Tag Archives: tax

VAT: Farm in business? The Babylon case

By Marcus Ward 21 September 2021

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

By Marcus Ward 17 September 2021

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).

Autumn Budget – date announced

By Marcus Ward 13 September 2021

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: Construction of a dwelling – zero-rated? The CMJ (Aberdeen) case

By Marcus Ward 18 August 2021

Latest from the courts

The First-Tier tribunal (FTT) considered the case of CMJ (Aberdeen) Limited (CMJ) and whether the supply of building services in respect of the construction of a dwelling were correctly zero rated by the appellant. HMRC deemed that the construction services were standard rated on the basis that the works were not carried out in accordance with the terms of the relevant statutory planning consent.

Background

HMRC’s view was that, although planning consent was in place at the time the construction services were supplied by the appellant, that planning consent permitted only the alteration or enlargement of a dwelling and did not allow for the construction of a dwelling. HMRC accept that the property was constructed as a new building, but that this was not permitted by the planning consent and so the construction was not carried out in accordance with it.

CMJ contended that statutory planning consent had been obtained for the construction via a combination of the planning consent and a construction building warrant which it had obtained from the relevant authority, and which allowed for the construction of a new building.

Legislation

The zero rating for the construction of new dwellings is contained in The VAT Act 1994, Schedule 8, Group 5, item 2

“The supply in the course of the construction of

(a) a building designed as a dwelling…”

Note 2 to Group 5 of Schedule 8 to the VAT Act include the following:

“(2) A building is designed as a dwelling or a number of dwellings where in relation to each dwelling the following conditions are satisfied…

…(d) statutory planning consent has been granted in respect of that dwelling and its construction or conversion has been carried out in accordance with that consent.

Decision

The appeal was dismissed. It was judged that the building warrant did not comprise statutory planning consent for the purposes of note 2 (d) because:

Planning consent and building warrants operate under different statutory regimes.

Breach of planning consent is dealt with separately from a breach of the building warrant legislation, and each is dealt with by the specific statutory regime . If there is a breach of planning consent, it would not affect the validity of the building warrant, and vice versa.

The Building Standards Handbook states that the purpose of the building standards system is setting out the standards to be met when building work takes place. This is different from planning consent which is consent to allow the authority to permit development on a piece of land. They are distinct and separate regimes aimed at distinct and separate issues. While planning permission is about how the house will look, a building warrant is about whether it meets building standards.

Both planning permission and a building warrant is required. One is no substitute for the other.

It is possible to obtain retrospective planning consent, the judge did not believe it is possible to get a retrospective building warrant.

It was not possible to carry out works of construction in accordance with a valid statutory consent, since no such consent had been given for construction at the time that the building works were carried out.

Commentary

The legislation covering building work is complex and there are many traps for the unwary. Even the seemingly straightforward matter of whether a new dwelling is constructed can produce difficulties, as in this case. We always counsel that proper VAT advice is sought in such circumstances.

VAT: Fraudster ordered to pay £37 million

By Marcus Ward 5 August 2021

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.

Check if an HMRC email is genuine

By Marcus Ward 5 August 2021

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.

VAT: Land and property – “simplification” ahead?

By Marcus Ward 19 July 2021

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:

over the years the amount of legislation has increased, and the land VAT exemption now contains fifteen exceptions and twenty-six sets of notes
some businesses can be required to make several separate decisions before the VAT liability of their supply can be established. Eg; once a business has established that it is supplying land (not always straightforward) it then has to consider whether that supply falls within one of the exceptions to the exemption. If it does fall within one of the exceptions, it then has to consider a number of conditions to establish whether it is excluded from that exception
businesses may spend a disproportionate amount of time and money to establish the correct liability of their land supplies. This can also cause additional burdens for HMRC to assure compliance of these businesses
the development of new markets and services that did not exist when VAT was introduced
the impact of precedent case law (both UK and EU)
the uncertainty of establishing when an exempt supply of land becomes a taxable supply of facilities

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:

removing the ability to opt and making all relevant transactions exempt
removing the option to tax and making all land and property taxable at a reduced rate
making all commercial land and property taxable at the standard rate with an option to exempt

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.

VAT Schemes Guide – Alternative ways of accounting for tax

By Marcus Ward 17 May 2021

There are a number of VAT Schemes which are designed to simplify accounting for the tax. They may save a business money, reduce complexity, avoid the need for certain documentation and reduce the time needed to deal with VAT. Some schemes may be used in combination with others, although I recommend that checks should be made first.

It is important to compare the use of each scheme to standard VAT accounting to establish whether a business will benefit. Some schemes are compulsory and there are particular pitfalls for certain businesses using certain schemes.

I thought that it would be useful to consider the schemes all in one place and look at their features and pros and cons.

These schemes reviewed here are:

Cash Accounting Scheme
Annual Accounting Scheme
Flat Rate Scheme
Margin schemes for second-hand goods
Global Accounting
VAT schemes for retailers

Cash Accounting Scheme

Normally, VAT returns are based on the tax point (usually the VAT invoice date) for sales and purchases. This may mean a business having to pay HMRC the VAT due on sales that its customers have not yet paid for.

The VAT cash accounting scheme instead bases reporting on payment dates, both for purchases and sales. A business will need to ensure its records include payment dates.

A business is only eligible for the Cash Accounting Scheme if its estimated taxable turnover is no more than £1.35m, and can then remain in the scheme as long as it remains below £1.6m.

Advantages

Usually beneficial for cash flow especially if its customers are slow paying
Output tax is not payable at all if a business has a bad debt

Disadvantages

Is generally not beneficial for a repayment business (one which reclaims more VAT than it pays, eg; an exporter or supplier of zero rated goods or services)
Not usually beneficial if a business purchases significant amounts of goods or services on credit

Annual Accounting Scheme

The Annual Accounting Scheme allows a business to pay VAT on account, in either nine monthly or three quarterly payments. These instalments are based on VAT paid in the previous year. It is then required to complete a single, annual VAT return which is used to calculate any balance owed by the business or due from HMRC.

A business is eligible for the scheme if its estimated taxable turnover is no more than £1.35m and is permitted to remain in the scheme as long as it remains below £1.6m.

Advantages

Reduces paperwork as only the need to complete one return instead of four (Although it does not remove the requirement to keep all the normal VAT records and accounts)
Improves management of cash flow

Disadvantages

Not suitable for repayment businesses as they would only receive one repayment at the end of the year
If turnover decreases, the interim payments may be higher than under standard accounting

Flat Rate Scheme

The Flat Rate Scheme is designed to assist smaller businesses reduce the amount of time and complexity required for VAT accounting. The Flat Rate Scheme removes the need to calculate the VAT on every transaction. Instead, a business pays a flat rate percentage of its VAT inclusive turnover. The percentage paid is less than the standard VAT rate because it recognises the fact that no input tax can be claimed on purchases. The flat rate percentage used is dependent on a business’ trade sector.

A business is eligible for this scheme if its estimated taxable turnover in the next year will not exceed £150,000. Once using the scheme, a business is permitted to continue using it until its income exceeds £230,000.

If eligible, a business may combine the Flat Rate Scheme with the Annual Accounting Schemes, additionally, there is an option to effectively use a cash basis so there is no need to use the Cash Accounting Scheme. New rules regarding ” limited cost traders” mean that the scheme has become less attractive.

Advantages

Depending on trade sector and circumstances may result in a real VAT saving
Simplified record keeping; no requirement to separate out gross, VAT and net in accounts
Fewer rules; no issues with input tax a business can and cannot recover on purchases
Certainty of knowing how much of income is payable to HMRC

Disadvantages

No reclaim of input tax incurred on purchases
Limited cost traders impact
If a business buys a significant amount from VAT registered businesses, it is likely to result in more VAT due
Likely to be unattractive for businesses making zero-rated or exempt sales because output tax would also apply to this hitherto VAT free income
Low turnover limit

Margin Scheme for Second Hand Goods

A business normally accounts for output tax on the full value of its taxable supplies and reclaims input tax on its purchases. However, if a business deals in second-hand goods, works of art, antiques or collectibles it may use a Margin Scheme. This scheme enables a business to account for VAT only on the difference between the purchase and selling price of an item; the margin. It is not possible to reclaim input tax on the purchase of an item and there will be no output tax if no profit is achieved. There is a special margin schemes for auctioneers. A variation of the Margin Scheme is considered below.

Advantages

Usually beneficial if buying from (non-VAT registered) members of the public
Purchaser will not see a VAT charge
Although no input tax claimable on purchases of scheme items, VAT may be claimed in the usual way on overheads and other fees etc

Disadvantages

Record keeping requirements are demanding and closely checked, eg; stock records and invoices which are required for both purchases and sales
Cannot be used for items purchased on a VAT invoice
Can be complex and create a cost if goods exported
Although no VAT due on sales if a loss is made, there is no set-off of the loss

Global Accounting

The problem with the Second Hand Goods Scheme is that full details of each individual item purchased and sold has to be recorded. Global Accounting is an optional, simplified variation of the Second Hand Margin Scheme. It differs from the standard Margin Scheme in that rather than accounting for the margin achieved on the sale of each individual item, output tax is calculated on the margin achieved between the total purchases and total sales in a particular accounting period.

Advantages

Simplified version of the Margin Scheme
Record keeping requirements reduced
Losses made on sales reduce VAT payable
Beneficial for businesses which buy and sell bulk volume, low value eligible goods

Disadvantages

Cannot be used for; aircraft, boats, caravans, horses or motor vehicles
Similar to Margin Scheme disadvantages apart from loss set off

VAT Schemes for Retailers

It is usually difficult for retailers to issue an invoice for each sale made, so various retail schemes have been designed to simplify VAT. The appropriate scheme for a business depends on whether its retail turnover (excluding VAT) is; below £1m, between £1m and £130m and higher.

Smaller businesses may be able to use a retail scheme with Cash Accounting and Annual Accounting but it cannot combine a Retail Scheme with the Flat Rate Scheme. However, retailers may choose to use the Flat Rate Scheme instead of a Retail Scheme.

Using standard VAT accounting, a VAT registered business must record the VAT on each sale. However, via a Retail Scheme, it calculates the value of its total VAT taxable sales for a period, eg; a day, and the proportions of that total that are taxable at different rates of VAT; standard, reduced and zero.

According to the scheme a business uses it then applies the appropriate VAT fraction to that sales figure to calculate the output tax due. A business may only use the Retail Scheme for retail sales and must use the standard accounting procedures for other supplies. It must still issue a VAT invoice to any VAT registered customer who requests one. It is a requirement of any scheme choice that HMRC must consider it fair and reasonable.

Examples of Retail Schemes

Apportionment
Direct calculation
The point of sale scheme

There are special arrangements for caterers, retail pharmacists and florists.

Advantages

No requirement to issue an invoice for each sale
Most schemes are relatively simple to administer once set up. Technology assists in a helpful way with EPOS systems
Simplifies record keeping

Disadvantages

It is usual for each line sold to need to be coded correctly for VAT liability
Smaller businesses without state of the art technology may be at a disadvantage
Time and resources required to set up and maintain systems
In some cases the calculation depends on staff “pressing the right button”
Often complex calculations and record keeping
Very precise and complicated rules
Lack of understanding by a number of inspectors
Complexity increases the risk of misdeclaration

Overall

As may be seen, there are a lot of choices for a business to consider, especially a start-up. Choosing a scheme which is inappropriate may result in VAT overpayment and a lot of unneeded record keeping and administration. There are real savings to be made by using a beneficial scheme, both in terms of VAT payable and staff time.

We are happy to review a business’ circumstances and calculate what schemes would produce the best outcome.

Please contact us if you require further information.

VAT: What is open market value? The Jupiter case

By Marcus Ward 11 May 2021

Latest from the courts

In the First Tier tribunal (FTT) case of Jupiter Asset Management Group Ltd the issue was the value of management services to an associated third party VAT group.

Background

The value is important because if HMRC believe that a supply between two connected parties (as defined by The Income and Corporation Taxes Act 1988 Section 839) is undervalue and the recipient cannot recover the relevant input tax in full, it is permitted via The VAT Act 1994, Schedule 6, PART 2, para 1 (1) to substitute open market value (OMV) by way of a Notice.

This paragraph is specifically intended to counter tax avoidance. If a supply between connected persons is made below open market value for a legitimate reason that the trader can substantiate, and which is unconnected with avoidance HMRC has the discretion not to issue a Notice. In Jupiter, HMRC directed that OMV be used to calculate the charge as it considered that value was too low and issued an assessment for underdeclared output tax.

Decision

In the absence of comparable supplies, OMV was to be determined by reference to:

the full cost of making the supplies;
the full cost included the costs incurred on goods and services used in making the supplies and general overhead costs the input tax in respect of which had been recovered
the remuneration paid to the executive directors to the extent that that remuneration related to activities performed by the executive directors in making the supplies of the management services

Consequently, the appeal against the output tax assessment was dismissed.

Commentary

An expected outcome, but ne which emphasises that care should be taken with transactions between connected parties, management charges and inter-company charges in general. This is even more relevant since the decision in the Norseman Gold plc case

A VAT did you know?

By Marcus Ward 29 April 2021

Wigs for teddy bears are subject to duty, but in a recent Upper Tribunal case it was ruled that ‘realistic” hearts used for a Build-A-Bear toy are duty free.