HMRC has issued two new documents which provide practical guidance for users of the One Stop Shop (OSS).
They cover how to pay the VAT due on an OSS return and how to use the service to submit an OSS VAT return if a business is registered for the OSS Union Scheme. A link has been added to allow a business to submit a OSS return directly.
HM Treasury has announced that government spending plans will be set out at the Spending Review on 27 October 2021 alongside an Autumn Budget.
The Spending Review will set out the plan for how public spending will be carried out over the next three years.
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:
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:
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:
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.
Latest from the courts
A high level fraudster who skipped his trial and fled to Dubai has been ordered to pay more than £37 million. Failure to do so will result in ten years in prison. He played a major role in this missing trader fraud (MTIC) which involves the theft of Value Added Tax from HMRC. He was part of a conspiracy to use a network of companies and a huge number of transactions to cover up the theft of VAT.
Adam Umerji, 43, was convicted in his absence of offences of conspiracy to cheat the government’s revenue and conspiracy to transfer criminal property, in a prosecution conducted by the CPS Specialist Fraud Division after a complex criminal investigation by HMRC.
Background
Missing trader fraud (also called missing trader intra-community fraud or MTIC fraud) involves the theft of VAT from a government by fraudsters who exploit VAT rules, most commonly the EU rules which provide that the movement of goods between Member States is VAT free. There are different variations of the fraud but they generally involve a trader charging VAT on the sale of goods and absconding with the VAT (instead of paying the VAT to the government’s taxation authority). The term “missing trader” is used because the fraudster has gone missing with the VAT.
A common form of missing trader fraud is carousel fraud. In carousel fraud, VAT and goods are passed around between companies and jurisdictions.
Further to my article on VAT: Land and property simplification and HMRC’s call for evidence the ICAEW has reiterated its call for all VAT land and property exemptions to be abolished and recommends the removal of all VAT options.
ICAEW also concludes that following the UK’s departure from the EU the government is in the best position since the introduction of VAT to thoroughly review the structure of the tax.
ICAEW also suggests that all land and property transactions should subject to VAT at either the standard rate or reduced rate, other than those relating to domestic property which should remain zero rated. This approach would remove many of the complexities of the current regime, it concludes.
Commentary
This is one area of the tax that is crying out for simplification and the case put forward by ICAEW has its merits. In my view, the Government should go further and review many complexities of the tax. As one example, the rules in respect of the sale of food products is ridiculously complex and produces odd and unexpected outcomes. Also, other exemptions would benefit from reconsideration, particularly financial services and insurance, but I suspect that the current government has a lot on its plate, much of it of its own making.
On 30 July 2021 HMRC published a list of emails which has sent taxpayers. Additionally, there is a check for genuine HMRC contact that uses more than one communication method.
It is clear that scammers are using the cover of tax authorities to obtain money by deception. I suspect that many of us have experienced this, to various of sophistication.
Consequently, HMRC have published this document which can be checked before any action is taken in respect of a purported communication from HMRC. If the email topic is not listed, caution should be exercised. The majority of the email subjects listed are VAT based.
Even in these days of increased contactless payments it may be interesting to look at HMRC’s methods of establishing underdeclarations.
HMRC have always taken an interest in cash businesses as they see them as a revenue risk. Such businesses are usually retail and commonly restaurants and take-aways (which I shall use as an example in this article). A retail business is obliged to keep certain records. For sales, this is a record of daily gross takings (DGT) and this is the area I will focus on as it is where “suppression” of income generally occurs. In a very crude example, the owner, or a member of staff does not ring up a sale and the payment is pocketed. There are more sophisticated ways in which suppression occurs, but this is the most common.
Even in this day and age where most payments are made by credit or debit cards, there is still significant scope for declarations to be inaccurate.
The methods
There are a number of ways in which HMRC can determine the accuracy of VAT declarations. These may be from the usual bank and accounts reconciliations, mark up exercises, to, say, counting take-away containers to build up a picture of the turnover. The following are also ways in which HMRC test the credibility of declarations:
These usually take place in the evenings when a restaurant is open for business (or soon after it closes). Officers gain entrance, question staff, examine records for that and previous days, and remove certain records. From this information they can build up a picture of trading. These visits are usually unannounced.
HMRC observe how the business operates and check that all sales of food and drinks are rung into the till. This is usually with the agreement of the business.
HMRC staff will purchase a test meal and at a later time check to see if it has been recorded correctly. It may be that this method will be repeated at a suspect restaurant by different HMRC staff, perhaps in the same evening. If any of the sales are not recorded correctly, it may be insufficient in itself to create an assessment, but it will confirm suspicions of suppression and lead to further action.
While posing as customers, HMRC will also count the number of covers, the amount of take aways, the number of staff, how orders are taken and paid for, and how payments are made.
Members of HMRC staff park outside a restaurant (usually in an unmarked van) and watch the activities of the restaurant. They count the number of people dining and the numbers of people exiting with take aways. This observation may also record the number of deliveries and other relevant information that they are able to obtain from what they can see. This exercise may be carried out over a number of days/nights or even weeks.
In more complex suppression, the value of purchases may also be suppressed in order to present a more credible picture to an inspector. This may be more common if the purchases are zero rated food (on which the business would not claim input tax). HMRC may attempt to build up a picture of sales by the volume of actual purchases made. They often check the restaurant’s suppliers’ records to get a full picture of trade.
Information obtained by one of the above methods may, on its own, be insufficient to raise an assessment, but combined with information obtained in different ways will more often than not result in one (should the exercises demonstrate an under-declaration of course).
Taxpayer’s rights
Attendance
HMRC do not have the right to attend a taxpayer’s premises at any time. The law says that inspections may be carried out “at any reasonable time”. This means that that if a business owner is busy, or the time is outside normal office hours, or there is not access to all of the relevant information, or the request is unreasonable for any other reason, the business owner (or his adviser) may request that an inspector leaves and makes an appointment at a future reasonable time. This is sometimes easier to do in theory than in practice, but a taxpayer’s rights are set out in The Finance Act 2009, Schedule 36, part II.
A business has no right to refuse a “regular” inspection but these are arranged for an agreed time in any case.
Records
The VAT Act 1994, Schedule 11 states that the requirement to produce records is limited to being provided at such time as HMRC “may reasonably require”. So, again, if HMRC are making demands that a business feels are unreasonable, it is within its rights to refuse to allow access and to make a mutually agreed and acceptable appointment to allow access to premises and records. This may lead to a discussion, but HMRC do not have unfettered rights to access premises or records.
Best judgement
Regardless of how HMRC have gathered information, any assessment must be made to the best of their judgement and must be “an honest and genuine attempt to make a reasoned assessment of the VAT payable”. If the business is able to demonstrate that this was not the case, the assessment must be removed. Broadly, this will entail demonstrating that things that ought to have been considered were ignored, or that things that have been included should not have been. Generally, the most common ways to challenge an assessment based on the above exercises are; that the period considered was not representative, or not long enough to be representative, or that the tests carried out were insufficient to demonstrate a consistent pattern of trading. There are usually specific facts in each case that may be used to challenge the validity and quantum of an assessment.
Action
Of course, it is hoped that no business which makes accurate declarations is troubled by such investigations. However, if a business feels that HMRC is being unreasonable with its demands it should seek professional advice before agreeing to permit HMRC access.
Matters change however, if HMRC have a Search Warrant or a Writ of Assistance in which case HMRC are able to compel a business to allow entry or inspection.
As always, we advise that any assessment is, at the very least, reviewed by a business’ adviser.
Over 25% of VAT registered businesses that were permitted to delay VAT payments as a result of the pandemic still owe HMRC the tax deferred.
The now closed payment scheme permitted VAT registered persons to defer VAT payments due between March and June 2020 and around 600,000 businesses took advantage of the relief. The deadline was 30 June 2021, and it has been stated that over a quarter of business have failed to contact HMRC about their debts and have not made the necessary payments.
The total outstanding, according to The Treasury, is £2.7 billion which represents circa 9% of the VAT take. Of the tax deferred under the scheme, £17.8 billion has been paid and around £13 billion is being paid via monthly instalments.
HMRC have announced its approach to collection VAT debt after Covid19.
It has also become clear is that businesses and consumers have fallen into default during and after the pandemic. It is anticipated that the ability to settle of debts on time will decrease and it is apparent that many debts will never be settled. Consequently, it appears timely to look at the available relief. An article on VAT Bad Debt Relief here.
We would urge, that even if a business cannot make a payment, that it still submits VAT returns on time. It is tempting to accept a centrally issued assessment if it is for a lesser amount than the actual VAT due for the period. However, such action can, and often does, lead to penalties and increased interest from HMRC.
HMRC published a call for evidence last year in respect of the VAT group registration provisions, specifically:
The call for evidence was used to gather information and views on the current UK rules, and on provisions that have been adopted by other countries.
Background
VAT grouping is a facilitation measure by which two or more eligible persons can be treated as a single taxable person for VAT purposes. Eligible persons are bodies corporate, individuals, partnerships and Scottish partnerships, provided that certain conditions are satisfied. Bodies corporate includes all types of companies and limited liability partnerships. From 1 November 2019, grouping is additionally available for all entities, including; partnerships, sole traders and Trusts in certain cases. We consider the pros and cons of VAT grouping here.
Outcome
HMRC state that it was clear from the responses how valuable UK VAT grouping is to businesses and it is appreciated that businesses require certainty following Brexit and the impact of Covid 19. The call for evidence prompted a substantial number of responses that were generally in favour of maintaining current practices. It also set out evidence on why changes to the provisions on VAT grouping would impact business growth and international competitiveness.
Consequently, HMRC has decided that there will be no changes to the VAT grouping rules.
* a sigh of relief *
With everything else going on in the VAT world, a little continuity is welcome.
HMRC has issued a call for evidence in respect of land exemption. HMRC acknowledges the complexity of the existing VAT rules on land and property and would like to hear views from businesses on the application of the current rules, and whether these rules could be simplified.
The application of VAT on land and property transactions is complicated. A range of different rates and exemptions can apply depending on the facts and circumstances of individual situations and the precise treatment of a transaction or project is often open to interpretation.
Complexity
The paper identifies a number of reasons why this area is extremely complicated:
The Option to Tax
The option to tax legislation enables a business to tax some supplies of land that would otherwise be treated as exempt from VAT. The usual rationale behind making such a choice is to be able to recover the VAT incurred on costs and overheads of a business, or to meet the conditions of a Transfer of a Going Concern (TOGC).
Suggestions
The document then suggests some ideas for simplification:
The first suggestion would result in many businesses incurring irrecoverable input tax which would be a direct cost, so this appears very unattractive.
The second seems a better option, but would bring new housing into the VAT net and I doubt that this would play out very well with the public.
The final suggestion would certainly simplify matters but would add VAT costs to entities which cannot recover any/all input tax, eg; charities, financial service providers, insurance companies, education bodies, health and welfare organisations and cultural services.
The document states that “The Government wants UK businesses to operate in the best possible environment and remain both productive and competitive”.
It remains to be seen whether the suggestions above (or other proposals put forward) will achieve this, but removing choices for a business (regardless of whether simplification is actually realised) is rarely a good idea and I wonder if simplification could be reached in other ways. If you have an interest in this area, please respond to this call as input is valuable for all parties.
Responses should be sent by 3 August 2021 by email to landsimplification@hmrc.gov.uk.