by way of intracommunity supplies – which had been imported with the appellant claiming input tax on the imports and then including them in the margin scheme. A&M wilfully failed to carry out due diligence on its suppliers.
Best Judgement
It may be helpful if we consider what the words “best judgement” mean. This was best described by Woolf J in Van Boeckel v CEC [1981] STC 290
“What the words ‘best of their judgement’ envisage, in my view, is that the commissioners will fairly consider all material 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. As long as there is some material on which the commissioners can reasonably act, then they are not required to carry out investigations which may or may not result in further material being placed before them.”
Technical
The second-hand margin scheme is provided for under The VAT Act 1994, Section 50A, The Value Added Tax (Special Provisions) Order 1995 and certain paragraphs of VAT Notice 718 which have force of law.
Decision
The appeal was dismissed. It was found that A&M deliberately rendered inaccurate VAT returns. The director of the company was aware both of how the margin scheme worked and that the terms of the scheme had to be complied with if a supply was to be taxed under the it. A&M was found to have acted deliberately in misusing the scheme by including ineligible supplies. A&M had been lax in the completion of its stock book, and it had not met the record-keeping requirements necessary to use the scheme for the relevant transactions. Additionally, some of its EU suppliers were not registered for VAT, a fact A&M did not take steps to discover, and so related purchases could not qualify for the scheme. Also, it was likely that some of the purchases were of new watches which made them ineligible for the margin scheme.
Re, evidence; the FTT found much of the A&M director’s evidence to have been self-serving and, in parts, evasive and that it did not consider that the integrity of HMRC could be impugned. The court determined that; the inspector was diligent and thorough, HMRC had legitimate concerns regarding A&M’s use of the margin scheme generally and specifically and there was a wider concern that the company was a participant in fraudulent supply chains. The FTT considered that the investigation was proportionately carried out considering these concerns and the assessments raised in exercise of best judgment.
Penalties and PLN
The case further considered penalties: whether the appellant’s conduct was deliberate (yes – appeal dismissed). Whether the Personal Liability Notice (PLN) [Finance Act 2007, Schedule 24, 19(1)] was appropriate for the conduct attributed to the director – whether his conduct led to penalty (yes – appeal dismissed).
Commentary
This case is a long read, but worthwhile for comments on; the margin scheme use, HMRC’s inspection methods, best judgement, evidence and MTIC amongst other matters.
Fruit pulp is zero-rated, but fruit juice is standard-rated.
A newly published (18 September 2024) set of guidelines: Guidelines for Compliance GfC8 are aimed at helping businesses with VAT compliance controls and set out what HMRC considers good practice for accounting and compliance processes.
HMRC says that these Guidelines for Compliance (GfC) set out its recommended approach and are designed to help businesses understand HMRC expectations as they plan, carry out, and review the accounting and compliance processes that ensure VAT is accurately declared by a business.
The guide covers:
General approach to VAT compliance controls
VAT reporting – manual adjustments
Next steps — correcting errors and guidance
The guidelines are aimed at those responsible for the governance, controls, processing and submitting of the VAT return. Such roles may include:
Pasties, sausage rolls, pies or other pastries
Sandwiches
Bread
Rotisserie chicken
Takeaways
Catering
This is a general guide and, as case law shows, there will always be products on the “borderline”.
In summary, food that is hot can be treated as cold…
The subject of invoices is often misunderstood and can create serious issues if mistakes are made. VAT is a transaction tax, so primary evidence of the transaction is of utmost importance. Also, a claim for input tax is usually not valid unless it is supported by an original valid invoice. HMRC can, and often do, reject input claims because of an inaccurate invoice. There are a lot of misconceptions about invoices, so, although a rather dry subject, it is very important and I thought it would be useful to have all the information in one place, so here is my guide:
Obligation to provide a VAT invoice
With certain exceptions, a VAT registered person must provide the customer with an invoice showing specified particulars when there is a supply of goods or services in the UK (other than an exempt supply) to a taxable person.
Exceptions
The above does not apply to the following supplies.
• Zero-rated supplies
• Supplies where the VAT charged is excluded from credit under VATA 1994, s 25(7) eg; business entertaining and certain motor cars although a VAT invoice may be issued in such cases.
• Supplies on which VAT is charged but which are not made for a consideration. This includes gifts and private use of goods.
• Sales of second-hand goods under one of the special schemes – any invoices for such sales must not show any VAT.
• Supplies that fall within the Tour Operators’ Margin Scheme (TOMS). VAT invoices must not be issued for such supplies.
• Supplies where the customer operates a self-billing arrangement.
• Supplies by retailers unless the customer requests a VAT invoice.
• Supplies by one member to another in the same VAT group.
• Transactions between one division and another of a company registered in the names of its divisions.
• Supplies where the taxable person is entitled to issue, and does issue, invoices relating to services performed in fiscal and other warehousing regimes.
Documents treated as VAT invoices
Although not strictly VAT invoices, certain documents listed below are treated as VAT invoices either under the legislation or by HMRC.
(1) Self-billing invoices
Self-billing is an arrangement between a supplier and a customer in which the customer prepares the supplier’s invoice and forwards it to him, normally with the payment.
(2) Sales by auctioneer, bailiff, etc.
Where goods (including land) forming part of the assets of a business carried on by a taxable person are, under any power exercisable by another person, sold by that person in or towards satisfaction of a debt owed by the taxable person, the goods are deemed to be supplied by the taxable person in the course or furtherance of his business.
The particulars of the VAT chargeable on the supply must be provided on a sale by auction by the auctioneer and where the sale is otherwise than by auction by the person selling the goods. The document issued to the buyer is treated as a VAT invoice.
(3) Authenticated receipts in the construction industry.
(4) Business gifts
Where a business makes a gift of goods on which VAT is due, and the recipient uses the goods for business purposes, that person can recover the VAT as input tax (subject to the normal rules). The donor cannot issue a VAT invoice (because there is no consideration) but instead may provide the recipient with a ‘tax certificate’ which can be used as evidence to support a deduction of input tax. The tax certificate may be on normal invoicing documentation overwritten with the statement:
“Tax certificate – No payment is necessary for these goods. Output tax has been accounted for on the supply.”
Full details of the goods must be shown on the documentation and the amount of VAT shown must be the amount of output tax accounted for to HMRC.
Invoicing requirements and particulars
A VAT invoice must contain certain basic information and show the following particulars:
(a) A sequential number based on one or more series which uniquely identifies the document.
The ‘invoice number’ can be numerical, or it can be a combination of numbers and letters, as long as it forms part of a unique and sequential series.
(b) The time of the supply, ie tax point.
(c) The date of issue of the document.
(d) The name, address and registration number of the supplier.
(e) The name and address of the person to whom the goods or services are supplied.
(f) A description sufficient to identify the goods or services supplied.
(g) For each description, the quantity of the goods or extent of the services, the rate of VAT and amount payable, excluding VAT, expressed in any currency.
(h) The unit price.
This applies to ‘countable’ goods and services. For services, the countable element might be, for example, an hourly rate or a price paid for standard services. If the supply cannot be broken down into countable elements, the total VAT-exclusive price is the unit price.
(i) The gross amount payable, excluding VAT, expressed in any currency.
(j) The rate of any cash discount offered.
(k) The total amount of VAT chargeable expressed in sterling.
(l) Where the margin scheme for second-hand goods or TOMS is applied, either a reference to the appropriate provision of The VAT Act 1994 or any indication that the margin scheme has been applied.
The way in which margin scheme treatment is referenced on an invoice is a matter for the business and but we recommend:
• “This is a second-hand margin scheme supply.”
• “This supply falls under the Value Added Tax (Tour Operators) Order 1987.”
The requirement only applies to TOMS invoices in business to business transactions.
(m) Where a VAT invoice relates in whole or in part to a supply where the person supplied is liable to pay the VAT, a reference to the appropriate provision of The VAT Act 1994 or any indication that the supply is one where the customer is liable to pay the VAT.
This covers UK supplies where the customer accounts for the VAT (eg under the gold scheme or any reverse charge requirement under the missing trader intra-community rules). The way in which margin scheme treatment is referenced on an invoice is a matter for the business and we recommend: “This supply is subject to the reverse charge”.
Exempt or zero-rated supplies
Invoices do not have to be raised for exempt or zero-rated transactions when supplied in the UK. But if such supplies are included on invoices with taxable supplies, the exempt and zero-rated supplies must be totalled separately and the invoice must show clearly that there is no VAT payable on them.
Leasing of motor cars
Where an invoice relates wholly or partly to the letting on hire of a motor car other than for self-drive, the invoice must state whether the car is a qualifying vehicle
Alternative evidence to support a claim for input tax
In certain situations HMRC can use its discretion and allow an input tax with documentary evidence other than an invoice. Guidance here.
Electronic invoices
Full information on electronic invoicing here.
Retailers
Retailers may issue a “less detailed tax invoice” if a customer requests one. the supply must be for £250 or less (including VAT) and must show:
Summary
As may be seen, it is a matter of law whether an invoice is valid and when they must be issued. Therefore it is important for a business to understand the position and for its system to be able to produce a valid tax invoice and to recognise what is required to claim input tax. As always with VAT, there are penalties for getting documentation wrong.
On 1 August 2024, the Bank of England reduced the rate from 5.25% to 5%. HMRC interest rates are linked to the Bank of England base rate, and consequently, it has published updated its interest rate tables which recognises the .25% decrease. This interest applies to late VAT payments and repayments.
These changes will come into effect on: