Chocolate body paint is zero rated, but a bar of chocolate is standard rated.
Category Archives: Start Up
VAT: TOGC and deliberate errors – The Apollinaire case
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
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
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
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?
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
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.
VAT: New process to support repayment claims
HMRC has announced a useful new tool for speeding up repayment payments.
When a business submits a repayment return (when input tax exceeds output tax) HMRC may carry out a “pre-cred” (pre-credibility check) inspection or queries. This is to ensure that a claim is valid before money is released.
If not subject to a visit, a business is likely to be asked for information to support a claim. Such requests are more common if a business normally submits payment returns or it is a first return. The requested information is usually in the form of copy purchase invoices or import documentation.
Prior to the changes, HMRC sent a letter by snail mail and the information would also be returned by post. This was often subject to delays and “misunderstandings”.
From this month, HMRC has launched an online form so that a claimant, or an agent, can upload documents to support the claim via the Government Gateway. It is hoped that this will result in businesses receiving a repayment in shorter order.
HMRC require:
- the VAT registration number
- the CFSS reference number from the HMRC letter
- details of the main business activities
- the date the business began
- the VAT rates that apply to sales
- details of any VAT schemes
- the detailed VAT account
- the five highest value purchase invoices, and
- any additional specific information requested by HMRC
Depending on circumstances, HMRC may also need:
- bank statements
- export sales invoices or supporting documents
- import VAT documents
- hire purchase or lease agreements
- completion statements and proof of transfer of funds for the purchase of land or property
- the planning reference and postcode of construction
- sales invoices where non-standard VAT rates were charged
HMRC aim to look at this information within seven working days and will contact the claimant or agent when a decision is made, or if any further information is required.
Let us hope that speeds up the process.
VAT: New penalties and interest for late returns and payments
Further to my article on the introduction of changes to penalties for late filing and payments of VAT and follow up guidance, the forthcoming introduction on 1 January 2023 has focussed attention on how they will impact certain businesses.
Late returns
Many businesses who have had to deal with the “old” default surcharge regime realised that it could be disproportionate and create unfair outcomes. The new penalties are, in my view, fairer, and, the changes bring some welcome features and some which are less so.
The good news is that the introduction of the new rules mean that businesses will start with a clean slate, regardless of their position under the default surcharge mechanism – there is no carry over form one set of rules to another.
However, for the first time, late rendering of returns can incur penalties and interest if the returns are either:
- nil, or
- repayment
In the previous regime when “non-payment” returns were filed late, this did not trigger a default.
Nil returns
Businesses which did not carry out any activity in the prescribed period, eg; intending traders, businesses temporary closed, or at the end of their life will have to recognise that a late nil return will now trigger points.
Repayment returns
Again, businesses which typically submit repayment returns, such as; new build constructors, exporters, and any business supplying zero rated goods or services will have to recognise tardy submissions will now affect them.
We understand that HMRC is aware of the impact on this sector and is planning to communicate with these businesses to make them aware of the new changes.
An additional point; from 1 March 2021 the Domestic Reverse Charge was introduced for the construction industry. As a result, an increased number of builders found themselves in a repayment position and will now need to ensure timely returns to avoid penalties.
Late payments – penalties and interest
The new late payment penalties regime will replace the default surcharge, which served as a combined late submission and late payment sanction.
Under the new rules, there will be two separate late payment penalties.
The first penalty has two separate elements:
- 2% of the VAT unpaid at day 15
- a further 2% of the VAT unpaid at day 30
The second penalty is triggered from day 31. This is charged daily and is based on an annual rate of 4% of any outstanding amount.
If all outstanding VAT is paid within 15 days of the due date, no late-payment penalty will arise. Although here will however still be late payment interest.
Interest
From 1 January 2023, HMRC will charge late-payment interest from the day a VAT payment is overdue to the day the VAT is paid, calculated at the Bank of England base rate plus 2.5%.
Time-to-Pay arrangements
HMRC offers the option of requesting a Time To Pay arrangement. This will enable a business to stop a penalty from accruing any further by approaching HMRC and agreeing a schedule for paying their outstanding tax.
Period of familiarisation
HMRC say that to give businesses time to get used to the changes, it will not be charging a first late payment penalty for the first year from 1 January 2023 until 31 December 2023, if the tax is paid in full within 30 days of the payment due date.
Appeals
It is anticipated that the number of appeals against late filing/payments will be reduced because of the more proportional approach of the new rules. However, it is still possible to appeal if a taxpayer considers the imposition of penalties and interest is unfair. An appellant needs a reasonable excuse to succeed.
Action
Advisers should ensure that clients affected by the new rules, specifically repayment business and those submitting nil returns, are aware of the impact. I know that a lot of these are habitual late filers and some “save up” returns for when they need a cash injection.
It will also be prudent for advisers to monitor penalty points accrued. We understand that HMRC is looking at how this information could be made available to agents and taxpayers. We expect more details about this in the coming months, including how software can be used to display points.
Repayment supplement
The new system may be fairer, however, the withdrawal of the repayment supplement is not! More details here. (I am still quite cross!)
VAT: Change of registration details – update
If any of the following details of a business’ registration changes, HMRC must be notified on form VAT484:
- name, or trading name
- address of the business
- accountant or agent who deals with a business’ VAT
- members of a partnership, or the name or home address of any of the partners (a form VAT 2 is also required)
The relevant guidance has been updated to reflect the new requirement that such changes must be notified within 30 days of the change taking place. Failure to do so will result in penalties.
Other changes
- Change of bank details
HMRC must be notified at least 14 days in advance if a business changes its bank details.
- Taking over someone else’s VAT responsibilities
A person must tell HMRC within 21 days if they take over the VAT responsibilities of someone who has died or is ill and unable to manage their own affairs. Use form VAT484 and post it to the address on the form.
- VAT group changes
If you join or leave a VAT group, you must first cancel your VAT registration. You will need to use the group’s VAT number once you’ve joined it. The VAT group should tell HMRC about the new member.
- Change of business structure
You need to tell HMRC if the structure of the business changes, eg; incorporation or a Transfer Of a Going Concern.