Category Archives: Start Up

VAT – Overseas holiday lets: A warning

By   8 April 2022
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Do you, or your clients, own property overseas which you let to third parties when you are not using it yourself?

It is important to understand the VAT consequences of owning property overseas.

The position of UK Holiday Lets

It may not be commonly known that the UK has the highest VAT threshold in the EC. This means that for many ‘sideline’ businesses such as; the rental of second or holiday properties in the UK, the owners, whether they are; individuals, businesses, or pension schemes, only have to consider VAT if income in relation to the property exceeds £85,000 pa, and this is only likely if a number of properties are owned.

It should be noted that, unlike other types of rental of homes, holiday lettings are always taxable for VAT purposes.

Overseas Holiday Lets

EU Member States have nil thresholds for foreign entrepreneurs.  This means that if any rental income is received, VAT registration is likely to be compulsory. Consequently, a property owner that rents out a property abroad will probably have a liability to register for VAT in the country that the property is located.  Failure to comply with the domestic legislation of the relevant Member State may mean; payment of back VAT and interest and fines being levied. VAT registration however, does mean that a property owner can recover input tax on expenditure in connection with the property, eg; agent’s fees, repair and maintenance and other professional costs.  This may be restricted if the home is used for periodical own use.

Given that every country has differing rules and/or procedures to the UK, it is crucial to check all the consequences of letting property overseas. Additionally, if any other services are supplied, eg; transport, this gives rise to a whole new (and significantly more complex) set of VAT rules.

A final word of warning; I quite often hear the comment “I’m not going to bother – how will they ever find out?”

If an overseas property owner based in the UK is in competition with local letting businesses, those businesses generally do not have any compulsion in notifying the local authorities. In addition, I have heard of authorities carrying out very simple initiatives to see if owners are VAT registered. In many resorts, income from tourism is vital and this is a very important revenue stream for them so it is well policed.

Please contact us if you are affected by this matter; we have the resources to advise and act on a worldwide basis.

A VAT Did you know?

By   30 March 2022
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So that’s what it’s called….. From HMRC guidance – “For the purposes of establishing the place of supply of services, stallion nominations (The right to nominate a mare to be covered by a stallion in one breeding season) and the covering of mares is treated as ‘work carried out on goods’.”

Making Tax Digital for VAT – extra revenue calculated

By   21 March 2022
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HMRC has published research which evaluates the impact of the introduction of Making Tax Digital (MTD) for VAT.

The report sets out that an additional circa £185 million of tax has been collected, according to its data. This is compared to the original estimate which was that an additional amount of £115 million of VAT would be received by the department.

For businesses above the registration threshold, the estimated additional tax revenue due to MTD is an average of £57 per business. This represents a 0.9% increase from the average amount estimated had the businesses not used MTD. HMRC says that this research provides “strong evidence that Making Tax Digital is achieving its objective of reducing the tax gap by reducing the amount of errors made when filing tax returns”.

MTD background

MTD aims to reduce the tax gap by helping businesses pay the right amount of tax. The tax gap is the difference between the theoretical amount of tax that should be paid and the actual tax receipts. The difference is caused by several reasons including avoidance, evasion, and calculation errors or failure to take reasonable care when filing returns.

MTD is intended to tackle the part of the tax gap which is caused by error and failure to take reasonable care. Businesses are required to keep records in digital form and file their VAT returns using software that directly extracts information from these digital records. This should improve accuracy and remove opportunities to make certain types of mistakes in preparing and submitting tax returns, particularly arithmetical and transposition errors.

Downside

All is not sweetness and light though. HMRC has been slammed by The House of Lords Economic Affairs Committee which published a report that said that MTD for VAT cost far more than was predicted in HMRC’s impact assessments. The Committee also criticised HMRC, saying it “inadequately considered the needs and concerns of smaller businesses” and that HMRC has neglected its duty to support small businesses through the implementation of the controversial measures, suggesting it “will make life even more difficult” for them. In addition, the Committee said it “remained unconvinced” of the government’s logic used to justify the speed and rigidity with which the programme was being introduced.

VAT: What is consideration and why is it important?

By   18 March 2022
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VAT Basics

Consideration – background

There is no definition of consideration in legislation. The meaning was originally taken from contract law, but after the European Court of Justice ruled that the term is to be given the Community meaning and is not to be variously interpreted by Member States the UK adopted that approach.

The expression “consideration” means everything received in return for the supply of goods or the provision of services, including incidental expenses (packing, transport, insurance etc). Consideration is a payment for the supply of goods or services. It is usually a payment in money, but can also be of a “non-monetary” nature, such as goods or services supplied in return.

The phrase “in return for the supply” is interpreted to mean that there must be a direct link between the supply and the consideration.

Therefore, in order that a supply for a consideration can be made, there must be at least two parties and a written or oral agreement between them under which something is done or supplied for the consideration. There is a direct link between the supply and the consideration because the supplier expects something in return for his supply and would not fulfil his obligation unless he thought that payment would be forthcoming.

Profit

It is important to recognise that the concept of consideration and profit are wholly different, and the fact that a business makes no profit on a supply does not mean that there is no consideration for it. Whether payment yields a profit or loss is immaterial and has no bearing on whether or not it is consideration for VAT purposes. 

Importance

If consideration is not recognised, or undervalued, a business can expect HMRC assessments and penalties. Overstating consideration will result in an overpayment of tax.

if there is no consideration, there is no supply.

Consideration hallmarks

  • Consideration is defined widely to bring within the tax everything which the taxable person receives as consideration for the goods or services supplied.
  • The consideration must be capable of being expressed in money.
  • There must be some form of bargain or transaction between the parties.
  • A payment should be related to what the payer receives although the fact that people pay the same amount for varying benefits does not stop it from being consideration.

Consequently, if the provision of goods or services is incapable of being expressed in money, it is not consideration and is outside the scope of VAT.

Indicators of no consideration

  • The absence of any consensual element on the part of the payer.
  • A lack of control by the payer over the services provided.

Valuation of consideration

This may seem obvious, but as the amount of case law demonstrates, this is not always the case. The starting point is:

Monetary consideration

Monetary consideration includes cash and payment by cheque, credit card, bank transfer, contactless payment, deduction from pay, etc. This is set out in The VAT Act 1994, section 19(2).

Non-monetary consideration

Non-monetary consideration includes goods or services supplied as payment, for example in a “barter” (including part exchange) agreement. Services provided include the giving up of a right, refraining from doing something, agreeing to suffer some loss etc in return for the supply. At first sight these may appear to be merely conditions of an agreement, but are in fact consideration for a supply. If the supply is for a consideration not consisting or not wholly consisting of money, its value shall be taken to be such amount in money as, with the addition of the VAT chargeable, is equivalent to the consideration. Where a supply of any goods or services is not the only matter to which a consideration in money relates, the supply is deemed to be for such part of the consideration as is properly attributable to it.

In determining the taxable amount, the only advantages received by a supplier that are relevant are those obtained in return for making the supply should be recognised.  Non-monetary consideration has the value of the alternative monetary payment that would normally have been given for the supply.

What is not consideration

Donations

If a monetary donation is freely given, it is not consideration for any supply and so is outside the scope of VAT. In this situation, the donation has to be unconditional, and the following points dictate whether this is the case.

  • Does the donor receive anything in return for the payment?
  • Are there any conditions attached to the payment?
  • What will the payments be used for?
  • If the donor does not benefit directly, does any third party receive a benefit?
  • Is there a contract and what are the terms and conditions?

Donations must be contrasted to sponsorship.

It is necessary to distinguish between donations and sponsorship payments. Whereas a donation means the donor does not expect anything in return, sponsorship involves the sponsor receiving identifiable benefits. These benefits may include advertising, publicity or use of facilities and any sponsorship payment is within the scope of VAT.

Open Market Value

The VAT Act 1994, section 19 (5) states that “…the open market value of a supply of goods or services shall be taken to be the amount that would fall to be taken as its value …if the supply were for such consideration in money as would be payable by a person standing in no such relationship with any person as would affect that consideration”.

Difficult areas

Commonly, areas which give rise to VAT consideration problems include, but are not limited to:

  • when consideration is provided in return for supplies of differing VAT liabilities
  • Special Valuation Provisions in The VAT Act 1994, Schedule 6
  • supplies to staff or goods for own use
  • discounts and special offers (eg; persons providing selling or introductory services to traders who receive goods for a reduced cash payment, or BOGOF)
  • barter transactions – when each supply has a different value
  • part-exchange
  • apportionment of monetary consideration
  • separate/composite supplies
  • supplies between connected parties
  • direct selling structures
  • gifts, prizes, and reward goods.
  • imports
  • prompt payment discounts
  • deemed supplies
  • non-business use of business assets or of services supplied to a business
  • reverse charges
  • reduced rate accommodation
  • supplies expressed in foreign currencies
  • transfer pricing
  • business gifts/samples
  • caravans sold with contents
  • self supplies
  • club membership benefits
  • correspondence courses
  • opticians and hearing aid dispensers (exempt services vs standard rated goods)
  • rebates/refunds
  • disbursements
  • tour operators (TOMS)
  • partial exemption

Further reading

For purposes of research or interest, the following cases on consideration are worth reading:

Staatssecretaries van Financien v Cooperatieve Aardapplenbewarr-plaats ((1981) ECR 445; (1981) – The Dutch Potato case for ease!

BAZ Bausystem Gmbh v Finanzamt Munchen Fur Korperschaften

Apple & Pear Development Council (APDC), (ECJ (1988) STC 221; (1988)2 CMLR 394)

Tolsma C-16/93 (1994 STC 509)

Naturally Yours Cosmetics Ltd

Empire Stores Ltd



VAT: Avoiding a Default Surcharge. Reasonable Excuse – Update

By   14 March 2022
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I have looked at the Default Surcharge regime in detail here but as statistics show more business to be in default (which is probably accurately attributable, inter alia, to the pandemic) I consider how a penalty may be mitigated, by the provision of a “Reasonable Excuse”. HMRC has updated its internal guidance on Reasonable Excuse this month.

Specifically: HMRC state that “…where a person has not been able to meet an obligation on time due to the impact of COVID-19, HMRC will usually accept that they will have a reasonable excuse.”

What is a Default Surcharge?

The Default Surcharge is a civil penalty issued by HMRC to encourage businesses to submit their VAT returns and pay the tax due on time.

A default occurs if HMRC has not received your return and all the VAT due by the due date. The relevant date is the date that cleared funds reach HMRC’s bank account. If the due date is not a working day, payment must be received on the last preceding working day.

More on late returns here and on late payments here.

New rules forthcoming

It is noted that there is a new regime for penalties, details here although these changes have been delayed until 1 January 2023

Reasonable Excuse

If a business has a reasonable excuse for failing to pay on time, and it remedies this failure without unreasonable delay after the excuse ends, it will not be liable to a surcharge. The onus is on a business to satisfy HMRC that it has a Reasonable Excuse.

Definition

There’s no statutory definition of Reasonable Excuse and it will depend on the particular circumstances of a case. A Reasonable Excuse is something that prevented the business meeting a tax obligation on time which it took reasonable care to meet. There is a great deal of case law on this particular issue. Please contact us should there be doubt about a Reasonable Excuse.

What may count as a Reasonable Excuse?

HMRC give the following examples:

  • “your partner or another close relative died shortly before the tax return or payment deadline
  • you had an unexpected stay in hospital that prevented you from dealing with your tax affairs
  • you had a serious or life-threatening illness
  • your computer or software failed just before or while you were preparing your online return
  • service issues with HMRC online services
  • a fire, flood or theft prevented you from completing your tax return
  • postal delays that you could not have predicted
  • delays related to a disability (including mental health) you have”

This list is not exhaustive.

What is NOT a reasonable excuse

Statute identifies two specific situations that are not a reasonable excuse:

  • lack of funds to pay any VAT due, or
  • reliance on any other person to perform a task, where there has been a delay or inaccuracy on that person’s part.

There can be exceptions to these two exclusions. For example, an insufficiency of funds may be a reasonable excuse where the insufficiency is a result of events outside the person’s control.

HMRC also states that these situations would not normally be accepted, on their own, as a reasonable excuse:

  • pressure of work
  • lack of information
  • lack of a reminder from HMRC

Facts

HMRC will establish what facts the business believes gave rise to a Reasonable Excuse. The facts may include:

  • the taxpayer’s beliefs
  • the taxpayer’s own experiences and relevant attributes
  • the situation of the taxpayer at any relevant time
  • acts carried out by the taxpayer or someone else
  • acts that the taxpayer or someone else should have carried out but did not.

Case Law

Although not a VAT issue, in the Upper Tribunal (UT) case of Christine Perrin [2018] UKUT 156 [TC], the judge provided guidance on how the Tribunal should approach a Reasonable Excuse defence. There are four steps:

  1. establish what facts the taxpayer asserts give rise to a reasonable excuse
  2. decide which of those facts are proven
  3. if those proven facts amount to an objectively reasonable excuse for the default
  4. having decided when any reasonable excuse ceased, decide whether the taxpayer remedied the failure without unreasonable delay after that time

Appeal

If HMRC refuse to accept an advance of a Reasonable Excuse and the Default Surcharge is maintained, there are two potential remedies:

If a business disagrees with a decision that it is liable to a surcharge or how the amount of surcharge has been calculated, it is possible to:

  • ask HMRC to review your case (A Statutory Review)
  • have your case heard by the Tax Tribunal

If you ask for a review of a case, a business will be required to write to HMRC within 30 days of the date the Surcharge Liability Notice Extension (SLNE) was sent. The letter should give the reasons why a business disagrees with the decision.

We are able to assist with all disputes with HMRC and have an enviable record of succeeding in having Default Surcharges removed.

VAT Grouping: Latest from HMRC

By   4 March 2022
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HMRC has updated its VAT Notice 700/2 on VAT Group registrations. This is as a result of the unacceptable delays in dealing with applications to set up or amend VAT groups. The update adds Section 2.17 which is reproduced below:

Details on VAT groups here and here.

2.17 What to do while you wait for a response to your application

If you are waiting for a response to your VAT grouping application, you should treat the application as provisionally accepted on the day it is received by HMRC and account for VAT accordingly. For more information on accounting for VAT in a VAT group see section 5. The date of receipt should be treated as, if submitted online the date it was submitted, or if it was posted the date it should be received by HMRC through the ordinary course of post.

If you have not been issued with a group VAT registration number, you cannot charge or show VAT on your invoices until it has been assigned. However, you’ll still have to pay VAT to HMRC for this period. You should increase your prices to allow for this and tell your customers why. Once you’ve got your VAT number you can then reissue the invoice showing the VAT. Further guidance on this can be found in Who should register for VAT (VAT Notice 700/1) section 5.1.

If you had a VAT registration number prior to your grouping application you should not submit returns under this number, and should follow this guidance.

While you are waiting to receive your VAT grouping registration number, you may receive:

  • an automated assessment letter
  • letters asking for payment of any automated assessments
  • notification of a default surcharge because you have not filed your tax return

If you do, you will not be required to take any action in response to any of these notices because HMRC will automatically cancel them once your application is fully processed. HMRC will not take recovery action for any debts which come about as a result of you following this guidance, though other VAT debts may still subject to recovery actions.




VAT: Late payment and repayment interest rates

By   21 February 2022
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The current late payment and repayment interest rates applied to the main taxes and duties that HMRC currently charges and pays interest on are:

  • Late payment interest rate — 3.0% from 21 February 2022
  • Repayment interest rate — 0.5% from 29 September 2009

Interest rates for all other taxes here.

Details of default surcharge here.

VAT: Fulfilment House Due Diligence Scheme registered businesses list

By   16 February 2022
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HMRC has issued updated guidance for businesses which need to check whether an entity which stores goods in the UK on its behalf is registered with the Fulfilment House Due Diligence Scheme (FHDDS).

The published list is alphabetical order by company name.

The list should be used if you are a business that is not established in the EU to see if the business that stores your goods in the UK is registered with the FHDDS.

If your business is outsourcing or considering outsourcing its fulfilment operations, then the fulfilment house you are using or intending to use of must be legally accredited by HMRC to do so.

Businesses that must be registered

Businesses are required to be registered if it stores any goods where all of the following apply:

  • the goods were imported from a country outside the EU
  • the goods are owned by, or stored on behalf of, someone established outside the EU
  • the goods are being offered for sale and have not been sold in the UK before

It is illegal to operate outside of the scheme and any fulfilment company found doing so will be prevented operating a fulfilment business and may be subject to a £10,000 penalty and a criminal conviction.

VAT: Is dog grooming taught in schools? The Dogs Delight case

By   15 February 2022
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Latest from the courts

In the Julie Lalou t/a Dogs Delight First Tier Tribunal (FTT) case the issue was whether the teaching of dog grooming qualified as private tuition and was therefore exempt.

Background

The Appellant operated a business providing dog grooming and dog grooming courses. The appeal was concerned only with the supplies of dog grooming tuition as it was accepted that dog grooming in itself is taxable.

Technical

The sole issue in dispute in this appeal was whether the supplies fall within the private tuition exemption as for provided by The Value Added Tax Act 1994, Schedule 9, Group 6, item 2 “The supply of private tuition, in a subject ordinarily taught in a school or university, by an individual teacher acting independently of an employer”.

HMRC’s view was that “to be eligible for exemption dog grooming would need to be a course that is ‘ordinarily’ taught in schools and universities which it is not…”

The appellant wrote to HMRC giving a list of seven “local Colleges and Universities where the Level 3 Dog Grooming Diploma is ordinarily taught”. The appellant went on to state “There are many more within the UK” which were said to represent around 30% of English colleges. Further it was stated that the business was a City & Guilds approved centre and that the courses were not recreational.

Decision

It was accepted that the courses that the appellant taught involved her making supplies of tuition in that she transferred to her students skills and knowledge.

But, unsurprisingly, the appeal was dismissed. The appellant had failed to demonstrate that dog grooming is taught at a wide number of schools and universities

The court also determined that the appellant needed to provide some evidence of whether dog grooming was taught at schools and universities in the EU (again, something she had failed to do).

Commentary

The exemption for private tuition is fraught with complexities and the amount of case law on the subject is significant, which indicates the difficulties in analysing the VAT position.  An example here. It is important to establish what is being provided and that research is carried out to consider the degree of ubiquity of the subject in education. A general guide to education here. The phrase “ordinarily taught” is rather nebulous and it would be prudent to obtain as much evidence as possible that a subject is s commonly or ordinarily taught in schools and universities if a supply is treated as exempt.