Category Archives: Start Up

VAT HMRC Updates

By   12 October 2017
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HMRC has updated some of its guidance.  This includes: VAT manuals (HMRC internal guidance), VAT Notices and VAT Information Sheets and Revenue and Customs Briefs.

Full details here And a brief summary below:

VAT manuals

VAT Land and Property/Construction

VATLP24750 – Supplies between landlords and tenants; provision of finance for the purposes of the option to tax anti-avoidance legislation

VATLP23500 – Guidance on the option to tax anti-avoidance legislation

VCONST15250 and VCONST15610 – Guidance on the differences between care homes and a hospitals

VAT Education

VATEDU53400 – Guidance on “closely related goods” in relation to education services following the case of Brockenhurst College (please see here)

New and revised VAT Notices

702: imports

701/49: finance

700/45: how to correct VAT errors and make adjustments or claims

700/58: treatment of VAT repayment returns and supplements

702/7: import VAT relief for goods supplied onward to another country in the EC

714: zero rating young children’s clothing and footwear

New VAT Information Sheets and Revenue and Customs Briefs

VAT Information Sheets

Revenue and Customs Briefs

Please contact us if any of the above affects you , or you have any queries.

New Customs Bill White Paper – VAT implications

By   12 October 2017
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A new Customs Bill White Paper has been issued.

As a result of the Brexit vote new domestic legislation is due to enter Parliament later this autumn which will provide for most negotiated outcomes, as well as a contingency scenario.

This Bill will be referred to in this paper as the “Customs Bill”. The purpose of the White Paper is to set out the government’s approach to the Bill. It sets out how the current customs, VAT, and excise regimes operate for cross border transactions, why the Bill is necessary, and what the Bill will contain.

Unfortunately, although being “sold” as containing concrete details, unsurprisingly there is nothing particular of substance. I shall refrain from adding any political comments, but just to observe that any process will be confusing, complex, and very unhelpful for businesses.

Good luck everyone…

VAT: Separate or composite supply? The Ice Rink Company Ltd case

By   4 October 2017
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Latest from the courts – Appellant on thin ice?

In the first Tier Tribunal case of The Ice Rink Company Ltd the issue was whether supplies of admission to ice skating rink and the hire of children’s ice skates – where sold as a package were single or multiple supplies. This is yet another separate/composite/compound supply case.

As a background to the issue please see previous relevant cases here here and here (in fact, this case was referred to in this hearing).

The issue of what is a single supply and what must be split as separate supplies seems to be neverending and HMRC appears to have an appetite to challenge every moot position through the courts.

Background

As anyone who has been ice skating will be aware (I tend to avoid the places not least as a result of not wishing to demonstrate my total lack of balance or skill) you can take your own skates, or hire skates for that session. In this case, the costs were £8 to use the rink or £10 with skate hire. The sole issue in the appeal was whether, when the appellants sold a “package deal” at £10 allowing a child to skate and to hire skates, it made a single supply or two separate supplies. If they made separate supplies, the £2 hire of skates to children is zero-rated. If it is a single supply the whole package is standard rated.

Decision

The judge decided that there were two separate supplies and that the skate hire supply could be treated as zero rated. This decision was based on a number of factors put forward by the appellant and which may be summarised as:

  • Skating with skate hire is a mixed supply, as the supply of skates is distinct and separate from the supply of admission
  • Around half the customers wishing to skate brought their own skates and some customers hired skates without paying to skate (at club sessions when a club had hired the rink and they needed skates for their club members). The hire of skates was therefore capable of being carved out from a single supply
  • A single “package” price is not determinative – in this case is it clear to the customer that they have freedom of choice and the components are available separately
  • Despite what HMRC said, it is clear that the skate hire is additional and optional
  • Neither supply is predominant and neither ancillary (as HMRC have previously accepted)
  • There was physical separation between the admission booth and the skate hire zone

The decision helpful included the following observations: “In our view… it is plain that in this case there are two supplies, a supply of the use of a skating rink and the supply of hire of ice skates. Neither is ancillary to the other as they both can be, and are, purchased on their own. Far from it being artificial to split the package into two, that is precisely what is in effect done in a substantial percentage of the appellant’s transactions with those using its facilities.” And “From the customers’ viewpoint a consumer of the package is getting the two things they want. The two elements are dissociable, not because of any spatial separation between the ticket office and the skate hire booth, but because that is the only appropriate way of looking at the supply of the elements.” And “…a substantial percentage of customers will choose to buy one or other of the element but not both, and that it is possible that the same customer may at one time buy a package and at another buy only one of the elements. Therefore it makes no sense to say that the elements are not dissociable when on a majority of the occasions that users enter the reception to use the rinks they choose only one of the two main elements, entry to the rink.”

 Commentary

A sensible decision based on the facts. There does not seem to be an end to these types of cases as the decision is always based on the unique facts of each situation. It is difficult, if not impossible, to draft legislation which covers every type of scenario. Consequently, case law is very important in this area and the lead cases of CPP and Levob are the most cited. This case further illustrates that HMRC are not always correct in reaching a conclusion on multiple/composite supply cases and there is usually value in challenging their determinations. I would also say, from experience, that a review of a business’ activities can often identify such contentious areas and as always, getting it wrong can either result in an assessment and penalties, or mean that a business is paying too much VAT – not something that sits easily with me!

VAT: Latest from the courts – partial exemption attribution

By   4 October 2017
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In court about courts…

In the First Tier tribunal (FTT) case of The Queen’s Club Limited the issue was whether certain input tax was attributable to the company’s taxable activities or, as HMRC contended; to both its taxable and exempt income (so that it was residual). If HMRC were correct an element of the input tax would fall to be irrecoverable via the appellants’ partial exemption calculation. A brief guide to partial exemption here 

Background

The Queen’s Club (The Club) is a well-known members’ tennis club in West London. The Club’s tennis facilities are world-class and each year the Lawn Tennis Association hires the Club’s courts to put on the Aegon Championship which is a precursor to the Wimbledon tournament and attracts many of the world’s leading players. It makes exempt supplies of sporting services to its members and also makes taxable supplies of food and drink in its bars and restaurants. It incurred VAT on the costs of refurbishing the bars, restaurant and café facilities on its premises. The Club considers that it is entitled to a full credit for input tax on those expenses as they were wholly attributable to the taxable supply of catering.

The Club’s revenue comes primarily from the membership fees that it charges. For the year 2012-13 the annual membership fee was £1820. By becoming a member of the Club, a person obtains the right to use both its sporting and non-sporting (catering) facilities. It was decided by the FTT that the Club had a discretion, but not an obligation, to provide the café etc to its members, however it was accepted that most members do not use the social facilities.  It was agreed that the membership fee was consideration for an exempt supply of services closely linked with sport for the purposes of Value Added Tax Act 1994, Schedule 9, item 10. The Club also receives five main sources of taxable income:

  • Fees from the LTA to use its courts for the Aegon Championship
  • Sales of food and drink from restaurant and bars
  • Sales of sporting and other goods
  • Provision of the use of the restaurant and bars, usually with catering
  • Rental income for certain other rooms

The decision

There was no dispute that there was a direct and immediate link between the refurbishment of the restaurant and bars and taxable supplies made from them. The question that divided the parties was whether there was also a direct and immediate link between the refurbishment the exempt membership supplies.

The judge decided that “In short, viewed objectively, what members obtain when they join the Club is a right of access to world-class sporting facilities together with such additional facilities as the Club decides, in its discretion, to offer. The focus is on the sporting facilities…” and that, viewed objectively, the renovated bars and restaurant are a means by which members are able enjoy the Club’s sporting offering. The overall conclusion was that there was no direct and immediate link between the renovation goods and services and exempt supplies that the Club made.

The decision was that the Club was entitled to credit for the full amount of input tax that it incurred.

Commentary

This case demonstrates that care is always required when costs are attributed to a business’ activities. This is especially important when the costs are significant; particularly when they are incurred on land and property. There tends to be a lot of “debate” with HMRC on such matters and slight nuances can affect attribution. These type of costs are often covered by the Capital Goods Scheme, so care must be taken over a ten year period which adds to the complexity.  As always, when considering land and property transactions it pays to obtain professional advice as mistakes are costly. A brief guide to land and property issues here

Recovering VAT on Staff Expenses

By   29 September 2017
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VAT on Staff Expenses – what is claimable?

Although the VAT rules normally prevent a business reclaiming input tax on supplies that are not made directly to it, there are certain circumstances when the rules are relaxed. Although rather a dry and basic area, experience insists that it creates many issues at inspections and is “low hanging fruit” for which HMRC may levy penalties. Some business decide not to recover VAT on such costs to avoid problems, but certain claims are permissible and may be worth significant sums if they have a number of employees.

 Subsistence Expenses

For instance, the VAT element of subsistence expenses paid to your employees may be treated as input tax. In order to qualify for this concession, employees must be reimbursed for their actual expenditure and not merely receive round sum allowances. These costs include hotels and meals.

VAT invoices (which may be made out to the employee) must also be obtained. The rule of thumb is that the employee must be more than five miles away from their place of employment and spend over five hours there (the so-called 5 mile/5 hour rule). A business cannot reclaim input tax if it pays an employees a flat rate for expenses.

Reimbursement for Road Fuel

The VAT legislation permits a business to treat as its own supply road fuel which is purchased by a non-taxable person whom it then pay for the actual cost of the fuel (usually through an expenses claim). This would therefore allow a business to recover input tax when it reimburses its employees for the cost of road fuel used in carrying out their employment duties.

A business is able to reclaim all the input tax on fuel if a vehicle is used only for business. There are three ways of claiming VAT if a business uses a vehicle for both business and private purposes.

  • reclaim all the VAT and pay the fuel scale charge – HMRC details here
  • only reclaim the VAT on fuel you use for business trips – this requires the retention of detailed mileage records
  • choose not to reclaim any VAT eg; if your business mileage is so low that the fuel scale charge would be higher than the VAT you can reclaim

If a business chooses not to reclaim VAT on fuel for one vehicle it cannot reclaim VAT on any fuel for vehicles used in the business.

Mileage Allowances

The legislation also enables you to reclaim the VAT element (or a reasonable approximation) of mileage allowances paid to employees.

Business entertainment

For details of this complex area please see here

Goods

Certain goods which are to be used in a business, eg; office supplies, the business may reclaim the input tax on purchases made by employees or directors. In all cases you’ll need a VAT invoice. Details required on a VAT invoice here

Mobile telephones

An element of mobile phone costs may be recovered. The VAT on the business use of the phone may be recovered, eg; if half of the mobile phone calls are private 50% of the VAT on the purchase price and the service plan can be recovered.

Work from home

If a person works from home an element of the costs may be recovered. As an example: if an office takes up 20% of the floor space in a house. A business may reclaim 20% of the VAT on utility bills.

Apportionment

A business must keep all records to support a claim and show how it arrived at the business proportion of a purchase of goods or services and it must also have valid VAT invoices in all cases.

VAT due on property search fees? Whether they are disbursements

By   25 September 2017
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Latest from the courts – Brabners LLP

In the First Tier Tribunal case of Brabners LLP (Brabners) the issue was whether an external search agency used by the appellant correctly treated its supplies as VAT free, and if this was the case, whether the VAT free treatment continued to the appellant’s clients by way of a disbursement.

This is an interesting case and may create historic difficulties for conveyancing solicitors.

Background

Brabners is a law firm with a real estate department. It offers conveyancing services, both to buyers and sellers, in relation to proposed property transactions, for both commercial and residential property. In order to fulfil certain legal requirements, it used an external third party entity to obtain online property searches. The Appellant stated that it uses the online system for the majority of its searches (as opposed to a postal search carried out by employees of a Local authority, or a personal search at the Local Authority’s premises). The online search is not carried out by the Appellant, but rather, a specialist online search agency (‘Searchflow’) engaged by Brabners. Searchflow obtained the required property searches from the Local Authority’s digitised or dematerialised files and registers, and passed those results back to Brabners.

Searchflow invoiced the appellant for the cost of obtaining access to documents without the addition of VAT. Brabners treated this as a disbursement and invoiced its clients for the same amount without VAT.

The issues were:

  • Should the supply by the search agency be subject to output tax?
  • Was there a single or multiple supply?
  • Whether the charge to the end user of the services should be treated as a disbursement in respect of the search element
  • Which party consumed Searchflow’s services? (Brabners, or Brabners’ clients)

Note: the disbursement position is only (practically) relevant in this case if it was decided that the search fee was VAT free. Local Authorities now (from March 2017) charge VAT for searches, so the impact is only likely to impact on past situations.

Contentions 

The main thrust of the Brabners’ argument is that the firm was requested, or expressly authorised, to obtain a search on the client’s behalf. Consequently, this meant that the firm was simply acting as the client’s agent, and the report belongs to the client. Brabners, argued that the search fees qualified as a disbursement for the purposes of VAT, and were not part of the otherwise taxable supply. It also argued that this separate treatment is intelligible and sensible. HMRC formed the view that the relevant payments cannot be treated as a disbursement as all the tests to do so were not met.  For a guide to disbursements and the relevant tests please see here

Decision

The judge decided that the relevant expenses paid to Searchflow had been incurred by the appellant “in the course of making its own supply of services to” (its client) “and as part of the whole of the services rendered by it to” (its client). Therefore Brabners had consumed the service such that it could not be a disbursement. This point in this case proves academic as it was also, unsurprisingly, decided that Searchflow’s services were standard rated, so even if it were a disbursement, the VAT would still be payable by the appellant’s client.

 Consequences

All firms which carry out conveyancing should review the VAT treatment of searches. If they have erroneously treated similar transactions as disbursements in the past, this is likely to require correction. Clearly, HMRC will be alive to this decision and it is anticipated that legal firms will be the subject of close inspection.

This case may also mean that third party search entities may be issuing retrospective VAT invoices or work which was previously treated as VAT free. This needs to be recognised and arrangements in place to recover any input tax incurred.

We are able to assist conveyancing firms with a review of the VAT position in light of this case.

VAT: Output tax on credits? A Tax point case

By   18 September 2017
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Latest from the courts

In the Scottish Court of Session case of Findmypast Limited the issue was whether the sale of credits represented a taxable supply, the tax point of which was when payment was received.

Background

Findmypast carries on a business of providing access to genealogical and ancestry websites which it owns or for which it holds a licence. If a customer wishes to view or download most of the records on the website, they will be required to make a payment. This may be done by taking out a subscription for a fixed period, which confers unlimited use of the records during that period. Alternatively, the customer may use a system known as Pay As You Go. This involves the payment of a lump sum in return for which the customer receives a number of “credits”. The credits may be used to view records on the website, and each time a record is viewed some of the credits are used up. The credits are only valid for a fixed period, but unused credits may be revived if the customer purchases further credits within two years; otherwise they are irrevocably lost.

Technical

Findmypast accounted for output tax on the price of the credits at the time when they were sold.  As a consequence, VAT was paid, not only on credits which were used, but also on credits that were not redeemed (The tax point therefore similar to the current rules on the sale of single use face value vouchers. Rules here).

The taxpayer claimed repayment of the VAT accounted for on the sale of unredeemed vouchers during a period which ran up to May 2012 when the legislation was changed.

The question was whether output tax should have been accounted for at the time when the vouchers were sold or at the time the vouchers were redeemed. If the tax point was the date of redemption, then the claim would be valid. The court identified the following issues:

  • What is the nature of the supply made by the taxpayer to customers?
    • Was it was the supply of genealogical records selected by the customer and viewed or downloaded by them?
    • Or was the supply a package of rights and services, which conferred a right to search the records and download and print items from the taxpayer’s websites?

If the former is accurate, the supply only takes place if and when a particular record is viewed or downloaded.  If the latter, the supply includes a general right to search which is exercisable as soon as the credits are purchased, with the result that the supply takes place at that point.

A subtle distinction, but one which has an obviously big VAT impact.

Decision

The Court decided that where credits were not redeemed, the taxpayer is entitled to be repaid the output tax previously declared as no tax point was created. In the Court’s view, Findmypast was making the relevant documents available in return for payments received. HMRC’s contention that there was a complex, multiple supply of the facility to find and access genealogical documents such that payment created a tax point was dismissed. The court further found that the relevant payments did not qualify as prepayments (deposits) because it was not known at the time of purchase whether the credits would be redeemed (many were not) or indeed at what time they would be redeemed if they were.  It was also decided that the credits were not Face Value Vouchers per VAT Act 1994, Schedule 10A, paragraph 1(1) as they are rather mere credits that permit the customer to view and download particular documents on the taxpayer’s website, through the operation of the taxpayer’s accounting system.  And that they are not purchased for their own sake but as a means to view or download documents.

Commentary

Readers of my past articles will have identified that multiple/single supplies and tax points create have been hot topics recently, and this is the latest chapter in the story.

This case highlights that any payments received by a business must be analysed closely and the actual nature of them determined according to the legislation and case law. Not all payments received create a tax point and

Some will not represent consideration such that output tax is due. Careful consideration of the tax point rules is necessary.  Not only can the correct application of the rules aid cashflow, but in certain circumstances (such as set out in this case) it is possible to avoid paying VAT on receipts at all.

VAT – Do as HMRC say…. and if you do… they may still penalise you!

By   13 September 2017
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Can you rely on a VAT ruling received from HMRC when they have been provided with full information in writing?

You would like to think so wouldn’t you? And in the past, you have been able to.

However, the long standing protection from assessments for deemed underdeclared VAT as a result of incorrect advice or actions by HMRC has been withdrawn. This was commonly known as “Sheldon Statement” protection. HMRC now state that there are some circumstances in which their primary duty is to collect tax according to the statute and it may mean that they can no longer be bound by advice they have given.  Despite all the publicity of their National Help Line and Advice Centre, plus the clearance procedures introduced to assist taxpayers with their obligations, HMRC can still renege on their advice! Even if you are fortunate enough to actually get a decision from HMRC (which is increasingly difficult and frustrating) you can’t necessarily rely on it. This is the case even if you have provided full information in writing (as required) and made a comprehensive disclosure of your position.

This makes it even more important to avoid errors and the increased risk of VAT penalties and interest. Details of the penalty regime here

This leaves the question as to whom businesses can rely on for accurate, cost effective VAT saving advice and guidance on getting VAT right?  The answer, clearly, is to contact their friendly local VAT consultant…

The Default Surcharge for late VAT payments

By   5 September 2017
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A Default Surcharge is a civil penalty issued by HMRC to “encourage” businesses to submit their VAT returns and pay the tax due on time.

VAT registered businesses are required by law to submit their return and make the relevant payment of the VAT by the due date.

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.

Payments on Account (POA)

If a business is required to make POA it must pay them and the balance due with the VAT Return by electronic transfer direct to HMRC’s bank account. The due dates for POA are the last working day of the second and third month of every quarterly accounting period. The due date for the balancing payment is the date shown on the business’ VAT Return. It is important to ensure that payments are cleared to HMRC’s bank by these dates or there will be a default.

Consequence of default

A business will receive a warning after the first default ‐ the Surcharge Liability Notice (SLN). Do not ignore this notice. If you fail to pay the VAT due on the due date within the next five quarters, the surcharge will be 2% of the outstanding tax. The surcharge increases to 5% for the next default, and then by 5% increments to a maximum of 15%.  Each default, whether it is late submission of the return or late payment, extends the surcharge liability period, but only late payment incurs a surcharge.

If you can’t pay the VAT you owe by the due date or are having difficulties, contact the Business Payment Support Service immediately.

Special arrangements for small businesses

There are special arrangements if a business’ taxable turnover is £150,000 or less to help if there are short term difficulties paying VAT on time. HMRC send a letter offering help and support rather than a Surcharge Liability Notice the first time there is a default. This aims to assist with any short-term difficulties before a business formally enters the Default Surcharge system. If the business defaults again within the following 12 months a Surcharge Liability Notice will be issued.

Minimum surcharges

There is a minimum of £30 for surcharges calculated at the 10% or 15% rates. There will not be a surcharge at the 2% and 5% rates if it is calculated it to be less than £400. However, a Surcharge Liability Notice Extension extending the surcharge period will be issued and the rate of surcharge if you default again within the surcharge period will be increased.

Circumstances when HMRC will not levy a surcharge

There’s no liability to surcharge if a business:

  • submits a nil or repayment return late
  • pays the VAT due on time but submit your return late

HMRC will not issue a surcharge in these circumstances because there is no late payment involved. If a business had defaulted previously HMRC will issue a Surcharge Liability Notice Extension extending the surcharge period because the return is late, but they will not increase the rate of surcharge.

Time limit

A business’ liability to surcharge will expire if a business submits all of its returns and payments for tax periods ending on or before the end of the surcharge liability period on time.

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.

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. The decision on whether a reasonable excuse exists depends upon the particular circumstances in which the failure occurred. There is a great deal of case law on this particular issue. Please contact us should there be doubt about a reasonable excuse.

Disagreement over a surcharge

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

  • ask HMRC to review your case
  • 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 was sent. The letter should give the reasons why you disagree with the decision.

Examples when a review may be appropriate are if a business considers that:

  • it has a reasonable excuse for the default
  • HMRC applied the wrong rate of surcharge
  • HMRC used the wrong amount of VAT when calculating the surcharge
  • there are exceptional circumstances which mean the default should be removed

A business will still be able to appeal to the Tribunal if it disagrees with the outcome of the HMRC review.

We are very experienced in dealing with disputes over Default Surcharges, so if you feel that one has been applied unfairly, or wish to explore your rights, please let us know.

VAT Public Notice 700 Updated

By   25 August 2017
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Notice 700: The VAT Guide has been updated.

This HMRC Notice is a “starting point” for general VAT information and provides a guide to all the main VAT rules and procedures. It also provides assistance with the problems faced by business and includes an index which helps users find further information by referring to a particular section or paragraph in one of HMRC’s other, more specialised publications. There have been over 30 changes to the Notice which was last updated in 2016.

A full list of changes is set out in the Notice, but the most salient are as follows:

  • Additional guidance on MOSS – para 4.8.4
  • Single and mixed supplies – para 8.1
  • Continuous supplies to connected persons – para 14.3.1
  • Various commentary on invoices (including electronic invoicing) – paras 16.6, 16.8, 17.7 17.8
  • Accounting schemes – para 19.2
  • Agents registered for VAT acting in their own name when the customer is not registered – para 1.2
  • Penalties for inaccuracies – para 27.3
  • Integrity of supply chains – para 27.5.2

The number of changes in just one year highlights the fast pace of the tax and the number of challenges which taxpayers have won. I cannot see this pace letting up in the future either.

As always, if you have any queries about the changes, please contact us.