Tag Archives: marcus-ward-co

Oops! Top Ten VAT howlers

By   8 May 2014
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I am often asked what the most frequent VAT errors made by a business are. I usually reply along the lines of “a general poor understanding of VAT, considering the tax too late or just plain missing a VAT issue”.

While this is unquestionably true, a little further thought results in this top ten list of VAT horrors:

1 Not considering that HMRC may be wrong. There is a general assumption that HMRC know what they are doing. While this is true in most cases, the complexity and fast moving nature of the tax can often catch an inspector out. Added to this is the fact that in most cases inspectors refer to HMRC guidance (which is HMRC’s interpretation of the law) rather to the legislation itself. Reference to the legislation isn’t always straightforward either, as often EC rather than UK domestic legislation is cited to support an analysis. The moral to the story is that tax is complicated for the regulator as well, and no business should feel fearful or reticent about challenging a HMRC decision.

2 Missing a VAT issue altogether. A lot of errors are as a result of VAT not being considered at all. This is usually in relation to unusual or one-off transactions (particularly land and property or sales of businesses). Not recognising a VAT “triggerpoint” can result in an unexpected VAT bill, penalties and interest, plus a possible reduction of income of 20% or an added 20% in costs. Of course, one of the basic howlers is not registering at the correct time. Beware the late registration penalty, plus even more stringent penalties if HMRC consider that not registering has been done deliberately.

3 Not considering alternative structures. If VAT is looked at early enough, there is very often ways to avoid VAT representing a cost. Even if this is not possible, there may be ways of mitigating a VAT hit.

4 Assuming that all transactions with overseas customers are VAT free. There is no “one size fits all” treatment for cross border transactions. There are different rules for goods and services and a vast array of different rules for different services. The increase in trading via the internet has only added to the complexity in this area, and with new technology only likely to increase the rate of new types of supply it is crucial to consider the implications of tax; in the UK and elsewhere.

5 Leaving VAT planning to the last minute. VAT is time sensitive and it is not usually possible to plan retrospectively. Once an event has occurred it is normally too late to amend any transactions or structures. VAT shouldn’t wag the commercial dog, but failure to deal with it at the right time may be either a deal-breaker or a costly mistake.

6 Getting the option to tax wrong. Opting to tax is one area of VAT where a taxpayer has a choice. This affords the possibility of making the wrong choice, for whatever reasons. Not opting to tax when beneficial, or opting when it is detrimental can hugely impact on the profitability of a project. Not many businesses can carry the cost of, say, not being able to recover VAT on the purchase of a property, or not being able to recover input tax on a big refurbishment. Additionally, seeing expected income being reduced by 20% will usually wipe out any profit in a transaction.

7 Not realising a business is partly exempt. For a business, exemption is a VAT cost, not a relief. Apart from the complexity of partial exemption, a partly exempt business will not be permitted to reclaim all of the input tax it incurs and this represents an actual cost. In fact, a business which only makes exempt supplies will not be able to VAT register, so all input tax will be lost. There is a lot of planning that may be employed for partly exempt businesses and not taking advantage of this often creates additional VAT costs.

8 Relying on the partial exemption standard method to the business’ disadvantage. A partly exempt business has the opportunity to consider many methods to calculate irrecoverable input tax. The default method, the “standard method” often provides an unfair and costly result. I recommend that any partly exempt business obtains a review of its activities from a specialist. I have been able to save significant amounts for clients simply by agreeing an alternative partial exemption method with HMRC.

9 Not taking advantage of the available reliefs. There are a range of reliefs available, if one knows where to look. From Bad Debt Relief, Zero Rating (VAT nirvana!) and certain de minimis limits to charity reliefs and the Flat Rate Scheme, there are a number of easements and simplifications which could save a business money and reduce administrative and time costs.

10 Forgetting the impact of the Capital Goods Scheme. The range of costs covered by this scheme has been expanded recently. Broadly, VAT incurred on certain expenditure is required to be adjusted over a five or ten year period. Failure to recognise this could either result in assessments and penalties, or a position whereby input tax has been under-claimed.

So, you may ask: “How do I make sure that I avoid these VAT pitfalls?” – And you would be right to ask.

Of course, I would recommend that you engage a VAT specialist to help reduce the exposure to VAT costs!

Latest from the courts – Trinity Mirror plc

By   1 May 2014
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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.

Latest on VAT/GST and International Trade

By   30 April 2014
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This month at a meeting in Tokyo over 250 high level delegates from over 100 countries and international organisations endorsed a framework for applying VAT to cross-border trade. There has been significant concern over the various domestic legislation applied to international trade which can result in transactions being taxed twice, or going untaxed. There has been little, or no co-ordination in the application of VAT and GST worldwide and the aim of the recent Organisation for Economic Co-operation and Development (OECD) summit was to remedy these discrepancies and endorse a new set of OECD guidelines for international trade. The new standards aim to ensure tax neutrality in cross-border transactions and a clearer taxation of B2B trade in services.

Meeting statement (with links to the relevant background) here:http://www.oecd.org/ctp/consumption/statement-of-outcomes-on-vat-gst-guidelines.pdf

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Charities & VAT

By   14 April 2014
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 Business activities

It is important not to confuse the term ‘trading’ as frequently used by a charity to describe its non-charitable commercial fund-raising activities (usually carried out by a trading subsidiary) with ‘business’ as used for VAT purposes. Although trading activities will invariably be business activities, ‘business’ for VAT purposes can have a much wider application and include some or all of the charity’s primary or charitable activities.

 Registration and basic principles

Registration. Any business (including a charity or its trading subsidiary) that makes taxable supplies in excess of the VAT registration threshold must register for VAT. Taxable supplies are business transactions that are liable to VAT at the standard rate, reduced rate or zero rate.

If a charity’s income from taxable supplies is below the VAT registration threshold it can voluntarily register for VAT but a charity that makes no taxable supplies (either because it has no business activities or because its supplies or income are exempt from VAT) cannot register.

Charging VAT. Where a VAT-registered charity makes supplies of goods and services in the course of its business activities, the VAT liability of those supplies is, in general, determined in the normal way as for any other business. Even if VAT-registered, a charity should not charge VAT on any non-business supplies or income.

Reclaiming VAT. The first stage in determining the amount of VAT which a VAT-registered charity can reclaim is to eliminate all the VAT incurred that relates to its non-business activities. It cannot reclaim any VAT it is charged on purchases that directly relate to non-business activities. It will also not be able to reclaim a proportion of the VAT on its general expenses (eg telephone and electricity) that relate to those non-business activities.

Once this has been done, the remaining VAT relating to the charity’s business activities is input tax.

  • It can reclaim all the input tax it has been charged on purchases which directly relate to standard-rated, reduced-rated or zero-rated goods or services it supplies.
  • It cannot reclaim any of the input tax it has been charged on purchases that relate directly to exempt supplies.

It also cannot claim a proportion of input tax on general expenses (after adjustment for non-business activities) that relates to exempt activities unless this amount, together with the input tax relating directly to exempt supplies, is below ade minimis limit. 

Business and non-business activities

An organisation such as a charity that is run on a non-profit-making basis may still be regarded as carrying on a business activity for VAT purposes. This is unaffected by the fact that the activity is performed for the benefit of the community. It is therefore important for a charity to determine whether any particular transactions are ‘business’ or ‘non-business’ activities. This applies both when considering registration (if there is no business activity a charity cannot be registered and therefore cannot recover any input tax) and after registration.  If registered, a charity must account for VAT on taxable supplies it makes by way of business. Income from any non-business activities is not subject to VAT and affects the amount of VAT reclaimable as input tax.

‘Business’ has a wide meaning for VAT purposes based upon Directive 2006/112/EC (which uses the term ‘economic activity’ rather than ‘business’), UK VAT legislation and decisions by the Courts and VAT Tribunals.  An activity may still be business if the amount charged does no more than cover the cost to the charity of making the supply or where the charge made is less than cost. If the charity makes no charge at all the activity is unlikely to be considered business.

An area of particular difficulty for charities when considering whether their activities are in the course of business is receipt of grant funding.

Partial Exemption

The VAT a business incurs on running costs is called input tax.  For most businesses this is reclaimed on VAT returns from HMRC if it relates to standard rated or zero rated sales that that business makes.  However, a business which makes exempt sales may not be in a position to recover all of the input tax which it incurred.  A business in this position is called partly exempt.  Generally, any input tax which directly relates to exempt supplies is irrecoverable.  In addition, an element of that business’ general overheads, e.g.; light, heat, telephone, computers, professional fees, etc are deemed to be in part attributable to exempt supplies and a calculation must be performed to establish the element which falls to be irrecoverable.

Input tax which falls within the overheads category must be apportioned according to a so called; partial exemption method.  The “Standard Method” requires a comparison between the value of taxable and exempt supplies made by the business.  The calculation is; the percentage of taxable supplies of all supplies multiplied by the input tax to be apportioned which gives the element of VAT input tax which may be recovered.  Other partial exemption methods (so called Special Methods) are available by specific agreement with HMRC.

De Minimis

There is however relief available for a business in the form of de minimis limits.  Broadly, if the total of the irrecoverable directly attributable (to exempt suppliers) and the element of overhead input tax which has been established using a partial exemption method falls to be de minimis, all of that input tax may be recovered in the normal way.  The de minimis limit is currently £7,500 per annum of input tax and one half of all input tax for the year.  As a result, after using the partial exemption method, should the input tax fall below £7,500 and 50% of all input tax for a year it is recoverable in full.  This calculation is required every quarter (for businesses which render returns on a quarterly basis) with a review at the year end, called an annual adjustment carried out at the end of a business’ partial exemption year.  The quarterly de minimis is consequently £1,875 of exempt input tax.

Should the de minimis limits be breached, all input tax relating to exempt supplies is irrecoverable.

One may see that this is a complex area for charities and not for profit entities to deal with. Certainly a review is almost always beneficial, as are discussions regarding partial exemption methods.

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Added VAT Cost For Charities

By   7 April 2014
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Charities have a very hard time of it in terms of VAT, since not only do they have to contend with complex legislation and accounting (which other businesses, no matter how large or complicated do not) but VAT represents a real and significant cost.

By their very nature, charities carry out “non-business” activities which means that VAT is not recoverable on the expenses of carrying out these activities.  Additionally, many charities are involved in exempt supplies which also means a restriction on the ability to recover VAT on attributable costs.

These two elements are distinct and require separate calculations which are often very convoluted.  The result of this is that charities bear an unfair burden of VAT, especially so since the sector carries out important work in respect of; health and welfare, poverty, education and housing etc.  Although there are some specific reliefs available to charities, these are very limited and do not, by any means, compensate for the overall VAT cost charities bear.

Another issue is legal uncertainty over what constitutes “business income” for charities, especially the VAT status of grants.  It’s worth bearing in mind here the helpful comment in the EC case of Tolsma translated as: “…the question is whether services carried on by [a person] were carried on for the payment or simply with the payment”.

Many charities depend on donations which, due to the economic climate have fallen in value at a time when there is a greater demand on charities from struggling individuals and organisations.

What can be done?

  • Ensure any applicable reliefs are taken advantage of.
  • If significant expenditure is planned, ensure that professional advice is sought to mitigate any tax loss.
  • Review the VAT position to ensure that the most appropriate partial exemption methods and non-business apportionment is in place.
  • Review any land and property transactions. These are high value and some reliefs are available. Additionally it is possible to carry out planning to improve the VAT position of a property owning charity.
  • Review VAT procedures to ensure that VAT is declared correctly. Penalties for even innocent errors have increased recently and are incredibly swingeing.
  • Consider a VAT “healthcheck” which often identifies problems and planning opportunities.

We have considerable expertise in the not for profit sector and would be pleased to discuss any areas of concern, or advise on ways of reducing the impact of VAT on a charity.

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

By   31 March 2014
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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.

VAT – Changes to the treatment of electronically-supplied services from 2015

By   24 March 2014
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Although it seems some time away, these changes, which come into effect on 1 January 2015, will have a significant impact on any business which provides e-services (wherever in the EC it is based). It is important for suppliers to understand and plan for the new rules; the sooner the better.

What are e-services for VAT purposes? – Broadly these are services usually obtained via the internet and may comprise; films, music, information, software for which the supplier makes a charge.

Are all of these services affected? – No, only B2C services (where the recipients are not in business, eg; an individual). The rules for B2B supplies will not change.

What are the changes? At present, suppliers based in the EC charge VAT at the rate applicable in the EC Member State in which the business is located. Currently, therefore, VAT planning insists that technology companies locate in countries with low VAT rates. However, to combat this, the EC will introduce a rule whereby the place of supply (where VAT is due) changes to where the customer is located (not where the supplier belongs). Consequently, a company currently based in Luxembourg supplying a service which is downloaded by an individual in the UK will charge VAT at 15% (the rate in Luxembourg). From 1 January 2015, the UK recipient will pay VAT at 20% (the UK rate).

Businesses will need to introduce these changes and manage budgets and forecasts to recognise what, on the whole, will be a significant increase in VAT payable. This will, for most businesses result in a reduction in profits or an increase in prices for customers.

As may be seen, this will add considerable complexity for businesses to deal with and with the current penalty regime care must be taken to avoid even further costs. Businesses affected must start to plan for these changes as soon as possible.

Are there any easements available? The new rules change would require EC suppliers to register and account for VAT in every EC Member State where their services are downloaded by non-business customers. In order to avoid this burden a “mini one stop shop” (MOSS) is also being introduced. This will allow suppliers to register just once in their own EU Member State. This single registration will then allow them to account for VAT due in other Member states. HMRC has indicated that businesses will be able to register under the MOSS from October 2014. How this will actually work in practice remains to be seen.

Good luck everybody!

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Agent or principal? Latest from The Supreme Court

By   13 March 2014
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There is a very important distinction in VAT terms between agent and principal as it dictates whether output tax is due on the entire amount received by a “middle-man” or just the amount which the middle-man retains (usually a commission). It is common for the relationship between parties to be open to interpretation and thus create VAT uncertainty in many transactions. It appears to me that this uncertainty has increased as a result of the increasing amount of on-line sales and different parties being involved in a single sale.

A very helpful recent case; Secret Hotels 2 Ltd (formerly Med Hotels) heard at the Supreme Court, has clarified some grey areas in agent/principal relationships.

Very broadly, in this case which the taxpayer won, the judgement tips the balance back into the favour of common law as opposed to civil law principles for UK taxpayers and that the nature of a supply is to be determined by the construction of the contract – unless it is a ‘sham’.

This Supreme Court Judgment helpfully indicates that we must place far greater emphasis on the form of the arrangement (contract) as opposed to the economic substance (as often argued by HMRC).

The full decision is available here: http://www.supremecourt.uk/decided-cases/docs/UKSC_2013_0036_PressSummary.pdf

Although there will always be disputes over agent/principal relationships, this decision goes some way to clarifying the analysis and demonstrating the importance of the contract over what HMRC describe as “economic reality”.

Please contact us if you are, or have been, in dispute with HMRC on this point as it provides additional ammunition for the taxpayer.

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Treatment of transactions using Bitcoin and other similar cryptocurrencies

By   13 March 2014
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HMRC have issued Revenue & Customs Brief 09/14 here: http://www.hmrc.gov.uk/briefs/vat/brief0914.htm
This provides guidance on the direct tax and VAT treatment of income received from, and charges made in connection with, activities involving Bitcoin and other similar cryptocurrencies. Bitcoin operates via a peer to peer network, independent of any central authority or bank. All functions such as issue, transaction processing and verification are managed collectively by this network.

The advent of cryptocurrencies such as Bitcoin is a new and evolving area. Bitcoin may be held as an investment (i.e. for trading with recognised currencies) or used to pay for goods or services at merchants where it is accepted. In the UK, there are already a number of outlets, including pubs, restaurants and internet retailers, that accept payment by Bitcoin.

In summary, the VAT treatment of Bitcoin activities will generally either be outside the scope of VAT or exempt from VAT (under Article 135(1)(d) of the VAT Directive), depending on the specific transaction involved. However, VAT will be due in the normal way on transactions involving any goods or services sold in exchange for Bitcoin or other similar cryptocurrency.

In the UK, as is the case with any other currency, the value of the supply of goods or services on which VAT is due will be the £sterling value of the cryptocurrency at the point the transaction takes place.

Please contact us if you would like more specific advice.

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