The new system for the way penalties and interest is charged due to be introduced on 1 April this year has been deferred to 1 January 2023.
The new points-based regime has been delayed to allow HMRC to implement the necessary IT changes.
I wonder if that represents a reasonable excuse for HMRC being late…
One would think that it would be a relatively straightforward matter to write to HMRC to obtain a ruling (non-stat clearance) on a matter. Surely a taxpayer ought to be able to set out the issue, describe the transaction, provide a tax analysis and ask HMRC whether they consider the proposed VAT treatment appropriate. Well, of course, it is not as simple as that (this is VAT after all).
So, what are the issues and what hurdles must be cleared before HMRC engage with a written query?
Checklist
First, there is a checklist which a business must consider and include in a non-stat clearance. Inter alia, this list includes:
Failure to address any items on the checklist usually means no determination will be forthcoming.
An applicant must also set out what HMRC guidance (including internal guidance) legislation, case law and other information has been considered. We find it helpful to reproduce the full checklist (as HMRC advise) and provide a comprehensive response to each point in order to avoid a straightforward refusal to respond.
Genuine uncertainty
One of the main reasons HMRC refuses to provide a non-stat clearance is that it considers that there is no genuine uncertainty; in other words, “go and look at the guidance”. This is very unhelpful after time and effort, and fees cost has gone into the application. The fact that an application is required to set out what guidance etc has been considered, and why it is ambiguous in the relevant circumstances does not seem to carry very much weight. I find it is unhelpful to say, “if it wasn’t uncertain, we wouldn’t be writing to you”! We recommend that a full explanation of the genuine uncertainty is provided to forestall such a HMRC refusal to reply.
Chances
Experience insists that it is difficult to obtain a non-stat clearance which is of any value. Quite often, HMRC will reply saying that their letter is not a non-stat clearance, but then go on to address (at least) some of the issues. This sometimes provides a degree of comfort. An approach that I sometimes adopt is to say, “we believe this to be the correct VAT treatment, and one we will apply to the transaction unless you advise otherwise with reasons”. This sometimes creates a reaction.
HMRC guidance
Details of obtaining a non-stat clearance here.
Address
I find that applications are looked at quicker if they are emailed: nonstatutoryclearanceteam.hmrc@hmrc.gsi.gov.uk. However, there is a 2mb size limit which is often unhelpful. If emailing, an applicant should state that you confirm that you understand and accept the risks involved in using email (otherwise this can cause delays).
Postal address
HM Revenue & Customs, Non-Statutory Clearance Team, S0563. 5th Floor, Saxon House, 1 Causeway Lane, Leicester , LE1 4AA
What HMRC will not rule on
Reliance
Even if a business does obtain a determination, is it possible to rely on it? The answer is no (well, not always). I consider this here.
Summary
It is understandable that a business wants certainty on a transaction, and it ought to be able to rely on HMRC for confirmation of its own analysis, but obtaining such an opinion is fraught with difficulties, frustrations and (genuine) uncertainty. It seems that HMRC will go to lengths to avoid giving a decision, but they are not reticent in penalising a taxpayer once a business has made a decision, applied it, and HMRC subsequently disagree with the VAT analysis.
A wholly unacceptable situation.
New rules from 1 January 2021.
GOV.UK has published new guidance from the Department for International Trade.
The guidance sets out what a business will need to do 1 January 2021. It will be updated if anything changes.
It covers:
Exporting to and importing from the EU
Exporting to and importing from non-EU countries
All business with goods crossing the new border will need to understand and prepare for the changes.
Latest from the courts.
The rolls used in Subway’s hot sandwiches are not bread. According to a recent ruling by Ireland’s Supreme Court, because of the high level of sugar in the rolls, they cannot be taxed as bread, so the VAT zero rate cannot apply.
The Government is consulting on plans to create up to ten freeports. Freeports may provide tariff flexibility, customs facilitations and tax measures designed to encourage global trade and attract inward investment post-Brexit. The proposed Freeports will have different customs rules to the rest of the country.
What is a Freeport?
Freeports are secure customs zones located at ports where business can be carried out inside a country’s land border, but where different customs rules apply. The paper says that Freeports may:
Typically, goods brought into a Freeport do not attract a requirement to pay duties until they leave the Freeport and enter the domestic market. No duty at all is payable the goods are re-exported. If raw materials are brought into a Freeport from overseas and processed into a final good before entering the domestic market, then duties will be paid on the final good.
Government aims
It is stated that the government wants Freeports to boost trade, jobs and investment. They say that is why they are proposing cutting red tape by streamlining customs processes, exploring the use of planning measures to speed up planning processes and accelerate development and housing delivery in and around Freeports, and consulting on a comprehensive set of tax breaks to support businesses. Of course, all this would be unnecessary if Brexit had not have occurred.
Deadline
The consultation deadline is 20 April 2020 so there is not a lot of time to make your views known.
Latest from the courts
In the Virgin Media Ltd First Tier Tribunal (FTT) case a number of issues were considered. These were:
Background
Virgin Media Limited (VML) provided cable TV, broadband and telephone services (media services) to members of the public. It was the representative member of a VAT Group which also contained Virgin Media Payment Limited (VMPL).
If customers choose not to pay by direct debit, they were required to pay a £5 “handling charge”. The handling charge was paid to VMPL and passed to VML on a daily basis. The issue was; what was the correct VAT treatment of the charge?
Contentions
The appellant argued that the £5 charge was optional for the customer and the collection of it was carried out by VMPL and was exempt as the transfer or receipt of, or any dealing with, money. Further, that, despite being members of the same VAT group, there was nothing in the legislation which forced the VAT group to treat supplies by separate entities within that group as a single supply to a recipient outside the group.
HMRC contended that there was a single taxable supply and thus no exempt services were provided and, in fact, VMPL was not making a supply at all (and therefore not to VML as the group representative member). In the first alternative, if it were decided that there was a supply, such a supply was an ancillary component of a single taxable supply by VML as representative group member and not by VMPL as per the Card Protection Plan case. In the second alternative, if both decisions above went against HMRC, that the service provided by VMPL fell outside the exemption so that it was taxable in its own right.
Decision
It was found that:
Therefore, the appeal was dismissed and a reference to the CJEU was considered inappropriate and output tax was due on the full amount received by the group from customers.
Summary
This was a complex case which suffered significant delays. It does help clarify a number of interconnected issues and demonstrates the amount of care required when planning company structures and the VAT analysis of them.
HMRC has significant powers to issue penalties for a wide range of reasons (which include imprisonment, but this is not the subject of this article). A summary of the penalty regime here and an overview from HMRC here.
In some circumstances, HMRC can decide to suspend a penalty, or suspension can be requested by a taxpayer.
I thought it worthwhile to look closer at suspension and the guidance HMRC has issued to its officers.
Suspension can only apply to errors which are “careless inaccuracies” in tax declarations, so a penalty for a deliberate error cannot be suspended.
Penalty suspension only applies if HMRC is able to set at least one suspension condition, with the intention that it will help a business avoid penalties for similar inaccuracies in the future.
When can a penalty be suspended?
HMRC use the standard SMART test
These conditions are in addition to the condition that all returns are filed on time during the suspension period.
When HMRC will not suspend a penalty
An example is if HMRC do not believe that an improved record keeping system will/can be put in place.
If HMRC decide not to suspend a penalty, it represents an appealable decision.
Agreement to suspension
Before HMRC will suspend a penalty, a business will need to agree conditions with it. A business will need to:
After a taxpayer has agreed the conditions HMRC will send a Notice of Suspension (NOS).
Length of the suspension period
The length will depend on how long HMRC considers that it will take a business to meet the specific suspension conditions. The maximum suspension period allowed by law is two years but normally it would be less than this.
Action during the suspension period
During the suspension period, a business must meet the conditions it agreed to. It must also ensure that it does not submit any other inaccurate returns, as this is likely another inaccuracy penalty will apply. If another inaccuracy penalty is incurred during the suspension period, the previously suspended penalty must be paid in full.
End of suspension period
At the end of the suspension period HMRC will ask whether the conditions have been fully met. Officers will check records and ask for other evidence, to ensure compliance. If HMRC agree that the conditions have been met, the original penalty will be cancelled. If it is decided that they have not, the penalty must be paid in full. A business cannot appeal against such a decision; however, it may be the subject of judicial review.
Appeal
An appeal may be lodged against:
Special reduction
In addition to suspension, HMRC is able to reduce a penalty in “special circumstances”.
Penalty legislation provides for common circumstances and these are therefore taken into account in establishing the liability to and/or level of a penalty.
Special circumstances are either:
To be special circumstances, the circumstances in question must apply to the particular individual and not be general circumstances that apply to many taxpayers by virtue of the penalty legislation.
It is very common that HMRC will not offer special reduction. This does not prevent a taxpayer asking it to consider one. Inspectors are supposed to consider special reduction before deciding on the amount of a penalty, but experience insists that this is uncommon and many are unaware of this particular area of internal guidance.
Summary
If a Penalty Notice is received, we highly recommend that it is reviewed and challenged as appropriate. In a significant number of cases it is possible to mitigate or remove a penalty. If that is not possible, suspension or special reduction may be possible. Never just accept a penalty!
This seems a rather pointless question to ask, and I suspect many people will reply “because we have to”. But is it as simple as that?
An Organisation for Economic Co-operation and Development (OECD) report this month looks at the willingness of individuals and businesses to voluntarily pay tax and how it can be improved through better understanding of the complex interlinkages between enforcement, trust in government and the ease of compliance.
The report called ‘Tax Morale: What Drives People and Businesses to Pay Tax?‘ is interesting to read for tax advisers and taxpayers alike. It considers the drivers behind compliance with tax obligations and focuses on developing countries where compliance rates are low.
Many developing countries face a range of challenges in increasing revenue domestically. These challenges include:
As a result, two-thirds of least developed countries still struggle to raise taxes equivalent to more than 15% of GDP, the widely accepted minimum to enable an effective state. In comparison, OECD member countries raise taxes, on average, close to 35% of GDP.
Apparently, compliance is not determined solely by tax rates or the threat of penalties, but rather by a wide range of socio-economic and institutional factors that vary across regions and populations.
Improving tax morale can contribute to efforts to overhaul the international tax rules and improve compliance by multinational enterprises and it may also improve the efforts to counter banking secrecy and tax evasion.
Tax morale is composed of several, interlinked, elements. A theory set out in the report posits that trust is driven by the degree to which the tax system, including the approach to facilitation and enforcement, is characterised as:
As such, strengthening tax compliance is not only about improving tax enforcement and enforced compliance, but also about pursuing “quasi-voluntary compliance” through building trust and facilitating payments.
Why is this important?
The report states that a better understanding of what motivates taxpayers to participate in, and comply with, a tax system is valuable for all countries and stakeholders. Tax administrations can benefit from increased compliance and higher revenues, taxpayers (both businesses and individuals) are better served by tax systems that understand and are responsive to their needs, while increased data and discussion can help researchers deepen their understanding.
So…
In terms of VAT, what are our experiences of HMRC? Is it fair, equitable, reciprocal and accountable? Having discussed this at most client meetings where businesses have been challenged, and my experience in the department and advising businesses is: It used to be a lot better, there was a feeling that they were “trying to get things right”, however, this sense has been declining and trust is increasingly and rapidly being lost. Is this nostalgia, or does HMRC increasingly rely on bullying, ignoring contentions, misunderstanding or misapplying legislation or not being concerned with taxpayers?
All I would say here is that the fact that HMRC can issue a written ruling, but then go back on it if it suits them, is hardly fair or equitable. See here – no more “Sheldon Statement” protection for taxpayers.
Latest from the courts.
In the Charles John Caton First Tier tribunal (FTT) case the issue was whether HMRC were correct in deciding that a business was artificially split to avoid VAT registration (so called disaggregation, details here).
Background
The appellant ran a café known as The Commonwealth for a number of years. Subsequently, his wife opened a restaurant in adjoining premises. HMRC decided that this was a single business and required a backdated VAT registration. This resulted in a retrospective VAT return and associated penalties for late registration.
HMRC pointed to the leases, the liability insurance and the alcohol licence, which are all in Mr Caton’s name, together with the fact he signed a questionnaire stating that he was sole proprietor of the restaurant, and the fact that the washing up area is shared, and say that these show that there was only one business. They also said that the fact that Mrs Caton did not have a bank account and therefore card takings from the restaurant went into Mr Caton’s bank account further bolsters their case.
The appellant proffered the following facts to support the contention that there were two separate businesses: There were separate staff in the restaurant and the café. Those for the cafe were hired by Mr Caton, and are his responsibility, and those for the restaurant were hired by Mrs Caton and are her responsibility. The cooking is done completely separately, by different people using different cooking areas. The menus are completely different, and when the café sells the restaurant ‘specials’ they are rung up on the till with a marker that shows they are restaurant sales. Although the majority of the food is ordered from the same place, there are separate orders (even though these orders are placed at the same time and paid for using Mr Caton’s bank account). Mrs Caton decides on the menu for the restaurant and the prices. She keeps the cash generated from the sales in the cafe, and this is not banked in Mr Caton’s account. Depending on the ratio of cash sales to card sales in any given month, she may need to pay some of it to Mr Caton for the rent, rates etc, but any surplus she keeps.There were two tills, one for the restaurant and one for the cafe.
The Law
The VAT Act 1994, Schedule 1 para 1A provides that:
(1) Paragraph 2 below is for the purpose of preventing the maintenance or creation of any artificial separation of business activities carried on by two or more persons from resulting in an avoidance of VAT.
(2) In determining for the purposes of sub-paragraph (1) above whether any separation of business activities is artificial, regard shall be had to the extent to which the different persons carrying on those activities are closely bound to one another by financial, economic and organisational links.
VAT Act 1994, Schedule 1 para 2 provides that:
(1)… if the Commissioners make a direction under this paragraph, the persons named in the direction shall be treated as a single taxable person carrying on the activities of a business described in the direction…
Decision
The judge decided that she considered the facts that point to the businesses being run and owned as two separate operations were significantly stronger that facts that point to a joint ownership. And the appeal was allowed.
Commentary
These types of cases are decided on the precise facts. I think that this one must have been a close call. It appears the fact that may have swung it was that the judge commented “We find it extremely surprising, in this case, that HMRC have never met with Mrs Caton or, in correspondence, asked her for any details. Mr Caton and HMRC have both told us that he has consistently maintained from the first meeting the fact that Mrs Caton runs the restaurant. We find it impossible that HMRC could be in possession of facts sufficient to make a reasonable decision on this case without hearing from Mrs Caton.” That approach by HMRC is never going to play well in court. It strikes me that this type of approach is increasing in the department. Whether this is down to lack of training, resources or simple corner cutting to save time I cannot say.
If HMRC issue a direction under VAT Act 1994, Schedule 1 para 2 that two or more businesses should be treated as one, it is always worth having that decision reviewed. This is especially relevant in cases such as this where customers are the final consumers making the VAT sticking tax.
A new Statutory Instrument (SI) SI 2018/1376 has been issued which sets out certain measures to be adopted in the event of a No Deal Brexit in respect of postal packets. A background to VAT and Brexit here
If the UK leaves the EU without a deal it will be unable to treat the movement of goods between EU Member States in the same way as previously. Such a movement of goods now become an import – similar to any other goods currently entering the UK from outside the EU. A guide to imports here
These regulations mean that certain overseas businesses will be required to register in the UK and pay import VAT on a consignment of goods up to the value of £135.
I have summarised below the most salient parts of the SI.
What is a qualifying import?
The regulations state that a “qualifying importation” is made where—
There are two exceptions (there always appear to be exceptions in VAT…)
Requirement to register
A supplier must be registered under the new regulations with effect from the date on which the first qualifying importation is dispatched by the supplier. There is no de minimis limit.
Application for registration
Returns
Returns will be known as “Postal Packet Returns” and will be quarterly and will be due on the first calendar day after the last day of the month next following the end of the period.
Penalties
This being VAT – of course there are penalties for getting wrong.
The penalty for failure to register is a flat rate of £1000.
The SI also contains regulations for others to be jointly and severally liable for that import VAT in certain circumstances. Further, as expected, (see here) the SI also removes Low Value Consignment Relief (LVCR) for the import of commercial goods with a value of £15 or less.
A No Deal Brexit will undoubtedly increase administration, red tape and cause delays and uncertainties, and VAT is only one aspect of that. Let us hope that this SI is not needed…