HMRC has updated its VAT Notice 701/19 from 5 January 2024.
Sections 2, 3 and 5 have been amended to include information about the VAT treatment of charging of electric vehicles (EVs) when using charging points.
Tag Archives: business
VAT: Payments on account – update
HMRC have updated its payments on account (POA) guidance.
What are POA?
These are advance payments towards a business’s VAT bill. They are mandatory.
HMRC will notify a taxpayer to make POA if a business renders VAT returns quarterly, and it owes more than £2.3 million in any period of 12 months or less.
Under the POA arrangement, businesses make interim payments at the end of months two and three for each return quarter. The interim payment is intended to cover part of the overall VAT liability for the that quarter. The balancing payment for the return’s VAT liability will be settled when the business submits its VAT return payment. Quarterly VAT returns are filed online as normal.
POA calculation
HMRC will calculate POA based on a business’s annual VAT liability in the period that it goes over the threshold. The annual VAT liability in that period will be divided by 24 to arrive at an instalment amount.
A taxable person who has been in business for less than 12 months will have POA calculated by HMRC on a pro rata basis.
POA start date and annual cycle
The payments on account cycle starts in the first quarter after a business exceeds the £2.3 million threshold.
The payments will remain the same until the start of the next annual cycle.
The annual cycle begins in April, May or June depending on which VAT return ‘stagger’ a business is on. HMRC bases the amount of payments during the annual cycle on the liability in the period known as the ‘reference year’.
POA due dates
The due dates for POA are the last working day of the second and third months of every VAT quarter no matter what the period end date is. The seven-day extension for paying electronically does not apply to POA.
POA that are not paid on time will be subject to late payment interest.
Due dates for quarterly balancing payments
Balancing payments are due with the VAT return and must clear HMRC’s bank account by the last working day of the month if standard period end dates are used.
Late payments
If a business does not make POA or the balancing payment in full and on time HMRC will:
- take immediate action to recover the debt
- charge late payment interest
- consider charging late payment penalties on amounts unpaid after the balancing payment due date
- consider transferring a business from quarterly to monthly returns
Removal from a POA arrangement
If a business’s VAT liability falls below £2.3 million in the reference year HMRC will remove it from the arrangement six months later.
Alternative to payments on account
If making POA and submitting quarterly VAT returns does not suit a business, it can choose to make VAT returns and payments monthly.
Commentary
As may be seen, it is important to recognise the POA limit and to make payments on time. There is an obvious cash flow impact and plans should be put in place if the VAT turnover is nearing the threshold.
VAT: Best judgement; what is it, and why is it important?
If HMRC carry out an inspection and decide that VAT has been underdeclared (eg: either by understating sales, applying the incorrect VAT rate, or overclaiming input tax) an inspector has the power to issue an assessment to recover VAT that it is considered underdeclared. This is set out in The VAT Act 73(1)
“Where a person has failed to make any returns … or where it appears to the Commissioners that such returns are incomplete or incorrect, they may assess the amount of VAT from him to the best of their judgment and notify it to him”.
So, the law requires that when an inspector makes an assessment (s)he must ensure that the assessment is made to the best of their judgement, otherwise it is invalid and will not stand.
Guidance to surviving a VAT inspection here.
HMRC’s methods of assessing cash businesses here.
Definition of best judgment
Per Van Boeckel vs HMCE (1981) the judge set out three tests:
- HMRC must make a value judgment on the material set before it honestly and bona fide and not knowingly set an inflated figure and then expect the taxpayer to disprove it on appeal
- there must be material available
- HMRC is not expected to do the work of the taxpayer but instead fairly interpret the material before it and come to a reasonable conclusion rather than an arbitrary one
If any of these three tests are failed, then best judgement has not been employed. However, the onus is on the appellant to disprove the assessment.
There were further comments on the matter:
“There are…obligations placed on the Commissioners to properly come to a view on the amount of tax that was due to the best of their judgement. In particular:
- a value judgement must be made on the material put before them
- they must perform their function honestly
- there must be material on which to base their judgement
- but they should not be required to do the job of the taxpayer, or carry out extensive investigations
This means that the assessing inspector must fairly consider all material placed before them and, on that material, come to a decision that is reasonable and not arbitrary, taking into account the circumstances of the business. In some cases, some “guesswork” may be required, but it should be honestly made based on the information available and should not be spurious, but HMRC must be permitted a margin of discretion.
Experience insists that it is usually more successful if the quantum of a best judgement assessment is challenged.
Where a business successfully disputes the amount of an assessment and the assessment is reduced, it will rarely fail the best judgement test.
In the case of MH Rahman (Khayam Restaurant) CO 2329/97 the High Court recognised the practice whereby the tribunal adopts a two-step approach, looking initially at the question of best judgement and then at the amount of the assessment. The message of the High Court appeared to be that the Tribunal should concern itself more with the amount of an assessment rather than best judgement.
Arguments which may be employed to reduce a best judgement assessment are, inter alia:
- period of calculation is unrepresentative
- wastage
- discounts
- staff use
- theft
- seasonal trends
- competition
- sales
- opening hours
- client base, etc
HMRC’s guidance to its own officers states that: Any assessments made must satisfy the best judgement criteria. This means that given a set of conditions or circumstances, “you must take any necessary action and produce a result that is deemed to be reasonable and not arbitrary”.
In other words, best judgement is not the equivalent of the best result or the most favourable conclusion. It is a reasonable process by which an assessment is successfully reached.
In the case of CA McCourtie LON/92/191 the Tribunal considered the principles set out in Van Boeckel and put forward three further propositions:
- the facts should be objectively gathered and intelligently interpreted
- the calculations should be arithmetically sound, and
- any sampling technique should be representative
Tribunals will not treat an assessment as invalid merely because they disagree as to how the judgement should have been exercised. It is possible that a Tribunal may substitute its own judgement for HMRC’s in respect of the amount of the assessment. However, this does not necessarily mean that because a different quantum for the assessment was arrived at that the assessment failed the best judgement test.
Further, it is not the function of the Tribunal to engage in a process that looks afresh at the totality of the evidential material before it (M & A Georgiou t/a Mario’s Chippery, QB October 1995 [1995] STC 1101).
It should be also noted that even if one aspect of an assessment is found not to be made to best judgement this should not automatically invalidate the whole assessment – Pegasus Birds [2004] EWCA Civ1015.
Summary
There are significant difficulties in arguing that an inspector did not use best judgement and it is a high bar to get over.
In order to succeed on appeal, it would be required to be demonstrated, to the judge’s satisfaction, that the assessment was raised:
- dishonestly
- vindictively
- capriciously
- arbitrarily
- spuriously
- via an estimate or a guess in which all elements or best judgement are absent
- wholly unreasonably
and that this action applies to the assessment in its entirety.
VAT: Revoke an option to tax after 20 years have passed – update
HMRC’s Form VAT1614J has been updated. This form is used to revoke an option to tax (OTT) land or buildings for VAT purposes after 20 years have passed. There is a new address to which the form and supporting documents are sent:
BT VAT
HM Revenue and Customs
BX9 1WR
Scanned copies of the form can be emailed to: optiontotaxnationalunit@hmrc.gov.uk
Background: Revoking an option where more than 20 years have elapsed since it first had effect.
A business may revoke an OTT without prior permission from HMRC where more than 20 years have elapsed since the option first had effect. This is done by submitting the Form VAT1614J.
When the OTT first has effect: An OTT first had effect on the day it was exercised, or any later day that was specified when opting to tax.
Who can revoke: The relevant guidance VAT Notice 742A – which has the force of law here states that the ‘Taxpayer’ can revoke the OTT. The taxpayer is defined as the person who exercised the option to tax or is treated as making that option by virtue of a real estate election.
When the revocation will take effect: The revocation will take effect from the day that the taxpayer specifies when HMRC is notified, but this cannot be any earlier than the day on which the taxpayer notifies HMRC.
Outcomes of revoking an Option To Tax
- any income (rent or sale) relating to the property becomes exempt
- any input tax relating to the property is not recoverable (subject to the de minimis rules)
- if no other taxable supplies are made a business must deregister
Revocation of option: The VAT Act 1994, Schedule 10, 25(1)(a).
VAT reliefs for charities – A brief guide
Unfortunately, there is no “general” rule that charities are relieved of the burden of VAT.
In fact, 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 often 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 zero rated 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
* HMRC have set out its views on digital/online advertising in Revenue and Customs Brief 13 (2020): VAT charity digital advertising relief.
There are also special exemptions applicable to supplies made by 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
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.
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
Additionally, there are certain Extra Statutory Concessions (*ESCs) which benefit charities. These zero rate supplies made to charities, these are:
- certain printed stationery used for appeals
- collection boxes and receptacles
- lapel stickers and similar tokens, eg; remembrance day poppies
* ESCs are formal, published concessions but have no legal force.
We strongly advise that any charity seeks assistance on dealing with VAT to ensure that no more tax than necessary is paid and that penalties are avoided. Charities have an important role in the world, and it is unfair that VAT should represent such a burden and cost to them.
Huge fall in number of VAT registrations
Information provided by the Office for National Statistics has revealed that the number of UK businesses registering for VAT and PAYE dropped by over 40,000. This is probably a result of a number of issues (I presume):
- covid fall out
- cost of living crises
- Brexit
- possibly HMRC slow processing and fraudulent registrations crackdown
This is the first drop in registrations since 2011 with the current number being 2.7 million. The most likely business to deregister are sole proprietors and other small businesses. The most negatively affected trade sectors were transport and storage, IT and the sciences.
Goodbye paper VAT registration applications
From November 2023 HMRC is removing the paper version of the VAT 1 Form – applying for VAT registration.
Around 95% of applicants (or their agents) currently use the online registration service: How to register for VAT and in order to improve processing time HMRC is removing the paper VAT 1 Form.
From November only a very limited number of businesses will be able to use the Form VAT 1 and these will only be available by specific request from the VAT Helpline. Those businesses are:
- those exempt from Making Tax Digital
- businesses applying for a registration exception
- businesses joining the agricultural flat rate scheme
- overseas partnerships
- certain entities without a Unique Taxpayer Reference
VAT: Updated guidance for medical professionals
HMRC has updated VAT Notice 701/57 – Health professionals and pharmaceutical products.
The changes, in summary, are:
Para 2.1 – Pharmacy technicians (only in England, Scotland and Wales) has been added to the meaning of a health professional list.
Para 2.5 – Services directly supervised by a pharmacist has been removed: Services that are not exempt from VAT.
Para 4.7 has been updated to make it clear when forensic physicians services are exempt healthcare.
Para 5.2 – Services supervised by pharmacists are now included when referring to a health professional: Exemption of care services performed by a person not enrolled on a statutory medical register.
The exemptions covered in the health and welfare area are complex and even slight differences in circumstances can change the VAT liability of a supply. Additionally, there are further exemptions for charities and NFP bodies and the age-old issue of business/non-business.
We advise that specialist advice is sought when considering the VAT position of supplies in this area.
Evidence of UK establishment required for certain VAT registered businesses
Businesses registered for VAT at a high-volume address will be asked by HMRC to prove they are established in the UK.
High-Volume Addresses
A high-volume address is where a single UK address is listed as the principal place of business (PPOB) for many VAT-registered businesses. We understand that many thousands of businesses are registered at single addresses in the UK.
HMRC will require proof of a place of belonging in the UK to avoid online marketplaces failing to account for output tax.
Online marketplaces
Online marketplaces are liable for the output VAT from sales on their platforms by overseas traders. HMRC understand that Non Established Taxable Persons (NETPs) have incorporated in the UK and provided UK address details to marketplaces. Since they are then no longer “overseas traders” these rules do not apply. In these situations, the NETP does not declare VAT and the marketplace does not become liable for it.
HMRC is writing to all VAT registered businesses with a PPOB at a high-volume address to ask for evidence to demonstrate that the business is actually established in the UK. If the business does not respond, by default, HMRC will consider the business to be a NETP and seek to recover VAT from the online marketplace business.
Evidence of UK establishment
HMRC will outline what specific evidence it will accept in their letter.
VAT: Difficulties with DIY Housebuilders’ claim – The Spani case
Latest from the courts
In the First Tier Tribunal (FTT) case of Spani v HMRC [2023] UKFTT 00727 (TC) the issue was whether a claim under the DIY Housebuilders’ Scheme (the scheme) was valid.
Mr Spani appealed against HMRC’s decision to refuse a claim. It was rejected as the respondents concluded that the property was to be used for business purposes because Planning Permission was for a holiday let rather than residential own use. To claim under the scheme, the relevant the property must be used “otherwise than in the course of furtherance of business” – VAT Act 1994, section 35)
Background
The cottage was constructed in Seaford – within the Souths Down National Park and, in order to obtain planning consent, it was required to be made available for letting on a commercial basis for 140 days a year. The appellant contended that it was his primary residence in the UK and any letting (which was interrupted by covid in any case) was/would be incidental to this primary purpose.
The property was listed on Air BnB in order to satisfy the requirements of the planning consent, but the property had not been actively marketed and no lettings had taken place.
Mr Spani contended that the use of the cottage “falls far short of the HMRC’s position that it was the appellant’s intention to use the property for a wholly commercial purpose”. It was simply the appellant’s home in the UK and that an identical property built outside the National Park would not have the Planning Permission holiday let requirement.
Further, if it was a commercial enterprise, Mr Spani could have could have used another reclaim route, viz: registering for VAT and recovering an element of the input tax incurred.
Decision
The appeal was dismissed – The judge opined that “none of these events subsequent to the grant of the Planning Permission and completion certificate detract from the fact that the property was built to be a holiday let (as stipulated by the planning consent) and was therefore constructed in furtherance of a FHL* business”.
Additionally, the FTT stated that: it is plain that the appellant’s plan to live in the property within the FHL regulations does not (and cannot) alter the property into a dwelling… when there is the express prohibition placed on the property to be a dwelling.
The conclusion was that the property was built in furtherance of a business which prohibited a claim.
Commentary
Yet another case highlighting precise requirements of a claim under the scheme and HMRC’s strict application of the rules. Care must always be taken in such cases and we advise professional advice is sought prior to a submission of a claim.
More on similar cases here and here and Top Ten Tips for the scheme.