There were no significant announcements on VAT in the budget.
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VAT: DIY housebuilders can make more than one claim – The Ellis case
Latest from the courts
In the First Tier Tribunal (FTT) case of Andrew Ellis and Jane Bromley [2021] TC08277, the issue was whether a person constructing their own house can make more than one claim for VAT incurred.
Background
The DIY Housebuilder’s Scheme enables a DIY housebuilder to recover VAT incurred on the construction of a house in which the constructor will live. Details here.
In this case, the specific issue was whether, despite the HMRC guidance notes on the scheme claim form explicitly stating that only one claim can be made, whether two claims may be submitted and paid by the respondent.
The appellant constructed a house over a period of five years (he was a jobbing builder and the work was generally only undertaken at weekends and holidays). To aid cash flow, an initial claim was made, followed by a second two years later.
The relevant legislation is The VAT Act 1994 section 35.
Decision
The appeal was allowed. The FTT found that HMRC’s rule that only one claim could be made under the DIY housebuilder’s scheme was ultra vires and that multiple claims should be permitted.
The judge stated that “…there is no express indication that only one claim may be made. Like many provisions, section 35 VATA is drafted in the singular. Drafting in the singular is an established technique to assist in clarity and to enable the proposal to be dealt with succinctly. As there is no express indication to the contrary in section 35 VATA, section 6 Interpretation Act 1978 applies to confirm that the reference to “a claim” in section 35 VATA must be read as including “claims”.
Commentary
This is good news for claimants who often must wait a number of years for a house to be built and therefore carry the VAT cost until the end of the project.
This case presumably means that it is possible to make claims as the project progresses and there is no need to wait until completion.
We await comment on this case from HMRC, but it is hoped that clarification will be forthcoming on whether the result of this case will be accepted.
VAT: Freeports – what are they? Are they beneficial?
Further to the background to Freeports here I consider the latest developments.
What are Freeports?
Freeports are a specific port where normal tax and customs rules do not apply. Imports can enter with simplified customs documentation and without paying tariffs. Businesses operating inside designated areas in and around the port can manufacture goods using the imports, before exporting again without paying the tariff on the original imported goods (however, a tariff may be payable on the finished product when it reaches its final destination).
Freeports are similar to Free zones, or “Enterprise Zones” which are designated areas subject to a broad array of special regulatory requirements, tax breaks and Government support. The difference is that a Freeport is designed to specifically encourage businesses that import, process and then re-export goods, rather than more general business support.
Use
Goods brought into a Freeport are not subject to duties until they leave the port and enter the UK market. Additionally, if the goods are re-exported no duty is payable at all.
If raw materials are brought into a Freeport and processed into final goods before entering the UK market, duties will be paid on the final goods.
Background
If a business chooses to use a Freeport to import or export goods, it will be able to:
- get relief from duties and import taxes
- use simplified declarations processes to reduce administrative burdens
- choose which rate of Customs Duty to use if processing the goods changes their classification
If goods are purchased in the UK, a business will continue to pay duties and import taxes using the normal UK rates.
Where are they?
The eight new Freeports are located at East Midlands Airport, Felixstowe and Harwich, the Humber region, Liverpool City Region, Plymouth, the Solent, the Thames, and Teesside.
Authorisation needed to use a Freeport
A business can apply to use the Freeport customs special procedure (a single authorisation combined with easier declaration requirements) to import goods for:
- processing and then export or for sale in the UK
- storage and then export or for sale in the UK
Declaring goods entering the UK Freeport
A form C21 is used to declare goods entering the UK. This can be done before the goods arrive in the UK or when the goods have arrived in the UK.
Declaring goods exported
A business will normally need to submit an exit summary declaration when goods are exported from the UK. When an exit summary declaration is not needed, a business will need to give an onward export notification to HMRC.
Disposing of goods which have been processed or repaired
When a business has finished processing or repairing goods, it must leave the Freeport and dispose of the goods by either:
- re-exporting them outside the UK
- declaring them to another customs procedure
- transferring them to another Freeport Business Authorisation holder
- destroying them – usually only possible under customs supervision
- using other simplified disposal methods
VAT on supplies in the Freeport
A business will be able to zero rate supplies within a Freeport of:
- goods declared to the Freeport
- services carried out on goods declared to the Freeport
When a zero rated VAT invoice is issued, it must include the reference “Free zone”.
Zero rating of goods applies if:
- they are declared to the Freeport
- they are sold from one authorised Freeport business to another in the Freeport
- both Freeport businesses are registered for VAT (unless they are exempt from registering for VAT and HMRC has approved this exemption)
Benefits
The Government says that Freeports and free zones are intended to stimulate economic activity in their designated areas. Government backed economic studies have found the main advantage of Freeports is that they encourage imports by lowering duty and paperwork costs. Manufacturing businesses that are inside the Freeport can benefit from cheaper imported inputs in comparison to those outside the area. However, some commentators such as the UK Trade Policy Observatory (UKTPO) suggest that whilst some form of free zones could help with shaping export-oriented and place-based regional development programmes, it is important to ensure that trade is not simply diverted from elsewhere and that wider incentives are needed.
Evasion
Considering that the European Parliament has called for Freeports to be scrapped across the EU because of tax evasion and money laundering and that they are where trade can be conducted untaxed, and ownership can be concealed it is likely that there will be a certain degree of evasion. This a result of the lack of scrutiny on imports and means that high-value items, eg; art, can be bought and easily stored in Freeports without the kind of checks and controls they would normally face.
Summary
Any business that regularly imports and/or exports goods should consider if a Freeport will benefit their business model. This is particularly relevant if work is carried out on imported goods.
VAT: Zero rating of seeds and plants
HMRC have updated VAT Notice 701/38 Seeds and plants that can be zero-rated. This Notice explains how to zero rate supplies of of seeds and plants which are used to grow food for human consumption. The supply of most basic foodstuffs for human or animal consumption is zero-rated. Plants and seeds used for the production of foodstuffs are also zero-rated depending on how they are held out for sale. The Notice explains when the following items can be zero-rated:
- plants
- seeds or other means of propagation (spores, rhizomes) used to produce those plants
- seeds used directly as foods
The main amendments have been made to paragraph 3.5 – Trees and fruit bearing shrubs.
Any businesses supplying such goods (garden centres, nurseries etc) should ensure that the available zero rating is applied as widely as possible within these rules.
A VAT Did you know?
The sales of counterfeit (illegal) goods are subject to 20% VAT, but the sale of counterfeit banknotes is not.
VAT: Farm in business? The Babylon case
Latest from the courts
In the Upper Tribunal (UT) case of Babylon Farm Ltd (the farm) the issue was whether the appellant was in business and consequently was able to recover certain input tax.
Background
Yet another case on whether there was any business activity in a company. Please see here, here, here and here for previous cases on this issue. The farm sold hay which it cut from another person’s fields to a connected party. The value of the one-off annual sale was £440 pa. The appellant also contended that it was also undertaking preparatory acts for the new business activities and that it would be able to levy management charges. Another new business activity was the creation of an investment and insurance product.
The farm built a new barn on which it claimed input tax of £19,760.
HMRC considered that no business was being carried on and decided to deregister the farm thus refusing to pay the input tax claim. The farm challenged this decision and contended that taxable supplies were being made, and there was also an intention to make taxable supplies in the future.
Legislation
Paragraph 9 of Schedule 1 of the VAT Act 1994 requires HMRC to be satisfied that a person is either making taxable supplies or is carrying on a business and intends to make such supplies in the course or furtherance of a business in order to be registered for VAT. There are a number of tests set out in case law (mainly The Lord Fisher case) to establish whether a person is in business:
- Is the activity a serious undertaking earnestly pursued?
- Is the activity an occupation or function, which is actively pursued with reasonable or recognisable continuity?
- Does the activity have a certain measure of substance in terms of the quarterly or annual value of taxable supplies made?
- Is the activity conducted in a regular manner and on sound and recognised business principles?
- Is the activity predominantly concerned with the making of taxable supplies for a consideration?
- Are the taxable supplies that are being made of a kind which, subject to differences of detail, are commonly made by those who seek to profit from them?
Decision
The appeal was dismissed. The farm was not in business and could not recover input tax on the costs of the new barn.
The judge stated that he could see no legal basis for the farm to be in business. The hay that the farm sold was taken from the customer’s own land and therefore belonged to him already. It was also noted that no invoices were raised, no payment for the hay had been made for a number of years and the single customer was a director of Babylon Farm Limited so the farm was not operating in an open market. The sale of hay had not been conducted on a basis that followed sound and recognised business principles or on a basis that was predominantly concerned with the making of taxable supplies for consideration. As a consequence, the farm was not operating as a business during the relevant period.
On the intention point; neither of the intended activities had yet resulted in any chargeable services being provided and both were to be carried on through companies that had been formed for these purposes (not the farm). Both businesses remained at a formative stage and neither company has generated any revenue. This was insufficient to retain the VAT registration.
Commentary
The decision was hardly a surprise and one wonders how it reached the UT. HMRC were always going to challenge an input tax claim of that quantum with no output tax (and such a low value of sales which may not have been made in any event).
VAT: The tax gap was £35bn in 2019/20
HMRC has published details of the tax gap for 2019/20. This is the gap between the expected tax that should be paid to HMRC and what is actually paid. The headline was that the tax gap was 5.3%. which represents an estimated £35 billion.
Total tax liabilities for the year were £674 billion.
What is the tax gap?
The tax gap is the difference between the amount of tax that should, in theory, be paid to HMRC, and what is actually paid.
Why is it measured?
The tax gap provides tool for understanding the relative size and nature of non-compliance. This understanding can be applied in many different ways:
- it provides a foundation for HMRC’s strategy – considering the tax gap helps the government to understand how non-compliance occurs and how it can be addressed
- the analysis provides insight into which strategies are most effective at reducing the tax gap
- it provides important information which helps HMRC understand its long-term performance
- provides information to the public on tax compliance, creating greater transparency in the tax system.
Why is there a tax gap?
The tax gap arises for a number of reasons. Some taxpayers make simple errors in calculating the tax that they owe, despite their best efforts, while others don’t take enough care when they submit their returns. Legal interpretation, evasion, avoidance and criminal attacks on the tax system also result in a tax gap.
Analysis
Around £3.7 billion of the gap is estimated to be due to error and £3 billion due to the hidden economy.
The tax gap for wealthy individuals fell from £1.6 billion in 2018/19 to £1.5 billion in 2019/20
£15.1 billion of the gap is attributed to small businesses and £6.1 billion is attributed to large businesses, with £5 billion attributed to medium-sized firms.
Taxpayers paid more than £633.4 billion in tax during 2019/20, an increase of more than £100 billion since 2015/16, when the total revenue paid was £532.5 billion.
The tax gap for Income Tax, National Insurance contributions and Capital Gains Tax is 3.5% in 2019 to 2020 at £12.6 billion which represents the largest share of the total tax gap by type of tax.
VAT
The VAT gap was estimated to be £12.3 billion in tax year 2019 to 2020. This equates to 8.4% of net VAT total theoretical liability.
The VAT gap has increased from 7.0% in tax year 2018 to 2019 to 8.4% in 2019 to 2020. Growth in VAT receipts (1.8%) was slower than the growth in the net VAT total theoretical liability (3.3%).
Behaviour
HMRC estimate that the causes of the tax gap are:
- Failure to take reasonable care £6.7bn 19%
- Legal interpretation £5.8bn 16%
- Evasion £5.5bn 15%
- Criminal attacks £5.2bn 15%
- Non-payment £4bn 11%
- Error £3.7bn 10%
- Hidden economy £3bn 8%
- Avoidance £1.5bn 4%
Taxpayers
Tax gap by taxpayer groups:
- Small businesses £15.1bn 43%
- Large businesses £6.1bn 17%
- Criminals £5.2bn 15%
- Mid-sized businesses £5.0bn 14%
- Individuals £2.6bn 7%
- Wealthy £1.5bn 4%
The impact on the tax gap from the coronavirus lockdowns and economic downturn is likely to be first seen in the 2020/21 figures, which will be released next year. It will also be interesting to see how the fallout from Brexit is covered (if at all).
Refunds of UK VAT for non-UK businesses and EU VAT for UK businesses
HMRC has published updated guidance VAT Notice 723A which sets out how a business established outside the UK can claim a refund of VAT incurred here, and how to reclaim VAT incurred in the EU VAT if a business is established in the UK.
More details of how to make post-Brexit VAT claims here.
Autumn Budget – date announced
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.
VAT: New rules for Uncertain Tax Treatments
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:
- turnover of more than £200 million per annum
- balance sheet total over £2 billion
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:
- Provision made in the accounts
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:
- Less output tax is accounted for or is accounted for later, than would otherwise be the case
- If there is an input tax claim which would otherwise not be obtained; a larger claim, or a claim earlier than would otherwise be the case
- If input tax is recovered as a recipient of a supply before the supplier accounts for the output tax; the period between the time when the input tax is recovered or the time when the output tax is accounted for is greater than would otherwise be the case
- The amount of non-deductible tax is less than it otherwise would be
- An obligation to account for VAT is avoided
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.