Category Archives: Planning

VAT: Are Turmeric shots zero rated food? The Innate-Essence Limited case

By   5 May 2023
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Latest from the courts

In the Innate-Essence Limited (t/a The Turmeric Co) First Tier tribunal (FTT) case the issue was whether turmeric shots were zero rated food via The VAT Act 1994, Schedule 8, Group 1, general item 1 or a standard rated beverage per item 4 of the Excepted items.

The Legislation

“General items Item No 1 Food of a kind used for human consumption. …

Excepted Items Item No … 4 Other beverages (including fruit juices and bottled waters) and syrups, concentrates, essences, powders, crystals or other products for the preparation of beverages.”

The Product

Turmeric roots are crushed and the pulp sieved to extract the liquid. No additional liquids such as apple juice, orange juice or water are added during the production process.

The Shots contain:

  • small quantities of crushed, whole fresh watermelon and lemons which act as a base and provides a natural preservative effect
  • fresh pineapple juice
  • flax oil and black pepper

All the ingredients are cold pressed to retain the maximum nutritional value of the raw ingredients. The Shots are not pasteurised as this would negatively affect the nutritional content of the Shots. No sugar or sweeteners are added to the Shots. The Shots are sold in small 60ml plastic bottles and it was stated that they  provided long term health benefits.

The court applied the many tests derived from case law on similar products, and as is usual in these types of cases, the essence of the decision was on whether the Exception for beverages applied to The Shots.

Whether a product is a beverage (standard rated) is typically based on tests established in the Bioconcepts case (via VFOOD7520) as there is no definition of “beverage” in the legislation. The tests:

  • it must be a drinkable liquid that is commonly consumed
  • it must be characteristically taken to increase bodily liquid levels, or
  • taken to slake the thirst, or
  • consumed to fortify, or
  • consumed to give pleasure

The principle of the tests is based on the idea that a drinkable liquid is not automatically a beverage, but could be a liquid food that is not a beverage.

The Tribunal found that the Shots were not beverages but zero rated food items. As The judge put it: “In our view, the marketing and customer reviews demonstrate clear consistency in the use to which the Shots are put. The Shots are consumed in one go on a regular, long-term basis for the sole purpose of the claimed health and wellbeing benefits. The purpose of the Shots is entirely functional: to maximise the consumers daily ingestion of curcumin which is achieved by cold pressing the raw ingredients into a liquid. We consider it highly unlikely that a consumer would attempt to ingest the same quantity of raw turmeric in solid form.

The Shots are marketed on the basis of the nutritional content of the high-quality ingredients (primarily raw turmeric) that are stated to support health and wellbeing. The Shots contain black pepper and flax oil, two ingredients that are not commonly found in beverages. The Shots are marketed as requiring regular daily consumption over a long period of time (at least three months) to provide the consumer with the claimed long-term health and wellbeing benefits. A one-off purchase of a Shot would not achieve the stated benefits of drinking a Shot”.

The Tribunal also went to consider the “lunch time pints in pubs” (The Kalron case) issue, but I would rather not comment on whether this is a usual substitute for a lunch…

The appeal was allowed.

Commentary

Yet another food/beverage case. Case law insists that each product must be considered in significant detail to correctly identify the VAT liability and even then, a dispute with HMRC may not be avoided. Very small differences in content, marketing, processes etc can affect the VAT treatment. As new products hit the shop shelves at an increasing rate I suspect that we will be treated to many more such cases in the future. If your business produces or sells similar products, it will be worth considering whether this case assists in any contention for zero rating.

VAT Inspections – How do HMRC choose which businesses to visit and what is “Connect”?

By   2 May 2023
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Big Brother is watching you…

It always used to be the case that “Control Visits” aka VAT inspections were decided by a business’

  • turnover
  • VAT complexity
  • business complexity
  • structure
  • compliance history
  • previous errors

The more ticks a business gets the more inspections it will receive. Consequently, a business with a high turnover (a “Large Trader”) with many international branches providing complicated financial services worldwide which has failed to file returns by the due date and has received assessments in the past will be inspected almost constantly. Tick only a few of the boxes and a sole trader with a low turnover building business will still generate HMRC interest if it has received assessments in the past or is constantly late with its returns.

These visits are in addition to what is known as “pre-credibility” inspections (pre-creds). Pre-creds take place in cases where a business has submitted a repayment claim.  HMRC will check whether the claim is valid before they release the repayment.  These may be done via telephone, email, or in person, and may lead to a full-blown inspection.

In addition, there was always a random element with inspections generated arbitrarily. The usual cycles were: six monthly, annually, three yearly, five yearly, or less frequently. On occasions, the next inspection would depend on the previous inspector’s report (they may, for instance, have recommended another inspection after a future event has occurred).

The Connect System

Although elements of the above “tests” may still apply, many inspections now are based on intelligence obtained from many sources. The main resource is a data system which HMRC call “Connect”. This system feeds from many bases and forms the basis of many decisions made by HMRC. Instead of HMRC relying on information provided by businesses on VAT returns, Connect draws on statistics from myriad government and corporate sources to create a profile of each VAT registered business. If this data varies from that submitted on returns it is more likely that that business will be inspected. As an example: HMRC obtains anonymised information on all Visa and MasterCard transactions, enabling it to identify areas of likely VAT underpayments which it can then target further. Other sources of information are: online marketplaces – websites such as eBay and Gumtree, as well as Airbnb can be accessed to identify regular traders who may not be VAT registered. Additionally, it can also access Land Registry records, so these can be checked not only to see what properties have been sold (and ought to have been subject to output tax) but what properties have been purchased (in order to determine whether a taxpayer is likely to be able to afford such properties).

The Connect system can also examine public social media account information, such as; Twitter, Facebook and Instagram using sophisticated mechanisms along with being able to access individual’s digital information such as web browsing and emails.

It is understood that less than 10% of all inspections are now random.

The £100 million plus Connect project is, and will be, increasingly important as HMRC is losing significant resources; particularly well trained and experienced inspectors.  With many local VAT offices closing there is also a concern on the ground that a lot of “local knowledge” of businesses has been lost.

Big Brother really is watching you…. And if you are on the receiving end of an inspection, there is a circa 90% chance that there is a reason for it!

For information on how to survive a VAT inspection, please see here.

I always suggest that if notification of an impending inspection is received a pre-visit review is undertaken to identify and deal with any issues before HMRC arrive and levy penalties and interest.

VAT: Recovering input tax on the charging of EVs

By   24 April 2023
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Following my last article on charging Electric Vehicles (EVs) I have been asked about the rules on recovering VAT incurred by a business on such costs.

The current rules are:

VAT incurred by businesses when charging EVs can be recovered on the business use of those vehicles, where they are charged at work or at public charging premises.

A business can also recover the VAT for charging EVs if it is a sole proprietor or a partner in a partnership business, and it charges the EV for business purposes at home.

A business must calculate how much of the cost of charging its EV is for business use and how much is for private use by keeping mileage records. The normal input tax rules then apply.

If an employee charges an EV (whether a company vehicle or not) at a public charging point, the supply of electricity is made to the company or employer. The business can recover the VAT on the cost of charging the electric vehicle, subject to the normal rules.

Again, the employer must keep detailed mileage records to calculate how much of the charging cost is used for business and private purposes.

However, where an employee charges an EV (whether a company vehicle or not) at home, the overall supply of electricity is made to the employee and not the employer. The employer is not entitled to recover the VAT on the cost of charging the electric vehicle.

NB: We understand that HMRC’s view on this may be soon be challenged.

Current developments

  • HMRC is currently reviewing the situation where an employee is reimbursed by the employer for the actual cost of electricity used in charging an electric vehicle for business purposes.
  • The Department is considering other simplification measures that may reduce administrative burdens in terms of accounting for VAT on private use.
  • The VAT rate applicable to public charging is 20%. We are aware that there could be a legal challenge to this and that the appropriate rate should be 5% (for all forms of EV charging). The reduced rate of VAT currently only applies to supplies of electricity to a person’s property which is less than 1,000 kilowatt-hours a month.

Hybrid cars are treated as either petrol or diesel cars for VAT purposes. The rules on input tax for petrol and diesel vehicles are here.

 

VAT: Credit notes – what are they and how are they treated?

By   18 April 2023
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VAT Basics

There can be confusion about credit notes and how they are used and accounted for, so I thought it worthwhile to pull together, in one place, an overview of the subject.

What are credit notes for?

A VAT credit note is a document issued by a supplier to a customer. It amends or corrects a previously issued invoice. Invoices are documents which evidence a taxable supply. The credit note is documentary evidence of a change to that supply, or of a decrease in the consideration for that supply. A reduction in consideration may be as a result of; cancellation, discount, refund, prompt payment, bulk order or other commercial reasons.

Why are VAT credit notes important?

The information given on a credit note is the basis for establishing the adjusted VAT figure on the supply of taxable goods or services. It also enables the customer to adjust the figures for the total VAT charged to them on their purchases.

If a business issues a credit note showing a lesser amount of VAT than is correct, it is liable for the deficiency.

Legislation

The UK Law that covers credit notes is found in VAT Regulations 1995, Regulations 15, 24 and 38 of. Regulation 24A defines the term “increase (or decrease) in consideration”.

Conditions of a valid credit note

Requirements for a credit note to be considered valid:

  • be issued to the customer
  • correct a genuine mistake or overcharge
  • reflect an agreed reduction in the value of a supply
  • give value to the customer
  • not be issued for a bad debt
  • be issued in good faith

HMRC also require for credit notes to:

  • be issued within 14 days of the decrease in consideration
  • contain all the details specified in Notice 700, Paragraph 18.2.2.

Accounting

HMRC has issued guidance on how to correct VAT errors and make adjustments or claims – VAT Notice 700/45.

When you issue a credit note you must adjust:

  • the records of the taxable supplies you have made
  • your output tax

The accounts or supporting documents must make clear the nature of the adjustment and the reason for it.

Where the adjustment is not in respect of an error in the amount of VAT declared on a VAT return, you should make any VAT adjustment arising from the issue or receipt of a credit or debit note in the VAT account in the accounting period in which the decrease in price occurs.

This will be the accounting period where the refunded amount is paid to the customer.

If you have charged an incorrect amount of VAT and have already declared it on a VAT return you can only correct an error in your declaration by adopting the appropriate method of error correction procedures.

Specific cases

Credits and contingent discounts

When a business allows a credit or contingent discount to a customer who can reclaim all the tax on the relevant supply, it does not have to adjust the original VAT charge – provided both it and its customer agree not to do so. Otherwise, both parties should both adjust the original VAT charge. A business should issue a credit note to its customer and keep a copy.

Prompt payment discounts

If the discount is taken up within the specified time you may adjust the consideration and amount of VAT accounted for by issuing a credit note. If you choose not to use a credit note, the original invoice must have the following information:

  • the discount terms (which must include, but need not be limited to, the time by which the discounted price must be paid)
  • a statement that the customer can only recover as input tax the VAT paid to the supplier

VAT rate change

Where a VAT invoice showed VAT at the old higher rate, then a credit note should be issued for the element of overcharged VAT. However, there is no way to charge VAT at the lower rate if:

  • VAT invoices for supplies were issued before the lower rate took effect, and
  • the supplies were actually made (delivered or performed) before then.

In such circumstances, VAT cannot be saved by issuing a credit note for the old VAT invoice and then issuing a new invoice charging VAT at the lower rate.

The deadline for issuing a credit note following a rate change is 45 days. Any credit notes issued after this 45-day deadline are invalid, so the old higher rate would apply to the affected supplies.

Case law – further reading

There is a significant amount of case law on credit notes as this is an area that often creates disputes. Some of the most salient cases are:

  • British United Shoe Machinery Company Ltd (1977 VATTR p187)
  • Silvermere Golf and Equestrian Centre Ltd (1981 VATTR p 106)
  • Robin Seamon Brindley Macro (MAN/83/100)
  • Highsize Ltd (LON 90/945)
  • Kwik Fit (GB) Ltd (1992 VATTR p427)
  • British Telecommunications plc (LON/95/3145)
  • The Robinson Group of Companies Ltd (MAN/97/348)
  • General Motors Acceptance Corporation UK Ltd (GMAC)(LON/01/242)

NB: A business can only reduce the output VAT on its return if it has made an actual refund. This could be by making a payment to the customer or offsetting the credit against other invoices.

Finally

Failing to issue a credit note is a mistake that needs to be corrected under the error correction procedures.

VAT: Was an option to tax valid? The Rolldeen Estates Ltd case

By   18 April 2023
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Latest from the courts

In the First-Tier tribunal (FTT) case of Rolldeen Estates Ltd there were a number of issues, inter alia; whether the appellant’s option to tax (OTT) was valid, if not, whether HMRC had the power to deem it valid, whether HMRC acted unreasonably and whether appellant estopped from relying on earlier meeting with an HMRC officer.

Background

The letting of property is an exempt supply, however, a landlord the owner can OTT the property and charge VAT on that supply.  If the OTT is exercised, the supplier is able to reclaim input VAT on costs such as repairs and maintenance, but charges output VAT on its supplies.  The OTT provisions are set out at The VAT Act 1994, Schedule 10.

The appellant in this case had previously submitted an OTT form VAT1614A and charged VAT on the rent to its tenant. Subsequently, the property was sold without charging VAT. HMRC issued an assessment for output tax on the sale value.

Schedule 10

A taxpayer does not need HMRC’s permission to OTT, unless that person has already made exempt supplies in relation to that property – in particular, if the property has already been let without VAT having been charged.  In that scenario, the person must apply to HMRC for permission to exercise the OTT, and permission will only be given if HMRC are satisfied that the input tax is fairly attributed as between the exempt period and the taxable period. When OTT the company stated that no previous exempt supplies of the relevant property had been made and this was also confirmed in subsequent correspondence with HMRC.

Appellant’s contentions

The company informed HMRC that the OTT was invalid so that no VAT was due on the sale. Evidence was provided which demonstrated that Rolldeen had made exempt supplies before the date of the OTT so that HMRC’s permission had therefore been required before it could be opted. No permission had been given and therefore there was no valid OTT in place even though the appellant had purported to exercise that option. Also, the appellant submitted that it was unreasonable of HMRC to have exercised the discretion to deem the OTT to have effect, because they had failed to take into account the fact that during an inspection, HMRC had known that Rolldeen had made exempt supplies before OTT.

HMRC’s view

VATA, Schedule 10, para 30 allows HMRC retrospectively to dispense with the requirement for prior permission, and to treat a “purported option as if it had instead been validly exercised”.  HMRC issued a decision stating that it was exercising its discretion under Schedule 10, para 30 to treat the relevant property as opted with effect from the date of the VAT1614A and that VAT was due on the sale and the assessment was appropriate.

Decision

The FTT found that:

  • after an inspection by HMRC it knew that prior exempt supplies had been made
  • although HMRC knew exempt supplies had already been made Rolldeen was estopped* from relying on that fact, because both parties had shared a “common assumption” that the OTT had been valid
  • para 30 could be used to retrospectively validate the OTT (albeit only in relation to supplies made after 1 June 2008).  In this case that was sufficient as the sale of the property occurred on in March 2015
  • HMRC had not acted unreasonably because they had not taken into account their own failure to carry out a compliance check
  • this is exactly the sort of situation for which para 30 was designed
  • it was entirely reasonable and appropriate of HMRC to deem the purported option to have been validly exercised

The appeal was rejected and the assessment was valid.

Commentary

Again, proof, if proof is needed, that OTT can be a complex and costly area of the tax and care must always be taken. Advice should always be sought, as once an OTT is made, there is usually no going back.

An interesting point in this case was that no case law was cited on this issue and the FTT was unable to identify any.

* The principle of “estoppel” means that a person may be prevented from relying on a particular fact or argument in certain circumstances.

VAT – What records must be kept by a business?

By   5 April 2023
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VAT Basics: Requirements for VAT records by taxable persons

I thought that it may be useful to round-up all the record-keeping requirements in one place and focus on what HMRC want to see. It is always good practice to carry out an ongoing review a business’ records to ensure that they comply with the rules.

General requirements

Every taxable person must keep such records as HMRC may require. Specifically, every taxable person must, for the purposes of accounting for VAT, keep the following records:

  • business and accounting records
  • VAT account
  • copies of all VAT invoices issued
  • VAT invoices received
  • certificates issued under provisions relating to fiscal or other warehouse regimes
  • copy documentation issued, and documentation received, relating to the transfer, dispatch or transport of goods overseas and/or imported
  • credit notes, debit notes and other documents which evidence an increase or decrease in consideration that are received, and copies of such documents issued
  • copy of any self-billing agreement to which the business is a party
  • where the business is the customer party to a self-billing agreement, the name, address and VAT registration number of each supplier with whom the business has entered into a self-billing agreement

Additionally

HMRC may supplement the above provisions by a Notice published by them for that purpose. They supplement the statutory requirements and have legal force.

Business records include, in addition to specific items listed above, orders and delivery notes, relevant business correspondence, purchases and sales books, cash books and other account books, records of daily takings such as till rolls, annual accounts, including trading and profit and loss accounts and bank statements and paying-in slips.

Unless the business mainly involves the supply of goods and services direct to the public and less detailed VAT invoices are issued, all VAT invoices must also be retained. Cash and carry wholesalers must keep all till rolls and product code lists.

Records must be kept of all taxable goods and services received or supplied in the course of business (standard and zero-rated), together with any exempt supplies, gifts or loans of goods, taxable self-supplies and any goods acquired or produced in the course of business which are put to private or other non-business use.

All records must be kept up to date and be in sufficient detail to allow calculation of VAT. They do not have to be kept in any set way but must be in a form which will enable HMRC officers to check easily the figures on the VAT return. Records must be readily available to HMRC officers on request. If a taxable person has more than one place of business, a list of all branches must be kept at the principal place of business.

Comprehensive records

In addition, we always advise businesses to retain full information of certain calculations such as; partial exemption, the Capital Goods Scheme, margin schemes, TOMS, business/non-business, mileage and subsistence claims, promotional schemes, vouchers, discounts, location of overseas customers, and OSS, amongst other records. The aim is to ensure that any inspector is satisfied with the records and that any information required is readily available. This avoids delays, misunderstandings and unnecessary enquiries which may lead to assessments and penalties.

If you have any doubts that your business records are sufficient, please contact us.

VAT: New guidance on zero rating exports

By   4 April 2023
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HMRC has published updated guidance on the evidence required to zero rate the export of goods. VAT Notice 703 sets out the following changes on the documentation which is required for proof of export:

  • Para 6.1 – For VAT zero rating purposes a business must produce official evidence or commercial evidence. Both types generally have equal weight but, if the commercial evidence is found to be lacking sufficient detail, a business will be expected to provide official evidence. An exporter must also provide supplementary evidence to show that a transaction has taken place, and that the transaction relates to the goods physically exported. If the evidence of export provided is found to be unsatisfactory, VAT zero rating will not be allowed and the supplier of the goods will be liable to account for the VAT at the appropriate UK rate.

 

  • Para 6.5 – What must be shown on export evidence (extract from the Notice)

“An accurate description of the exported goods and quantities are required, for example ‘2000 mobile phones (Make ABC and Model Number XYZ2000), value £50,000’.

If the evidence is found to be unsatisfactory you as the supplier will become liable for the VAT due.

If you’ve described goods inaccurately on an export declaration you may be liable for a customs penalty.

The rest of this paragraph has force of law.

The evidence you obtain as proof of export, whether official or commercial, or supporting must clearly identify:

    • the supplier
    • the consignor (where different from the supplier)
    • the customer
    • an accurate and full description of the goods including quantities
    • an accurate and consistent value of the good
    • the export destination, and
    • the mode of transport and route of the export movement

Vague descriptions of good, quantities or values are not acceptable. An accurate value must be shown and not excluded or replaced by a lower or higher amount”.

  • Paras 7.3 and 7.4 on merchandise in baggage and direct exports of personal goods in accompanied baggage have also be amended.

Overview

It is vitally important that exporters obtain the correct evidence that goods have physically left the UK and that all descriptions of the goods are accurate and satisfy HMRC requirements. There has been a significant amount of case law on export documentation (an example here) which illustrates that this is often an area of dispute.

A VAT Did you know?

By   28 March 2023
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Embryos of animal species which are used for human food may be zero-rated but “anything below” the embryo stage is standard-rated.

VAT: DIY Housebuilders’ Scheme – deadline for claims extended

By   20 March 2023
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The DIY Housebuilders’ Scheme  is a tax refund mechanism for people who build, or arrange to have built, a house they intend to live in. It also applies to converting commercial property into a house(s). This puts a person who constructs their own home on equal footing with commercial housebuilders. There is no need to be VAT registered in order to make the claim.

One of the main problems was the very strict (and rigorously enforced) deadline of three months for the submission of the claim form. This is from completion of the build (usually this is when the certificate of practical completion is issued) or the building is inhabited, although it can be earlier if the certificate is delayed.

A case on when a house is considered to be complete here.

However, HMRC has announced that this deadline will be extended to six months from a date yet to be announced. This extension is welcome as it is often difficult to collect all the required information and documentation. In addition, the whole process will be digitised some time in the future which will also simplify the process.

The Scheme can be complex, but here is our Top Ten Tips for claimants.

VAT: Evidence for retrospective claims – new guidance

By   14 March 2023
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HMRC has updated its Manual VRM9300 on historic VAT claims.
These types of claims are often called “Fleming” claims and refer to those made before the introduction of the four (once three) year time cap. Such claims extend beyond the period that businesses were required to keep business records and so these were less likely to have remained available.

Standard of Proof where records are unavailable

Where detailed records are unavailable it does not mean there is a lower standard of proof for a claim. The civil standard of proof (on a balance of probabilities) remains.

However, taxpayers’ estimates, assumptions and extrapolations must be sufficiently robust to support a claim. HMRC and the Tribunals must have regard to the evidence that is available, and each claim must be considered on its individual merits.
HMRC state that it “…is not obliged to accept a figure simply because some input tax is due or because it is the claimant’s ‘best guess’ based on the material available”. The claimant must first establish that its method of valuing the claim is reasonable and provide an identifiable repayable amount.
The guidance considers the judgement in the NHS Lothian [2022] UKSC 28 case and its impact on claims where full evidence is unavailable.
Alternative evidence
It is also worth noting that HMRC have the discretion to accept alternative evidence.