Girls Brigade officers’ dress hats are standard rated. Girls Brigade soft forage hats are zero-rated.
Category Archives: Small Businesses
VAT: Updated guidance on deliberate behaviour
HMRC has published updated guidance on deliberate behaviour. It clarifies the definition of these actions in respect of extended time limits.
What is deliberate behaviour?
A deliberate inaccuracy in a document occurs when a person (or another person acting on behalf of that person) knowingly gives HMRC an inaccurate document.
“A person who submits a document containing a deliberate inaccuracy might assert that they did not intend to cause a loss of tax. For the purpose of assessing this loss of tax, the person or any persons acting on their behalf will be treated as deliberately causing the loss of tax if they consciously intended to mislead HMRC”.
Examples
- knowingly failing to record all sales
- describing transactions inaccurately or in a way likely to mislead
- lodging a VAT return that includes a figure of net VAT due that is too low because the person does not have the cash at that time to pay the full amount, and later telling HMRC the true figure when he has the funds to pay
- similarly declaring less tax due for aggregates levy, climate change levy, landfill tax or excise duty because the person does not have the funds at that time to pay the full amount
(This list is not exhaustive and HMRC provide more examples in the guidance).
Why is it important?
Mainly, there are different time limits within which HMRC can take action.
A 20 year time limit applies where tax has been underdeclared, or over-repaid, as a result of a deliberately inaccurate return or other document. The normal cap is four years.
Other action
Although HMRC can make assessments to recover any tax lost, it also have a criminal investigation policy and will refer the most serious cases for consideration of criminal proceedings where appropriate.
If you or your clients are subject to an investigation, please seek professional advice immediately. There is a dark side to VAT.
VAT: Alternative Dispute Resolution (ADR) new guidance
HMRC has published an updated Internal Manual which provides guidance on the ADR mechanism. I have written about this in detail here.
What is ADR?
ADR is the involvement of a third party (a facilitator) to help resolve disputes between HMRC and taxpayers. It is mainly used by SMEs and individuals for VAT purposes, although it is not limited to these entities. Its aim is to reduce costs for both parties (the taxpayer and HMRC) when disputes occur and to reduce the number of cases that reach statutory review and/or Tribunal. The facilitator is impartial and independent and aims to assist both parties in resolving the tax dispute.
Changes
The changes are mainly in connection with disagreements about whether a case is suitable for ADR. These include cases where requests have been made for ADR, for example:
- requests from taxpayers for ADR where the HMRC decision is that the case is not suitable for ADR
- requests from taxpayers for ADR where some of the HMRC case team believe the case is unsuitable, but other members of the team believe the case may be suitable
- referrals from HMRC for complex or sensitive cases where they would like to offer ADR to the taxpayer
An ADR Panel, which consists of senior personnel from HMRC, will consider requests for ADR in circumstances where there is uncertainty about the suitability of a case for ADR. The ADR Panel will aim to provide assurance that applications by taxpayers in the most complex or potentially contentious cases for ADR are properly assessed and that decisions are consistent and principled.
VAT: How claims are processed
Further to my article on repayment interest, I thought it may be helpful if I looked at how HMRC process repayment returns, and what can delay payments.
Once a business submits a repayment return it is subject to a number of set steps:
- Step 1
HMRC records the date a return is submitted online via MTD.
- Step 2
Automated credibility checks are applied to all claims. HMRC say that most returns pass these tests. If this is the case, they proceed immediately for payment.
- Step 3
Credibility queries (or “pre-cred” queries) – returns that fail the automated tests are checked manually and are either resolved by the credibility team, or sent to officers to carry out further investigation.
- Step 4
Returns sent for further checks – HMRC say that high priority is given to these verifications and any queries are handled with the minimum involvement of, or inconvenience to, a business. Experience insists that this is not always the case.
- Step 5
Credibility queries are returned to the credibility team – results of the officer’s action, including any amendments required, are returned with a certificate detailing the amount of time taken and any official delay. Claims are passed for payment.
- Step 6
Payment of the claim – once a claim has been accepted, repayment is made immediately. HMRC’s systems check whether repayment interest is applicable. If it is, the interest is paid automatically at the same time as the repayment.
Commentary
Most issues usually arise when returns show “unexpected” repayments – eg; a business regularly submitting payment returns submits an one-off claim, or when a first return shows a significant repayment. The pre-cred checks are undertaken to protect the revenue, that is; to ensure that the claim is valid before money is released. Normally, these checks involve a request for copies of purchase invoices, a telephone conversation, or a physical visit by an officer. Not unreasonably, the quantum of the claim impacts significantly the way HMRC handle it.
However, delays can occur on both sides. A business will have to reply to all HMRC requests timeously (and this is in its interest) but more often a claim will be ‘lost” in the system, or inspectors take an unacceptable time to deal with queries. I have one claim that is still in the system after being lodged in January 2021, despite us providing all information requested immediately.
Reasons for unexpected repayments
There are a number of reasons why a return may be an unusual repayment, which include, but are not limited to a:
- large one-off VAT bearing purchase, eg; machinery, computer system, or land/property
- premises refurbishment
- concentration of professional/advisory fees
- large export order
- change in business structure
- new line of business
- change of a product’s liability
- change of government policy
- new product launch
VAT: New guidance on repayment interest
HMRC has published new guidance on repayment interest – in cases where HMRC is late in settling a repayment claim for overpaid VAT.
If HMRC is late in paying an amount representing a repayment, ie; when a return shows more input tax than output tax, or a claim is made for VAT previously overpaid, a business may be entitled to repayment interest on the VAT that it is owed. From 1 January 2023 repayment interest replaced the repayment supplement.
Amount of interest
Repayment interest is paid at the Bank of England base rate minus 1%, with a minimum rate of 0.5%.
Start date
VAT already paid to HMRC
The day after the later of these two dates:
- when the VAT was paid to HMRC
- the payment deadline for your accounting period
VAT not paid to HMRC
The day after the later of these two dates:
- the payment deadline for the accounting period
- when the VAT return or claim was submitted
End date
Repayment interest ends when HMRC either repays the VAT or sets it off against a different VAT or tax amount that is deemed to be owed.
Notes
- any retrospective claims are subject to the unjust enrichment rules
- repayment interest is not due if there are any outstanding VAT returns
- HMRC will not pay interest on early payments of VAT
- if payment on account businesses pay instalments that exceed VAT owed, repayment interest begins on the date the return was due
- in cases where HMRC demand a VAT security, and it is not paid, no repayment interest will be due
VAT: TOMS – negative margin permitted? The Square case
Latest from the courts
In the First-Tier Tribunal (FTT) case of The Squa.re Limited (TSL) the issue was whether unsold inventory or inventory sold at a loss could affect the calculation of the Tour Operators’ Margin Scheme (TOMS).
Background
TSL provided serviced apartments to travellers. The company leased accommodation from the owners of the properties who were frequently, if not exclusively, private individuals who were not registered for VAT.
These leases were often for an extended period, eg; annual leases, such that the appellant is committed under the terms of the lease even where the accommodation cannot then be on supplied or not supplied for a profit.
The Issue
The issue was whether TOMS operated in such a way as to permit a negative calculation resulting in repayment to the appellant. HMRC issued an assessment because, while they accepted that there may be a zero margin on a TOMS supply, they considered that a negative margin was not permitted by the scheme. TSL maintained that a repayment of overdeclared output tax was appropriate if a loss was made (an “overall negative margin”) as TOMS does not exclude the possibility of a negative margin.
The dispute between the parties was a technical one only and concerned the interpretation of the statutory provisions implementing TOMS into UK law.
Legal
The domestic implementation of the TOMS is authorised by The Value Added Tax Act 1994, Section 53 and found in Value Added Tax (Tour Operators’) Order 1987 (SI1987/1806). Guidance is provided via Notice 709/5 and Sections 8 to 13 have the force of law.
Decision
The Tribunal determined that it was clear from the legislation that the taxable amount is concerned with the supply made, and not the VAT incurred on the various cost components. Under normal VAT accounting the output tax charged on supplies is calculated by reference to the consideration received by the supplier from the customer. There can realistically be no concept of negative consideration.
The FTT considered that there is no basis inherent within TOMS which would permit a calculation of a negative sum. There had been a supply (of a designated travel service) for a consideration, and it is the taxable amount of that supply which was to be determined. A negative taxable amount is a “conceptual impossibility”. A negative margin arises as a consequence of a lack of profitability, but VAT is a transaction tax and not a tax on profit.
When sold at a loss where the total calculation resulted in a negative margin the annual sum due by way of output tax would be nil (not a repayment).
Where the accommodation is not sold at all, the FTT noted that this cost represented a cost of doing business but, on the basis that there has been no onward supply, there is no supply which meets the definition of a designated travel service. The relevant accommodation is not for the direct benefit of any traveller so there is no supply and TOMS is irrelevant.
Whilst the FTT considered that were it the case that identified costs incurred in buying in goods and services which are not then the subject of an onward supply should be excluded from TOMS calculations, costs associated with the block booking of accommodation of the type incurred by TSL were to be included. Where such costs exceed the value obtained by onward supply, the negative margin forms part of the annual calculation. However, where the global calculation results in a negative margin the tax due for the year under TOMS is nil and there was no basis for a repayment to TSL.
There was no basis on which to permit an overall TOMS negative margin and the appeal was dismissed.
Commentary
Another demonstration of the complexities of TOMS and the potential pitfalls.
It may be useful to note that input tax claims are not permitted in TOMS calculations, however, any VAT incurred on any bought in, but unsold, services would not be excluded from recovery as there is no TOMS supply. The input tax on unsold inventory was a general cost of doing business and, as such, recoverable in the normal way. Consequently, there may be circumstances for businesses using TOMS where input tax incurred on unsold elements may be claimed outside of TOMS
A VAT Did you know?
Children’s clothing made from the skin of goats is zero rated, but only if not made from Yemen, Mongolian or Tibetan goats.
VAT: Insurance partial exemption
HMRC has issued new guidance for the insurance sector. It will be relevant to those dealing with partial exemption for insurers, including business and HMRC when discussing how partial exemption applies in practice for an insurer.
The guidance is intended to help insurers agree a fair and reasonable partial exemption special method (PESM) with the minimum of cost and delay. It also helpfully sets out definitions of various insurance/reinsurance transactions and business structures.
Background
Insurance businesses usually make a mixture of exempt and taxable supplies and may also provide specified services to customers located outside of the UK which incur a right to recover input tax.
When determining how to calculate the recoverable elements of input tax, the starting point is with the standard partial exemption method, as defined within The VAT Regulations 1995, regulation 101, but this will rarely be suitable for the insurance sector.
Many insurance businesses are complex organisations that provide many different services of differing liabilities to customers, often in different countries, using costs form suppliers around the world in different proportions. In addition, certain costs may have little relation to the value of the supplies for which they are incurred.
Therefore, most insurance businesses will need to apply to HMRC for approval to use a PESM.
Fair and reasonable
Partial exemption is the set of rules for determining recoverable input tax on costs which are used, or intended to be used, in making taxable supplies which carry a right of deduction. The first step is usually allocating costs which are directly attributable to taxable or exempt supplies. The balance (overhead input tax, or “the pot”) is required to be apportioned by either a standard method (The “standard method” requires a comparison between the value of taxable and exempt supplies made by the business) or a PESM.
A PESM needs be fair and reasonable, namely:
- robust, in that it can cope with reasonably foreseeable changes in business
- unambiguous, in that it can deal, definitively with all input tax likely to be incurred
- operable, in that the business can apply it without undue difficulty
- auditable, in that HMRC can check it without undue difficulty
- fair, in that it reflects the economic use of costs in making taxable and exempt supplies
HMRC will only agree the use of a PESM if a business declares that it has taken reasonable steps to ensure the method is fair and reasonable. HMRC cannot confirm that a special method is fair and reasonable but will make enquiries based on an assessment of risk and will never knowingly approve an unfair or unreasonable special method.
Attribution of input tax
In the insurance sector, relatively few costs are either used wholly to make taxable or exempt supplies.
The VAT regulations (see above) require direct attribution to be carried out before cost allocation to sectors. However, direct attribution at this stage can cause difficulties where tax departments are unaware of how particular costs are used and have a large number of such costs to review.
It has therefore been agreed between HMRC and the Association of British Insurers that, whilst direct attribution must still take place, it need not always be the first step, and could, for some costs, follow the allocation stage. Methods could refer to direct attribution both pre- and post-allocation, so that costs are dealt with in the most appropriate way. The underlying principle is that the method must be both fair and reasonable.
Types of PESMs
The guidance gives the following examples of special methods:
- sectors and sub-sectors
- multi pot
- time spent
- headcount
- values
- number of transactions
- floor space
- cost accounting system
- pro-rata
- combinations of the above methods
with descriptions of each method.
VAT: Doctors and healthcare professionals
Healthcare services – an overview
I have noticed that I am receiving more and more queries in this area and HMRC does appear to be taking an increased interest in healthcare entities. This is hardly surprising as it can be complex and there are some big numbers involved.
(This article refers to doctors, but applies equally to most healthcare professional entities including; opticians, nurses, osteopaths, chiropractors, midwives, dentists etc.)
The majority of the services provided by doctors’ practices are VAT free. Good news one would think; no need to charge VAT and no need to deal with VAT records, returns and inspections.
However, there is one often repeated question from practices; “How can we reclaim the VAT we are charged?” This is particularly relevant if a practice intends to spend significant amounts on projects such as property construction or purchase.
The first point to make is that if a practice only makes exempt supplies (of medical services) it is not permitted to register for VAT and consequently cannot recover any input tax. Therefore we must look at the types of supplies that a practice may make that are taxable (at the standard or zero rate). If any of these supplies are made it is possible to VAT register regardless of their value. Of course, if taxable supplies are made, the value of which exceeds the current turnover limit of £85,000 in a rolling 12-month period, registration is mandatory.
Examples of supplies of services and goods which may be taxable are:
- drugs, medicines or appliances that are dispensed by doctors to patients for self-administration
- dispensing drugs against an NHS prescription (zero-rated)
- drugs dispensed against private prescriptions (standard-rated)
- medico legal services that are predominantly legal rather than medical – for example negotiating on behalf of a client or appearing in court in the capacity of an advocate
- clinical trials or market research services for drug companies that do not involve the care or assessment of a patient
- paternity testing
- certain rental of rooms/spaces
- car parking
- signing passport applications
- providing professional witness evidence
- any services which are not in respect of; the protection, maintenance or restoration of health of a patient.
So what does VAT registration mean?
Once you join the “VAT Club” you will be required to file a VAT return on a monthly of quarterly basis. You may have to issue certain documentation to patients/organisations to whom you make VATable supplies. You may need to charge VAT at 20% on some services. You will be able to reclaim VAT charged to you on purchases and other expenditure subject to the partial exemption rules – see below. You will have to keep records in a certain way (see MTD) and your accounting system needs to be able to process specific information.
Because doctors usually provide services which attract varying VAT treatment, a practice will be required to attribute VAT incurred on expenditure (input tax) to each of these categories. Generally speaking, only VAT incurred in respect of zero-rated and standard-rated services may be recovered. In addition, there will always be input tax which is not attributable to any specific service and is “overhead” eg; property costs, professional fees, telephones etc. VAT registered entities which make both taxable and exempt supplies are deemed “partly exempt” and must carry out calculations on every VAT return.
Partial Exemption
Once the calculations described above have been carried out, the resultant amount of input tax which relates to exempt supplies is compared to the de-minimis limits (broadly; £625 per month VAT and not more than 50% of all input tax). If the figure is below these limits, all VAT incurred is recoverable regardless of what activities the practice is involved in. More details here.
VAT registration in summary
Benefits
- recovery of input tax; the cost of which is not claimable in any other way
- potentially, recovery of VAT on items such as property, refurbishment and other expenditure that would have been unavailable prior to VAT registration
- only a small amount of VAT is likely to be chargeable by a practice
- may provide opportunities for pre-registration VAT claims
Drawbacks
- increased administration, documentation and staff time
- exposure to penalties and interest
- may require VAT to be added to some services provided which were hitherto VAT free
- likely that only an element of input tax is recoverable as a result of partial exemption
- uncertainty on the VAT position of certain services due to current tax cases
- potentially dealing with the Capital Goods Scheme (CGS)
- possible increased costs to the practice in respect of professional fees.
Please contact us if any of the above affects you or your clients.
VAT: Increase in interest rates
As a consequence of the change in the Bank Of England base rate from 3% to 3.5%, HMRC’s interest rates for late payment and repayment will also increase.
These changes will come into effect on:
- 26 December 2022 for quarterly instalment payments
- 6 January 2023 for non-quarterly instalments payments
The HMRC publication Information on the interest rates for payments will be updated shortly.
HMRC interest rates are set in legislation and are linked to the Bank of England base rate. Late payment interest is set at base rate plus 2.5%. Repayment interest is set at base rate minus 1%, with a lower limit, or “minimum floor” of 0.5%.