Category Archives: Planning

Check if an HMRC email is genuine

By Marcus Ward 5 August 2021

On 30 July 2021 HMRC published a list of emails which has sent taxpayers. Additionally, there is a check for genuine HMRC contact that uses more than one communication method.

It is clear that scammers are using the cover of tax authorities to obtain money by deception. I suspect that many of us have experienced this, to various of sophistication.

Consequently, HMRC have published this document which can be checked before any action is taken in respect of a purported communication from HMRC. If the email topic is not listed, caution should be exercised. The majority of the email subjects listed are VAT based.

VAT Investigations

By Marcus Ward 5 August 2021

Even in these days of increased contactless payments it may be interesting to look at HMRC’s methods of establishing underdeclarations.

HMRC have always taken an interest in cash businesses as they see them as a revenue risk. Such businesses are usually retail and commonly restaurants and take-aways (which I shall use as an example in this article). A retail business is obliged to keep certain records. For sales, this is a record of daily gross takings (DGT) and this is the area I will focus on as it is where “suppression” of income generally occurs. In a very crude example, the owner, or a member of staff does not ring up a sale and the payment is pocketed. There are more sophisticated ways in which suppression occurs, but this is the most common.

Even in this day and age where most payments are made by credit or debit cards, there is still significant scope for declarations to be inaccurate.

The methods

There are a number of ways in which HMRC can determine the accuracy of VAT declarations. These may be from the usual bank and accounts reconciliations, mark up exercises, to, say, counting take-away containers to build up a picture of the turnover. The following are also ways in which HMRC test the credibility of declarations:

Compliance checks

These usually take place in the evenings when a restaurant is open for business (or soon after it closes). Officers gain entrance, question staff, examine records for that and previous days, and remove certain records. From this information they can build up a picture of trading. These visits are usually unannounced.

Invigilation exercise

HMRC observe how the business operates and check that all sales of food and drinks are rung into the till. This is usually with the agreement of the business.

Test meals

HMRC staff will purchase a test meal and at a later time check to see if it has been recorded correctly. It may be that this method will be repeated at a suspect restaurant by different HMRC staff, perhaps in the same evening. If any of the sales are not recorded correctly, it may be insufficient in itself to create an assessment, but it will confirm suspicions of suppression and lead to further action.

Observation

While posing as customers, HMRC will also count the number of covers, the amount of take aways, the number of staff, how orders are taken and paid for, and how payments are made.

Surveillance

Members of HMRC staff park outside a restaurant (usually in an unmarked van) and watch the activities of the restaurant. They count the number of people dining and the numbers of people exiting with take aways. This observation may also record the number of deliveries and other relevant information that they are able to obtain from what they can see. This exercise may be carried out over a number of days/nights or even weeks.

Purchases

In more complex suppression, the value of purchases may also be suppressed in order to present a more credible picture to an inspector. This may be more common if the purchases are zero rated food (on which the business would not claim input tax). HMRC may attempt to build up a picture of sales by the volume of actual purchases made. They often check the restaurant’s suppliers’ records to get a full picture of trade.

Information obtained by one of the above methods may, on its own, be insufficient to raise an assessment, but combined with information obtained in different ways will more often than not result in one (should the exercises demonstrate an under-declaration of course).

Taxpayer’s rights

Attendance

HMRC do not have the right to attend a taxpayer’s premises at any time. The law says that inspections may be carried out “at any reasonable time”. This means that that if a business owner is busy, or the time is outside normal office hours, or there is not access to all of the relevant information, or the request is unreasonable for any other reason, the business owner (or his adviser) may request that an inspector leaves and makes an appointment at a future reasonable time. This is sometimes easier to do in theory than in practice, but a taxpayer’s rights are set out in The Finance Act 2009, Schedule 36, part II.

A business has no right to refuse a “regular” inspection but these are arranged for an agreed time in any case.

Records

The VAT Act 1994, Schedule 11 states that the requirement to produce records is limited to being provided at such time as HMRC “may reasonably require”. So, again, if HMRC are making demands that a business feels are unreasonable, it is within its rights to refuse to allow access and to make a mutually agreed and acceptable appointment to allow access to premises and records. This may lead to a discussion, but HMRC do not have unfettered rights to access premises or records.

Best judgement

Regardless of how HMRC have gathered information, any assessment must be made to the best of their judgement and must be “an honest and genuine attempt to make a reasoned assessment of the VAT payable”. If the business is able to demonstrate that this was not the case, the assessment must be removed. Broadly, this will entail demonstrating that things that ought to have been considered were ignored, or that things that have been included should not have been. Generally, the most common ways to challenge an assessment based on the above exercises are; that the period considered was not representative, or not long enough to be representative, or that the tests carried out were insufficient to demonstrate a consistent pattern of trading. There are usually specific facts in each case that may be used to challenge the validity and quantum of an assessment.

Action

Of course, it is hoped that no business which makes accurate declarations is troubled by such investigations. However, if a business feels that HMRC is being unreasonable with its demands it should seek professional advice before agreeing to permit HMRC access.

Matters change however, if HMRC have a Search Warrant or a Writ of Assistance in which case HMRC are able to compel a business to allow entry or inspection.

As always, we advise that any assessment is, at the very least, reviewed by a business’ adviser.

A VAT Did you know?

By Marcus Ward 29 July 2021

Gingerbread men: No tax is due if the figure has two chocolate spots for its eyes, but any chocolate-based additions, such as buttons or a belt, mean VAT is payable.

Businesses still owe £Billions after VAT deferral

By Marcus Ward 27 July 2021

Over 25% of VAT registered businesses that were permitted to delay VAT payments as a result of the pandemic still owe HMRC the tax deferred.

The now closed payment scheme permitted VAT registered persons to defer VAT payments due between March and June 2020 and around 600,000 businesses took advantage of the relief. The deadline was 30 June 2021, and it has been stated that over a quarter of business have failed to contact HMRC about their debts and have not made the necessary payments.

The total outstanding, according to The Treasury, is £2.7 billion which represents circa 9% of the VAT take. Of the tax deferred under the scheme, £17.8 billion has been paid and around £13 billion is being paid via monthly instalments.

HMRC have announced its approach to collection VAT debt after Covid19.

It has also become clear is that businesses and consumers have fallen into default during and after the pandemic. It is anticipated that the ability to settle of debts on time will decrease and it is apparent that many debts will never be settled. Consequently, it appears timely to look at the available relief. An article on VAT Bad Debt Relief here.

We would urge, that even if a business cannot make a payment, that it still submits VAT returns on time. It is tempting to accept a centrally issued assessment if it is for a lesser amount than the actual VAT due for the period. However, such action can, and often does, lead to penalties and increased interest from HMRC.

VAT: Partial Exemption -What Is It? What do I need to know?

By Marcus Ward 21 July 2021

VAT Basics

As part of our guides to VAT basics, we take a brief look at partial exemption and how it affects a business.

The first point to make is that partial exemption is often complex and costly. In some cases it may be avoided by planning and in others it is a fact of life for a business which needs to be managed properly.

Background

The VAT a business incurs on its expenditure is called input tax. For most businesses this is reclaimed from HMRC on VAT returns if it relates to standard rated or zero rated sales (referred to as “taxable supplies”) that that business makes. Exempt supplies are not to be confused with non-business income which are dealt with under a different regime.

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, e.g.; light, heat, telephone, computers, professional fees, etc 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. A flowchart which illustrates the Standard Method of apportionment is below.

partial exemption flowchart1

Which businesses are affected?

Any business which receives income from the following sources may be affected by partial exemption:

Property letting and sales – generally all types of supply of land*
Financial services
Insurance
Betting, gaming and lotteries
Education
Health and welfare
Sport, sports competitions and physical education
Cultural services

This list is not exhaustive.

* Most businesses which do not routinely make exempt supplies usually encounter exemption in the area of land and property and it is an easy trap to fall into not to consider VAT when involved in property transactions. This is one area where VAT planning may be of assistance as it is possible in most situations to deliberately choose to add VAT to an exempt supply to avoid a loss of input tax. This is known as the option to tax, and it is considered in more detail here.

De Minimis relief

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 (£625 per month) 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 which represents spending of under £10,000 net; not a huge amount.

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

The value for the de minimis limit has been in place for over 25 years (when it was increased by a huge £25 per month) and it is rather ridiculous that it has not been increased to reflect inflation. This, coupled with the fact that the VAT rate has increased significantly means that the relief which was once very useful for a business has withered away to such an extent that partial exemption catches even very small businesses which I am sure goes against the original purpose of the relief.

In summary – for a business exemption is a burden not a relief. It represents a real cost in terms of tax payable, time and other resources, in addition to uncertainty. We often find that this is an area which HMRC examine closely and one which benefits from proactive negotiation with HMRC.

VAT: Land and property – “simplification” ahead?

By Marcus Ward 19 July 2021

HMRC has issued a call for evidence in respect of land exemption. HMRC acknowledges the complexity of the existing VAT rules on land and property and would like to hear views from businesses on the application of the current rules, and whether these rules could be simplified.

The application of VAT on land and property transactions is complicated. A range of different rates and exemptions can apply depending on the facts and circumstances of individual situations and the precise treatment of a transaction or project is often open to interpretation.

Complexity

The paper identifies a number of reasons why this area is extremely complicated:

over the years the amount of legislation has increased, and the land VAT exemption now contains fifteen exceptions and twenty-six sets of notes
some businesses can be required to make several separate decisions before the VAT liability of their supply can be established. Eg; once a business has established that it is supplying land (not always straightforward) it then has to consider whether that supply falls within one of the exceptions to the exemption. If it does fall within one of the exceptions, it then has to consider a number of conditions to establish whether it is excluded from that exception
businesses may spend a disproportionate amount of time and money to establish the correct liability of their land supplies. This can also cause additional burdens for HMRC to assure compliance of these businesses
the development of new markets and services that did not exist when VAT was introduced
the impact of precedent case law (both UK and EU)
the uncertainty of establishing when an exempt supply of land becomes a taxable supply of facilities

The Option to Tax

The option to tax legislation enables a business to tax some supplies of land that would otherwise be treated as exempt from VAT. The usual rationale behind making such a choice is to be able to recover the VAT incurred on costs and overheads of a business, or to meet the conditions of a Transfer of a Going Concern (TOGC).

Suggestions

The document then suggests some ideas for simplification:

removing the ability to opt and making all relevant transactions exempt
removing the option to tax and making all land and property taxable at a reduced rate
making all commercial land and property taxable at the standard rate with an option to exempt

The first suggestion would result in many businesses incurring irrecoverable input tax which would be a direct cost, so this appears very unattractive.

The second seems a better option, but would bring new housing into the VAT net and I doubt that this would play out very well with the public.

The final suggestion would certainly simplify matters but would add VAT costs to entities which cannot recover any/all input tax, eg; charities, financial service providers, insurance companies, education bodies, health and welfare organisations and cultural services.

The document states that “The Government wants UK businesses to operate in the best possible environment and remain both productive and competitive”.

It remains to be seen whether the suggestions above (or other proposals put forward) will achieve this, but removing choices for a business (regardless of whether simplification is actually realised) is rarely a good idea and I wonder if simplification could be reached in other ways. If you have an interest in this area, please respond to this call as input is valuable for all parties.

Responses should be sent by 3 August 2021 by email to landsimplification@hmrc.gov.uk.

VAT: The “business” of shooting – a tale

By Marcus Ward 14 July 2021

Sometimes one is involved in a dispute which goes to the core of the tax. This is a case which highlights basic VAT principles, HMRC’s approach to an issue and the lengths to which a taxpayer has to go to defend his position.

Are you sitting comfortably?

A day out in the countryside; striding across beautiful landscape, amongst friends, enjoying each other’s’ company and a bit of sport – can this really be the subject of such intense debate with HMRC? Well, unfortunately this seems to be the case when it comes to the operation of a day’s shooting. In the eyes of the taxman, whether or not a profit or a surplus is achieved, shooting, conducted in the course of furtherance of a business is subject to VAT.

This is not usually an issue which shooting syndicates find themselves having to address; they are not concerned with the ins and outs of what constitutes a business for the purposes of the VAT legislation. However, HMRC was pursuing this issue in earnest and they have a team devoted solely to attacking shoots.

Who is HMRC targeting?

HMRC seem to be focusing on syndicate run shoots which are not registered for VAT but who HMRC believe are operating on business principles. If an organisation is operating as a business then it may be liable to register for VAT if certain income thresholds are exceeded. The shoot will then have to charge output VAT on the supplies it makes. In my case there would have been a significant assessment plus penalties and interest which could double the past VAT bill.

How is HMRC attacking the issue?

HMRC is looking closely at the specific activities of syndicate shoots in order to build an argument demonstrating that the organisation of the shoot is run on “sound business principles”. The reason that there is room for debate on this matter is that what constitutes a business is not explicitly defined anywhere in the VAT legislation either in UK or EC law. Rather, the issue has been defined in case law.

The defining case was Lord Fisher, which co-incidentally also concerned a shoot. This case is relied upon throughout the VAT world to give guidance on what constitutes a business – and not just in respect of shoots but for all types of activity.

Anyway, back to this syndicate…

I was involved in a battle lasting four years which concerned a local shoot run for over five decades by a group of friends and which was provided only for the benefit of the syndicate members. The shoot was not open to the common commercial market place or members of the public and the shoot did not advertise. HMRC spent a great deal of time trying to understand the finer details of the running of this shoot and concluded that it was a business

We advised The Shoot to appeal to the VAT Tribunal against HMRC’s decision to levy VAT on its activities.

They key to the syndicate’s defence was to demonstrate that no true business would operate commercially in the way that The Shoot does. If it did, it would be completely unprofitable and would soon be out of business. To demonstrate this effectively, every aspect of the shoot was examined in detail and compared and contrasted with the way a commercial shoot operates. This involved everything from the lunch arrangements, CVs of the gamekeepers and how beautiful the land is, right through to whether chicks or poults are purchased and whether local deer were sold to the highest bidder. However, the most important factor was the demonstration that the syndicate does not have a profit built in to the cost structure and the amounts that the syndicate members contribute. The syndicate is run on a cost sharing basis and is not “an activity likely to be carried out by a private undertaking on a market, organised within a professional framework and generally performed in the interest of generating a profit.”

It all sounds so simple to those familiar with the industry but unfortunately from a VAT ‘business’ perspective it has been a long, stressful and costly argument for the appellant to make. A few days before the case was to be heard at the Tribunal, HMRC withdrew their assessment and conceded the case.

HMRC had seen the many witness statements filed by the members of the syndicate waxing lyrical about how this was an age-old hobby run by a few friends and in no way could it be considered a commercial business. They had seen the expert witness report written by a specialist in the field. The distinctions made between commercial and syndicate shooting were made very clear. They had also seen the powerful argument which concluded that the shoot “cannot seriously be suggested to amount to a ‘business’ for the purpose of the VAT code”.

What this means?

Of course this victory over HMRC was a fantastic result for the members of The Shoot, but from a practical point of view quite frustrating in that the case was not heard; denying other entities the benefit of the predicted victory. Alas, it was one case that HMRC could not afford to lose.

It is therefore likely that HMRC will continue to target other shoots where they think they can ‘win’ or at least not be challenged.

Have you been affected? – What should you do next?

If this makes for frighteningly familiar reading and you or your local syndicate shoot are, or have been, under HMRC investigation then it is vital that you should take professional advice. As I orchestrated the defence for The Shoot we believe that we are the leading advisers in such matters.

For completeness, the six tests derived from the Lord Fisher case (and others) are:

Is the activity a serious undertaking earnestly pursued?
Is the activity an occupation or function, which is actively pursued with reasonable or recognisable continuity?
Does the activity have a certain measure of substance in terms of the quarterly or annual value of taxable supplies made?
Is the activity conducted in a regular manner and on sound and recognised business principles?
Is the activity predominantly concerned with the making of taxable supplies for a consideration?
Are the taxable supplies that are being made of a kind which, subject to differences of detail, are commonly made by those who seek to profit from them?

The case of Lajvér Meliorációs Nonprofit Kft. and Lajvér Csapadékvízrendezési Nonprofit Kft is also helpful in looking at what a business is.

VAT: Collection of tax debts

By Marcus Ward 8 July 2021

HMRC has announced its approach to collecting debts after Covid-19.

The Policy Paper explains that the government’s priority is protecting livelihoods and keeping people in work. It states that HMRC has been central to this, for example by pausing many of its debt collection activities and delivering support packages.

However, HMRC is restarting its collection of outstanding debts and will be contacting taxpayers who have fallen behind with VAT and other taxes as a result of the pandemic.

HMRC action

If there is a VAT debt, HMRC will contact a business by phone, post or text message so that they can discuss the situation and agree a way forward. It is important for businesses to respond to these communications as soon as possible because, if there is no reply, HMRC cannot establish whether support is needed or there is a simple refusal to pay.

Time To Pay

HMRC usually discuss payment options, such as a payment plan (called Time to Pay – TTP), which is paying off the debt in affordable instalments.

NB: HMRC typically have more than half a million of TTP arrangements in place and more than nine out of ten of them complete successfully.

As part of agreeing Time to Pay arrangements with businesses, HMRC may also discuss other forms of support available. For example, exploring the range of government-backed lending support like Bounce Back loans and Coronavirus Business Interruption Loans, and agreeing repayment holidays or extending repayment terms.

More information about payment arrangements (Time to pay) is available at How HMRC supports customers who have a tax debt.

Deferral

If a business cannot make a payment immediately, by getting in touch with HMRC it may be possible to arrange a short-term VAT deferral. This means nothing would need to be paid for a set period of time, and no further action to collect the tax debt would be taken until that time has lapsed.

Further powers

Although HMRC state that it will take an “understanding and supportive approach” to tax debt, from September 2021, where businesses are unwilling to discuss a payment plan, or where they ignore attempts to contact them, HMRC may start the process of collecting the debt using its enforcement powers. These powers include; taking control of goods, summary warrants and court action including insolvency proceedings.

As may be seen, ignoring tax debts is not a good policy. Talk to HMRC and see if the various support schemes available are suitable.

VAT: New HMRC tool for payment deadlines

By Marcus Ward 22 June 2021

HMRC has published a tool to enable taxpayers to calculate the date by which VAT payments are due. It covers payments by:

direct debit
online or telephone banking
online debit or credit card
Bacs direct credit
bank giro
CHAPS
cheque

Simple, but it works.

VAT: Day-care services by private bodies are taxable

By Marcus Ward 22 June 2021

Latest from the courts

Following the Supreme Court decisions in Life Services Ltd and The Learning Centre (Romford) Ltd HMRC have published guidance in Revenue & Customs Brief 9 (2021).

NB: This guidance applies to bodies in England and Wales only – Scotland and Northern Ireland have different rules.

The relevant cases concerned the VAT liability of day-care services provided by private bodies to vulnerable adults in England. They confirmed that HMRC’s interpretation of the legislation is correct; that providers of day-care must be charities, public bodies or regulated by the relevant authority (“approved, licensed, registered or exempted from registration by any Minister or other authority pursuant to a provision of a public general Act”) in order to be able to exempt these services.

The legislation is: The VAT Act 1994, Schedule 9, group 7, item 9.

It is understood that there were a significant number of claims stood behind the Supreme Court cases and these will now fail.

HMRC state that providers who have not accounted for VAT on supply of these services must do so with immediate effect.

Commentary

This is a further example of the VAT complexity in the provision of health and welfare services. It has always been an area ripe for disputes and such bodies and their advisers would be prudent to review the tax treatment of their supplies. There are usually two discrete areas of potential problems; whether services are business or non-business, and if business – do they fall within the various exemptions found at Schedule 9, group 7, items 1 to 11.