Tag Archives: vat-compliance

VAT: Avoiding a Default Surcharge. Reasonable Excuse – Update

By   14 March 2022
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I have looked at the Default Surcharge regime in detail here but as statistics show more business to be in default (which is probably accurately attributable, inter alia, to the pandemic) I consider how a penalty may be mitigated, by the provision of a “Reasonable Excuse”. HMRC has updated its internal guidance on Reasonable Excuse this month.

Specifically: HMRC state that “…where a person has not been able to meet an obligation on time due to the impact of COVID-19, HMRC will usually accept that they will have a reasonable excuse.”

What is a Default Surcharge?

The Default Surcharge is a civil penalty issued by HMRC to encourage businesses to submit their VAT returns and pay the tax due on time.

A default occurs if HMRC has not received your return and all the VAT due by the due date. The relevant date is the date that cleared funds reach HMRC’s bank account. If the due date is not a working day, payment must be received on the last preceding working day.

More on late returns here and on late payments here.

New rules forthcoming

It is noted that there is a new regime for penalties, details here although these changes have been delayed until 1 January 2023

Reasonable Excuse

If a business has a reasonable excuse for failing to pay on time, and it remedies this failure without unreasonable delay after the excuse ends, it will not be liable to a surcharge. The onus is on a business to satisfy HMRC that it has a Reasonable Excuse.

Definition

There’s no statutory definition of Reasonable Excuse and it will depend on the particular circumstances of a case. A Reasonable Excuse is something that prevented the business meeting a tax obligation on time which it took reasonable care to meet. There is a great deal of case law on this particular issue. Please contact us should there be doubt about a Reasonable Excuse.

What may count as a Reasonable Excuse?

HMRC give the following examples:

  • “your partner or another close relative died shortly before the tax return or payment deadline
  • you had an unexpected stay in hospital that prevented you from dealing with your tax affairs
  • you had a serious or life-threatening illness
  • your computer or software failed just before or while you were preparing your online return
  • service issues with HMRC online services
  • a fire, flood or theft prevented you from completing your tax return
  • postal delays that you could not have predicted
  • delays related to a disability (including mental health) you have”

This list is not exhaustive.

What is NOT a reasonable excuse

Statute identifies two specific situations that are not a reasonable excuse:

  • lack of funds to pay any VAT due, or
  • reliance on any other person to perform a task, where there has been a delay or inaccuracy on that person’s part.

There can be exceptions to these two exclusions. For example, an insufficiency of funds may be a reasonable excuse where the insufficiency is a result of events outside the person’s control.

HMRC also states that these situations would not normally be accepted, on their own, as a reasonable excuse:

  • pressure of work
  • lack of information
  • lack of a reminder from HMRC

Facts

HMRC will establish what facts the business believes gave rise to a Reasonable Excuse. The facts may include:

  • the taxpayer’s beliefs
  • the taxpayer’s own experiences and relevant attributes
  • the situation of the taxpayer at any relevant time
  • acts carried out by the taxpayer or someone else
  • acts that the taxpayer or someone else should have carried out but did not.

Case Law

Although not a VAT issue, in the Upper Tribunal (UT) case of Christine Perrin [2018] UKUT 156 [TC], the judge provided guidance on how the Tribunal should approach a Reasonable Excuse defence. There are four steps:

  1. establish what facts the taxpayer asserts give rise to a reasonable excuse
  2. decide which of those facts are proven
  3. if those proven facts amount to an objectively reasonable excuse for the default
  4. having decided when any reasonable excuse ceased, decide whether the taxpayer remedied the failure without unreasonable delay after that time

Appeal

If HMRC refuse to accept an advance of a Reasonable Excuse and the Default Surcharge is maintained, there are two potential remedies:

If a business disagrees with a decision that it is liable to a surcharge or how the amount of surcharge has been calculated, it is possible to:

  • ask HMRC to review your case (A Statutory Review)
  • have your case heard by the Tax Tribunal

If you ask for a review of a case, a business will be required to write to HMRC within 30 days of the date the Surcharge Liability Notice Extension (SLNE) was sent. The letter should give the reasons why a business disagrees with the decision.

We are able to assist with all disputes with HMRC and have an enviable record of succeeding in having Default Surcharges removed.

Latest European VAT rates

By   2 November 2021
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NB: Not all countries listed are part of the European Union (EU).

Country VAT rates
Albania 20%
Andorra 4.5%
Austria 20% Reduced rates 19%, 10%, 13%
Belarus 20%
Belgium 21% Reduced rates of 12%, 6%
Bosnia & Herzegovina 17%
Bulgaria 25% Reduced rates 13%, 5%
Croatia 25% Reduced rates 13%, 5%
Cyprus 19% Reduced rates 9%, 5%
Czech Republic 21% Reduced rates 15%, 10%
Denmark 25% Reduced rate 0%
Estonia 20% Reduced rate 9%
Finland 24% Reduced rates 14%, 10%
France 20% Reduced rates 10%, 5.5%
Germany 19% Reduced rate 7%
Georgia 18%
Greece 24% Reduced rates 13%, 6%
Hungary 27% Reduced rates 18%, 5%
Iceland 24% Reduced rate 12%
Ireland 23% Reduced rates 13.5%, 9%
Italy 22% Reduced rates 10%, 5%
Latvia 21% Reduced rates 12%, 5%
Liechtenstein 7.7% Reduced rate 2.5%
Lithuania 21% Reduced rates 9%, 5%
Luxembourg 17% Reduced rates 14%, 8%
North Macedonia 18%
Malta 18% Reduced rates 7%, 5%
Monaco 20% Reduced rates 10%, 5.5%, 2.1%
Montenegro 21%
Netherlands 21% Reduced rates 9%
Norway 25% Reduced rates 12%, 6%
Poland 23% Reduced rates of 8%, 5%
Portugal 23% Reduced rates 13%, 6%
Romania 19% Reduced rates of 9%, 5%
Russia 20%
Serbia 20% Reduced rate 10%
Slovakia 20% Reduced rate 10%
Slovenia 22% Reduced rates 9.5%, 5%
Spain 21% Reduced rates 10%
Sweden 25% Reduced rates 12%, 6%
Switzerland 7.7% Reduced rates 3.7%, 2.5%
Ukraine 20%
United Kingdom 20% Reduced rates 12.5%, 5% 0%

Businesses still owe £Billions after VAT deferral

By   27 July 2021
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Over 25% of VAT registered businesses that were permitted to delay VAT payments as a result of the pandemic still owe HMRC the tax deferred.

The now closed payment scheme permitted VAT registered persons to defer VAT payments due between March and June 2020 and around 600,000 businesses took advantage of the relief. The deadline was 30 June 2021, and it has been stated that over a quarter of business have failed to contact HMRC about their debts and have not made the necessary payments.

The total outstanding, according to The Treasury, is £2.7 billion which represents circa 9% of the VAT take. Of the tax deferred under the scheme, £17.8 billion has been paid and around £13 billion is being paid via monthly instalments.

HMRC have announced its approach to collection VAT debt after Covid19.

It has also become clear is that businesses and consumers have fallen into default during and after the pandemic. It is anticipated that the ability to settle of debts on time will decrease and it is apparent that many debts will never be settled. Consequently, it appears timely to look at the available relief. An article on VAT Bad Debt Relief here.

We would urge, that even if a business cannot make a payment, that it still submits VAT returns on time. It is tempting to accept a centrally issued assessment if it is for a lesser amount than the actual VAT due for the period. However, such action can, and often does, lead to penalties and increased interest from HMRC.

VAT: New One Stop Shop (OSS) rules from 1 July 2021

By   15 June 2021
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All you need to know about the new One Stop Shop (OSS)

New VAT rules will be introduced on 1 July 2021, and it is important that businesses and advisers are aware of the impact on transactions from this date. These changes have been introduced to increase the control of tax revenues as it is an area where a significant amount of tax is lost – creating an unfairness for businesses that correctly pay tax. They also aim to provide simplification for suppliers and consumers.  

Who will be affected?

The new rules will impact all businesses that sell products online to consumers (B2C) in the EU, known as: distance sales. It will also affect suppliers of certain designated services and electronic interfaces.

UK online sellers not established anywhere in the EU can use the “Non-Union” version of OSS.

How OSS works

The current position

The current EU VAT rules state that cross-border sales of goods are subject to VAT in the EU Member State (MS) of dispatch. However, there are thresholds; once these sales reach a threshold in the MS of sale, a business is required to VAT register in that MS and ensure compliance and payment of VAT there.

The new rules

All sales will be subject to VAT in the MS of arrival of the goods. The existing thresholds for distance sales of goods (where the supplier is responsible for the transport of the products) within the EU will be replaced by a new EU threshold of €10,000*. To avoid a business having to VAT register in every EU MS into which it supplies goods, online sellers will be able to use the OSS electronic portal. This will enable the seller to account for, and pay, VAT in all EU MS on a single electronic quarterly return in one EU MS.

* As, since Brexit, the UK is no longer an EU MS, one the main differences is that the €10,000 annual turnover threshold for small business does not apply, so an EU VAT registration will be required for any distance sales to the EU. The business will need to nominate any single EU MS to register, submit returns, and make payments. Additionally. As a non-union OSS, depending on the chosen MS’s domestic regulations, a business may be required to appoint a fiscal representative.

Note: Even if a UK business has a turnover below the VAT registration threshold (currently £85,000 pa) so that it need not register here, it will be subject to OSS rules and need to register in an EU MS, this is compulsory.

Supplies covered by OSS

  • distance sales of goods within the EU by suppliers not belonging in that MS
  • supplies of certain B2C services (below) made by a supplier which take place in a MS in which it is not established

Services covered by Non-Union OSS

Examples of supplies of services to customers (a non-exhaustive list) that could be reported under the non-Union scheme are:

  • accommodation services
  • admission to cultural, artistic, sporting, scientific, educational, entertainment or similar events; such as fairs and exhibitions
  • transport services, plus ancillary activities such as; loading, unloading, handling or similar
  • valuation and work on movable tangible property
  • services connected to immovable property
  • hiring of means of transport
  • restaurant and catering services for consumption on board ships, aircraft or trains etc

Electronic interfaces

From 1 July 2021, if an electronic interface, eg; marketplace, platform, etc facilitates distance sales of goods by a non-EU established seller to a buyer in the EU, the electronic interface is considered to be the seller (“deemed supplier” rather than agent) and is liable for the payment of VAT via the OSS.

IOSS

In addition to the OSS, a new scheme covering the import of goods subject to a distance sales transaction and in consignments not exceeding €150 is being introduced to simplify accounting for VAT. This is called the Import One-Stop Shop (IOSS). If the value of the consignment exceeds €150, it will usually be the end customer who will be the importer and will have to pay VAT, and any, customs clearance etc costs.

Note: The VAT exemption at import of small consignments of a value up to €22 will be removed. This means all goods imported in the EU will now be subject to VAT.

VAT rates

Businesses will need to apply the VAT rate of the MS where the goods are dispatched to or where the services are supplied. Information on the VAT rates in the EU is available on the European Commission website.

How to register for the OSS

Each EU MS will have an online OSS portal where businesses can register from 1 April 2021 and can use for transactions made on or after 1 July 2021. The single registration will be valid for all eligible supplies made by online sellers (including electronic interfaces) or supplies facilitated by electronic interfaces.

OSS Requirements

A business that uses the OSS will be required to:

  • apply the VAT rate of the MS to which the goods are shipped
  • collect VAT from the buyer
  • submit a quarterly electronic VAT return
  • make quarterly VAT payments
  • keep records of all OSS supplies for ten years

Summary

The OSS is not compulsory, however, as the alternative is to VAT register in every EU MS where goods are received, it is a simplification in that respect – the previous distance selling rules were cumbersome and antiquated.

Further information

Full details of the OSS and IOSS from the EC here

VAT: Input tax recovery – whether a taxable supply. The Door Specialist case

By   9 June 2021
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Latest from the courts

In the First Tier Tribunal case of The Door Specialist Limited (TDSL) the issue was whether an HMRC assessment for overclaimed input tax was correct.

Background

The appellant recovered input tax on the import of goods (doors). The company did not sell the doors, but simply gave the goods (no consideration provided) to a separate company called Just Doors (JD).  It was JD who made the sales of the doors to third party customers.  TDSL and JD were under common ownership but no VAT group in place at the relevant time. TDSL was VAT registered as it made separate, unrelated taxable supplies of property rental

Arguments

HMRC contended that as there was no onward taxable supply of the doors by TDSL, no input tax was recoverable per The VAT Act 1994 section 24 (1). TDSL relied on HMRC’s published guidance (Notices 700 and 700/7) in relation to gifts and proposed that it would be proper to assess for output tax on the “supply” to JD rather than denying the input tax claim.  

Issues

The issues may therefore be summarised as whether;

  • the relevant goods were used for the purpose of any economic activity by TDSL
  • the doors could be treated as business gifts as contended by the applicant such that the input tax was recoverable.

Further cases on economic activity/business here, here and here

Decision

It was decided that as there was no direct and immediate link between the purchase of the goods and any onward taxable supply in the course of business or economic activity by TDSL (as required by the outcome of the cases of BAA Ltd JDI International Leasing Ltd) the disallowance of the input tax was appropriate. The advancement of the business gifts contention did not assist the taxpayer as this was not an economic activity in itself. The appeal was therefore dismissed.

 Commentary

A clear example of not considering the VAT implications when carrying out transactions. This tax cost could have easily been avoided if TDSL had sold the doors to JD. As both parties were fully taxable, there would have been no VAT hit. Business gifts and promotional activities are also often a complex area of VAT and as one former colleague once remarked “If you have a marketing department you have a VAT issue”.

VAT: Certificate of Status

By   16 March 2021
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Claiming VAT in another country

If a UK business wishes to claim VAT incurred in a country outside the UK it will need a Certificate of Status (a “Certificate of Status of Taxable Person”). This certificate, known as a VAT66A, may be obtained from HMRC and certifies that an entity is in business (engaged in an economic activity).

Changes from 8 March 2021

HMRC has announced HMRC changes to the way it issues VAT66As to UK businesses. From 8 March 2021, HMRC will send the certificate by email. A small, but helpful nod to 21st Century technology. A business must first complete an informed consent form before HMRC will correspond by email. The VAT66A only lasts for 12 months, so it is prudent to set a reminder to renew.

However, and there is usually a however, some countries require a “wet stamped” document to support a claim, in which case, HMRC will continue to issue these by post. It makes sense to check what actual documentation each country in which a claim is made requires, as it does vary. It is usually also necessary to make a claim in the language of the country in which the VAT was incurred.

Who can request a certificate of status?

The authorised persons (director or secretary) of the businesses which is registered in the UK for VAT, or an agent which has a letter of authority from a UK VAT-registered business – form 64-8 to act on its behalf.

Requesting a certificate

Send an email to vat66@hmrc.gov.uk with “VAT certificate of status request” in the subject line and the following information:

  • business name
  • VAT registration number
  • business address
  • applicant’s name and role in the business
  • contact telephone number
  • the country (or countries) where the VAT refund claim is being made
  • number of certificates required (one for each country in which a claim is to be made)
  • if the certificate should be sent to you by post or by email

Agent application

Write ‘VAT certificate of status – agent request’ in the subject line of the email, and provide the following information:

  • agent’s name
  • agent’s business address
  • the name of the business to which the certificate relates
  • an attachment with a letter of authority from an authorised signatory of the business you are requesting a certificate for – a list of authorised signatories here; VAT Notice 742A
  • VAT registration number of the business
  • business address
  • the country (or countries) where the VAT refund claim is being made
  • the number of certificates required
  • if the certificate should be sent by post or by email to you or the business you are requesting a certificate for

HMRC say that a certificate will be sent within 15 working days of an application.

Oh for the days of a single electronic application to HMRC which covered all 27 Member States…

VAT: Changes to late returns and payments penalties announced

By   8 March 2021
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HMRC have announced changes to the penalties applied to failure to submit VAT returns on time. Similar changes will be made for late payment penalties. it is anticipated that these changes will apply from 1 April 2022. Changes will also be made to the way interest is charged.

The new penalty regime replaces the existing default surcharges. The new penalties use a points based system . Businesses will no longer receive an automatic financial penalty if they make a late return. Instead, it will incur penalty points for missed obligations before a financial penalty is levied.

Penalties for late submission of returns

VAT registered businesses will receive a point every time they miss a submission deadline. At a certain threshold of points, a financial penalty of £200 will be charged and the business will be notified. A penalty will be charged for that failure and every subsequent failure to make a submission on time, but the points total will not increase.

The penalty thresholds will be:

  • Annual returns – 2 points
  • Quarterly returns – 4 points
  • Monthly returns – 5 points

Points expiry

Points will have a lifetime of two years calculated from the month after the month in which the failure occurred.

However, points will not expire when a business is at the penalty threshold to ensure an achievement of a period of compliance to reset the points.

Penalties for late payment and interest harmonisation

The new Late Payment Penalties regime will replace the the Default Surcharge, which served as a combined late submission and late payment sanction.

There are two late payment penalties applicable; a first penalty and then an additional or second penalty, with an annualised penalty rate.

First Penalty

A business will not incur a penalty if the outstanding tax is paid within the first 15 days after the due date. If VAT remains unpaid after Day 15, the business incurs the first penalty. This penalty is set at 2% of the tax outstanding after Day 15. If any of this tax is still unpaid after Day 30, the penalty increases to 4% of the tax outstanding after Day 30.

Second Penalty

If tax remains unpaid on Day 31, a business will begin to incur an additional penalty on the VAT that remains outstanding. It accrues on a daily basis, at a rate of 4% per annum on the outstanding amount. This additional penalty will stop accruing when the taxpayer pays the tax that is due.

Time-to-Pay arrangements

HMRC offers the option of requesting a Time To Pay arrangement. This will enable a business to stop a penalty from accruing any further by approaching HMRC and agreeing a schedule for paying their outstanding tax.

Interest Harmonisation

HMRC will charge interest on tax that is outstanding after the due date, regardless of whether any Late Payment Penalties have been charged. Interest will apply from the date the payment was due until the date on which it is paid. It will be calculated as simple interest at a rate of 2.5% + the Bank of England base rate.

Where a business has overpaid tax, HMRC will pay Repayment Interest on any VAT due to be repaid either from the last day the payment was due to be received or the day it was received, whichever is later, until the date of repayment. Interest will be paid at the Bank of England base rate less 1% (with a minimum rate of 0.5%).

Reviews and appeals

Businesses will be able to challenge a point or penalty through both an internal HMRC review process and an appeal to the courts (in a similar way to assessments for VAT are challengeable).

More on late returns here and on late payments here.

VAT: Budget 2021 – hospitality, holiday accommodation and attractions

By   4 March 2021
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Further to my articles here and here the government have announced further measures for hospitality, holiday accommodation and tourist attractions.

These measures introduce

  • an extension to the temporary reduced rate of VAT (5%) for a further 6 month period until 30 September 2021. A new reduced rate of will then be introduced until 31 March 2022.
  • a new reduced rate of 12.5% will then be introduced which will end on 31 March 2022.

Aims

These changes are aimed at supporting the reopening of the economy following the outbreak of the coronavirus pandemic and help to re-establish habits such as eating out in restaurants.

The measures will help to protect an estimated 2.4 million jobs in these industries.

VAT – Disbursements Q & As

By   22 February 2021
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Disbursements

A very common query regarding VAT is “I pass on charges incurred on behalf of my client/customer – do I add VAT?”  In other words, does the payment qualify as a disbursement?

Does it matter if the original supply has VAT on it?

Yes. Whether a payment is a disbursement is only a practical issue if the charge involved is initially VAT free since, if it were VATable, there would be no benefit to the final customer in passing the charge on “in the same state”.  The points below assume that the charge in question is VAT free, eg; statutory fees (land registry, stamp duty, search fees, MOTs etc) insurance, financial products etc although benefits may also be obtained if the original supply is reduced rated.

So only if a supply is a disbursement can I pass it on in the “same state; ie; VAT free?

Yes

So when can I pass on a payment VAT free? 

A disbursement is passed on without any alteration (eg; not marked up or changed in any way) and the supply must be to the final customer by the original provider.  If the supply is VAT free then the recovery of the costs is also VAT free.  The passing on of the payment from the final customer to the supplier is done as agent.  Therefore, in these circumstances, a supplier may be acting as principal for part of a supply, and agent for another part.  The disbursement should not appear on the “agent’s” VAT return.

When do I have to add VAT onto a supply which is originally VAT free?

When the onward supply is not a disbursement.

A distinction must be drawn between a necessary cost component of a supplier making a supply and a disbursement.  An example is zero-rated travel.  A supplier may incur a train fare in providing his service, but that is a cost component for him and not a disbursement, so VAT would be added to any onward charge.  It is clear that the supplier is not actually supplying train travel to his customer, but is consuming the cost in providing his overall VATable service.

What are the rules for treating a payment as a disbursement?

The following criteria must be met by a supplier to establish whether it qualifies as a disbursement:

  • you acted as the agent of your client when you paid the third party
  • your client actually received and used the goods or services provided by the third party
  • your client was responsible for paying the third party
  • your client authorised you to make the payment on their behalf
  • your client knew that the goods or services you paid for would be provided by a third party
  • your outlay will be separately itemised when you invoice your client
  • you recover only the exact amount which you paid to the third party, and
  • the goods or services, which you paid for, are clearly additional to the supplies which you make to your client on your own account.

What if I get it wrong?

If you add VAT to a properly VAT free disbursement HMRC will treat the amount shown on the invoice as VAT.  However, it will not permit the recipient of the supply to recover input tax (as it is not VAT) thus creating an actual VAT cost. if you treat a supply as a VAT free disbursement when it actually forms part of your taxable supply, HMRC will issue and assessment and potentially penalties and interest.  Unfortunately, I have seen this course of action taken a number of times and the amounts of VAT involved were significant.

Please contact us if you have any queries on this matter.  Sometimes the matter is less than straightforward and getting it wrong can be very expensive for a business. If you have been charged VAT on what you believe to be a VAT free disbursement, it may also be worth challenging your supplier.

The latest case law on disbursements here Brabners LLP

VAT: Domestic Reverse Charge for construction services from 1 March 2021

By   17 February 2021
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A reminder

The twice delayed introduction of the Domestic Reverse Charge (DRC) for the construction industry will be introduced from the first of next month and affected businesses need to have the necessary procedures in place – as it won’t be deferred again.!

Details of the scheme here and here.

Please contact us if you have any queries.