Category Archives: Penalties

VAT: eInvoicing Glossary

By   1 September 2023
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Further to my article on eInvoicing, I thought it may be helpful if I compiled a Glossary of terms used in connection with the subject. These definitions have been compiled from various sources and I have tried to keep them as “non-techy” as possible.

Accounts Payable Automation (APA)

An automated management of accounts payable by dealing with invoices received and payments sent. It requires integration of the invoicing process with accounting software.

Accounts Receivable Automation (ARA)

As APA but for accounts receivable (dealing with invoices sent and payments received).

Acknowledgement Of Receipt

The acknowledgement of receipt of an EDI message – the syntax and semantics are checked, and a corresponding acknowledgement is sent by the receiver.

Advanced Electronic Signature

A digital signature based on an advanced certificate uniquely identifying the signer. The signature keys are used with a high level of confidence by the signatory, who has sole control of the signing key.

Agreed Format

The electronic data format that businesses have agreed to treat as the data format of the original electronic invoice for tax purposes. 

Audit Trail

The system which traces the detailed transactions relating to any item in an accounting record.

Authentication

The process of verifying a claim that a system entity or system resource has a certain attribute value.

Authenticity Of Origin

Assurance of the identity of the supplier or issuer of the invoice and that the document is the true original.

B2B

Business to business.

B2C

Business to consumer

Biller Portal

Invoice providers’ web portal where invoice receivers can log on with a username/password to check and manage their invoices.

Billing Service Provider

A provider offering services to senders and receivers which involves the sending, collection and administrative processing of eInvoices.

Certification Service Provider

An entity which issues digital certificates or provides services related to electronic signatures.

Clearance

A tax authority approval being a precondition for the validity of a document.

Clearance Model

A tax authority is involved in the invoice data exchange between the vendor and the customer as a third party. It allows the tax authorities a real-time insight into the business transactions. The eInvoice must be approved by the tax authority before being sent to the recipient.

Continuous Transaction Controls (CTC Reporting)

Obligations requiring a taxpayer to submit relevant data to the relevant tax authority before, or shortly after, a transaction.

Data Integrity

Checks that data has not been changed, destroyed, or lost in an unauthorised or accidental manner.

Digital Certificate

A file or electronic password that proves the authenticity of a device, server, or user via cryptography and the public key infrastructure.

Digital Reporting Requirements (DRR)

The obligation for a taxable person to submit digital data on their transactions to HMRC.

Digital Signature

A technique used to validate the authenticity and integrity of a digital document, message or software.

eAccounting

The requirement for a taxable person to submit digital business records to a tax authority platform.

eArchiving

Storing electronic documents as evidence for a prescribed period of time according to the relevant HMRC regulations.

Electronic Data Interchange (EDI)

An intercompany communication of business documents in a standard format. EDI is a standard electronic format that replaces paper-based documents such as purchase orders or invoices.

eInvoice

Details here.

eReceipt

Electronically issued customer receipts.

EU eInvoicing

Details/how to here.

Format

The method of presentation of electronic data in an electronic document.

Four Corner Model

A process where suppliers and customers have one or several service providers that ensure the correct processing between them.

Invoicing Directive

The eInvoicing Directive which requires EU entities to receive and process all electronic invoices – compliant with the European standard.

Mandatory eInvoicing

The obligatory use of eInvoicing by business which is imposed by the country’s authorities. Around 80 countries mandate eInvoicing.

Pan-European Public Procurement On-Line (Peppol)

An EDI protocol, designed to simplify the purchase-to-pay process between government bodies and suppliers. It facilitates electronic ordering, invoicing and shipping between government organisations and businesses.

Periodical Transaction Reporting

An obligation for a taxpayer to submit transactional data on a monthly, quarterly or annual basis.

QR Code

eInvoice verification which allows users to verify the authenticity of an eInvoice based on the QR code appearing on it. The QR code is used to provide information related to a particular invoice.

Qualified Electronic Signature

An electronic signature which is compliant with EU Regulation 910/2014 for electronic transactions within the internal European market. It enables verification of the authorship of a declaration in electronic data exchange over long periods of time.

Post Audit eInvoicing

An invoice is sent to the tax authorities only after the transaction has been completed. The business must guarantee the authenticity and integrity of the invoice and archive the document to satisfy audit requirements. This is being overtaken by the Clearance Model (above). 

Readability

The ability of a tax administration to interpret the content of an eInvoice.

Real-time reporting

An obligation for a taxpayer to submit fiscal data to a tax authority platform immediately, or shortly after, a transaction.

Transactional Data

Information that is captured from transactions. It records the time of the transaction, the place of supply, the value of the supply, the payment method, discounts if any, and other quantities and qualities associated with the transaction.

Three Corner Model

A process where invoice senders and receivers are connected via a single service provider for the sending and receiving of messages.

Two Corner Model

A process where invoice senders and receivers are connected directly for the sending and receiving of messages.

UN/CEFACT

The United Nations’ Centre for Trade Facilitation and Electronic Business has a global remit to secure the interoperability for the exchange of information between private and public sector entities.

Unstructured Invoice Document

An invoice that is created manually or automatically from a system and is not in a database. An Unstructured Document may contain data, but the data is not organised in a fixed format. Consequently, it is difficult to find and capture the data for use.

VAT Listing

An obligation for a business to submit VAT transactional data according to a domestic format. The data includes: information on values and recipients, as well as data which is required to be included on an invoice. The data are submitted on a periodic basis, often jointly with the VAT return.

Web Payment

An online service that manages the transfer of funds from a customer to the merchant of an e-commerce website.

Web Publication

A method of exchanging invoices with a buyer by placing an original electronic invoice on an agreed web site, in a secure closed environment operated by the supplier.

VAT – Tour Operators’ Margin Scheme (TOMS) A Brief Guide

By   24 August 2023
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VAT and TOMS: Complex and costly

Introduction

The tour operators’ margin scheme (TOMS) is a special scheme for businesses that buy in and re-sell travel, accommodation and certain other services as principals or undisclosed agents (ie; that act in their own name). In many cases, it enables VAT to be accounted for on travel supplies without businesses having to register and account for VAT in every country in which the services and goods are enjoyed. It does, however, apply to travel/accommodation services enjoyed within the UK and wholly outside the UK.

Under the scheme:

  • VAT cannot be reclaimed on margin scheme supplies bought in for resale. VAT on overheads outside the TOMS can be reclaimed in the normal way.
  • A UK-based tour operator need only account for VAT on the margin, ie; the difference between the amount received from customers and the amount paid to suppliers.
  • There are special rules for determining the place, liability and time of margin scheme supplies.
  • VAT invoices cannot be issued for margin scheme supplies.
  • In-house supplies supplied on their own are not subject to the TOMS and are taxed under the normal VAT rules. But a mixture of in-house supplies and bought-in margin scheme supplies must all be accounted for within the TOMS.
  • No UK VAT is due via TOMS on travel/accommodation/tours enjoyed outside the UK.

Who must use the TOMS?

TOMS does not only apply to ‘traditional’ tour operators. It applies to any business which is making the type of supplies set out below even if this is not its main business activity. For example, it must be used by

  • Hoteliers who buy in coach passenger transport to collect their guests at the start and end of their stay
  • Coach operators who buy in hotel accommodation in order to put together a package
  • Companies that arrange conferences, including providing hotel accommodation for delegates
  • Schools arranging school trips
  • Clubs and associations
  • Charities.

The CJEC has confirmed that to make the application of the TOMS depend upon whether a trader was formally classified as a travel agent or tour operator would create distortion of competition. Ancillary travel services which constitute ‘a small proportion of the package price compared to accommodation’ would not lead to a hotelier falling within the provisions, but where, in return for a package price, a hotelier habitually offers his customers travel to the hotel from distant pick-up points in addition to accommodation, such services cannot be treated as purely ancillary.

Supplies covered by the TOMS

The TOMS must be used by a person acting as a principal or undisclosed agent for

  • ‘margin scheme supplies’; and
  • ‘margin scheme packages’ ie single transactions which include one or more margin scheme supplies possibly with other types of supplies (eg in-house supplies).

‘Margin scheme supplies’ are those supplies which are

  • bought in for the purpose of the business, and
  • supplied for the benefit of a ‘traveller’ without material alteration or further processing

by a tour operator in an EU country in which he has established his business or has a fixed establishment.

A ‘traveller’ is a person, including a business or local authority, who receives supplies of transport and/or accommodation, other than for the purpose of re-supply.

Examples

If meeting the above conditions, the following are always treated as margin scheme supplies.

  • Accommodation
  • Passenger transport
  • Hire of means of transport
  • Use of special lounges at airports
  • Trips or excursions
  • Services of tour guides

Other supplies meeting the above conditions may be treated as margin scheme supplies but only if provided as part of a package with one or more of the supplies listed above. These include

  • Catering
  • Theatre tickets
  • Sports facilities

This scheme is complex and specialist advice should always be sought before advising clients.

VAT: Electronic Invoicing (eInvoicing)

By   21 August 2023
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The rules for sending, receiving and storing VAT invoices in an electronic format.

What is an eInvoicing?

eInvoicing is the transmission and storage of invoices in an electronic format without duplicate paper documents. The format may be a structured format such as XML or an unstructured format such as PDF.

The benefits of eInvoicing

eInvoicing offers significant advantages over paper invoices. The electronic transmission of documents in a secure environment usually provides for:

  • structured data for auditing
  • improved traceability of orders
  • decreased reliance on paper reducing storage and handling costs
  • rapid access and retrieval
  • improved cash flow
  • security and easier dispute handling

Currently, a business does not have to use eInvoicing, but if it does, in conjunction with paper invoices, (a so-called dual system) it can only do this for a short period, ie; if eInvoicing is being trialled.

It is not necessary to inform HMRC that a business is using eInvoicing.

Requirements

eInvoices must contain the same information as paper invoices.

A business may eInvoice where the “authenticity of the origin”, “integrity of invoice data”, and “legibility” can be ensured, and the customer agrees to receive eInvoices

  • authenticity of the origin means the assurance of the identity of the supplier or issuer of the invoice
  • integrity of content means that the invoice content has not been altered
  • legibility of an invoice means that the invoice can be easily read

A business is free to select a method of ensuring the above requirements. Examples of ensuring authenticity and integrity include:

Formats

HMRC accepts a variety of eInvoice message formats, including:

  • traditional EDI standards such as UN/EDIFACT, EANCOM and ODETTE
  • XML-based standards
  • comma-delimited ASCII, PDF

The eInvoices must be transmitted in a secure environment, using industry-accepted authenticity and security technologies, including, but not limited to: http-s, SSL, S-MIME and FTP.

Internal controls required

A business will need to demonstrate that it has control over:

  • completeness and accuracy of the invoice data
  • timeliness of processing
  • prevention, or detection of, the possible corruption of data during transmission
  • prevention of duplication of processing (by the person who receives the invoice)
  • prevention of the automatic processing, by the person who receives the invoice, of certain types of invoice on which VAT may not be recoverable – for example, margin scheme invoices
  • a recovery plan in case of a system failure or loss of data
  • an audit trail between eInvoicing systems and the internal application systems which are used to process the eInvoices

Storage

The same rules apply to storage of eInvoices as to paper invoices. A business must normally keep copies of all invoices for six years.

HMRC Access

HMRC may request access to:

  • the operations of any computer systems which produce or receive VAT invoices, and to the data stored on them
  • supporting documentation including; file structures, audit trail, controls, safe keeping, and information about how the accounting system is organised
  • information about the system’s interrogation facilities

HMRC must be able to take copies of information from the system.

If a business cannot meet the conditions for transmission and storage of eInvoicing, it will have to issue paper invoices.

VAT: Land related services

By   21 August 2023
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Whether a service is “related to land” is important because there are distinct rules for this type of supply compared to the General Rule. The place of supply (POS) of land related services is where the land is located, regardless of where the supplier or recipient belong.

The rule applies only to services which relate directly to a specific site of land. This means a service where the land is a central and essential part of the service or where the service is intended to legally or physically alter a property.

It does not apply if a supply of services has only an indirect connection with land, or if the land related service is only an incidental component of a more comprehensive supply of services.

What is land?

For the purpose of determining the POS, land (also called immoveable property in legislation) means:

  • a specific part of the earth, on, above or below its surface
  • a building or structure fixed to, or in, the ground above or below sea level which cannot be easily dismantled or moved
  • an item making up part of a building without which it is incomplete (such as doors, windows, roofs, staircases and lifts)
  • items of equipment or machinery permanently installed in a building which cannot be moved without destroying or altering the building

What services directly relate to land?

HMRC provide the following examples:

  • construction or demolition of a building or permanent structure
  • surveying and assessing property
  • valuing property
  • providing accommodation in hotels, holiday camps, camping sites or timeshare accommodation
  • maintenance, renovation and repair of a building
  • property management services carried out on behalf of the owner
  • arranging the sale or lease of land or property
  • drawing up of plans for a building or part of a building designated for a particular site
  • services relating to the obtaining of planning consent for a specific site
  • on-site security services
  • agricultural work on land
  • installation and assembly of machines which, when installed, will form a fixture of the property that cannot be easily dismantled or moved
  • the granting of rights to use all or part of a property (such as fishing or hunting rights and access to airport lounges)
  • legal services such as conveyancing and drawing up of contracts of sale or leases, including title searches and other due diligence on a specific property
  • bridge or tunnel toll fees
  • the supply of space for the use of advertising billboards
  • the supply of plant and equipment together with an operator
  • the supply of specific stand space at an exhibition or fair without any related services

What services are only indirectly related to land?

The following HMRC examples are not deemed to be land related services:

  • management of a property investment portfolio
  • drawing up of plans for a building that do not relate to a particular site
  • arranging the supply of hotel accommodation or similar services
  • installation, assembly, repair or maintenance of machines or equipment which are not, and do not become, part of the building
  • accountancy or tax advice, even when that relates to tax on rental income
  • the supply of storage of goods in property without a right to a specific area for the exclusive use of the customer
  • advertising services including those that involve the use of a billboard
  • marketing, photography and public relations
  • the supply of equipment with an operator, where it can be shown that the supplier has no responsibility for the performance of the work
  • general legal advice on contractual terms
  • legal services connected with fund raising for property acquisitions or in connection with the sale of shares in a company or units in a unit trust which owns land
  • stand space at an exhibition or conference when supplied as part of a package with related services, eg; design, security, power, telecommunications, etc.

These examples are mainly derived from case law and the department’s understanding of the legislation and they are not exhaustive.

The Reverse Charge

If an overseas supplier provides land related services in GB, the POS is GB and the reverse charge applies if the recipient is GB VAT registered.

If a GB supplier provides services directly related to land where the land is located outside GB, the POS is not GB. This means that there is a supply in another country. VAT rules in different countries vary (even across the EU) – some countries use the reverse charge mechanism, but others require the GB supplier to VAT register in the country of the POS (where the land is physically located).

VAT: How to use HMRC advice and information

By   8 August 2023
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HMRC have updated information (on 30 June 2023) on how to use its guidance. This includes when a taxpayer can rely on information and/or advice provided by HMRC. This is the first update since the original publication in March 2009.

The document covers; how to check the advice and information given give applies to a business, what a taxpayer can expect from HMRC, and what to do if you think you have incorrect information.

This covers enquiries made via:

  • letters
  • telephone calls
  • pages on gov.uk
  • webchat
  • posts on social media

HMRC publishes information and guidance that can address common issues, but this does not always provide a definitive answer in every situation. If this is the case, a business can:

Reliance on incorrect information

HMRC says:

“You may be able to rely on incorrect advice and information from HMRC, if it’s both:

  • reasonable for you to expect this
  • very unfair for HMRC to act in a different way from the advice and information given.”

HMRC will take a number of things into account when considering this. In some cases, there may be a strong reason for HMRC to act in a different way from the advice and information given.

Where relevant, HMRC will generally consider whether:

  • you told HMRC about all the relevant facts
  • HMRC’s advice and information was clear and certain
  • you already relied on the advice and information and would be worse off if HMRC did not act in line with it

Once it is clear HMRC’s advice and/or information was incorrect, a taxpayer must make sure to use the correct advice and information going forward.

Right of appeal

There is no general right of appeal against the advice and information HMRC provides, except where rights of appeal are set out in statute.

NB: It is always worth considering the HMRC Charter which sets out what a taxpayer can expect from HMRC and what HMRC expects from a taxpayer.

That is all well and good, but I have written about this: VAT – Do as HMRC say…. and if you do… they may still penalise you!

 

VAT: B2B and B2C – The distinction and importance

By   1 August 2023
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A key feature of the place of supply rules is the distinction between B2B (business to business) and B2C (business to consumer) supplies. The distinction is important because it determines, inter alia, whether GB VAT is applicable to a supply made by a GB supplier.

Status of the customer:

  • B2C: A supply is B2C when the customer is a private individual, an organisation with only non-business activities or the supply is wholly for private use (eg for the private use of a business owner)
  • B2B: A supply is B2B when the customer has any level of business activity (though if a supply is wholly for private use it remains B2C). It does not matter if the supply is for a non-business activity of the customer or if the customer is not VAT registered. All that matters is the customer has some level of business activity – this includes VAT exempt activity and taxable activity below the VAT registration threshold VAT place of supply.

To apply the B2B treatment a GB supplier must obtain evidence that the customer has business activities. If the supplier cannot obtain any evidence, they should apply B2C treatment.

  • If the customer is VAT registered, the customer’s VAT number is evidence of status and it is good practice to quote this on the supplier’s invoice. A GB supplier should check the customer’s VAT registration number is in the correct format for the country concerned. This can be done via the EC Vies website. for EU customers. NB: Special evidence rules apply to electronically supplied services.
  • If the customer is not VAT registered, a GB supplier should obtain and retain evidence that the customer has business activities. HMRC state “If your customer is unable to provide a VAT number, you can accept alternative evidence.This includes certificates from fiscal authorities, business letterheads or other commercial documents indicating the nature of the customer’s activities”.

A supplier needs to identify where his customer belongs in order to establish the place of supply.

VERY broadly, depending on the nature of the supply, the rule of thumb is that a B2B service is GB VAT free (it is subject to a reverse charge by the recipient as it is deemed to be “supplied where received”) but a B2C service is generally subject to GB VAT, regardless of the place of belonging of the recipient. There are exceptions to these rules however, such as the use and enjoyment provisions, land related services, hire of transport and admission to events.

A VAT Did you know?

By   27 July 2023
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Popcorn is standard rated, but microwavable popcorn is VAT free.

VAT: Is a cosmetic treatment exempt medical care? The Illuminate Skin Clinics Ltd case

By   12 July 2023
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Latest from the courts

In the Illuminate Skin Clinics Ltd First-Tier Tribunal (FTT) case the issue was whether cosmetic procedures qualified as exempt medical treatment.

Background

The Appellant runs a private, ie; non-NHS clinic offering a range of aesthetic, skincare and wellness treatments advertised as: fat freezing, thread lifts, chemical peels, fillers, facials, intravenous drips and boosters. The Appellant’s sole director and shareholder, Dr Shotter, complies with Item 1 (below) in terms of qualifications, ie; she is enrolled on the register of medical professionals.

The list of treatments included:

  • Botox
  • Dermal fillers
  • CoolSculpting
  • Microsclerotherapy
  • Prescription skincare
  • Chemical peels
  • Microdermabrasion
  • Thread lifting
  • Thermavein
  • Aqualyx
  • Platelet-rich plasma treatment.

HMRC contended that these supplies were standard rated because there is no medical purpose behind the treatments, and they are carried out for purely cosmetic purposes. An assessment was raised for output tax on this income.

The Appellant argued that what it provided was exempt medical care via The VAT Act 1994, Schedule 9, Group 7, item 1 – “The supply of services consisting in the provision of medical care by a person registered or enrolled in any of the following:

  • The register of medical practitioners…”

And its contention was that the primary purpose of the treatments was “the protection, maintenance or restoration of the health of the person concerned”

In the Mainpay case it was established that “medical” care means “diagnosing, treating and, in so far as possible, curing diseases or health disorders”

Decision

Although there may have been a beneficial psychological impact on undergoing such treatments and this may have been the reason for a patient to proceed (and they may be recommended by qualified medical professionals) this, in itself, was insufficient to persuade the judge that the services were exempt. Consequety, the appeal was rejected and the assessment was upheld.

The FTT found that there was very little evidence of diagnosis. This was important to the overall analysis because diagnosis is the starting point of medical care. Without diagnosis, “treatment”, in the sense of the exemption, is not something which is being done responsively to a disease or a health disorder.

The fact that people go to the clinic feeling unhappy with some aspect of their appearance, and (at least sometimes) are happier when something is done at the clinic about that aspect of their appearance, does not mean that the treatment is medical, or has a therapeutic aim.

It was telling that the differentiation, in Dr Shotter’s own words, between what the clinic does from what “a GP or other health professional” does is; diagnosis. It also highlighted the general trend or purpose of the clinic’s activity – helping people to feel better about their appearance, in contexts where their appearance is not itself a health condition, or threatening to their health in a way which mandates treatment of their appearance by a GP or another health professional.

Helping someone to achieve goals in relation to their appearance, which is what this clinic did, is not treating someone’s mental health status, but is going to their self-esteem and self-confidence. It is a misuse of language to say that this is healthcare in the sense that it would fall within Item 1 of Group 7.

Commentary

There has been an ongoing debate as to what constitutes medical care. Over 20 years ago I was advising a large London clinic on this very point and much turned on whether patients’ mental health was improved by undergoing what many would regard as cosmetic procedures. We were somewhat handicapped in our arguments by the fact that many of the patients were lap dancers undergoing breast augmentation on the direction of the owner of the club…

It is worth remembering that not all services provided by a medically registered practitioner are exempt. The question of whether the medical care exemption is engaged in any given case will turn on the particular facts.

Further recent cases on medical exemption here and here.

VAT: New HMRC guidance on error reporting

By   4 July 2023
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HMRC has published new guidance to assist taxpayers on how to deal with errors discovered on submitted VAT returns. The catchy title is: Check if you need to report errors in your VAT Return – Check if you need to notify HMRC about errors that are over the threshold on your VAT Return and find out how to report them.

The guidance sets out how to report errors of £10,000 or more (net of all errors). This broadly comes down to using the online service by completing a form VAT652 or adjusting a current VAT return.

Please see our flowchart on error reporting Error Reporting Flowchart

New portal for VAT payment plans

By   4 July 2023
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VAT is normally due on the relevant due date*. However, HMRC has launched a new self-service portal for businesses to set up payment plans.

We look at managing VAT debt in detail here.

A business can set up a VAT payment plan online if it:

  • has filed its latest tax return
  • owes £20,000 or less
  • is within 28 days of the payment deadline
  • does not have any other payment plans or debts with HMRC
  • plans to pay off its debt within the next six months

A taxpayer cannot set up a VAT payment plan online if it uses the Cash Accounting Scheme, Annual Accounting Scheme, or makes payments on account.

If a business cannot set up a payment plan online it will need to contact HMRC.

HMRC will ask:

  • if you can pay in full
  • how much you can repay each month
  • if there are other taxes you need to pay
  • how much money you earn
  • how much you usually spend each month
  • what savings or investments you have

If you have savings or assets, HMRC will expect you to use these to reduce your debt as much as possible.

* For businesses that pay their VAT monthly or quarterly, the deadline for both submitting a return and paying the VAT owing is usually one calendar month plus seven days after the VAT period has ended

VAT payment deadline calculator here.