Category Archives: Start Up

VAT: What are split payments?

By Marcus Ward 9 January 2023

The term “split payment” is increasingly cropping up in conversations and in the media, so I thought it would be a good time to look at the concept.

Split payments, sometimes called real-time extraction, uses card payment technology to collect VAT on online sales and transfer it directly to HMRC rather than the seller collecting it from the buyer along with the payment for the supply, and then declaring it to HMRC on a return in the usual way.

Clearly, HMRC is very keen to introduce such a system, but there are significant hurdles, the biggest being the complexity for online sellers, payment processors, input tax systems, agents, advisers and HMRC itself.

Where are we on split payments?

At the end of the year HMRC published a Prior Information Notice (PIN) and associated Request for Information (RFI), seeking views on the outline requirements and proposed procurement process split payments. This should, inter alia, assist HMRC in:

identifying where it is intended that the purchased goods or services are to be delivered and/or consumed
the possibility to apply a split only above or below a certain value threshold
the feasibility for the splitting mechanism to calculate a composite VAT total across a mixed basket of goods and/ or services, each potentially with a different rate of VAT.

This builds on previous information gathering/consultations/discussions carried out a number of years ago.

Background

The expansion of the online shopping market has brought unprecedented levels of transactions. The results of digitalisation have also brought challenges for tax systems. Jurisdictions all over the world are currently grappling with the question of how to prevent large VAT losses, which can arise from cross-border online sales. This happens when consumers buy goods from outside their jurisdiction from sellers who, through fraud or ignorance, do not comply with their tax obligations. It is costing the UK tax authorities an estimated £1 billion to £1.5 billion (figures for 2015-16) a year. The UK government believes that intercepting VAT through intermediaries in the payment cycle, split payment potentially offers a powerful means of enforcing VAT compliance on sellers who are outside the UK’s jurisdiction.

Fraud

The fraud carried out by online sellers is not particularly sophisticated but is difficult to combat. Simply, sellers either use a fake VAT number to collect VAT without declaring it, or even more basically, collect the VAT and disappear.

Proposed spilt payment methods

The way in which payments are split represent difficult technical VAT issues, particularly when sales are at different VAT rates. The three proposals are:

Standard rate split. This assumes that all sales are liable to the standard rate VAT and does not recognise any input tax deduction. Extraction of 20% of tax, regardless of the actual liability (potentially, 5%, or zero) appears unfair and would be very difficult to impose. Cashflow would be negatively affected too.
Flat Rate Scheme (FRS). This is a proposal by HMRC to insist that online sellers overseas to use the FRS using a specific new rate for this purpose. The FRS threshold of £150,000 pa could be increased for overseas businesses, but this would potentially give overseas sellers an advantage over UK businesses, so politically, if nothing else, would prove to be a hard sell.
Net effective rate. This would mean an overseas business calculating its own exact net effective rate, based on its outputs and inputs from the previous year’s transactions (similar to TOMS).
Composite rate. A composite VAT total across a mixed range of goods or services, each potentially with a different rate of VAT. The mechanism for carrying this calculation out is unclear.

There may be more proposals forthcoming, but none of the above proposals appear reasonable and the complexity they would bring would seem to rule them out as matters stand – although this has not previously stopped HMRC introducing certain measures and the obvious benefits to the authorities cannot be ignored.

Overall

The technology for split payments currently exists and is being used in some Latin American countries (and Poland). The concept is part of a larger movement towards real-time taxation and MTD. Our view is that split payments are coming, but we do not know in which form or when.

VAT: How to remove penalty points under the new system

By Marcus Ward 9 January 2023

HMRC has introduced new penalty and interest rules for late returns and payments from 1 January 2023. Details here.

On 4 January 2023 HMRC published guidance on how to remove these points to avoid a penalty. This is particularly important if a business has reached the penalty point threshold.

The penalty thresholds are:

annual returns – 2 points
quarterly returns – 4 points
monthly returns – 5 points

If a business is at the limit and has the maximum points allowed for its accounting periods, it can remove them by meeting two conditions which are:

to complete a period of compliance, submitting all returns by the deadline
to submit all outstanding returns for the previous 24 months

The guidance sets out how these tests are calculated and applied.

VAT: Selling goods using an online marketplace – new guidance

By Marcus Ward 3 January 2023

HMRC has published new guidance for use when a business sells goods using an online marketplace (an e-commerce site that connects sellers with buyers where transactions are managed by the website owner) or direct to customers in the UK.

It can be used to check when a seller is required to pay UK VAT.

It is important, especially for sellers based outside the UK, to understand the tax consequences when such marketplaces are used. It is not always possible to rely on the platforms to deal with output tax on sales made to UK recipients.

The guidance covers:

selling goods using an online marketplace
selling goods direct to customers in the UK
checks online marketplaces need to do
VAT when goods are returned to the seller

A VAT Did you know?

By Marcus Ward 19 December 2022

Chocolate body paint is zero rated, but a bar of chocolate is standard rated.

VAT: TOGC and deliberate errors – The Apollinaire case

By Marcus Ward 19 December 2022

Latest from the courts

In the First -Tier Tribunal (FTT) case of Apollinaire Ltd and Mr Z H Hashmi the issues were:

whether the appellant’s input tax claim was valid
were the director’s actions “deliberate”
was a Personal Liability Notice (PLN) appropriate?

Background

Mr Hashmi (the sole director of Apollinaire) asserted that he sold his business, Snow Whyte Limited to a Mr Singh as a going concern, together with the trading name “Benny Hamish”. The purchase price was never paid. He alleged that Mr Singh traded for approximately one month and then sold stock worth £573,756 to Apollinaire. The appellant submitted an input tax claim for the purchase of the goods. HMRC refused to make the repayment and raised penalties for deliberate errors. HMRC subsequently issued a PLN to Mr Hashmi.

Issues

Initially HMRC stated that Mr Singh may not have existed, that there was no sale of Snow Whyte Ltd by Mr Hashmi to Mr Singh and similarly, no sale back to Mr Hashmi. However, this submission was later amended to argue that Mr Hashmi controlled the movement of the stock at all times and that the issue was whether the transfer of stock from Snow Whyte Limited was a Transfer Of a Going Concern (TOGC), whether or not Mr Singh existed.

Mr Hashmi appealed, contending that the transactions took place as described to HMRC.

Decision

Unsurprisingly, given Mr Hashmi’s previous history of dissolving companies, but continuing to trade under the same name as those companies (listed at para 14 of the decision) and failing to submit returns and payments, the FTT accepted HMRC’s version of events. Further, there was insufficient evidence to support the transactions (if they took place) and the judge fund that the appellant’s evidence was not credible. If the events did take place, there was no input tax to claim as all the tests (where relevant here) for a TOGC (Value Added Tax (Special Provisions) Order 1995, Regulation 5) were met:

the assets were sold as a business as a going concern
the assets were used by the transferee in carrying on the same kind of business
there was no break in trading
both entities traded under the same name
both entities operated from the same premises
both entities had the same employees and tills

The appeal was dismissed.

Penalties

The FTT further decided that HMRC’s penalties and PLN [Finance Act 2007, Schedule 24, 19(1)] were appropriate. The claim for input tax was deliberately overstated and that Mr Hashmi was the controlling mind of both entities and was personally liable as the sole company director of Apollinaire.

HMRC relied on case law: Clynes v Revenue and Customs[2016] UKFTT 369 (TC) which reads as follows:

“On its normal meaning, the use of the term indicates that for there to be a deliberate inaccuracy on a person’s part, the person must have acted consciously, with full intention or set purpose or in a considered way…

…Our view is that, depending on the circumstances, an inaccuracy may also be held to be deliberate where it is found that the person consciously or intentionally chose not to find out the correct position, in particular, where the circumstances are such that the person knew he should do so.”

Commentary

This case is a reverse of the usual TOGC disputes as HMRC sought to establish that there was no taxable supply so no VAT was due. It underlines that:

care should always be taken with applying TOGC treatment (or appreciating the results of failing to recognise a TOGC)
penalties for deliberate errors can be significant and swingeing
directors can, and are, held personally responsible for actions taken by a company

VAT Domestic Reverse Charge technical guide

By Marcus Ward 12 December 2022

An overview of the Domestic Reverse Charge (DRC) here.

HMRC has published amended guidance on the DRC. The main change involves the supply of scaffolding on zero-rated new build housing. The guidance confirms the change to HMRC’s previous policy and that there will be transitional period up to 1 February 2023 where businesses can use either reverse charge accounting or normal VAT rules.

Updated guidance on agents VAT registering clients

By Marcus Ward 7 December 2022

HMRC has published updated guidance for agents registering business for VAT. Broadly, the new document covers what information agents require, which may be summarised as:

the agent’s Government Gateway user ID and password for either agent services account or HMRC Online services
agent’s name
agent’s phone number
agent’s email address
the client’s name
client’s date of birth
details of client’s turnover and nature of business
client’s bank account details
client’s National Insurance number
a form of ID from the client, eg: passport or driving licence
client’s Corporation Tax Payments, PAYE, Self-Assessment Return, recent payslip or P60

Limited companies

If an agent is registering a limited company client, they must have a Company Registration Number and a Corporation Tax Unique Taxpayer Reference (UTR) to complete the VAT registration process.

Individuals and partnerships

These applications do not need to have a Self-Assessment UTR to register for VAT, but if they do, it must be supplied.

An agent will be asked to verify the entity it is registering, therefore it is prudent to obtain the basic history and background of the applicant’s business before starting the process. Cleary this is good practice generally!

VAT – A Christmas Tale

By Marcus Ward 6 December 2022

Well, it is nearly Christmas…. and at Christmas tradition dictates that you repeat the same nonsense every year….

Dear Marcus

My business, if that is what it is, has become large enough for me to fear that HMRC might take an interest in my activities. May I explain what I do and then you can write to me with your advice? If you think a face to face meeting would be better, I can be found in most decent sized department stores from mid-September to 24 December.

First of all, I am based in Greenland, but I do bring a stock of goods, mainly toys, to the UK and I distribute them. Where do I belong? Am I making supplies in the UK? Do I pay Customs Duty?

If I do this for philanthropic reasons, am I a charity, and if so, does that mean I do not pay VAT?

I have heard that giving vouchers can be complicated, I think I will need help with these gifts.

The toys are of course mainly for children and I wonder if zero rating might apply? I have heard that small T shirts are zero rated so what about a train set – it is small and intended for children. Does it matter if adults play with it? My friend Rudolph has told me that there is a peculiar rule about gifts. He says that if I give them away regularly or they cost more than £50 I might have to account for output tax. Is that right?

My next question concerns barter transactions. Fathers often leave me a food item such as a mince pie and a drink and there is an unwritten rule that I should then leave something in return. If I’m given Sainsbury’s own brand sherry, I will leave polyester underpants but if I’m left a glass of Glenfiddich I will be more generous and leave best woollen socks. Have I made a supply and what is the value please? My feeling is that the food items are not solicited so VAT might not be due and, in any event; isn’t food zero-rated, or does it count as catering? Oh, and what if the food is hot?

Transport is a big worry for me. Lots of children ask me for a ride on my airborne transport. I suppose I could manage to fit twelve passengers in. Does that mean my services are zero-rated? If I do this free of charge will I need to charge Air Passenger Duty? Does it matter if I stay within the UK, or the EU or the rest of the world? What if I travel to every country? My transport is the equivalent of six horsepower and if I refuel with fodder in the UK will I be liable for fuel scale charges? After dropping the passengers off I suppose I will be accused of using fuel for the private journey back home – is this non-business? Somebody has told me that if I buy hay labelled as animal food I can avoid VAT but if I buy the much cheaper bedding hay I will need to pay tax. Please comment.

May I also ask about VAT registration? I know the limit is £85,000 per annum but do blips count? If I do make supplies at all, I do nothing for 364 days and then, in one day (well, night really) I blast through the limit and then drop back to nil turnover. May I be excused from registration? If I do need to register should I use AnNOEL Accounting? At least I can get only one penalty per annum if I get the sums wrong.

I would like to make a claim for input tax on clothing. I feel that my red clothing not only protects me from the extreme cold, but it is akin to a uniform and should be allowable. These are not clothes that I would choose to wear except for my fairly unusual job. If lady barristers can claim for black skirts, I think I should be able to claim for red dress. And what about my annual haircut? That costs a fortune. I only let my hair grow that long because it is expected of me.

Insurance worries me too. You know that I carry some very expensive goods on my transport. Play Stations, mountain bikes, i-Pads and Accrington Stanley replica shirts for example. My parent company in Greenland takes out insurance there and they make a charge to me. If I am required to register for VAT in England will I need to apply the Reverse Charge? This seems to be a daft idea if I understand it correctly. Does it mean I have to charge myself VAT on something that is not VATable and then claim it back again?

And what about Brexit? I know the UK has already left the EU, but does this affect me? What about distance selling? How do I account for supplies to and from the EU? Will there be Tariffs? Do I have to queue at Dover?

Next, you’ll be telling me that Father Christmas isn’t real……….

HAPPY CHRISTMAS EVERYBODY!

A VAT Did you know?

By Marcus Ward 28 November 2022

Colouring books are zero rated unless they contain swear words, nudity or theft – in which case they are standard rated.

Claiming UK VAT from overseas

By Marcus Ward 28 November 2022

With news that HMRC is testing a new electronic submission portal – the Secure Data Exchange Service (SDES) system for overseas businesses to recover VAT incurred in the UK, I thought it timely to look at the process. Especially as the deadline is 31 December 2022 for VAT incurred between 1 July 2021 and 30 June 2022.

The SDES is currently being tested. However, it is available to businesses to make claims, but during the testing period a claimant will need to email HMRC to request access.

Access to SDES request

Claimants wishing to use SDES, are required to email newcastle.oru@hmrc.gov.uk and should include:

‘SDES’ in the subject field
confirmation that the business would like to use the SDES
whether there is a Business Tax Account already set up

HMRC says it will contact the requestor within 15 calendar days to start the registration process and provide registration guidance.

Any queries on the registration process, may be addressed to the Overseas Repayment Unit on 0300 322 9279

If it goes wonky

HMRC states that during testing there may be times when SDES be stopped without notice. If it is stopped, claimants will be told by HMRC updating its online guidance. Further: If the service is stopped, it will not affect the claims that have already been submitted through it.

The alternative to claiming during testing is the good old-fashioned paper claims.

Claims in the UK

A non-UK based business may make a claim for recovery of VAT incurred in the UK. Typically, these are costs such as; employee travel and subsistence, service charges, exhibition costs, tooling, imports of goods, training, purchases of goods in the UK, and clinical trials etc.

Who can claim?

The scheme is available for any businesses that are:

not VAT registered in the UK
have no place of business or other residence in the UK
do not make any supplies in the UK

What cannot be claimed?

The usual rules that apply to UK business claiming input tax also apply to claims from overseas. Consequently, the likes of; business entertainment, car purchase, non-business use and supplies used for exempt activities are usually barred.

Amount

There is no maximum claim amount, but for most periods of less than twelve months a minimum of £130 of VAT must be claimed. For annual claims or for periods less than three months ending on 30 June, the VAT must be at least £16.

Process

The business must obtain a Certificate Of Status (CoS) from its local tax or government department to accompany a claim.

The CoS must be the original and contain the:

name, address and official stamp of the authorising body
claimants name and address
nature of the claimant’s business
claimant’s business registration number

The CoS is only valid for twelve months. Once it has expired you will need to submit a new CoS.

HMRC has previously announced (RCB 12 – 2018) that it is taken a firmer stance on what constitutes an acceptable CoS.

Claim form

The application form is a VAT65A and is available here Original invoices which show the VAT charged must be submitted with the claim form and CoS. Applications without a certificate, or certificates and claim forms received after the deadline are not accepted by HMRC. It is possible for a business to appoint an agent to register to enable them to make refund applications on behalf of that business.

Deadline

Claim periods run annually up to 30 June and must be submitted by 31 December of the same year. With the usual Christmas rush and distractions, it may be easy to overlook this deadline and some claims may be significant. Unfortunately, this is not a rapid process and even if claims are accurate and the supporting documents are in all in order the claim often takes some time to be repaid. Although the deadline is the end of the year HMRC say that it will allow an additional three months for submission of a CoS (only).

Payment

Refunds are made within six months of a “satisfactory application”.

Further information is available here HMRC guidance.