Category Archives: Technical

VAT: Second-hand goods scheme and best judgement – The Ancient & Modern Jewellers Limited case

By Marcus Ward 7 October 2024

Latest from the courts

The second-hands of time.

In the First-tier Tribunal (FTT) case, the issue was whether the second-hand goods margin scheme (margin scheme) was applicable and whether HMRC’s assessments for £5,474,249 (later reduced to £5,004,595) of underdeclared of output tax were issued in best judgement.

Background

The Ancient & Modern Jewellers Limited (A&M) sold second-hand wristwatches with the majority of the sales properly accounted for via the margin scheme. However, from information obtained from Italian tax authorities in respect of supply chain fraud, HMRC issued the assessments on the basis that supplies of certain goods did not meet the conditions of the margin scheme so that output tax was due on the full value of the watches rather than the difference between the purchase and sale values. HMRC decided to penalise A&M because the errors were deliberate and prompted and subsequently to issue a PLN on the basis that such conduct was attributable to the director. A&M is a “High Value Dealer” for anti-money laundering purposes.

Contentions

Appellant

The appellant claimed that HMRC did not use best judgement on the grounds that:

the inspector did not impartially consider the evidence
HMRC lacked sufficient evidence to raise an assessment thereby failing to meet the Van Boeckel test
the calculated amounts were no more than unreasonable and random guesses
the inspector did not approach the investigation with an open mind to such an extent that it could not be said that the assessments and penalties were the product of the reasonable behaviours of HMRC
put in terms of the case law: HMRC had acted in a way which no reasonable body of commissioners could have acted or, put another way, had been vindictive, dishonest or capricious

so the assessments and penalties were invalid.

Whilst accepting that a best judgment challenge is a high bar A&M contended that the conduct and mindset of HMRC’s investigating and assessing officer was so unreasonable that it vitiated the whole assessment.

Respondent

HMRC contended that the assessments were based on best judgement and that its focus was not on the supply chain fraud claims (as claimed by A&M). Additionally, a previous inspection in 2014 had raised prior concerns which provided adequate grounds for the assessments. Moreover, A&M was aware of the terms of operation of the second-hand margin scheme and considered that A&M had wilfully misused the scheme in several regards. The scheme had been incorrectly used for goods purchased by way of intracommunity supplies – which had been imported with the appellant claiming input tax on the imports and then including them in the margin scheme. A&M wilfully failed to carry out due diligence on its suppliers.

Best Judgement

It may be helpful if we consider what the words “best judgement” mean. This was best described by Woolf J in Van Boeckel v CEC [1981] STC 290

“What the words ‘best of their judgement’ envisage, in my view, is that the commissioners will fairly consider all material before them and, on that material, come to a decision which is one which is reasonable and not arbitrary as to the amount of tax which is due. As long as there is some material on which the commissioners can reasonably act, then they are not required to carry out investigations which may or may not result in further material being placed before them.”

Technical

The second-hand margin scheme is provided for under The VAT Act 1994, Section 50A, The Value Added Tax (Special Provisions) Order 1995 and certain paragraphs of VAT Notice 718 which have force of law.

Decision

The appeal was dismissed. It was found that A&M deliberately rendered inaccurate VAT returns. The director of the company was aware both of how the margin scheme worked and that the terms of the scheme had to be complied with if a supply was to be taxed under the it. A&M was found to have acted deliberately in misusing the scheme by including ineligible supplies. A&M had been lax in the completion of its stock book, and it had not met the record-keeping requirements necessary to use the scheme for the relevant transactions. Additionally, some of its EU suppliers were not registered for VAT, a fact A&M did not take steps to discover, and so related purchases could not qualify for the scheme. Also, it was likely that some of the purchases were of new watches which made them ineligible for the margin scheme.

Re, evidence; the FTT found much of the A&M director’s evidence to have been self-serving and, in parts, evasive and that it did not consider that the integrity of HMRC could be impugned. The court determined that; the inspector was diligent and thorough, HMRC had legitimate concerns regarding A&M’s use of the margin scheme generally and specifically and there was a wider concern that the company was a participant in fraudulent supply chains. The FTT considered that the investigation was proportionately carried out considering these concerns and the assessments raised in exercise of best judgment.

Penalties and PLN

The case further considered penalties: whether the appellant’s conduct was deliberate (yes – appeal dismissed). Whether the Personal Liability Notice (PLN) [Finance Act 2007, Schedule 24, 19(1)] was appropriate for the conduct attributed to the director – whether his conduct led to penalty (yes – appeal dismissed).

Commentary

This case is a long read, but worthwhile for comments on; the margin scheme use, HMRC’s inspection methods, best judgement, evidence and MTIC amongst other matters.

VAT: Updated guidance for public bodies

By Marcus Ward 7 October 2024

HMRC has updated its guidance on VAT refunds for public bodies.

Certain public bodies (known as “Section 33 bodies” per The VAT Act 1994, section 33) such as; local authorities, fire and rescue authorities, police authorities and the BBC which carry on non-business activities are nevertheless entitled to input tax recovery despite the normal non-business rules. Similar rules apply to certain museums and galleries.

The method for doing this is not on VAT returns, but by submission of Form VAT126 (for entities not registered for VAT). This form has been updated so that it can be completed and submitted digitally for first claims.

VAT Notice 998 (VAT Refund Scheme for museums and galleries) and VAT Notice 749 (Local authorities and similar bodies) have also been updated to set out how to claim VAT refunds.

VAT: Pre-registration activities

By Marcus Ward 2 October 2024

This article looks at the period of activity before a business VAT registers: How to deal with sales and what input tax may be recovered.

VAT Registration

The obligation to VAT register here and the pros and cons of voluntary registration here.

Sales

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 relevant invoices showing VAT.

Purchases

Purchases made before registration:

Only the legal entity which actually purchased the goods or services and has applied to VAT register is entitled to input tax recovery.

There are time limits for backdating claims for input tax incurred before registration. These are:

four years for goods on hand at the time of the Effective Date of Registration (EDR), or that were used to make other goods on hand at the EDR. This includes both stock for resale or fixed assets
six months for services

Input tax can only be reclaimed if the pre-registration expenditure related to the taxable supplies made, or to be made, by the newly VAT registered business (whether these supplies are subject to subsequent output tax or whether they were made pre-registration but would have been taxable if the business was VAT registered).

The only VAT return on which such input tax is recoverable is the first.

Tip

When a business applies for registration, there is an opportunity to backdate the EDR. The provision for taxpayers to negotiate an earlier date is contained in The VAT Act 1994, Schedule 1, 9. This option should be considered if there is additional VAT that would become recoverable. This will mean that the first return will be longer than the normal quarterly or monthly returns.

The limit for backdating EDR is four years.

Irrecoverable VAT

Input tax cannot be reclaimed on:

goods that have been completely consumed before registration, eg; fuel, electricity or gas
goods that have been sold before registration
goods or services which relate to exempt supplies made, or to be made, by the registered business (see below)
services which related to goods disposed of before registration

NB: Businesses are not required to reduce the VAT deducted in respect of pre-registration use of fixed assets. Eg; input tax incurred on a van purchased three years before registration and used before and after registration would be recoverable in full.

The “usual” rules for input tax also apply to pre-registration claims; that is, some VAT is never reclaimable, see here.

Specific circumstances

There are special rules for partially exempt businesses and for businesses that have non-business income and for the purchase of certain items (see below) covered by the Capital Goods Scheme (CGS).

Included in the CGS are:

taxable land, property purchases of £250,000 or over
refurbishment or civil engineering works costing £250,000 or over
computer hardware costing £50,000 or over (single items, not networks)
aircraft, ships, and other vessels costing £50,000 or more

NB: The partial exemption de minimis limit does not apply to input tax incurred pre-registration.

Pre-incorporation

A limited company cannot register for VAT until it is formally incorporated. Goods or services may have been supplied to the directors or employees setting up the company before then.

A company can claim input tax on those goods and services if the it relates directly to the taxable business to be carried on by it following incorporation and registration for VAT. The six-month (services) four-year (goods) limits also apply to pre-incorporation claims.

Documentation

Any claim must be supported by a valid VAT invoice for each item. If this documentation is not available, there is a possibility that HMRC will accept alternative evidence.

Legislation

The right to deduct input tax as above is covered by The VAT general Regulations 1995, reg 111.

UK e-invoicing initiative and consultation

By Marcus Ward 30 September 2024

The future for e-invoicing

On 23 September 2024, the Government announced plans to encourage an increased use of e-invoicing among businesses and government departments to reduce administrative burdens, enhance cash flow, boost productivity, and minimise tax filing errors.

E-invoicing is a long-accepted form of commercial data exchange and is becoming important for regulatory authorities.

HMRC will initiate a consultation process to gather feedback on fostering investment in e-invoicing. The consultation date has not yet been specified, but we recommend that businesses should prepare for potential mandatory e-invoicing. This consultation will seek input from businesses on how HMRC can support investment in and uptake of e-invoicing.

The initiative reflects global trend towards e-invoicing and HMRC’s focus on digital transformation.

Further information on, and a glossary for, e-invoicing here.

Change of bank details for HMRC

By Marcus Ward 30 September 2024

HMRC has announced that its bank accounts have changed

The bank details for the following tax regimes have changed:

Plastic Packaging Tax
Biofuels or gas for road use — Fuel Duty
Economic Crime Levy
Soft Drinks Industry Levy
Trust Registration Penalty

These details have changed to allow HMRC to future proof our accounts in the event of migrating its banking services to another bank. The new bank details are now permanent and will not change.

All taxpayers who are making payments for the above-mentioned regimes by Faster Payments, Bacs or CHAPS should use the following details:

sort code — 08 32 10
account number — 12529599
account name — HMRC General Business Tax Receipts

Taxpayers who have this banking information stored on their banking apps will need to change the details to reflect the new sort code, account number and account name.

Any customers who pay by Direct Debit do not need to take any action as the changes will be made automatically.

A VAT Did you know?

By Marcus Ward 26 September 2024

Fruit pulp is zero-rated, but fruit juice is standard-rated.

New VAT guidelines for compliance

By Marcus Ward 23 September 2024

A newly published (18 September 2024) set of guidelines: Guidelines for Compliance GfC8 are aimed at helping businesses with VAT compliance controls and set out what HMRC considers good practice for accounting and compliance processes.

HMRC says that these Guidelines for Compliance (GfC) set out its recommended approach and are designed to help businesses understand HMRC expectations as they plan, carry out, and review the accounting and compliance processes that ensure VAT is accurately declared by a business.

The guide covers:

Purpose, scope and audience

General approach to VAT compliance controls

VAT reporting – manual adjustments

Outsourcing

Next steps — correcting errors and guidance

The guidelines are aimed at those responsible for the governance, controls, processing and submitting of the VAT return. Such roles may include:

VAT and tax managers
finance and IT professionals involved in VAT and tax
senior management with VAT and tax oversight, such as the designated senior accounting officer
VAT specialists who process and submit returns, whether in-house or within third party providers including shared service centres
agents

VAT: Zero rated “hot” food – a summary

By Marcus Ward 23 September 2024

Food – What’s hot and what’s not?

Generally, cold takeaway food and drink is zero-rated (as long as it is not of a type that is always standard-rated, such as crisps, sweets and some beverages including bottled water).

Via VAT Act 1994 Schedule 8, Group 1, the sale of certain food is zero rated. However, there is an exception for supplies in the course of catering. Anything coming within the definition of catering reverts to the general rule and is taxable at the standard rate. The definition of catering includes “any supply of hot food for consumption off those premises…” Note 3 (b).

Historically, there has been many disputes over what food is “hot”. A seemingly straightforward definition one would think, but this is VAT, and case law insists that that is often not the case. A good example is the Eat case.

It may be coincidence, but I have dealt with a number of issues around this recently, so I thought it may be helpful to look at the VAT treatment of different types of food.

Pasties, sausage rolls, pies or other pastries

If they are hot and straight from the oven: Although the pastry is hot, it is not being kept warm, so therefore there is no VAT
Left to cool to room temperature: The pasty is not being kept warm, so no VAT is chargeable.
Kept hot in a cabinet, on a hot plate or under a heat lamp: The pasty is being kept warm so VAT is due

Sandwiches

Cold food is zero-rated for tax purposes so no VAT.
Heated for a customer – standard rated per the Eat case.

Bread

Freshly baked, cooling or cold – the bread is not kept warm, even though it may be straight from the oven, so would be VAT free.

Rotisserie chicken

If hot from the spit; VAT on takeaway food intended to be served hot is VATable.
Kept hot in a cabinet, on a hot plate or under a heat lamp – As the food is kept hot and served hot, VAT is applicable.
Left to cool to room temperature – If the chicken is cooked then left to cool, such as in bags in a supermarket, it will be VAT free.

Takeaways

such as fish and chips: VAT remains on all takeaway food served hot.

Catering

All supplies of catering is subject to VAT regardless of what food and drink is being provided. This includes all restaurants and cafés: VAT applies if a supply of food and drink is made for consumption on the premises that it’s supplied in.

This is a general guide and, as case law shows, there will always be products on the “borderline”.

In summary, food that is hot can be treated as cold…

VAT: Zero-rating for residential caravans

By Marcus Ward 16 September 2024

HMRC have issued guidance in relation to The Value Added Tax (Caravans) Order 2024. This will come into force on 30 September 2024.

Since 2013 caravans that meet certain size criteria and are manufactured to meet BSI standard 3632 are considered to be residential caravans. Such residential caravans are the only caravans that qualify for zero rate VAT.

The BSI standard in place on 6 April 2013 was BS3632:2005. In 2015 when the BSI updated the standard, the updated reference to BS3632:2015 was added into the legislation. This standard was updated again in 2023, so the legislation needed to be updated in order to maintain the zero rate for residential caravans. The amended legislation provides for the continuation of the zero rate, which will also apply to caravans meeting any updated version of BS3632 published by the BSI in the future.

Legislation

The Statutory Instrument amends The VAT Act 1994, Schedule 8, Group 9, item 1, which applies zero-rating to caravans manufactured to any version of BS3632. The effect of this is to extend the zero-rate to caravans manufactured to the 2023 version of BS3632 and also to ensure that if the BSI updates BS3632 in future the zero rate is maintained.

It also makes a consequential amendment to item 1(b) of Group 9, to preserve the zero rate for second-hand caravans occupied before 6 April 2013.

Definition of a caravan

The term ‘caravan’ is not defined in the VAT legislation. In practice HMRC bases its interpretation on the definitions in the Caravan Sites and Control of Development Act 1960 and the Caravans Sites Act 1968.

A caravan is a structure that:

is designed or adapted for human habitation
when assembled, is physically capable of being moved from one place to another (whether by being towed or by being transported on a motor vehicle so designed or adapted)
is no more than:
- 20 metres long (exclusive of any drawbar)
- 6.8 metres wide
- 3.05 metres high (measured internally from the floor at the lowest level to the ceiling at the highest level)

More information on the VAT liabilities if various caravans here.

VAT: HMRC manual on supply and consideration updated

By Marcus Ward 9 September 2024

HMRC internal manual – VAT Supply and Consideration has been updated.

The manual provides guidance on determining the liability of the supply of goods or services effected for a consideration including:

basic principles and underlying law
identifying a supply
consideration
illegal supplies
goods or services
supplies of goods for both consideration and no consideration
supplies of services for both consideration and no consideration
definition of consideration
indicators of consideration
off-setting
compensation
payments which are not consideration
payments in specific sectors
settlement of disputes

The amendments are in respect of payments that are not consideration: Carbon offsetting which adds two new pages giving examples of outside the scope activities and commentary on other ecosystem services.