New approach to VAT inspections by HMRC

By Marcus Ward 16 May 2016

A VAT quickie.

We understand that HMRC are about to introduce new plans to change the way some VAT inspections are carried out.

The intention is that when a business is selected to an inspection, rather than arranging and visiting the business in the traditional way, initial contact will be made with the responsible person. At this point a short telephone questionnaire will take place. If this option is taken then it is possible that HMRC will reconsider the need for a full inspection. This appears to be along the lines of some pre-credibility processes. It is a pilot exercise and will be entirely voluntary for the taxpayer.

If this approach enables HMRC to focus on evasion and high risk business while reducing the burden for the majority of businesses who always try to be accurate with VAT declarations it is to be welcomed. We shall see how the pilot goes and whether this is rolled out to more businesses. HMRC expects that this will be a benefit for both them and taxpayers and it is to be hoped that this is the case.

We have no knowledge currently how “brief” the questionnaire will be and how much information and preparation will be required. However, it is likely that they will focus on industry specific questions rather than on processes and controls.

If contacted by HMRC our usual advice is to contact us to ensure everything is as it should be. This may avoid penalties and ensure any enquires are concluded smoothly.

Ten Questions every business should ask about VAT

By Marcus Ward 8 March 2016

1. Am I sure that a VAT inspection would not find any errors?

An inspection can result in significant assessments, penalties and interest, apart from a business becoming “known” to HMRC. Peace of mind is a valuable benefit for a business owner too!

2. Am I sure that I am reclaiming as much VAT as possible?

We often find that businesses miss out on recovering input tax, this clearly results in an actual cost.

3. Do I take full advantage all available VAT reliefs, customs exemptions and duty refund schemes?

Failure to do so will create a tax cost and may be putting a business in a less competitive position.

4. Am I up to date on the indirect tax developments in my key markets?

Indirect tax changes rapidly, and so does the market place. Being unaware of changes that affect you may result in VAT being overpaid, or penalties being levied if you have underdeclared tax. It may also put you at a competitive disadvantage.

5. Have I considered the impact of tax rate changes on my pricing and margin, and have I taken the necessary measures?

Budgeting is affected by VAT. Failure to consider indirect taxes may eat into profit.

6. Do I collect all the data about my customers and transactions that could be required by tax authorities?

As in many VAT circumstances, getting it wrong or missing something results in penalties.

7. Do I comply with all indirect tax requirements in the jurisdictions where I operate or where my customers belong?

VAT and GST does exist outside the UK and ignoring overseas indirect tax obligations may result in action being taken by foreign authorities which will prove to be very uncomfortable and expensive. It is important to understand the rules for indirect tax in each country/area you trade. Don’t get caught out.

8. Do I have the tools to analyse my indirect tax flows and data?

Allocating sufficient technical and human resources to VAT is important. Seeking professional advice at the appropriate time is also prudent.

9. Could changes in the way my business is structured or how transactions are organised improve my indirect tax position and/or reduce complexity?

Saving money and reducing tax complications must be near the top of every business’ wish list. Seeking professional advice on structuring a business or a transaction goes a long way to achieving this

10. Is my business using the right VAT scheme?

There are many special schemes that a business may use, from the Flat Rate Scheme to Margin Schemes. Most are optional, but some, like the Tour Operators’ Margin Scheme are compulsory. Choose the wrong one, or being unaware of a beneficial scheme could cost.

It is important to constantly monitor a business’ VAT position. The nature of trade changes, technology changes, case law changes and the VAT rules are constantly in a state of flux. It is easy to assume that everything is alright because it has always been done that way, but there may be significant exposures and missed opportunities out there. We offer services from a basic healthcheck to a full technical review. A review will let you rest easy in your bed if nothing else!

UK VAT Registration For Overseas Businesses – A Guide

By Marcus Ward 5 January 2016

When must an overseas business register for VAT in the UK?

This question is increasingly being asked by overseas entities which do business in the UK. So what are the requirements, and what choices are there?

Compliance

An overseas business must VAT register in the UK if:

• it makes any taxable supplies of goods and services in the UK in the course of furtherance of his business. These supplies could be of any description, but commonly are the sale of goods which are physically located in the UK and the operation of certain events that take place in the UK.

• the business is registered for VAT in another EC country, and it sells and delivers goods in the UK to customers who are not VAT-registered;so-called ‘distance sales’ (details here) and the value of those distance sales exceeds the relevant threshold (currently £70,000).

• it acquires goods in the UK directly from a VAT-registered supplier in another EC country and the total value of the acquisitions exceeds the acquisitions threshold.

• it makes a claim under the EC 8th Directive or EC 13th Directive and subsequently supplies the relevant goods in the UK.

If these tests are met, a supply is made in the UK. It does not matter in which country where the business “belongs” or where it’s staff or technical resources are located. A guide to the place of belonging here.

For VAT purposes, the UK includes the territorial sea of the UK (ie waters within twelve nautical miles of the coastline).

There is no need to register if the only UK supplies are those on which the customer is liable to account for any VAT due under the ‘reverse charge’ procedure.

An overseas trader may also be registered if:

• he has started in business but is not yet making taxable supplies, provided he can show the intention of making taxable supplies in the future as part of his business; or

• his turnover is below the threshold, provided he can prove to HMRC that he is carrying on a business for VAT purposes and making taxable supplies.

Consequences of registration

An overseas business which is registered or required to be registered for VAT in the UK must account for VAT in respect of those supplies and acquisitions taking place in the UK. It is also liable to VAT on imports of any goods into the UK and on the acquisition in the UK of excisable goods or of new means of transport from another EC country. It also usually means that any VAT incurred in the UK may be recovered as input tax. This is particularly relevant if import VAT is incurred on importing goods into the UK.

Registration options available

An overseas trader who is not normally resident in the UK, does not have a UK establishment and, in the case of a company, is not incorporated here, and which is required or entitled to be registered in the UK can normally choose between three registration options:

(1) It may appoint a VAT representative who will be jointly and severally liable for any VAT debts. The overseas trader must still complete a VAT registration form. In addition to this, both the overseas trader and the VAT representative must complete a Form VAT 1TR. It is understood that, in practice, very few businesses are prepared to provide the services of a VAT representative because they are unwilling to become liable for any VAT debts of the overseas trader.

(2) It may appoint an agent to deal with the VAT affairs. The agent cannot be held responsible to HMRC for any VAT debts and HMRC reserve the right not to deal with any particular agent. (In some cases, HMRC could insist that a tax representative is appointed although this cannot now be done where the overseas trader is based in a country where certain mutual assistance arrangements exist.) The overseas trader must still complete a VAT registration form. In addition, HMRC will need a letter of authority. A suggested letter of authority approved by HMRC is:

(Insert principal’s name) of (insert principal’s address) hereby appoints (insert name of UK agent or employee) of (insert address of UK agent or employee) to act as agent for the purpose of dealing with all their legal obligations in respect of Value Added Tax.

This letter authorises the above-named agent to sign VAT return forms 100 and any other document needed for the purpose of enabling the agent or employee to comply with the VAT obligations of the principal.

Signed (insert principal’s signature)

Date (insert date)

(3) It may deal with all the VAT obligations (including registration, returns and record-keeping) itself. To register, the overseas business should contact the Aberdeen VAT office at Ruby House, 8 Ruby Place, Aberdeen, AB10 1ZP (Tel: 01224 404807/818). This is known as a Non-Established Taxable Person (NETP) registration.

Summary

There can be confusion around this matter, not only from a technical aspect, but with an overseas business’ unfamiliarity with the UK authority’s requirements and also possibly language and communication problems. Additionally, the practical aspects of identifying the need to VAT register in the UK and the completion of forms etc can delay matters. Of course, just like any other VAT registration, there are penalties for not registering, or not registering at the appropriate time. There is also the reluctance of certain overseas businesses to deal with UK VAT at all. Unfortunately, a head in the sand attitude just stores up problems for the future. We have been called on to firefight on this topic a number of times, and it rarely ends well.

VAT Flat Rate Scheme – beware the hidden costs

By Marcus Ward 5 November 2015

VAT Basics

Anything that makes VAT easier and that can even reduce the amount payable must be a good thing….right?

The Flat Rate Scheme (FRS) was introduced to simplify VAT accounting for small businesses (with an annual turnover under £150,000) and does away with the concept of input and output tax. Instead a flat rate is applied to a business’ VAT inclusive turnover. This means a business in the FRS cannot reclaim any VAT incurred on its purchases, but a lower (than 20%) rate of VAT is applied to its VAT inclusive income.

Additionally, there is an option to only account and pay VAT when the business itself has been paid by its customers; doing away with VAT bad debt issues and improving cashflow.

Now this certainly has its attractions in terms of reducing the administrative burden and some business find that it reduces the amount of VAT payable. However care should be taken to select the appropriate business category/rate. A simple exercise to compare VAT declared under the “normal” rules to that due under the FRS is clearly prudent. But, as with all things VAT, there can be a catch.

The two drawbacks to the scheme

1) If a business incurs a significant amount of input tax then, unless the flat rate percentage benefit outweighs the loss of input tax, then the FRS is not for them.

2) If a business makes any supplies at the zero rate, or that are exempt, or outside the scope of VAT this income is also included in the turnover for the FRS. The result is then that VAT has to be accounted for on sales that would be VAT free under the normal VAT rules.

This is a bad thing!

Examples of businesses which need to be particularly aware are ones which:

– Export goods or services

– Provide goods or services cross-border to other EC member States

– Sell books, food, or children’s clothes

– Build new homes

– Provide transport

– Let property

– Are charities or Not For Profit entities

– Provide financial or insurance services or brokerage

– Provide health and/or welfare services

– Provide education and/or training

– Offer subscriptions to membership organisations

– Provide sport services

– Are usually in a repayment position with HMRC

(This list is not exhaustive).

The FRS should certainly be considered for smaller businesses especially start-ups; since a first year discount is available for those that are in their first year of VAT registration. These get a one per cent reduction in the flat rate percentage until the day before their first anniversary of becoming VAT registered.

It is important for advisers to consider whether a client would benefit from being in the FRS, or indeed, whether continuation of the scheme remains advantageous to the business.

The VAT flat rates

The VAT flat rate you use depends on the type of business. If the rate changes, a business must apply the new rate from the date it changes. Also, if the nature of a taxpayer’s business changes it is important to review its FRS position.

The applicable rates here

The detailed rules of the FRS here

VAT Payment Problems – Q & As

By Marcus Ward 29 September 2015

If you can’t pay your VAT bill, please do not put your head in the sand, the problem will not go away. Here are some answers to the most commonly asked VAT payment problems.

Q: I have received a demand notice for payment of VAT. Why?

A: HMRC have not received payment of the VAT liability that is described in the demand notice. You should therefore pay the outstanding debt without delay so as to avoid further recovery action. HMRC take prompt action to recover debts.

Q: I am not able to pay the debt immediately because of a temporary cash-flow problem. What should I do?

A: You should make urgent contact with your bank or your financial adviser to explore means of overcoming these temporary financial difficulties.

Q: I have consulted the bank/financial adviser but they are unable to help. What else can I do?

A: Without further delay contact the Regional Debt Management Unit whose address appears on the demand notice. They may be able to help you by agreeing a brief period in which to pay the debt. They are usually helpful and will consider carefully all practical options for settlement. However, if these do not produce a solution or they do not receive a response to their request for payment, they may, like other creditors, take action to recover the money they are owed.

Q: What is the Default Surcharge?

A: Default Surcharge is a civil penalty to encourage businesses to submit their VAT returns and pay the tax due on time.

Q: When will a Default Surcharge be issued?

A: A business is in default if it sends in its VAT return and or the VAT due late. No surcharge is issued the first time a business is late but a warning (a Surcharge Liability Notice) is issued. Subsequent defaults within the following twelve months (the “surcharge period”) may result in a surcharge assessment. Each time that a default occurs the surcharge period will be extended. There is no liability to a surcharge if a nil or repayment return is submitted late, or the VAT due is paid on time but the return is submitted late (although a default is still recorded).

Q: How much is it?

A: The surcharge is calculated as a percentage of the VAT that is unpaid at the due date. If no return is submitted the amount of VAT due will be assessed and the surcharge based on that amount. The rate is set at 2 per cent for the first default following the Surcharge Liability Notice, and rises to 5 per cent, 10 per cent and 15 per cent for subsequent defaults within the surcharge period. A surcharge assessment is not issued at the 2 per cent and 5 per cent rates if it is calculated at less than £200 but a default is still recorded and the surcharge period extended. At the 10 per cent and 15 per cent the surcharge will be the greater of the calculated amount or £30.

Q: What sort of assessments are sent out?

A: An assessment may be issued if a VAT return is not submitted by the due date. The amount may be based on previous returns. If a business does not submit its returns time after time, the assessment value will increase. An officer may also issue an assessment after a visit, if they have found errors in the amount of tax declared on previous returns.

Both types are included in the traders’ debt and are collected in the normal way if they are not paid promptly.

Help

There are a number of schemes available which may help cashflow or possibly reduce the amount of VAT you pay.

Cash Accounting – where you only pay VAT to HMRC when you have received payment from your customer.
Annual Accounting – where you make set monthly payments and make one return a year with an adjusting payment.
Flat Rate Scheme – where you pay a set percentage of your turnover rather than calculating output tax less input tax.
Bad Debt Relief – where you are able to reclaim VAT relief on your bad debts.

Please contact us if VAT payments are proving a problem for your business. Negotiation with HMRC is possible.

VAT Reliefs for Charities. A brief guide.

By Marcus Ward 3 August 2015

Charity and Not For Profit entities – a list of VAT reliefs.

Unfortunately, charities have to contend with VAT in much the same way as any business. However, because of the nature of a charity’s activities, VAT is not usually “neutral” and becomes an additional cost. VAT for charities often creates complex and time consuming technical issues which a “normal” business does not have to consider.

There are only a relatively limited number of reliefs specifically for charities and not for profit bodies, so it is important that these are taken advantage of. These are broadly:

Advertising services received by charities;
Purchase of qualifying goods for medical research, treatment or diagnosis;
New buildings constructed for residential or non-business charitable activities;
Self-contained annexes constructed for non-business charitable activities;
Building work to provide disabled access in certain circumstances;
Building work to provide washrooms and lavatories for disabled persons;
Supplies of certain equipment designed to provide relief for disabled or chronically sick persons;

There are also special exemptions available for charities:

Income from fundraising events;
Admissions to certain cultural events and premises;
Relief from “Options to Tax” on the lease and acquisition of buildings put to non-business use.
Membership subscriptions to certain public interest bodies and philanthropic associations;
Sports facilities provided by non-profit making bodies;

The reduced VAT rate (5%) is also available for charities in certain circumstances:

Gas and electricity in premises used for residential or non-business use by a charity;
Renovation work on dwellings that have been unoccupied for over two years;
Conversion work on dwellings to create new dwellings or change the number of dwellings in a building;
Installation of mobility aids for persons aged over 60.

Although treating certain income as exempt from VAT may seem attractive to a charity, it nearly always creates an additional cost as a result of the amount of input tax which may be claimed being restricted. Partial exemption is a complex area of the tax, as are calculations on business/non-business activities which fundamentally affect a charity’s VAT position. I strongly advise that any charity seeks assistance on dealing with VAT to ensure that no more tax than necessary is paid. Charities have an important role in the world, and it is unfair that VAT should represent such a burden and cost to them.

VAT: Global Accounting simplification

By Marcus Ward 27 April 2015

VAT: Second Hand Scheme – Global Accounting simplification

Overview

The problem with the VAT Second-Hand Goods Scheme is that details of each individual item purchased, and then later sold, has to be recorded. This requirement can lead to a lot of paperwork and an awful lot of administration which, obviously, many businesses are not too keen to comply with.

Global Accounting is an optional, simplified variation of the Second Hand Margin Scheme (Margin Scheme).

It differs from the standard Margin Scheme because rather than accounting for the margin achieved on the sale of individual items VAT is calculated on the margin achieved between the total purchases and total sales in a particular accounting period without the requirement to establish the mark up on each individual item. It is beneficial if a business buys and sells bulk volume, low value eligible goods, and is unable to maintain the detailed records required of businesses who use the standard Margin Scheme

There two significant differences in respect of Global Accounting compared to the standard Margin Scheme. The first difference is that losses on an item are automatically offset against profits on items. Thus losses and profits are offset together in the period. In the standard Margin Scheme no VAT is due if a loss is made on an item, but that loss cannot be offset against any other profit. There is also a timing advantage with Global Accounting because all purchases made in the period are included, even if those goods are not actually sold in the same period.

Goods which may be included in Global Accounting

Global Accounting can be used for all items which are eligible under the standard Margin Scheme. However, the following goods cannot be included in Global Accounting:

individual items costing more than £500 (although these can be accounted for via the standard Margin Scheme)
aircraft, boats and outboard motors,
caravans and motor caravans,
horses and ponies, and
motor vehicles, including motorcycles; except those broken up for scrap.

Starting to use the scheme

When a business starts using Global Accounting, it may find that it already has eligible stock on hand. It may include the value of this stock when it calculates the total purchases at the end of the first period. If a business does not take its stock on hand into account, it will have to pay VAT on the full price, rather than on the margin achieved, when it is sold.

Valuation of stock

A business must be able to identify:

stock which is eligible for Global Accounting, and
its purchase value

It would normally be possible to establish the value from the original purchase documentation, ie; invoices.

But if a business is newly VAT registered, or it does not have original purchase records it may determine the purchase value using another method. There is no set way of doing this, but a business must be able to demonstrate that the method used has produced a fair and reasonable total.

Note: any goods bought on an invoice which shows a separate VAT figure are not eligible for resale under the scheme.

The calculation

VAT is calculated at the end of each tax period. Because you can take account of opening stock in your scheme calculations, you may find that you produce a negative margin at the end of several periods. In other words, your total purchases may exceed your total sales. In such cases, no VAT is due. But you must carry the negative margin forward to the next period as in the following example:

Period One

a) Total purchase value of stock on hand 10,000

b) Total purchases 2,000

c) Total sales 8,000

Margin = c – (a+b) = (4,000)

Because this is a negative margin there is no VAT to pay. However, negative margin must be carried forward into the next period as follows:

Period Two

a) Negative margin from previous period 4,000

b) Total purchases 1,000

c) Total sales 7,000

d) Margin = c – (a + b), sales minus (purchases plus negative margin), £7,000 – (£1,000 + £4,000) 2,000

e) VAT due = margin (£2,000) × VAT fraction (1/6) 333.33

There is no negative margin to carry forward this time. Therefore, in the third period, the margin is calculated solely by reference to sales less purchases.

The negative margin may only be offset against the next Global Accounting margin. It cannot be offset against any other figure or record.

Global Accounting Records and Accounts

A business does not need to keep all the detailed records which are required under the normal Margin Scheme – for instance, you do not have to maintain a detailed stock book.

Global Accounting records do not have to be kept in any set way but they must be complete, up to date and clearly distinguishable from any other records. A business must keep records of purchases and sales as set out below, together with the workings used to calculate the VAT due.

If we HMRC cannot check the margins declared from the records, VAT will be due on the full selling price of the goods sold, even if they were otherwise eligible for the scheme.

Buying goods under Global Accounting

When a business buys goods which it intends to sell under Global Accounting it must:

check that the goods are eligible for Global Accounting
obtain a purchase invoice. If a business buys from a private individual or an unregistered entity, the purchaser should make out the invoice at the time the goods are purchased. If purchased from another VAT-registered dealer, the dealer must make out the invoice at the time of sale, and
enter the purchase details of the goods in your Global Accounting purchase records. The purchase price must be the price on the invoice which has been agreed between you and the seller.

You cannot use the scheme if VAT is shown separately on the invoice.

Details to be included on purchase invoices

Purchase invoices must include:

your name and address

the seller’s name and address
invoice number
date of transaction
description of goods (this must be sufficient to enable HMRC to verify that the goods are eligible for Global Accounting)
total price, you must not show VAT separately, and
for goods purchased from another VAT-registered dealer: the statement “Global Accounting Invoice”

Remember: if you are buying from a private individual or an unregistered business, you must make out the purchase invoice yourself.

When selling goods under Global Accounting

If the purchase conditions above apply, Global Accounting may be used when the goods are sold by:

recording the sale in the usual way
issuing a sales invoice for sales to other VAT-registered dealers and keeping a copy of the invoice, and
transferring totals of copy invoices to the Global Accounting sales record or summary
you must be able to distinguish at the point of sale between sales made under Global Accounting and other types of transaction

Details to be included on sales invoices

A sales invoice must be issued to other VAT-registered customers. These invoices and any other Global Accounting sales invoice issued must show the following details:

your name, address and VAT registration number
the buyer’s name and address
invoice number
date of sale
description of goods (this must be sufficient to enable HMRC to verify that the goods are eligible for Global Accounting)
total price – you must not show VAT separately
the statement “Global Accounting Invoice”
you are selling an item for more than £500 and you don’t want the purchaser to know that you bought it under Global Accounting, you may use one of the Margin Scheme sales invoice statements.

Details to be included in purchase and sales summaries

Although a business does not have to keep purchase and sales records or summaries in any particular way, they must include the following details taken from the purchase invoices and any sales invoices you issue:

invoice number (where the purchase invoice shows one)
date of purchase/sale
description of goods, and total price

Cessation of using the scheme

If a business stops using Global Accounting for any reason, it must make a closing adjustment to take account of purchases for which it has taken credit, but which have not been sold (closing stock on hand). The adjustment required does not apply if the total VAT due on stock on hand is £1,000 or less. In the final period for which the business uses the scheme, it must add the purchase value of its closing stock to the sales figure for that period. In this way VAT will be paid (at cost price) on the stock for which the business previously had credit under the scheme.

Here is an example of a closing adjustment under Global Accounting: At the end of the period calculate:

(a) value of purchases during the period – £5,000

(b) value of sales during the period – £10,000

(d) add purchase value of closing stock to sales for period (c+b) – £18,000

(e) subtract purchases in this period from sale (d-a) – £13,000

(f) VAT due on margin (e x 1/6) – £2,166.66

You must make a similar adjustment if you transfer goods as part of a transfer of a going concern (TOGC). In that case, you should add the purchase value of goods included in the scheme to your sales figure for the period in which the TOGC takes place. This adjustment is separate from the TOGC itself, which is not subject to VAT.

Items sold outside the scheme

If goods are sold which had been included in a business’ Global Accounting purchase (for example, they are exported), a business must adjust its records accordingly. This is done by subtracting the purchase value of the goods sold outside the scheme from the total purchases at the end of the period.

Stolen or destroyed goods

If a business loses any goods through breakage, theft or destruction, it must subtract their purchase price from your Global Accounting purchase record.

Repairs and restoration costs?

A business may reclaim the VAT it is charged on any business overheads, repairs, restoration costs, etc. But it must not add any of these costs to the purchase price of the goods sold under the scheme.

EC Sales List, Intrastat and VAT returns

VAT registered businesses in the UK who make supplies of goods to VAT-registered businesses in other EC Member States are required to complete lists (form VAT 101) of their EC supplies.

But a business should not include any margin schemes transactions on an EC Sales list because they will be subject to VAT in the UK.

Intrastat is the system for collecting statistics on the trade in goods between EC Member States. But, because margin scheme goods are subject to VAT in the country of origin, there is no requirement either:

to include margin scheme purchases or sales in boxes 8 and 9 of your VAT return, or
to complete a supplementary declaration

For further advice on any global accounting, used goods schemes, or any other special VAT schemes please contact me.

VAT – Prompt Payment Discounts; new rules

By Marcus Ward 19 January 2015

The rules on how VAT is accounted for on prompt payment discounts (PPD) will change on 1 April 2015. Currently, suppliers offering a PPD are able to account for output tax on the discounted price, even if the PPD is not taken up by the customer.

From April, suppliers must account for output tax on the amount actually received.

This will entail changes to accounting processes for, and recovering VAT when a prompt payment discount is offered and taken up, and the new rules provide for an alternative to issuing credit notes.

HMRC Brief 49 is here; https://www.gov.uk/government/publications/revenue-and-customs-brief-49-2014-vat-prompt-payment-discounts/revenue-and-customs-brief-49-2014-vat-prompt-payment-discount

And I have reproduced it in full below:

HMRC Brief 49

1.Introduction

PPD VAT legislation was amended earlier this year. This brief provides guidance on what to do when you raise or receive a VAT invoice offering a PPD from the 1 April 2015 when the change takes effect.

2.Who needs to read this?

Suppliers who offer and customers who receive PPD where an invoice is issued.

3.Background

A PPD is an offer by a supplier to their customer of a reduction in the price of goods and/or services supplied if the customer pays promptly; that is, after an invoice has been issued and before full payment is due. For example a business may offer a discount of 5% of the full price if payment is made within 14 days of the date of the invoice.

at present, suppliers making PPD offers are permitted to put on their invoice, and account for, the VAT due on the discounted price, even if the full price (i.e. the undiscounted amount) is subsequently paid. Customers receiving PPD offers may only recover as input tax the VAT stated on the invoice.
after the change, suppliers must account for VAT on the amount they actually receive and customers may recover the amount of VAT that is actually paid to the supplier.

Changes were made to UK legislation in the Finance Act 2014 in order to protect the revenue, and put it beyond doubt that UK legislation is aligned with EU legislation. The new legislation is at paragraph 4 below.

The change took effect on 1 May 2014 for supplies of broadcasting and telecommunication services where there was no obligation to provide a VAT invoice. For all other supplies the change takes effect on 1 April 2015.

A consultation took place between 17 June and 9 September 2014 asking businesses for their views and suggestions on how the changes should be implemented. In particular whether issuing credit or debit notes to evidence a change in the consideration would cause them difficulties. The Summary of Consultation Responses was published shortly after Autumn Statement 2014. We accepted that an alternative to issuing credit or debit notes was needed (see guidance below).

4.The New Legislation

The revised paragraph 4, Schedule 6, VATA 1994 is set out below:

4 (1) Sub-paragraph (2) applies where. (a) goods or services are supplied for a consideration which is a price in money, (b) the terms on which those goods or services are so supplied allow a discount for prompt payment of that price, (c) payment of that price is not made by instalments, and (d) payment of that price is made in accordance with those terms so that the discount is realised in relation to that payment. (2) For the purposes of section 19 (value of supply of goods or services) the consideration is the discounted price paid.

5.Guidance

Suppliers:

a) on issuing a VAT invoice, suppliers will enter the invoice into their accounts, and record the VAT on the full price. If offering a PPD suppliers must show the rate of the discount offered on their invoice (Regulation 14 of the VAT Regulations 1995 (SI 1995/2518)).

b) the supplier will not know if the discount has been taken-up until they are paid in accordance with the terms of the PPD offer, or the time limit for the PPD expires.

c) the supplier will need to decide, before they issue an invoice, which of the processes below they will adopt to adjust their accounts in order to record a reduction in consideration if a discount is taken-up.

d) when adjustments take place in a VAT accounting period subsequent to the period in which the supply took place the method of adjustment needs to comply with Regulation 38 of the VAT Regulations 1995 (SI 1995/2518).

e) suppliers may issue a credit note to evidence the reduction in consideration. In which case, a copy of the credit note must be retained as proof of that reduction.

f) alternatively, if they do not wish to issue a credit note, the invoice must contain the following information (in addition to the normal invoicing requirements):

the terms of the PPD (PPD terms must include, but need not be limited to, the time by which the discounted price must be made).
a statement that the customer can only recover as input tax the VAT paid to the supplier.

Additionally, it might be helpful for invoices to show:

the discounted price
the VAT on the discounted price
the total amount due if the PPD is taken up.

g) if a business has adopted the option at (f), the VAT invoice, containing appropriate wording as described above, together with proof of receipt of the discounted price in accordance with the terms of the PPD offer (e.g. a bank statement) will be required to evidence the reduction in consideration, and the reduction to the supplier’s output tax (in accordance with Regulation 38 of the VAT Regulations 1995).

h) we recommend businesses use the following wording on the invoice:

“A discount of X% of the full price applies if payment is made within Y days of the invoice date. No credit note will be issued. Following payment you must ensure you have only recovered the VAT actually paid.”

i) if the discounted price is paid in accordance with the PPD terms, then the supplier must adjust their records to record the output tax on the amount actually received.

If the full amount is received no adjustment will be necessary.

Customers:

On receiving an invoice offering a PPD a VAT registered customer may recover the VAT charged, in accordance with VAT Regulation 29 of the VAT Regulations 1995.

As adjustments may take place in a VAT accounting period subsequent to the period in which the supply took place the method of adjustment needs to comply with Regulation 38 of the VAT Regulations 1995 (SI 1995/2518).

In practice this will mean:

a) if the customer pays the full price they record it in their records and no VAT adjustment is necessary.

b) if the customer pays the discounted price in accordance with the PPD terms on receipt of the invoice they may record the discounted price and VAT on this in their accounts and no subsequent VAT adjustment is necessary.

c) if the customer does not pay when the invoice is first issued, they must record the full price and VAT in their records as shown on the invoice. If they subsequently decide to take-up the PPD then:

if they have received an invoice setting out the PPD terms which states no credit note will be issued they must adjust the VAT in their records when payment is made. They should retain a document that shows the date and amount of payment (e.g. a bank statement) in addition to the invoice to evidence the reduction in consideration.
if the supplier’s invoice does not state that a credit note will not be issued, the customer must adjust the VAT they claim as input tax when the credit note is received. They must retain the credit note as proof of the reduction in consideration.
Imports

The legislation in relation to prompt payments on imports has not changed; section 21(3) of VATA 1994 still applies.

Payments outside PPD terms

Where a supplier receives a payment that falls short of the full price but which is not made in accordance with the PPD terms it cannot be treated as a PPD. The supplier must account for VAT on the full amount as stated on the invoice. If the amount not paid remains uncollected it will become a bad debt in the normal way. If a price adjustment is agreed later, then adjustment must be made in the normal way e.g. a credit note.

For more information please contact us.

Latest from the courts – Trinity Mirror plc

By Marcus Ward 1 May 2014

Good news for taxpayers who submit returns or payments slightly late.

There is an HMRC default surcharge regime whereby a taxpayer is penalised when he fails to lodge a VAT return or payment by the due date (usually one month and one week after the end of the VAT period). There was no dispute over the fact that the return and payment was indeed a day late.

Trinity Mirror plc appealed against a default surcharge of £70,909 at the 2% rate. Broadly, the company was late twice within the same 12 month period. However, the return was just one day late and the company contended that such a surcharge was disproportionate having regard to domestic and EC legislation. Applying the Upper Tribunal’s decision in the case of Total Technology (Engineering) Ltd, the Tribunal held that proportionality had to be assessed at the level of the default surcharge regime as a whole and at the individual level by asking whether the penalty imposed on a particular taxpayer based on the particular facts of its case was proportionate. The Tribunal held that the surcharge in Trinity Mirror plc’s case was unfair as the company had been previously compliant and the default was only one day. The chairman went on to comment that this penalty was harsh and excessive in light of the low gravity of the infringement.

Because there are no provisions for the Tribunal to mitigate such a surcharge, it had no option but to completely set aside the penalty.

This may well provide a taxpayer with an additional weapon in their armoury when dealing with HMRC’s surcharges and provides additional clarity on proportionality in relation to the levying of default surcharges. There already exists a concept of “reasonable excuse” which goes toward mitigation of surcharges and there is significant case law to illustrate what constitutes a reasonable excuse. If you have received what you consider to be an unfair or harsh penalty, please contact us as experience insists that in the majority of cases we have dealt with we have been able to either remove or reduce HMRC’s penalties.

Alternative Dispute Resolution (ADR) – What is it? How does it work?

By Marcus Ward 31 March 2014

ADR is the involvement of a third party (a facilitator) to help resolve disputes between HMRC and taxpayers. It is mainly used by SMEs and individuals for VAT purposes. Its aim is to reduce costs for both parties (the taxpayer and HMRC) when disputes occur and to reduce the number of cases that reach statutory review and/or Tribunal.

Practically, a typical process is; HMRC officials and the facilitator meet with the taxpayer and adviser in a room, and agree on what the disputes are. They then retire to two separate, private rooms, and the facilitator goes between the two parties and mediates on a resolution.

ADR is a free service from HMRC and the only costs the taxpayer will incur are fees from their advisers on preparation and any representation they require on the day.

Taking a case to Tribunal is often an expensive, complicated and time consuming option, but until recently, it has been the only option open to a taxpayer to challenge a decision made to HMRC. From personal experience, the number of cases from which HMRC withdraw “on the steps of the court” illustrate a weakness in their legal procedures and possibly a lack of confidence in presenting their cases. This is very frustrating for our clients as they have already incurred costs and invested time when HMRC could have pulled out a lot earlier. Of course, our clients cannot apply for costs. The sheer number of cases going through the Tribunal process means that there are often very long and frustrating delays getting an appeal heard.

Therefore, should we welcome ADR as a watered down version of a Tribunal hearing? Or is it actually something else entirely?

HMRC say that “ADR provides an excellent opportunity for Local Compliance to handle disputes in a modern and collaborative way. It is not intended to replace statutory internal review which is an already established process aimed at resolving disputes without a tribunal hearing. Review looks at legal challenges to decisions whereas ADR is more suitable for disputes where there might be more than one tenable legal outcome”.

After a two-year pilot which shaped the final programme, and was guided by a Working Together group that included CIOT, AAT, ICAEW and legal representatives HMRC concluded that “ADR has shown that many disputes, where an impasse has been reached, can be resolved quickly without having to go to tribunal.” And “ADR is a fair and even-handed way of resolving tax disputes between HMRC and its customers and helps save time and costs for everyone.” Ignoring the dreadful use of the word “customers”… what has the profession made of the scheme?

Hui Ling McCarthy – Barrister has reported “HMRC’s ADR pilot studies have produced extremely encouraging and positive results – owing in large part to HMRC’s willingness to engage with taxpayers, advisers and the professional bodies and vice versa. Taxpayers involved in a dispute with HMRC would be well-advised to take advantage of ADR wherever appropriate”.

So what was the outcome of the two year scheme? The headline is that 58% of cases were successfully resolved, 8% were partially resolved and 34% were unresolved.

Of the fully resolved facilitations –

33% were resolved by educating the taxpayer/agent about the correct tax position.
24% were resolved due to the facilitator obtaining further evidence.
23% were resolved by educating the HMRC decision maker about the correct tax position.
20% were resolved through facilitators restoring communication between both parties.

These figures are encouraging and the conclusion that; well planned, constructive meetings, with the intervention of an HMRC facilitator, do increase the chances of dispute resolution – appear to be well founded.

Further, the fact that the project team saw no evidence of any demand from HMRC, taxpayers or their agents for access to external mediators and that there is also conclusive evidence from taxpayers that HMRC facilitators have acted in a fair and even-handed manner add to the feeling that ADR is a useful new tool.

Features of ADR:

Without prejudice discussions – “anything said or documents produced during the ADR process cannot be used in future proceedings without the express consent of both parties subject to the obligations placed on the parties by the operation of English law”
Appropriate place for ADR in the lifecycle of a compliance check – Evidence is that ADR can work for both VAT and Direct Taxes disputes both before and after an appealable decision or assessment has been made. However, ADR for VAT disputes is more suited to post appealable decision and assessments.
Memorandum of Understanding (MOU) and a Code of Conduct – a MOU is created to commit customers/agents to the requirements of the ADR process. The project team are exploring the introduction of a Code of Conduct for HMRC staff.
Elapsed time – The average elapsed time for all closed ADR cases is 61 days. This figure is from application to resolution or the papers being returned to either the caseworker or the review team. The average elapsed time for VAT it is 53 days.
The average age of VAT disputes entering the project was 8 months.
At the time of writing there have been 334 applications in both stages. Excluding applications currently in process, the ADR Panel has rejected fewer than 30% of applications.
ADR Panel – An ADR Panel has been created to accept or reject applications for ADR. This is in order to strengthen procedures and reduce dependency on the project manager. It screens all applications and not just those where ADR was thought to be inappropriate.
Customer / Agent Questionnaire Summary – Findings from customers and agents included:
- An appreciation of the personal interaction that the ADR process allowed.
- Facilitators were even handed and impartial in all cases and kept the taxpayer well informed
- ADR was particularly well suited to resolution of long standing disputes.

Conclusion of the HMRC pilot scheme:

Project objectives have been met.
HMRC facilitators have proven to be objective and even-handed for all types of taxpayers.
External stakeholders strongly support the project and its roll-out to business as usual.
Successful facilitations have ensured that the right amount of tax has been identified and secured with less delay for both parties.
A better understanding of disputes has been gained.
Resource savings have been identified.

The commentary from HMRC on ADR is (probably understandable) positive. However, reactions from the profession and taxpayers who have gone through the process are equally generous on ADR as a mechanism for settling disputes.

My view is that any alternative to a Tribunal hearing is welcome and even if ADR works half as well as reports conclude then it should certainly be explored. It should definitely be considered as an alternative to simply accepting a decision from HMRC with which a taxpayer disagrees.

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