HMRC has updated this Notice to reflect the new de minimis limits (para 6.1.1).
Category Archives: Start Up
VAT agents and advisers – Updated HMRC standards
HMRC has published updated standards for agents and advisers. It sets out HMRC’s expectations of tax agents. Tax agents are agents and advisers, who are acting professionally in relation to the tax affairs of others. This includes third party agents and advisers, whether acting in respect of UK or offshore tax affairs, and to all dealings they have with HMRC. Most agents are members of professional regulatory bodies that publish and endorse standards for behaviour. All the directors and staff of Marcus Ward Consultancy who provide professional advice are members of CIOT and/or ATT and are covered by their principles and ethics. Our approach to tax planning is set out here and is summarised below.
Summary
HMRC’s standard for dealing with agents: HMRC states that it wants to provide agents with a service that is fair, accurate and based on mutual trust and respect.
What HMRC expects from agents
- Integrity
- Professional competence and due care
- Professional behaviour
- Standards for tax planning – tax planning must
- be lawful
- be disclosed and transparent
- agents must not create, encourage or promote tax planning arrangements or structures that:
- set out to achieve results that are contrary to the clear intention of Parliament in enacting relevant legislation
- are highly artificial or highly contrived and seek to exploit shortcomings in the relevant legislation
- HMRC will monitor agent standards
Agents who do not follow the standard are considered to be in breach of it. HMRC has a range of different approaches, policies and powers to deal with breaches of the standard. For more information, HMRC has published a review of its powers to uphold its standard for agents.
Our approach to planning and HMRC
Marcus Ward Consultancy Ltd does not market, advise on, or advocate aggressive schemes. The company provides bespoke solutions to an individual business and does not believe in “one size fits all” mass-marketed schemes. We will always work within the law and the spirit of the law. We operate a full disclosure policy and may refuse to work with you if you do not subscribe to this attitude. We will, on occasion, cross swords with HMRC if we believe we are correct and that HMRC is being unreasonable and we will fight to uphold our clients’ rights against any unfair accusations.
Call for evidence: VAT energy saving materials relief
HMRC require feedback on improving energy efficiency and reducing carbon emissions.
The three key objectives are:
- improving energy efficiency and reducing carbon emissions
- cost effectiveness
- alignment with broader VAT principles
HMRC is asking for responses by 31 May 2023, either via email or post.
VAT: Charity exemption for show admittance – The Yorkshire Agricultural Society case
Latest from the courts
In the Yorkshire Agricultural Society First Tier Tribunal (FTT) case the issue was whether payments for entry into the annual The Great Yorkshire Show qualified as exempt via The VAT Act 1994, Schedule 9, Group 12, item 1 –
“The supply of goods and services by a charity in connection with an event—
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- that is organised for charitable purposes by a charity or jointly by more than one charity,
- whose primary purpose is the raising of money, and
- that is promoted as being primarily for the raising of money.”
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HMRC raised an assessment on the grounds that the supply of admittance fell outwith the exemption so it was standard rated. It appears that this view was formed solely on the basis that the events were not advertised as fundraisers.
The exemption covers events whose primary purpose is the raising of money and which are promoted primarily for that purpose. HMRC contended that the events were not advertised as fundraisers and therefore the exemption did not apply. Not surprisingly, the appellant contended that all of the tests at Group 12 were fully met.
The FTT found difficulty in understanding HMRC’s argument. It was apparent from the relevant: tickets, posters and souvenir programmes all featured the words “The Great Yorkshire Show raises funds for the Yorkshire Agricultural Society to help support farming and the countryside”.
Decision
The FTT spent little time finding for the taxpayer and allowing the appeal. The assessment was withdrawn. There was a separate issue of the assessment being out of time, which was academic given the initial decision. However, The Tribunal was critical of HMRC’s approach to the time limit test (details in the linked decision). HMRC’s argument was that apparently, the taxpayer had brought the assessment on itself by not providing the information which HMRC wanted. The Judge commented: “That is not the same as HMRC being in possession of information which justified it in issuing the Assessment. It is an inversion of the statutory test”.
HMRC’s performance (or lack of it)
Apart from the clear outcome of this case, it also demonstrated how HMRC can get it so wrong. The FTT stated that it was striking that there was very little by way of substantive challenge by HMRC to the appellant’s evidence, nor any detailed exploration of it in cross-examination. The FTT, which is a fact-finding jurisdiction, asked a series of its own questions to establish some facts about the Society’s activities and the Show in better detail. No-one from HMRC filed a witness statement or gave evidence, even though HMRC, in its application to amend its Statement of Case, had said that the decision-maker would be giving evidence. The decision-maker did not give evidence. HMRC were wrong on the assessment and the time limit statutory test and did not cover itself in glory at the hearing.
Commentary
More evidence that if any business receives an assessment, it is always a good idea to get it reviewed. Time and time again we see HMRC make basic errors and misunderstand the VAT position. We have an excellent record on challenging HMRC decisions. Charities have a hard time of it with VAT, and while it is accurate to say that some of the legislation and interpretation is often complex for NFPs, HMRC do not help by taking such ridiculous cases.
VAT: Are Turmeric shots zero rated food? The Innate-Essence Limited case
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: Updated Road Fuel Scale Charges
HMRC has published updated Road Fuel Scale Charge (RFSC) tables for the recovery of input tax on motoring costs which start on 1 May 2023.
RFSC
A scale charge is a way of accounting for output tax on road fuel bought by a business for cars which is then put to private use. If a business uses the scale charge, it can recover all the VAT charged on road fuel without having to split mileage between business and private use. The charge is calculated on a flat rate basis according to the carbon dioxide emissions of the car.
VAT Inspections – How do HMRC choose which businesses to visit and what is “Connect”?
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.
A VAT Did you know?
Eels, salmon and trout are VAT free when sold dead or alive, but bream, perch, pike and tench are standard rated.
VAT: Recovering input tax on the charging of EVs
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?
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.