Popcorn is standard rated, but microwavable popcorn is VAT free.
Tag Archives: output-tax
VAT: Is a cosmetic treatment exempt medical care? The Illuminate Skin Clinics Ltd case
Latest from the courts
In the Illuminate Skin Clinics Ltd First-Tier Tribunal (FTT) case the issue was whether cosmetic procedures qualified as exempt medical treatment.
Background
The Appellant runs a private, ie; non-NHS clinic offering a range of aesthetic, skincare and wellness treatments advertised as: fat freezing, thread lifts, chemical peels, fillers, facials, intravenous drips and boosters. The Appellant’s sole director and shareholder, Dr Shotter, complies with Item 1 (below) in terms of qualifications, ie; she is enrolled on the register of medical professionals.
The list of treatments included:
- Botox
- Dermal fillers
- CoolSculpting
- Microsclerotherapy
- Prescription skincare
- Chemical peels
- Microdermabrasion
- Thread lifting
- Thermavein
- Aqualyx
- Platelet-rich plasma treatment.
HMRC contended that these supplies were standard rated because there is no medical purpose behind the treatments, and they are carried out for purely cosmetic purposes. An assessment was raised for output tax on this income.
The Appellant argued that what it provided was exempt medical care via The VAT Act 1994, Schedule 9, Group 7, item 1 – “The supply of services consisting in the provision of medical care by a person registered or enrolled in any of the following:
- The register of medical practitioners…”
And its contention was that the primary purpose of the treatments was “the protection, maintenance or restoration of the health of the person concerned”
In the Mainpay case it was established that “medical” care means “diagnosing, treating and, in so far as possible, curing diseases or health disorders”
Decision
Although there may have been a beneficial psychological impact on undergoing such treatments and this may have been the reason for a patient to proceed (and they may be recommended by qualified medical professionals) this, in itself, was insufficient to persuade the judge that the services were exempt. Consequety, the appeal was rejected and the assessment was upheld.
The FTT found that there was very little evidence of diagnosis. This was important to the overall analysis because diagnosis is the starting point of medical care. Without diagnosis, “treatment”, in the sense of the exemption, is not something which is being done responsively to a disease or a health disorder.
The fact that people go to the clinic feeling unhappy with some aspect of their appearance, and (at least sometimes) are happier when something is done at the clinic about that aspect of their appearance, does not mean that the treatment is medical, or has a therapeutic aim.
It was telling that the differentiation, in Dr Shotter’s own words, between what the clinic does from what “a GP or other health professional” does is; diagnosis. It also highlighted the general trend or purpose of the clinic’s activity – helping people to feel better about their appearance, in contexts where their appearance is not itself a health condition, or threatening to their health in a way which mandates treatment of their appearance by a GP or another health professional.
Helping someone to achieve goals in relation to their appearance, which is what this clinic did, is not treating someone’s mental health status, but is going to their self-esteem and self-confidence. It is a misuse of language to say that this is healthcare in the sense that it would fall within Item 1 of Group 7.
Commentary
There has been an ongoing debate as to what constitutes medical care. Over 20 years ago I was advising a large London clinic on this very point and much turned on whether patients’ mental health was improved by undergoing what many would regard as cosmetic procedures. We were somewhat handicapped in our arguments by the fact that many of the patients were lap dancers undergoing breast augmentation on the direction of the owner of the club…
It is worth remembering that not all services provided by a medically registered practitioner are exempt. The question of whether the medical care exemption is engaged in any given case will turn on the particular facts.
Further recent cases on medical exemption here and here.
VAT: New HMRC guidance on error reporting
HMRC has published new guidance to assist taxpayers on how to deal with errors discovered on submitted VAT returns. The catchy title is: Check if you need to report errors in your VAT Return – Check if you need to notify HMRC about errors that are over the threshold on your VAT Return and find out how to report them.
The guidance sets out how to report errors of £10,000 or more (net of all errors). This broadly comes down to using the online service by completing a form VAT652 or adjusting a current VAT return.
Please see our flowchart on error reporting Error Reporting Flowchart
New portal for VAT payment plans
VAT is normally due on the relevant due date*. However, HMRC has launched a new self-service portal for businesses to set up payment plans.
We look at managing VAT debt in detail here.
A business can set up a VAT payment plan online if it:
- has filed its latest tax return
- owes £20,000 or less
- is within 28 days of the payment deadline
- does not have any other payment plans or debts with HMRC
- plans to pay off its debt within the next six months
A taxpayer cannot set up a VAT payment plan online if it uses the Cash Accounting Scheme, Annual Accounting Scheme, or makes payments on account.
If a business cannot set up a payment plan online it will need to contact HMRC.
HMRC will ask:
- if you can pay in full
- how much you can repay each month
- if there are other taxes you need to pay
- how much money you earn
- how much you usually spend each month
- what savings or investments you have
If you have savings or assets, HMRC will expect you to use these to reduce your debt as much as possible.
* For businesses that pay their VAT monthly or quarterly, the deadline for both submitting a return and paying the VAT owing is usually one calendar month plus seven days after the VAT period has ended
VAT payment deadline calculator here.
VAT: Business or non-business? The 3D Crowd CIC case
Latest from the courts
Business or non-business?
In the First-Tier Tribunal (FTT) case of 3D Crowd CIC (3D) the issue was whether a donation of goods, with a subsequent intention to sell similar goods constituted a business activity such that input tax incurred in relation to it was recoverable.
Background
3D was formed at the beginning of the Covid 19 pandemic to produce face protection via the process of 3D printing. Such protection was in high demand, but there was a shortage of suitable products for healthcare workers. The appellant produced 130,000 face shields in the first six weeks of production; which was an admirable feat. However, it was not possible to sell this equipment without the appropriate accreditation. Consequently, to alleviate demand, 3D donated the PPE to the NHS.
By the time accreditation was given the demand for PPE had reduced so it was not possible to sell the 3D printed face coverings as initially intended.
Technical
The issue of business versus non-business has been a contentious issue in the VAT world from day one. This classification is important for two reasons. If an activity is a business (an economic activity) it could be subject to VAT and, as in this case, if an activity is non-business there is usually a restriction of input tax.
Contentions
3D said that input tax could be recovered on costs which involved no direct onward supply of goods or services, but which laid the groundwork for them. That is, the input tax could be attributed to an intended taxable supply, even though that intention was not fulfilled by circumstances outside its control.
HMRC argued that per Longbridge the correct test for determining whether an activity is a business activity is whether there is a direct link between the services or goods supplied and a payment received by the supplier. In this case, there was not so no input tax was reclaimable. HMRC also referred to the decision in Wakefield College, supporting the proposition that an activity is only a business activity if it results in the supply of goods or services for a consideration.
Decision
The FTT found that the VAT incurred on supplies made to 3D, constituted elements:
- in connection with 3D seeking CE certification
- related to general overheads
- related to VAT incurred on materials bought to produce the PPE
Input tax incurred on the costs of accreditation is recoverable because these were incurred in order to sell PPE in the future and for no other purpose. The fact that these costs are not linked to a particular supply (and is in the nature of preparing the ground for future supplies) was irrelevant per The VAT Act 1994, Schedule 1, para 10.
The VAT incurred on the general overhead costs and on the costs of producing the PPE was incurred in part for business purposes and party for non-business (donations) and should be apportioned using a method agreed between 3D and HMRC.
Commentary
Another case highlighting the difficulty in identifying the distinction between business and non-business and the complexity of input tax attribution. The altruistic efforts of the CIC is to be admired, but such charitable (in the broad sense) activities do not always get their just reward in VAT terms.
VAT: How to characterise a supply – The tests
In the age-old matter of whether a supply is separate/composite/compound for VAT purposes which and what is the nature of that supply, the Court of Appeal case of Gray & Farrar International LLP has provided very helpful guidance. A background to facts of the initial hearing here (although this decision was overturned by both the UT and the CoA).
I have previously considered these types of supply here, here, here, here, and here. Although not specifically concerning composite/separate supplies, the case sets out a hierarchy of tests to be applied in characterising a single supply for VAT purposes which now sets the standard. These test are:
- The Mesto predominance test should be the primary test to be applied in characterising a supply for VAT purposes.
- The principal/ancillary test is an available, though not the primary, test. It is only capable of being applied in cases where it is possible to identify a principal element to which all the other elements are minor or ancillary. In cases where it can apply, it is likely to yield the same result as the predominance test.
- The “overarching” test is not clearly established in the ECJ jurisprudence, but as a consideration the point should at least be taken into account in deciding averments of predominance in relation to individual elements, and may well be a useful test in its own right.
Comments
The Mesto Test
CJEU Mesto Zamberk Financini (Case C-18/12)
The primary test to be applied when characterising a single supply for VAT purposes is to determine the predominant element from the point of view of the typical consumer with regard to the qualitative and not merely the quantitative importance of the constituent elements.
Principal/ancillary
If a distinct supply represents 50% or more of the overall cost, it can not be considered ancillary to the principal supply. In such cases an apportionment will usually be required.
Overarching
A generic description of the supply which is distinct from the individual elements. In many cases the tax treatment of that overarching single supply according to that description will be self-evident.
CPP
One must also have regard to the Card Protection Plan Ltd case. This has become a landmark case in determining the VAT treatment for single and multiple supplies. In this case the ECJ ruled that standard rated handling charges were not distinct from the supply of exempt insurance. It was noted that ‘a supply that comprises a single service from an economic point of view should not be artificially split’. Notably many subsequent court decisions have since followed this outcome thereby suggesting a general lean towards viewing cases as single supplies where there are reasonable grounds to do so.
A VAT Did you know?
In this hot weather it is important to drink sufficient fluids. If you buy a bottle of water, you will pay VAT, but milk is zero rated.
VAT: How long do I have to keep records?
Record keeping is a rather dry subject, but it is important not to destroy records which HMRC may later insist on seeing! I have looked at what VAT records a business is required to keep here, but how long must they be kept for?
This is seemingly a straightforward question, but as is usual with VAT there are some ifs and buts.
The basic starting point
The usual answer is that VAT records must be kept for six years. However, there are circumstances where that limit is extended and also times when it may be reduced. Although the basic limit is six years, unless fraud is suspected, HMRC can only go back four years to issue assessments, penalties and interest.
Variations to the six year rule
One Stop Shop (OSS)
If a business is required to use the OSS then its records must be retained for ten years (and they should be able to be sent to HMRC electronically if asked).
Capital Goods Scheme (CGS)
If a business has assets covered by the CGS, eg; certain property, computers, aircraft and ships then adjustments will be required up to a ten year period. Consequently, records will have to be retained for at least ten years in order to demonstrate that the scheme has been applied correctly.
Land and buildings
In the case of land and buildings you might need to keep documents for 20 years. We advise that records are kept this long in any event as land and buildings tend to be high value and complex from a VAT perspective, However, it is necessary in connection with the option to tax as it is possible to revoke an option after 20 years.
Transfer Of a Going Concern (TOGC)
This is more of a ‘who” rather than a what or a how long. When a business is sold as a going concern, in most circumstances the seller of the business will retain the business records. When this happens, the seller must make available to the buyer any information the buyer needs to comply with his VAT obligations. However, in cases where the buyer takes on the seller’s VAT registration number, the seller must transfer all of the VAT the records to the buyer unless there is an agreement with HMRC for the seller to retain the records. If necessary, HMRC may disclose to the buyer information it holds on the transferred business. HMRC do this to allow the buyer to meet his legal obligations. But HMRC will always consult the seller first, to ensure that it does not disclose confidential information.
How can a business cut the time limits for record keeping?
It is possible to write to HMRC and request a concession to the usual time limits. HMRC generally treat such a request sympathetically, but will not grant a concession automatically. If a concession is granted there is still a minimum allowance period of preservation which is in line with a business’ commercial practice.
Computer produced records
Where records are stored in an electronic form, a business must be able to ensure the records’ integrity, eg; that the data has not changed, and the legibility throughout the required storage period. If the integrity and legibility of the stored electronic records depends on a specific technology, then the original technology or an equivalent that provides backwards compatibility for the whole of the required storage period must also be retained.
How to keep records
HMRC state that VAT records may be kept on paper, electronically or as part of a software program (eg; bookkeeping software). All records must be accurate, complete and readable.
Penalties
If a business’ records are inadequate it may have to pay a record-keeping penalty. If at an inspection HMRC find that records have deliberately been destroyed your they will apply a penalty of £3,000 (this may be reduced to £1,500 if only some of the records are destroyed). In addition, there will be questions about why they have been destroyed!
VAT: Mind the gap – HMRC latest figures
GOV.UK has published details of the most recent measurement of the tax gap for 2021-2022.
What is the tax gap?
The tax gap is measured by comparing the net tax total theoretical liability with tax actually paid. This is comparing the amount of tax HMRC expected to receive in the UK and the amount HMRC actually received.
The figures
The tax gap is estimated to be 4.8% of total theoretical tax liabilities, or £35.8 billion in absolute terms, in the 2021 to 2022 tax year.
Total theoretical tax liabilities for the year were £739.3 billion.
There has been a long-term reduction in the tax gap as a proportion of theoretical liabilities: the tax gap reduced from 7.5% in the tax year 2005 to 2006 to 4.8% in 2021 to 2022 – remaining low and stable between the years 2017 to 2018 and 2021 to 2022.
Criminal activity and evasion accounted for £4.1billion loss in tax collected.
30% of all underpayments of tax were due to a failure to take reasonable care, while 13% of instances were down to evasion.
A massive 56% of the tax gap is made up by small businesses (up from 40% of the total in 2017-18). Whether this is down to HMRC improving collection from large businesses or an increasing failure to crack down on small business is a moot point. It remains to be seen how HMRC react to this new information, but experience insists that small businesses may expect increased attention for the authorities.
The VAT gap
VAT represents 21% of the overall tax gap.
The VAT tax gap is 5.4%.
The absolute VAT gap is £7.6 billion.
The VAT gap has reduced from 14.0% of theoretical VAT liability in 2005 to 2006 to 5.4% in 2021 to 2022.
More than two thirds of the theoretical VAT liability was estimated to be from household consumption. The remainder came from the expenditure by businesses that supply goods and services where the VAT is non-recoverable (they are exempt from VAT), and from the government and housing sectors.
Information on the method used to estimate the VAT gap is here for those interested (I don’t imagine that there will be that many…).
So, £7.6 millions of VAT is missing. That seems an awful lot.
VAT refunds guidance
VAT Claims
HMRC has completely rewritten its manual VRM7000 on VAT repayments and set-off.
When a business makes a claim for VAT (for whatever reason) HMRC have the power to set-off a payment against other amounts due.
HMRC also has a discretion to take account of any taxpayer liabilities in other regimes HMRC administers such as corporation tax or excise duty.
In summary, the new guidance covers:
- Inherent set-off via The VAT General Regulations 1995, Section 80(2A) and Regulation 29. This is where, say, a supply was incorrectly treated as standard rated when it was exempt. It would not be possible to claim the overcharged output tax (subject to unjust enrichment) without recognising the potential overclaim of input tax as a result of partial exemption.
- Set-off under The VAT Gen Regs 1995, Section 81(3) HMRC. This covers HMRC liability to only pay a claim after setting off any VAT, penalties, interest or surcharge owed to it. Section 81(3) is mandatory and applies to the current liabilities of a taxpayer, regardless of the period incurred.
- Set-off under section 81(3A). This is a special provision which requires HMRC to set any liabilities that would otherwise be out-of-time to assess, against any amounts for which HMRC is liable under a claim. It does this by disregarding the assessment time limit, to undo all the consequences of a mistake.
- VAT group set-offs. When a company leaves a VAT group, it is still jointly and severally liable under section 43(1) VAT Act 1994 for any outstanding debts of the group incurred while the company was a member. Any VAT claim by the ex-member will be subject to set-off against these group debts.
- Set-offs against other taxes and duties. HMRC has the discretion under Section 130 of the Finance Act 2008 to set-off debts due from any other tax regimes HMRC is responsible for. This is subject to the insolvency rules in section 131 Finance Act 2008. A taxpayer should always check that no further liabilities have arisen since the claim was made.
- Transfers of rights to claim to another person (Section 133 of the Finance Act 2008) – A claim will be subject to set-off of any outstanding liabilities to HMRC from both transferor and transferee. NB: HMRC policy is to make reasonable efforts to recover outstanding debts from the original creditor before applying set-off to the current creditors claim.