Category Archives: VAT commentary

VAT: Freeports – what are they? Are they beneficial?

By   12 October 2021
0

Further to the background to Freeports here I consider the latest developments.

What are Freeports?

Freeports are a specific port where normal tax and customs rules do not apply. Imports can enter with simplified customs documentation and without paying tariffs. Businesses operating inside designated areas in and around the port can manufacture goods using the imports, before exporting again without paying the tariff on the original imported goods (however, a tariff may be payable on the finished product when it reaches its final destination).

Freeports are similar to Free zones, or “Enterprise Zones” which are designated areas subject to a broad array of special regulatory requirements, tax breaks and Government support. The difference is that a Freeport is designed to specifically encourage businesses that import, process and then re-export goods, rather than more general business support.

Use

Goods brought into a Freeport are not subject to duties until they leave the port and enter the UK market. Additionally, if the goods are re-exported no duty is payable at all.

If raw materials are brought into a Freeport and processed into final goods before entering the UK market, duties will be paid on the final goods.

Background

If a business chooses to use a Freeport to import or export goods, it will be able to:

  • get relief from duties and import taxes
  • use simplified declarations processes to reduce administrative burdens
  • choose which rate of Customs Duty to use if processing the goods changes their classification

If goods are purchased in the UK, a business will continue to pay duties and import taxes using the normal UK rates.

Where are they?

The eight new Freeports are located at East Midlands Airport, Felixstowe and Harwich, the Humber region, Liverpool City Region, Plymouth, the Solent, the Thames, and Teesside.

Authorisation needed to use a Freeport

A business can apply to use the Freeport customs special procedure (a single authorisation combined with easier declaration requirements) to import goods for:

  • processing and then export or for sale in the UK
  • storage and then export or for sale in the UK

Declaring goods entering the UK Freeport

A form C21 is used to declare goods entering the UK. This can be done before the goods arrive in the UK or when the goods have arrived in the UK.

Declaring goods exported

A business will normally need to submit an exit summary declaration when goods are exported from the UK. When an exit summary declaration is not needed, a business will need to give an onward export notification to HMRC.

Disposing of goods which have been processed or repaired

When a business has finished processing or repairing goods, it must leave the Freeport and dispose of the goods by either:

  • re-exporting them outside the UK
  • declaring them to another customs procedure
  • transferring them to another Freeport Business Authorisation holder
  • destroying them – usually only possible under customs supervision
  • using other simplified disposal methods

VAT on supplies in the Freeport

A business will be able to zero rate supplies within a Freeport of:

  • goods declared to the Freeport
  • services carried out on goods declared to the Freeport

When a zero rated VAT invoice is issued, it must include the reference “Free zone”.

Zero rating of goods applies if:

  • they are declared to the Freeport
  • they are sold from one authorised Freeport business to another in the Freeport
  • both Freeport businesses are registered for VAT (unless they are exempt from registering for VAT and HMRC has approved this exemption)

Benefits

The Government says that Freeports and free zones are intended to stimulate economic activity in their designated areas. Government backed economic studies have found the main advantage of Freeports is that they encourage imports by lowering duty and paperwork costs. Manufacturing businesses that are inside the Freeport can benefit from cheaper imported inputs in comparison to those outside the area. However, some commentators such as the UK Trade Policy Observatory (UKTPO) suggest that whilst some form of free zones could help with shaping export-oriented and place-based regional development programmes, it is important to ensure that trade is not simply diverted from elsewhere and that wider incentives are needed.

Evasion

Considering that the European Parliament has called for Freeports to be scrapped across the EU because of tax evasion and money laundering and that they are where trade can be conducted untaxed, and ownership can be concealed it is likely that there will be a certain degree of evasion. This a result of the lack of scrutiny on imports and means that high-value items, eg; art, can be bought and easily stored in Freeports without the kind of checks and controls they would normally face.

Summary

Any business that regularly imports and/or exports goods should consider if a Freeport will benefit their business model. This is particularly relevant if work is carried out on imported goods.

VAT: Are freemasons’ aims philosophical, philanthropic, or civic? The United Grand Lodge case

By   4 October 2021
0

Latest from the courts

In the First Tier Tribunal (FTT) case of United Grand Lodge of England (UGLE) the issue was whether subscriptions paid by members of the freemasons are exempt via The VAT Act 1994, Schedule 9, Group 9, section 31, item 1(e) “Subscriptions to trade unions, professional and other public interest bodies” which exempts membership subscriptions paid to a non-profit making organisation which has objects which are of a political, religious, patriotic, philosophical, philanthropic or civic nature.

Background

So, in this case, for the subscriptions to be exempt, freemasonry’s aims must be philosophical, philanthropic, or civic. UGLE submitted input tax claims on the basis that its subscription income was exempt and HMRC declined to make the repayments.

An organisation which has more than one main aim can still come within the exemption if those aims are all listed and described in the legislation. The fact that the organisation has other aims which are not set out in law does not mean that its services to members are not exempt provided that those other aims are not main aims. If, however, the organisation has a number of aims, all equally important, some of which are covered by the exemption, and some of which are not, then the services supplied by the organisation to its members are wholly outside the exemption.

The contentions

The respondents stated that the aims were not UGLE’s sole main aim or aims, and, even if they were, the aims were not in the public domain.

UGLE claimed that its sole main aim was philosophical in nature; or, in the alternative, the main aims, taken together, were of a philosophical, philanthropic, or civic nature and it did not have any other main aims.

Decision

The appeal was dismissed. The judge decided that the supplies made by UGLE in return for subscription payments were properly standard rated.

It was common ground that the motives of the members in joining the organisation are irrelevant.

It was accepted that since 2000 freemasonry has become more outward looking and since then has become more involved in charitable work among those, and for the benefit of those, who are not freemasons or their dependants. That said, the judge was not satisfied that the charitable works of individual freemasons, such as volunteering to give time to a local charity, were undertaken by them as freemasons rather than simply as public-spirited members of the community.

It was found that UGLE did have aims of a philosophical, philanthropic and civic nature (the promotion of all aspects of the practice of freemasonry and charity was central to UGLE’s activities). However, it was not accepted that these were UGLE’s main or primary aims. At least 48% of payments made by UGLE were to freemasons and their dependants and in the FTT’s judgment such support remained one of the main aims of freemasonry and thus of UGLE. The importance of providing support for freemasons and their dependants who are in need is a central tenet of freemasonry – The duty to help other freemasons is clearly set out in the objects of the four central masonic charities. The evidence showed that the provision of relief to freemasons and their dependants was the more important than donations to good causes unconnected with freemasonry.

Civic aims

There was nothing in the evidence which indicates any civic aim. UGLE cannot be said to be an organisation that has aims pertaining to the citizen and the state. Indeed, freemasons are prohibited from discussing matters of religion and politics in lodges.

Consequently, as one of UGLE’s main aims could not be described as philosophical, philanthropic, or civic, its membership subscriptions were standard rated. Making payments to freemasons was more akin to self-insurance, rather than philanthropic in nature.

VAT: Zero rating of seeds and plants

By   30 September 2021
0

HMRC have updated VAT Notice 701/38 Seeds and plants that can be zero-rated. This Notice explains how to zero rate supplies of of seeds and plants which are used to grow food for human consumption. The supply of most basic foodstuffs for human or animal consumption is zero-rated. Plants and seeds used for the production of foodstuffs are also zero-rated depending on how they are held out for sale. The Notice explains when the following items can be zero-rated:

  • plants
  • seeds or other means of propagation (spores, rhizomes) used to produce those plants
  • seeds used directly as foods

The main amendments have been made to paragraph 3.5 – Trees and fruit bearing shrubs.

Any businesses supplying such goods (garden centres, nurseries etc) should ensure that the available zero rating is applied as widely as possible within these rules.

VAT: Farm in business? The Babylon case

By   21 September 2021
0

Latest from the courts

In the Upper Tribunal (UT) case of Babylon Farm Ltd (the farm) the issue was whether the appellant was in business and consequently was able to recover certain input tax.

Background

Yet another case on whether there was any business activity in a company. Please see here, here, here and here for previous cases on this issue. The farm sold hay which it cut from another person’s fields to a connected party. The value of the one-off annual sale was £440 pa. The appellant also contended that it was also undertaking preparatory acts for the new business activities and that it would be able to levy management charges. Another new business activity was the creation of an investment and insurance product.

The farm built a new barn on which it claimed input tax of £19,760.

HMRC considered that no business was being carried on and decided to deregister the farm thus refusing to pay the input tax claim. The farm challenged this decision and contended that taxable supplies were being made, and there was also an intention to make taxable supplies in the future.

Legislation

Paragraph 9 of Schedule 1 of the VAT Act 1994 requires HMRC to be satisfied that a person is either making taxable supplies or is carrying on a business and intends to make such supplies in the course or furtherance of a business in order to be registered for VAT. There are a number of tests set out in case law (mainly The Lord Fisher case) to establish whether a person is in business:

  1. Is the activity a serious undertaking earnestly pursued?
  2. Is the activity an occupation or function, which is actively pursued with reasonable or recognisable continuity?
  3. Does the activity have a certain measure of substance in terms of the quarterly or annual value of taxable supplies made?
  4. Is the activity conducted in a regular manner and on sound and recognised business principles?
  5. Is the activity predominantly concerned with the making of taxable supplies for a consideration?
  6. Are the taxable supplies that are being made of a kind which, subject to differences of detail, are commonly made by those who seek to profit from them?

Decision

The appeal was dismissed. The farm was not in business and could not recover input tax on the costs of the new barn.

The judge stated that he could see no legal basis for the farm to be in business. The hay that the farm sold was taken from the customer’s own land and therefore belonged to him already. It was also noted that no invoices were raised, no payment for the hay had been made for a number of years and the single customer was a director of Babylon Farm Limited so the farm was not operating in an open market. The sale of hay had not been conducted on a basis that followed sound and recognised business principles or on a basis that was predominantly concerned with the making of taxable supplies for consideration. As a consequence, the farm was not operating as a business during the relevant period.

On the intention point; neither of the intended activities had yet resulted in any chargeable services being provided and both were to be carried on through companies that had been formed for these purposes (not the farm). Both businesses remained at a formative stage and neither company has generated any revenue. This was insufficient to retain the VAT registration.

Commentary

The decision was hardly a surprise and one wonders how it reached the UT. HMRC were always going to challenge an input tax claim of that quantum with no output tax (and such a low value of sales which may not have been made in any event).

VAT: The tax gap was £35bn in 2019/20

By   17 September 2021
0

HMRC has published details of the tax gap for 2019/20. This is the gap between the expected tax that should be paid to HMRC and what is actually paid. The headline was that the tax gap was 5.3%. which represents an estimated £35 billion.

Total tax liabilities for the year were £674 billion.

What is the tax gap?

The tax gap is the difference between the amount of tax that should, in theory, be paid to HMRC, and what is actually paid.

Why is it measured?

The tax gap provides tool for understanding the relative size and nature of non-compliance. This understanding can be applied in many different ways:

  • it provides a foundation for HMRC’s strategy – considering the tax gap helps the government to understand how non-compliance occurs and how it can be addressed
  • the analysis provides insight into which strategies are most effective at reducing the tax gap
  • it provides important information which helps HMRC understand its long-term performance
  • provides information to the public on tax compliance, creating greater transparency in the tax system.

Why is there a tax gap?

The tax gap arises for a number of reasons. Some taxpayers make simple errors in calculating the tax that they owe, despite their best efforts, while others don’t take enough care when they submit their returns. Legal interpretation, evasion, avoidance and criminal attacks on the tax system also result in a tax gap.

Analysis

Around £3.7 billion of the gap is estimated to be due to error and £3 billion due to the hidden economy.

The tax gap for wealthy individuals fell from £1.6 billion in 2018/19 to £1.5 billion in 2019/20

£15.1 billion of the gap is attributed to small businesses and £6.1 billion is attributed to large businesses, with £5 billion attributed to medium-sized firms.

Taxpayers paid more than £633.4 billion in tax during 2019/20, an increase of more than £100 billion since 2015/16, when the total revenue paid was £532.5 billion.

The tax gap for Income Tax, National Insurance contributions and Capital Gains Tax is 3.5% in 2019 to 2020 at £12.6 billion which represents the largest share of the total tax gap by type of tax.

VAT

The VAT gap was estimated to be £12.3 billion in tax year 2019 to 2020. This equates to 8.4% of net VAT total theoretical liability.

The VAT gap has increased from 7.0% in tax year 2018 to 2019 to 8.4% in 2019 to 2020. Growth in VAT receipts (1.8%) was slower than the growth in the net VAT total theoretical liability (3.3%).

Behaviour

HMRC estimate that the causes of the tax gap are:

  • Failure to take reasonable care £6.7bn 19%
  • Legal interpretation £5.8bn 16%
  • Evasion £5.5bn 15%
  • Criminal attacks £5.2bn 15%
  • Non-payment £4bn 11%
  • Error £3.7bn 10%
  • Hidden economy £3bn 8%
  • Avoidance £1.5bn 4%

Taxpayers

Tax gap by taxpayer groups:

  • Small businesses £15.1bn 43%
  • Large businesses £6.1bn 17%
  • Criminals £5.2bn 15%
  • Mid-sized businesses £5.0bn 14%
  • Individuals £2.6bn 7%
  • Wealthy £1.5bn 4%

The impact on the tax gap from the coronavirus lockdowns and economic downturn is likely to be first seen in the 2020/21 figures, which will be released next year. It will also be interesting to see how the fallout from Brexit is covered (if at all).

Refunds of UK VAT for non-UK businesses and EU VAT for UK businesses

By   14 September 2021
0

HMRC has published updated guidance VAT Notice 723A which sets out how a business established outside the UK can claim a refund of VAT incurred here, and how to reclaim VAT incurred in the EU VAT if a business is established in the UK.

More details of how to make post-Brexit VAT claims here.

VAT: Report on Tax Tribunal performance published

By   7 September 2021
0

A new report reviewing the performance of the Tax Chamber of the First-tier Tribunals (FTT) has been published. It identifies the FTT’s strengths and areas for improvement It has been published by the independent the Tax Law Review Committee (TLRC)

The major causes of dissatisfaction among FTT users include:

  • delay
  • lack of communication by the FTT administration
  • a lack of engagement by some judges during the hearing
  • the allocation of cases to judges with the appropriate knowledge or skill.

Delay is the overriding concern among tribunal users surveyed: both delay between the hearing and the release of the decision (which sometimes is over one year) and delay caused by the FTT administration. Especially in relation to the FTT administration, the underlying cause of these problem seems to be a lack of funding, as there is a rapid staff-turnover with staff leaving for better renumerated jobs in other parts of the Civil Service.

Area of strength:

  • how litigants in person are often assisted by judges taking an inquisitorial approach.

The report identifies potential for further improvements to access to justice for litigants in person, including allowing remote video-hearings as an alternative to having cases determined on paper without a hearing, and the possible establishment of a pro-bono advocacy scheme.

VAT: New rules for Uncertain Tax Treatments

By   7 September 2021
0

The government have released draft legislation and guidance in respect of Uncertain Tax Treatments (UTT). In addition to VAT, this legislation also covers; corporation tax, income tax and PAYE.

Who is affected?

Large businesses with a:

  • turnover of more than £200 million per annum
  • balance sheet total over £2 billion

Threshold

A business must notify HMRC in cases of UTT where the tax advantage of the treatment is £5 million or more in a twelve-month period.

Start date

The new rules will be introduced from 1 April 2022.

Notification

There are three triggers for notification:

  1. Provision made in the accounts

The amount relates to a transaction which a provision has been made in the accounts, in accordance with GAAP, to reflect the probability that a different tax treatment will be applied to the transaction

2. HMRC’s known interpretation of the law

Reliance was placed on an interpretation or application of the law that is different to HMRC’s known interpretation or application.

3. Substantial possibility amount would be found to be incorrect

It is reasonable to anticipate that, if a court were to consider the way in which the amount was arrived at, there is a substantial possibility that the treatment would be found to be incorrect.

Tax advantage

The definition of tax advantage for VAT is:

  • Less output tax is accounted for or is accounted for later, than would otherwise be the case
  • If there is an input tax claim which would otherwise not be obtained; a larger claim, or a claim earlier than would otherwise be the case
  • If input tax is recovered as a recipient of a supply before the supplier accounts for the output tax; the period between the time when the input tax is recovered or the time when the output tax is accounted for is greater than would otherwise be the case
  • The amount of non-deductible tax is less than it otherwise would be
  • An obligation to account for VAT is avoided

Exemptions

There are exemptions from notification. For VAT, exemption will apply where it is reasonable to conclude that HMRC is already aware of the information which would otherwise be required to be notified or in circumstances where a business has previously requested clearance and where HMRC agrees with the proposed treatment.

Penalties

The penalty for failure to make a notification will be £5k initially, £25k for a second failure and £50k for a third failure within a three-year period. There will be an opportunity to advance a reasonable excuse argument to avoid a penalty.