The new system for the way penalties and interest is charged due to be introduced on 1 April this year has been deferred to 1 January 2023.
The new points-based regime has been delayed to allow HMRC to implement the necessary IT changes.
I wonder if that represents a reasonable excuse for HMRC being late…
Earlier this month, I wrote an article on VAT registration. A query which commonly follows an initial registration query is: can I split my business into separate parts which are all under the VAT registration turnover limit to avoid registering? Prima facie, this seems a straightforward planning point. But is it possible?
You will not be surprised to learn that HMRC don’t like such schemes and there is legislation and case law for them to use to attack such planning known as “disaggregation”. This simply means artificially splitting a business.
What HMRC will consider to be artificial separation:
HMRC will be concerned with separations which are a contrived device set up to circumvent the normal VAT registration rules. Whether any particular separation will be considered artificial will, in most cases, depend upon the specific circumstances. Accordingly, it is not possible to provide an exhaustive list of all the types of separations that HMRC will view as artificial. However, the following are examples of when HMRC would at least make further enquiries:
Separate entities supply registered and unregistered customers
Same equipment/premises used by different entities on a regular basis
Splitting up of what is usually a single supply
Artificially separated businesses which maintain the appearance of a single business
One person has a controlling influence in a number of entities which all make the same type of supply in diverse locations
The meaning of financial, economic, and organisational links
Again, each case will depend on its specific circumstances. The following examples illustrate the types of factors indicative of the necessary links, although there will be many others:
Financial links
Economic links
Organisational links
HMRC often attack structures which were not designed simply to avoid VAT registration, so care should be taken when any entity VAT registers, or a conscious decision is made not to VAT register. Registration is a good time to have a business’ activities and structure reviewed by an adviser.
As with most aspects of VAT, there are significant and draconian penalties for getting registration wrong, especially if HMRC consider that it has been done deliberately to avoid paying VAT.
VAT Inspections
The first point to make is that inspections are usually quite standard and routine and generally there is nothing to worry about. They are hardly enjoyable occasions, but with planning they can be made to go as smoothly as possible. As an inspector in my previous life, I am in a good position to look at the process from “both sides”. If you are concerned that the inspection is not routine (for any reason) please contact us immediately.
Background
Typically, the initial meeting will begin with an interview with the business owner (and/or adviser) to go through the basic facts. The inspector will seek to understand the business and how it operates and will usually assess the answers with specific tests (further tests will be applied to the records). After the interview the inspector(s) will examine the records and will usually have further queries on these. More often than not they will carry out; bank reconciliations, cash reconciliations, mark-up exercises, and often “references” which are the testing of transactions using information obtained from suppliers and customers. There are many other exercises that may be carried out depending on the type of business. Larger businesses have more regular inspections where one part of the business is looked at each meeting. The largest businesses have more or less perpetual inspections (as one would expect). The length of the inspection usually depends on:
The above measurements will also dictate how often a business is inspected.
More details on certain inspections/investigations here
The initial inspection may be followed by subsequent meetings if required, although HMRC state that they aim is to conclude matters at the time of the first meeting.
The inspection – how to prepare
The inspection – during the visit
The inspection – at the end of the visit
The inspector should:
You should:
After the inspection
HMRC will write to you confirming:
On a final point: Never simply assume that the inspector is correct in his/her decision. It always pays to seek advice and challenge the decision where possible. Even if it is clear that an error has been made, mitigation may be possible.
We can provide a pre-inspection review as well as attending inspections if required. It is quite often the case that many HMRC enquiries may be nipped in the bud at the time of the inspection rather than becoming long drawn out sagas. We can also act as negotiator with HMRC and handle disputes on your behalf.
VAT Basics
A business must register for VAT with HMRC if its VAT taxable turnover is more than £90,000 in a 12 month period.
Taxable Turnover
Taxable turnover means the total value of everything that a business sells that is not exempt or outside the scope of VAT.
Registration is mandatory if turnover exceeds the current registration threshold in a rolling 12-month period. This is not a fixed period like the tax year or the calendar year – at the end of every month a business is required to calculate income (not profit) over the past year.
A business may also register voluntarily, which may be beneficial if it wants to reclaim input tax it has incurred.
Catches
There are some transactions that must be included in the turnover calculation which can easily be missed:
Timing
A business must register within 30 days of the end of the month when it exceeded the threshold. The effective date of registration (EDR) is the first day of the second month after a business goes over the threshold.
Future test
A business must mandatorily register for VAT if it expects its VAT taxable turnover to be more than £90,000 in the next 30-day period. This may be because of a new contract or a other known factors.
Registration exception
If a business has a one-off increase in income it can apply for a registration ‘exception’. If its taxable turnover goes over the threshold temporarily it can write to HMRC with evidence showing why the taxable turnover will not exceed the deregistration threshold (currently £88,000 in the next 12 months). HMRC will consider an exception and write confirming if a business will receive one. If not, HMRC will compulsory register the business for VAT.
Transfer of a going concern (TOGC)
If a VAT-registered ongoing business is purchased the buyer must register for VAT from the purchase date. It cannot wait until its turnover exceeds the threshold.
Businesses outside the UK
If a business belongs outside the UK, there is a zero threshold. It must register as soon as it supplies any goods and services to the UK (or if it expects to in the next 30 days).
Late registration
If a business registers late, it must pay the VAT due from when it should have registered (the EDR). Further, it will receive a penalty depending on how much it owes and how late the registration is. The rates based on the VAT due are:
How to register
A business can register online. By doing this it will register for VAT and create a VAT online account via which it will submit VAT returns.
Between application and receiving a VAT number
During the wait, a business cannot charge or show VAT on its invoices until it receives a VAT number. However, it will still be required to pay the VAT to HMRC for this period. Usually, a business will increase its prices to allow for this and tell its customers why. Once a VAT number is received, the business can then reissue the invoices showing the VAT.
Purchases made before registration
There are time limits for backdating claims for input tax incurred before registration. These are:
Once registered
A business’ VAT responsibilities. From the EDR a business must:
VAT groups
VAT grouping is a facilitation measure by which two or more entities can be treated as a single taxable person (a single VAT registration). There are pros and cons of grouping set out here.
Buying a coffin is standard-rated but hiring a hearse is VAT free.
HMRC has published UK VAT statistics for 2020 to 2021.
Headlines
The total VAT receipts in the tax year ending March 2021 decreased by 22% (£24.1 billion) from the previous year. There was a downward impact on receipts from the VAT deferral measure which took effect from 20 March 2020.
The Wholesale and Retail sector continued to be the largest contributor to net Home VAT liabilities.
Import VAT receipts was also lower: £4.2 billion (13%) for the year compared to the year ending March 2020. This was mainly due to postponed VAT accounting.
68% of total net home VAT declared was paid by traders with an annual turnover greater than £10 million.
VAT population – income
Incorporated companies accounted for the largest share of the VAT population and annual turnover. Companies accounted for 73% of taxpayers, and 92% of annual taxable turnover in the year ending March 2021. Sole proprietors were the second largest group in terms of VAT population; this group accounted for 16% of VAT traders.
Businesses with an annual turnover greater than £10 million declared £67 billion in net VAT, 68% of the total for the tax year. This group only accounted for 1% of businesses.
52% of businesses declared annual turnover below the VAT registration threshold of £85,000.
VAT population – trade sectors
The wholesale and retail sector was the largest in terms of contribution to VAT liabilities. Net VAT liabilities were £29 billion (30%) of the total for the tax year ending March 2021. The financial and insurance sector has replaced the arts, entertainment and recreation sector and accommodation and food services sector in the top ten trade sectors from the previous year.
The construction sector increased by £650 million (12%), the largest year-on-year change. The only other sectors to see increases were wholesale and retail sectors which increased by £30 million (2%) and professional, scientific, and technical activities which increased by £19 million (2%). Of the top VAT contributing sectors, the financial and insurance sector saw the largest decrease of £560 million (25%).
VAT registrations
New registrations increased from the tax year ending March 2013 to the tax year ending March 2017 where it decreased by 33,666 (8%). Since the tax year ending March 2018, there has been an upward trend in new registrations – 300,000 in the year to 2021.
Deregistrations were below 200,000 a year from the tax year ending March 2014 to the tax year ending March 2016, but increased above that level in the tax year ending March 2017, increasing further in the tax year ending March 2018. This increase in deregistrations was likely to be linked to policy changes in relation to the Flat Rate Scheme.
The freeze in the VAT registration and deregistration thresholds has increased the number of registrations and decreased the number of deregistrations progressively from the year ending March 2019.
Further to my article on the new changes from next year, HMRC has published information on the rules of origin for trade between the UK and EU.
The Bulletin covers the rules of origin and the forthcoming changes to the requirement for supplier declarations to support proof of origin.
Latest from the courts
Further to my article on the Supreme Court case, Uber went to the High Court seeking to challenge this decision, but the High Court has now upheld it.
This means it is very likely that Uber will be required to charge VAT on its supplies as the court found that taxi firms make contracts directly with their customers because Uber drivers should be treated as workers not contractors. This means that Uber make to supply of taxi services to the fare and not the individual drivers.
The High Court agreed with the Supreme Court and stated that: “… in order to operate lawfully under the Private Hire Vehicles (London) Act 1998 a licensed operator who accepts a booking from a passenger is required to enter as principal into a contractual obligation with the passenger to provide the journey which is the subject of the booking.”
A spokesperson for Uber said: “Every private hire operator in London will be impacted by this decision, and should comply with the verdict in full.”
Although not a VAT case itself, this decision is the latest in a long list of VAT agent/principal cases, the most important being:
It is crucial that businesses review their position if there is any doubt at all whether agent status applies to their business model.
Latest from the courts
In the Upper Tribunal (UT) case of Greenspace Limited the issue was whether insulated roof panels were “energy-saving materials” per VAT Act 1994, sect 29A, Schedule 7A, group 2, items 1 and 2 and thus liable at the reduced rate of 5%. Or rather at the standard rate of 20% on the basis that they were a supply of a roof itself.
Background
The appellant supplied and installed roof panels for conservatories which comprised a layer of close-cell extruded polystyrene foam (Styrofoam) around 71mm thick. The Styrofoam was covered with a thin aluminium layer and a protective powder coating which are together around 2mm thick. The supplies were made to residential customers and the panels were fitted onto their pre-existing conservatory roofs. The Panels were slotted into place on the existing roof structure and Greenspace did not replace its customers’ existing roof framework when doing this; the struts and glazing bars that supported the previous glass or polycarbonate panels were left in place. Consequently, the Panels were not self-supporting and could only be used if the customer already had an existing conservatory roof structure.
The decision
The First-tier Tribunal (FTT) decided in 2020 that the panels were not “insulation for a roof” but were a new roof in their own right, and that the appellant’s supplies did not therefore qualify for the reduced rate of VAT (unlike insulation that could be separately attached to a roof, the panels actually formed the roof).
The UT dismissed the new appeal and found that the FTT had not been obliged to compare the roof after Greenspace had installed its panels to the original roof. The frame that was retained could not itself be described as a roof, and the provision of the Thermotec panels which made the conservatory weatherproof as well as insulating it could properly be categorised as the provision of a new roof.
One of Greenspace’s grounds of appeal was that the FTT decision was vitiated by the assumption that because the panels took the form of roof coverings, they were necessarily incapable of constituting “insulation for … roofs”. The appellant argued that as this was a flawed assumption (that Greenspace’s supplies “must” be treated as something more than insulation) the decision should be set aside. This contention was rejected by the UT judge.
Commentary
A fine distinction is often required to be made to establish the correct VAT treatment of a supply. In this case a degree of semantics was required to determine whether the panels were energy-saving materials (even when they certainly saved energy). On such small things turned the assessment of £2.6 million here. It always pays to double check VAT treatments rather than making assumptions.
Latest from the courts
Technical: I have considered the importance of the Place of Belonging (POB) here.
The issue
In the Upper Tribunal (UT) case of Mandarin Consulting Ltd the issue was the POB of the appellant’s clients, and the evidence to support that POB.
Background
Mandarin supplied career coaching and support services to students of Chinese origin. Those services would be outside the scope of VAT if supplied to persons whose usual residence was outside the EU. So, in order to treat its supplies as UK VAT free the appellant need to demonstrate where the recipients of its services lived.
First-Tier Tribunal (FTT) decision
The FTT decided that the services were outside the scope of VAT if the recipient had a permanent address, or usually resided, at that time, outside the EU. It was agreed that from July 2016 the supplies were made to the students’ parents who almost exclusively lived in China. The dispute was with pre-2016 services which were deemed to be made to the students. HMRC argued that, as the students lived in the UK for the duration of the courses, their “usual residence” was the UK, so VAT applied. Although the FTT dismissed this argument, the appeal failed because the proffered evidence did not establish that the usual place of residence of the students as required by Council Implementing Regulation 282/2011/82, Article 23 (reproduced below).
The UT decision
The UT considered the following issues:
Issue 1 – In deciding whether the requirements of Article 23 had been satisfied should the FTT have had regard to “informal evidence” as well as the documentary evidence provided? What evidence could the appellant rely upon to establish that students had a “permanent address” or “usual residence” outside the Community? Is Mandarin limited to such documentary evidence as it had in its possession prior to the time of supply, or can Mandarin in principle rely on all evidence available to it, whether obtained before or after the time of supply, including witness evidence given in connection with the FTT proceedings?
Issue 2 – Taking into account the answers to the above, had the evidence that Mandarin put forward established a prima facie case that its supplies were to persons with a “permanent address” or “usual residence” outside the Community? If so, was there an evidential burden on HMRC to rebut that prima facie case which HMRC had failed to discharge?
Issue 3 – To the extent that Mandarin had failed to satisfy the requirements of Article 23 of the Implementing Regulation, was that fatal to its claim to treat supplies made to students prior to July 2016 as outside the scope of VAT?
Unfortunately, the appellant obtained “relatively patchy” information in respect of the usual residence of individual students.
The UT found that a business retained the right to argue the place of supply (POS) was outside the EU even if the requirements of Article 23 were not met. Also, that while the POS had to be determined by the relevant circumstances existing at the time of supply, Mandarin was not precluded from relying on information discovered later. Finally, it was decided that Article 23 was not the only means available to demonstrate the appellant’s clients had a usual residence outside the EU.
However, the FTT had failed to consider the informal evidence provided concerning the business and customer base. The UT did consider this but still found that the evidence still did not succeed in demonstrating the POB of clients sufficiently. Consequently, the UT was not satisfied that the POB of the students was outside the EU so the supplies were subject to UK VAT and the appeal was dismissed.
Commentary
Another case demonstrating the importance of obtaining and retaining information on the location of customers. Superficially, it appears that the appellant’s supplies may have been UK VAT free, but a failure to evidence this was its downfall. It would not have taken very much to be covered by Article 23, but…
Legislation
Article 23
“… 23. Where, in accordance with Articles 58 and 59 of the PVD, a supply of services is taxable at the place where the customer is established, or, in the absence of an establishment, where he has his permanent address or usually resides, the supplier shall establish that place based on factual information provided by the customer, and verify that information by normal commercial security measures such as those relating to identity or payment checks.”