Tag Archives: VAT-error-correction

HMRC internal manual: VAT Assessments and Error Correction update

By Marcus Ward 21 October 2024

HMRC’s manual VAT Assessments and Error Correction was updated on 15 October 2024.

This internal guidance is for HMRC inspectors (but is equally useful for advisers) covers assessments and error correction. The amendments apply mainly to General assessment procedures: Importance of avoiding delay.

The manual covers:

It also refers to for the most up-to-date guidance on reasonable excuse CH160000.as a defence against penalties and interest.

VAT: What is unjust enrichment?

By Marcus Ward 2 November 2022

If a business has overdeclared output tax on past returns then it seems reasonable that this should be corrected, either by adjusting a current return or submitting a form VAT652 if the “error” is over £10,000 net.

If it is a genuine adjustment, surely HMRC must recognise the correction and either make a repayment or offset the overdeclaration against a current amount of VAT due.

The answer is yes, but… “unjust enrichment”…

Unjust enrichment

HMRC has a defence of unjust enrichment via The VAT Act 1994, sect 80(3)

“It shall be a defence, in relation to a claim under this section by virtue of subsection (1) or (1A) above, that the crediting of an amount would unjustly enrich the claimant.”

This means that HMRC can refuse to repay a claim if they can show that it would unjustly enrich the taxpayer.

It should always be borne in mind that if a claimant absorbed the burden of the wrongly charged VAT himself then unjust enrichment cannot be used as a defence against refusal to repay the claim. Loss or damage to a business due to overpaid VAT is considered in detail here.

Meaning

A refusal to repay a VAT claim using the unjust enrichment contention is to prevent a business becoming enriched at the expense of other entities who actually bore the cost of the incorrectly charged VAT. The authorities consider that a taxpayer should not be put into a better position by recovering the VAT than if VAT had not been charged at all. HMRC regard it as appropriate for unjust enrichment to be considered every time a claim is made.

The recipients of the corrected supply may be final consumers but can also be businesses, charities, etc, who were unable to deduct the overcharged VAT as input tax.

The salient point being whether the VAT was added to the price charged by the claimant or whether the claimant would have charged less had he known that his supplies were not liable to VAT.

HMRC consider that the process of establishing whether a claimant will be unjustly enriched by payment of his claim is two-stage procedure.

First stage

Whether the burden of the overdeclared VAT being claimed was passed on to the claimant’s customers, that is, whether the claimant charged the market rate* plus VAT. This is done on the basis of an economic analysis of the market in which the claimant is operating see; Berkshire Golf Club [2015] UKFTT 627 (TC).

If the customer deducted the wrongly invoiced output tax as input tax, HMRC is entitled to assume that the supplier passed the economic burden of the tax charge on to its customers. In this case, the VAT wrongly accounted for is a cost neither to the supplier nor to the customer.

Second stage

This stage occurs if the claimant accepts that he passed the burden of the tax charge on to his customers but argues that doing that caused loss or damage to his business, for example, by loss of customers or of profits, ie; has the taxpayer been economically damaged by having to bear the VAT cost?

The burden of proof of establishing that there is unjust enrichment falls upon HMRC. The standard of proof is the civil standard of proof; on a balance of probabilities.

HMRC will require the claimant to provide all of the relevant information on; pricing, policy and any other relevant documentation that establishes the pricing strategy**. It is to the taxpayer’s advantage to demonstrate that their margins have been depressed, as they have been required to charge VAT incorrectly.

Factors that HMRC consider:

who are the claimant’s competitors?
what is its market? (comparisons made with other competitors’ products)
how does the business set its prices?
what are the business’ overheads?
any other factors that may affect the prices

The reimbursement scheme

This is an undertaking to comply with certain reimbursement arrangements. The full text of the required undertaking is set out here.

This scheme applies where a business accepts, or HMRC prove, that by receiving a refund of sums incorrectly accounted for as output tax the business would be unjustly enriched at its customers’ expense and it wishes to refund the money they overpaid. If a customer was able to deduct all of the mistaken VAT charge as input tax HMRC will not regard them as having borne the burden of the charge.

In such cases HMRC will only make a refund of overpaid VAT if the taxpayer agrees to reimburse those customers in accordance with the terms of the scheme. More details Notice 700/45.

If HMRC repay a claim and the claimant is unable or unwilling to reimburse its customers (who bore the cost) with any amounts paid to him by HMRC then unjust enrichment will always apply. See The Deluxe High Court case.

Prices after a claim

It is worth bearing in mind that where a claimant has kept prices the same after he has found out that no VAT was due on the supplies in question, courts are likely to assume that that is because the business was charging the market rate. That assumption is made on the basis that, if the market rate were less, he would be compelled to reduce his prices. HMRC often check any post-claim price changes (or lack thereof).

Case law (summary)

The salient points from European Court of Justice case law may be summarised as:

a person who has wrongly accounted for VAT is entitled to recover it
HMRC is entitled to refuse to repay where it can show that the claimant did not bear the economic burden of the wrongly paid tax but passed it on to its customers
the invocation of the unjust enrichment defence is the restriction of a personal right derived from EU law, and so it is something that should be done only exceptionally
the unjust enrichment defence cannot be invoked simply on the grounds that the VAT was shown separately on an invoice
before HMRC can invoke the unjust enrichment defence it must carry out an economic analysis of the market in which the claimant is operating
the case law of both the European and the UK courts assumes that, in a free market economy, a trader required to account for a transaction-based tax will charge the market rate, not market rate plus tax

* The case law of the European Court of Justice and of the courts in the UK begin with the assumption that in a free market economy (and probably even in a managed economy) a business will charge the market rate and account for any VAT out of his profit margin.

** A pricing strategy is a business’s approach to determining the price at which it offers goods or services to the market. Pricing policies ensure businesses remain profitable and they give them the flexibility to price separate products differently.

Pricing policies refer to the processes and methodologies a businesses uses to set prices for their supplies. There are various pricing strategies that may be used, but some of the more common ones include:

value-based pricing
competitive pricing
price skimming
cost-plus pricing
penetration pricing
economy pricing
dynamic pricing

Further reading

VAT: New online service for error correction

By Marcus Ward 30 August 2022

HMRC has launched a new online service for the correction of errors made on previous VAT returns. Previously, a business must have emailed a correction to form to: inbox.btcnevaterrorcorrection@hmrc.gov.uk (it is still possible to use this method of reporting). The Form VAT652 – “Tell HMRC about any errors in your VAT Return” is used for any corrections of £10,000 (net of all errors) or more of VAT.

Oops! – Top Ten VAT howlers

By Marcus Ward 2 November 2021

I am often asked what the most frequent VAT errors made by a business are. I usually reply along the lines of “a general poor understanding of VAT, considering the tax too late or just plain missing a VAT issue”. While this is unquestionably true, a little further thought results in this top ten list of VAT horrors:

Not considering that HMRC may be wrong. There is a general assumption that HMRC know what they are doing. While this is true in most cases, the complexity and fast moving nature of the tax can often catch an inspector out. Added to this is the fact that in most cases inspectors refer to HMRC guidance (which is HMRC’s interpretation of the law) rather to the legislation itself. Reference to the legislation isn’t always straightforward either, as often EC rather than UK domestic legislation is cited to support an analysis. The moral to the story is that tax is complicated for the regulator as well, and no business should feel fearful or reticent about challenging a HMRC decision.
Missing a VAT issue altogether. A lot of errors are as a result of VAT not being considered at all. This is usually in relation to unusual or one-off transactions (particularly land and property or sales of businesses). Not recognising a VAT triggerpoint can result in an unexpected VAT bill, penalties and interest, plus a possible reduction of income of 20% or an added 20% in costs. Of course, one of the basic howlers is not registering at the correct time. Beware the late registration penalty, plus even more stringent penalties if HMRC consider that not registering has been done deliberately.
Not considering alternative structures. If VAT is looked at early enough, there is very often ways to avoid VAT representing a cost. Even if this is not possible, there may be ways of mitigating a VAT hit.
Assuming that all transactions with overseas customers are VAT free. There is no “one size fits all” treatment for cross border transactions. There are different rules for goods and services and a vast array of different rules for different services. The increase in trading via the internet has only added to the complexity in this area, and with new technology only likely to increase the rate of new types of supply it is crucial to consider the implications of tax; in the UK and elsewhere.
Leaving VAT planning to the last minute. VAT is time sensitive and it is not usually possible to plan retrospectively. Once an event has occurred it is normally too late to amend any transactions or structures. VAT shouldn’t wag the commercial dog, but failure to deal with it at the right time may be either a deal-breaker or a costly mistake.
Getting the option to tax wrong. Opting to tax is one area of VAT where a taxpayer has a choice. This affords the possibility of making the wrong choice, for whatever reasons. Not opting to tax when beneficial, or opting when it is detrimental can hugely impact on the profitability of a project. Not many businesses can carry the cost of, say, not being able to recover VAT on the purchase of a property, or not being able to recover input tax on a big refurbishment. Additionally, seeing expected income being reduced by 20% will usually wipe out any profit in a transaction.
Not realising a business is partly exempt. For a business, exemption is a VAT cost, not a relief. Apart from the complexity of partial exemption, a partly exempt business will not be permitted to reclaim all of the input tax it incurs and this represents an actual cost. In fact, a business which only makes exempt supplies will not be able to VAT register, so all input tax will be lost. There is a lot of planning that may be employed for partly exempt businesses and not taking advantage of this often creates additional VAT costs.
Relying on the partial exemption standard method to the business’ disadvantage. A partly exempt business has the opportunity to consider many methods to calculate irrecoverable input tax. The default method, the “standard method” often provides an unfair and costly result. I recommend that any partly exempt business obtains a review of its activities from a specialist. I have been able to save significant amounts for clients simply by agreeing an alternative partial exemption method with HMRC.
Not taking advantage of the available reliefs. There are a range of reliefs available, if one knows where to look. From Bad Debt Relief, Zero Rating (VAT nirvana!) and certain de minimis limits to charity reliefs and the Flat Rate Scheme, there are a number of easements and simplifications which could save a business money and reduce administrative and time costs.
Forgetting the impact of the Capital Goods Scheme (CGS). The range of costs covered by this scheme has been expanded recently. Broadly, VAT incurred on certain expenditure is required to be adjusted over a five or ten year period. Failure to recognise this could either result in assessments and penalties, or a position whereby input tax has been under-claimed. The CGS also “passes on” when a TOGC occurs, so extra caution is necessary in these cases.

So, you may ask: “How do I make sure that I avoid these VAT pitfalls?” – And you would be right to ask.

Of course, I would recommend that you engage a VAT specialist to help reduce the exposure to VAT costs!

VAT: Coronavirus latest – correction of errors

By Marcus Ward 9 April 2020

Correcting errors on your VAT Return

HMRC have announced that, due to coronavirus, it will no longer be accepting paper copies of VAT652s by post.

If an error is discovered on a past VAT return it is necessary to report it to HMRC on form VAT652 if it is £10,000 (net of all errors) or more of VAT. More details here

email

A business must now email its VAT652 form to:
inbox.btcnevaterrorcorrection@hmrc.gov.uk

Telephone

A business can call to check HMRC has received its error correction notification if it has not had an acknowledgement after 21 days.

Errors cannot be corrected over the phone.

Telephone: 0300 200 3700

This is said to be a temporary measure, but I cannot see why HMRC would revert to a paper based system when the virus poses less of a threat.

Remember: stay in!