Tag Archives: HMRC

VAT: How to avoid MTD penalties

By Marcus Ward 15 June 2022

HMRC has published a new Factsheet CC/FS69 which sets out compliance checks to be made to avoid penalties for Making Tax Digital (MTD).

Under MTD, VAT-registered businesses must keep certain records digitally and file their VAT returns using compatible software.

The Factsheet covers:

signing up to MTD – go to www.gov.uk and search for ‘VAT record keeping’. A business must have functional compatible software in place before you signing up

filing VAT return using functional compatible software. This needs to be able to record and store digital records, provide HMRC with information and VAT returns from the data held in those digital records, and receive information from HMRC

keep records digitally in an “electronic account” (all transactions must be contained in an electronic account but there is no need to scan paper records like invoices and receipts)

use digital links to transfer or exchange data

use the checking functions within the software (to ensure returns are correct before being filed)

Penalties

HMRC levy penalties for MTD for the following actions:

filing returns not using use functional compatible software. A penalty applies for every return filed in error

not keeping records digitally, a penalty applies for every day on which a business does not meet this requirement

not using digital links to transfer data between pieces of software, a penalty applies for every day on which a business does not meet this requirement

not signing up to MTD

These penalties apply in addition to existing penalties and interest charged for a range of misdemeanours from late returns to deliberate underdeclarations.

VAT: Electronic invoicing update

By Marcus Ward 8 June 2022

HMRC has updated VAT Notice 700/63 – Electronic Invoicing in respect of “information required on a tax invoice” (para 3.2).

The Notice sets out what a business needs to do if it is sending, receiving and storing VAT invoices in an electronic format.

Electronic invoicing offers many advantages over traditional paper invoices. The rapid electronic transmission of documents in a secure environment may provide for:

structured data for auditing
improved traceability of orders
decreased reliance on paper reducing storage and handling costs
rapid access and retrieval
improved cash flow
security and easier dispute handling

A business does not need to inform, nor seek permission from, HMRC to use electronic invoicing.

We advise that any business periodically reviews its use of any invoicing system to ensure that:

invoices contain all of the required information
credit notes are properly issued and accounted for
the authenticity of the origin, integrity of invoice data, and legibility are all appropriate
its customers agree to receive invoices electronically
there is an interchange agreement between EDI (electronic data interchange) trading partners which makes provision for the use of procedures which guarantee the authenticity of the origin and integrity of the data
appropriate internal controls are in place
- system controls, eg; a control which prevents a sales order being changed after the invoice has been issued
- procedural controls, eg; a purchase order must be issued before an invoice is received
- authorisation controls, eg; a user who has access to maintain supplier master data can not enter invoices from that supplier
the electronic invoice message format is acceptable. Examples include:
- traditional EDI standards such as UN/EDIFACT, EANCOM and ODETTE
- XML-based standards
- comma-delimited ASCII, PDF (this list is not exhaustive)
the cross-border invoicing rules are adhered to
the conditions for electronic storage are met
HMRC can access required information
invoices meet all the other conditions in the above Notice

If a business cannot meet HMRC’s conditions for transmission and storage of electronic invoicing, it must issue paper invoices.

There are penalties for incorrect invoices or systems.

A VAT Did you know?

By Marcus Ward 30 March 2022

So that’s what it’s called….. From HMRC guidance – “For the purposes of establishing the place of supply of services, stallion nominations (The right to nominate a mare to be covered by a stallion in one breeding season) and the covering of mares is treated as ‘work carried out on goods’.”

New Form 64-8 agent authorisation

By Marcus Ward 29 March 2022

New 64-8 agent authorisation form

HMRC has issued a notice which states that, from 31 March 2022, businesses taking on new clients will need them to complete a new form 64-8 to give authorisation for them to deal with HMRC on their client’s behalf.

Existing clients do not need to re-authorise their current relationship.

Access

The new form will be available from 31 March 2022 and may be downloaded by searching for “Tax agents and advisers; authorising your agent” on GOV.UK. There is no direct link yet.

The new form is said to improve data protection and allows taxpayers to state which tax regime they want you to access. The form also includes new guidance for taxpayers and what data they are agreeing to share with their agent.

Making Tax Digital for VAT – extra revenue calculated

By Marcus Ward 21 March 2022

HMRC has published research which evaluates the impact of the introduction of Making Tax Digital (MTD) for VAT.

The report sets out that an additional circa £185 million of tax has been collected, according to its data. This is compared to the original estimate which was that an additional amount of £115 million of VAT would be received by the department.

For businesses above the registration threshold, the estimated additional tax revenue due to MTD is an average of £57 per business. This represents a 0.9% increase from the average amount estimated had the businesses not used MTD. HMRC says that this research provides “strong evidence that Making Tax Digital is achieving its objective of reducing the tax gap by reducing the amount of errors made when filing tax returns”.

MTD background

MTD aims to reduce the tax gap by helping businesses pay the right amount of tax. The tax gap is the difference between the theoretical amount of tax that should be paid and the actual tax receipts. The difference is caused by several reasons including avoidance, evasion, and calculation errors or failure to take reasonable care when filing returns.

MTD is intended to tackle the part of the tax gap which is caused by error and failure to take reasonable care. Businesses are required to keep records in digital form and file their VAT returns using software that directly extracts information from these digital records. This should improve accuracy and remove opportunities to make certain types of mistakes in preparing and submitting tax returns, particularly arithmetical and transposition errors.

Downside

All is not sweetness and light though. HMRC has been slammed by The House of Lords Economic Affairs Committee which published a report that said that MTD for VAT cost far more than was predicted in HMRC’s impact assessments. The Committee also criticised HMRC, saying it “inadequately considered the needs and concerns of smaller businesses” and that HMRC has neglected its duty to support small businesses through the implementation of the controversial measures, suggesting it “will make life even more difficult” for them. In addition, the Committee said it “remained unconvinced” of the government’s logic used to justify the speed and rigidity with which the programme was being introduced.

VAT: Avoiding a Default Surcharge. Reasonable Excuse – Update

By Marcus Ward 14 March 2022

I have looked at the Default Surcharge regime in detail here but as statistics show more business to be in default (which is probably accurately attributable, inter alia, to the pandemic) I consider how a penalty may be mitigated, by the provision of a “Reasonable Excuse”. HMRC has updated its internal guidance on Reasonable Excuse this month.

Specifically: HMRC state that “…where a person has not been able to meet an obligation on time due to the impact of COVID-19, HMRC will usually accept that they will have a reasonable excuse.”

What is a Default Surcharge?

The Default Surcharge is a civil penalty issued by HMRC to encourage businesses to submit their VAT returns and pay the tax due on time.

A default occurs if HMRC has not received your return and all the VAT due by the due date. The relevant date is the date that cleared funds reach HMRC’s bank account. If the due date is not a working day, payment must be received on the last preceding working day.

More on late returns here and on late payments here.

New rules forthcoming

It is noted that there is a new regime for penalties, details here although these changes have been delayed until 1 January 2023

Reasonable Excuse

If a business has a reasonable excuse for failing to pay on time, and it remedies this failure without unreasonable delay after the excuse ends, it will not be liable to a surcharge. The onus is on a business to satisfy HMRC that it has a Reasonable Excuse.

Definition

There’s no statutory definition of Reasonable Excuse and it will depend on the particular circumstances of a case. A Reasonable Excuse is something that prevented the business meeting a tax obligation on time which it took reasonable care to meet. There is a great deal of case law on this particular issue. Please contact us should there be doubt about a Reasonable Excuse.

What may count as a Reasonable Excuse?

HMRC give the following examples:

“your partner or another close relative died shortly before the tax return or payment deadline
you had an unexpected stay in hospital that prevented you from dealing with your tax affairs
you had a serious or life-threatening illness
your computer or software failed just before or while you were preparing your online return
service issues with HMRC online services
a fire, flood or theft prevented you from completing your tax return
postal delays that you could not have predicted
delays related to a disability (including mental health) you have”

This list is not exhaustive.

What is NOT a reasonable excuse

Statute identifies two specific situations that are not a reasonable excuse:

lack of funds to pay any VAT due, or
reliance on any other person to perform a task, where there has been a delay or inaccuracy on that person’s part.

There can be exceptions to these two exclusions. For example, an insufficiency of funds may be a reasonable excuse where the insufficiency is a result of events outside the person’s control.

HMRC also states that these situations would not normally be accepted, on their own, as a reasonable excuse:

pressure of work
lack of information
lack of a reminder from HMRC

Facts

HMRC will establish what facts the business believes gave rise to a Reasonable Excuse. The facts may include:

the taxpayer’s beliefs
the taxpayer’s own experiences and relevant attributes
the situation of the taxpayer at any relevant time
acts carried out by the taxpayer or someone else
acts that the taxpayer or someone else should have carried out but did not.

Case Law

Although not a VAT issue, in the Upper Tribunal (UT) case of Christine Perrin [2018] UKUT 156 [TC], the judge provided guidance on how the Tribunal should approach a Reasonable Excuse defence. There are four steps:

establish what facts the taxpayer asserts give rise to a reasonable excuse
decide which of those facts are proven
if those proven facts amount to an objectively reasonable excuse for the default
having decided when any reasonable excuse ceased, decide whether the taxpayer remedied the failure without unreasonable delay after that time

Appeal

If HMRC refuse to accept an advance of a Reasonable Excuse and the Default Surcharge is maintained, there are two potential remedies:

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

ask HMRC to review your case (A Statutory Review)
have your case heard by the Tax Tribunal

If you ask for a review of a case, a business will be required to write to HMRC within 30 days of the date the Surcharge Liability Notice Extension (SLNE) was sent. The letter should give the reasons why a business disagrees with the decision.

We are able to assist with all disputes with HMRC and have an enviable record of succeeding in having Default Surcharges removed.

VAT: Latest on early termination and compensation payments

By Marcus Ward 8 February 2022

HMRC has published a new Revenue and Customs Brief 2(2022) which replaces Revenue and Customs Brief 12 (2020): VAT early termination fees and compensation payments.

It introduces a revised policy on early termination payments and compensation fees. Following representations from industry the Brief issued in September 2020 was suspended in January 2021. HMRC has reviewed the policy in the light of those representations and is adopting a revised policy which will take effect from 1 April 2022. The new policy will result in fewer early termination payments being subject to VAT than in the 2020 guidance.

The new Brief also advises businesses that adopted the treatment outlined in Brief 12 (2020) on what action they should now take.

Background

Whether a payment is for a VAT supply depends on whether anything is being done in return for a consideration. Where a party agrees to do something in return for a fee there is a supply. How that fee is described does not affect whether there is a supply for VAT. What matters is whether something is done and if there is a direct link between what is done and the payment received, and reciprocity between the supplier and the customer (see VATSC05100).

Previous HMRC guidance stated that when customers are charged to withdraw from agreements to receive goods or services, these charges were not generally for a supply and were outside the scope of VAT.

Following the Court of Justice of the European Union (CJEU) judgments in Meo (C-295/17) and most recently in Vodafone Portugal (C-43/19), it is evident that some of these charges are additional consideration for the supply of goods or services. Most early termination fees and some cancellation fees are therefore liable for VAT if the goods or services for which the fees have been paid are liable for VAT, even if they are described as compensation or damages.

The main impact of the revised policy is that fees charged when customers terminate a contract early will be regarded as further consideration for the contracted supply. For example, if a customer is charged a fee for exiting a mobile phone contract early, or if they terminate a car hire contract early, it will be liable for VAT.

The new guidance can be found at VATSC05910, VATSC05920 and VATSC05930.

VAT: Bad Debt Relief. The Regency Factors case

By Marcus Ward 7 February 2022

Latest from the courts

In the Regency Factors plc Court Of Appeal (CoA) case the issue was the validity of the appellant’s claim for Bad Debt Relief (BDR) on amounts it had not received after the issue of an invoice.

Technical

BDR is a mechanism which goes some way to protect a business from payment defaulters. Under the normal rules of VAT, a supplier is required to account for output tax, even if the supply has not been paid for (however, the use of cash accounting or certain retail schemes removes the problem of VAT on bad debts from the supplier). The specific relief for unpaid VAT is via the BDR scheme.

A guide to BDR here.

Commentary on the Upper Tribunal (UT) hearing in this case here.

Background

In the CoA case the issue was whether the appellant met the conditions in The VAT General Regulations 1995, Reg 168 for claiming BDR via The VAT Act 1994, section 36.

Regency provided a factoring service to its clients for which it is paid a fee. VAT invoices for those fees were issued to clients when the invoices which are being factored are assigned to Regency for collection.

Regency appealed against a decision of the Upper Tribunal (UT) which dismissed Regency’s appeal against VAT assessments made by HMRC to withdraw BDR which Regency had claimed in its VAT returns.

The UT held that the BDR claim was not valid because

there was no bad debt; and
Regency had failed to comply with the procedural requirements for the making of a claim.

Regency appealed against the decision of the UT on the second point.

Decision

The CoA decided that as Regency’s record keeping was insufficient to support a BDR claim. Specifically, although it did keep the records required by Regulation 168 (2), it did not keep a single VAT BDR account which is required by Regulation 168 (3). The ruling commented that this requirement was a legitimate feature of the scheme as it enables an inspector to check the claim easily. It is not acceptable for a claimant to simply have a pile of unsorted documents which may, or may not, evidence a valid claim.

The court also said that it was possible for HMRC to allow a discretionary claim (clearly, they did not use that discretion in this case) and that the legal requirement was not a barrier to Regency making a proper BDR claim. The appeal was dismissed.

“In short, Regency had the opportunity to prove its claim for bad debt relief in the FTT… but it failed to do so. It is not entitled to a second opportunity”.

Commentary

As always with VAT, accurate record-keeping is essential. As the tax is transaction based, it is vital to keep comprehensive evidence of those transactions and associated payments. Failure to do so may result in:

assessments and penalties
give HMRC the opportunity to refuse otherwise legitimate input tax recovery
refuse other VAT claims (in this case BDR).
confusion and uncertainty which often creates costs in time and other resources, and extended relations with HMRC, which is in no business’ interest.

If Regency had taken “one step further” with its record keeping, BDR would have been paid by HMRC.

VAT: Trading with the EU from 1 January 2022

By Marcus Ward 14 December 2021

Further to my article on the new changes from next year, HMRC has published information on the rules of origin for trade between the UK and EU.

The Bulletin covers the rules of origin and the forthcoming changes to the requirement for supplier declarations to support proof of origin.

VAT: Trading with the EU. Changes from 1 January 2022

By Marcus Ward 23 November 2021

From 1 January 2022 the rules for selling to, and buying from, the EU will change.

HMRC have issued information about these changes.

Broadly, from 1‌‌ ‌January‌‌ ‌2022, businesses will no longer be able to delay making import customs declarations under the Staged Customs Controls rules that have applied during 2021. Most businesses will have to make declarations and pay relevant tariffs at the point of import. However, see details of Postponed Accounting.

Please also see a publication issued by the Cabinet Office which includes a Policy Paper on The Border Operating Model.