In or out?
If a biscuit is covered, even partially, in chocolate the VAT is 20%, but if the chocolate is inside, say a choc chip cookie or a bourbon, it is VAT free.
Tag Archives: vat-errors
VAT: Personal Liability Notices
A Personal Liability Notice (PLN) can be issued by HMRC to a company’s director(s) to transfer the liability to pay VAT or a VAT penalty from the company to an individual. A PLN can also be issued to a member of an LLP.
When a PLN is issued
An officer or officers of a company may be personally liable to pay all or part of the company penalty where:
- a company is liable to a penalty for a deliberate wrongdoing and
- the wrongdoing is attributable to the deliberate action of an officer or officers of the company
Additionally, one of the two circumstances below must also apply
- the officer gained or attempted to gain personally from the wrongdoing, or
- the company is insolvent or likely to become insolvent
Any grounds for suspicion that the company may become insolvent should to be supported by evidence, for example, where there are cash flow problems, insufficient assets to cover liabilities, or evidence of phoenixism.
An officer’s liability to pay a penalty also applies to inaccuracy penalties.
Liable persons
The company officers are known in HMRC guidance as “liable officers”. These include:
- elected officers
- managers
- directors
- company secretary
- any other person managing or purporting to manage any of the company’s affairs.
LLP officers are members.
A PLN’s power gives HMRC the right to recover all or part of the penalty from the liable officer rather than the company/LLP itself.
Where there is more than one deliberate wrongdoing, each deliberate wrongdoing must be considered separately for the purpose of establishing whether it should be attributed to an officer or officers.
Wrongdoings
There are four types of wrongdoings:
- the issue of an invoice showing VAT by an unauthorised person
- misuse of a product so that it attracts a higher rate of excise duty
- the handling of goods on which payment of excise duty is outstanding
- knowingly disposing of, or causing or permitting the disposal of, material at an unauthorised waste site
The wrongdoing must arise from the deliberate action of an officer of the company.
Personal gain
Once HMRC has attributed the deliberate wrongdoing to one or more company officers it must consider whether any of the officers, by fact or implication, have gained or attempted to gain personally from the wrongdoing. It is sufficient to show that each officer has gained or attempted to gain. It will not however always be possible to establish the full extent to which each officer has gained or attempted to gain, in which case HMRC would issue the PLN based on best judgment of the amount they attempted to gain personally, eg:
- the officer may accept that there was an actual or attempted personal gain from a deliberate wrongdoing that can be attributed to them, or
- it may be clear from business records or the officer’s lifestyle that they gained or attempted to gain personally from the results of the deliberate wrongdoing
Appeals
A liable officer can appeal against
- a decision to pursue them for all or part of the penalty assessed on the company, as set out in the PLN, including whether the penalty is attributable to them, and
- the amount of the penalty HMRC has allocated to them
- They cannot however appeal against a decision that they have gained or attempted to gain personally from the deliberate wrongdoing, or that the company is likely to go into liquidation
PLNs are subject to the same procedures as company penalties.
Legislation
Finance Act 2008, Schedule 41: Penalties: failure to notify and certain VAT and Excise wrongdoing.
VAT: DIY Housebuilders’ Scheme – The Brian Lawton case
Latest from the courts
In the First-Tier Tribunal (FTT) case of Brian Lawton the issue was whether a second claim under the DIY Housebuilders’ Scheme was valid.
Background
Mr Lawton appealed against the refusal of HMRC to pay a claim submitted in respect of the conversion of a barn into a dwelling and subsequent extensions. Unfortunately, the project faced delays and increased costs due to the Covid-19 pandemic. He claimed a refund of VAT in June 2021, which HMRC repaid. The appellant submitted a second planning application for an extension, which was approved, and the work was completed in October 2022. He then made a second VAT claim October 2022 which HMRC refused.
The issue
Whether it was possible to make more than one single VAT refund claim via the scheme when the project was split into two specific phases. Planning permission was granted for two developments, the:
- first permission was for the conversion of a barn to a dwelling
- second permission was for an extension to existing barn conversion for two bedrooms
– whether the second claim was ineligible for a refund as an extension to an existing dwelling and whether decision to disallow claim for a VAT refund was correct.
Arguments
Lawton contended that it was possible to make two separate claims due to the distinct nature of the projects, and that his first claim had been erroneous since the barn conversion was uninhabitable.
HMRC’s view was that the second claim related to an extension to a dwelling and not the actual conversion and was consequently ineligible.
Decision
Despite the FTT being sympathetic to BL’s predicament in progressing the first application development at the time of the Covid pandemic and the lockdown with the financial and economic challenges these brought about, the appeal was dismissed.
The Tribunal considered that HMRC were entitled to insist that only one claim was made under the scheme in circumstances where there has been no repayment in error or invoices and works carried out before the claim was submitted and left out of account in error or invoices issued late by a contractor.
It considered that the first claim was the only one which could be made and was restricted to the stage of development that Lawton had submitted and was covered by the completion certificate of March 2021, being “the conversion of a barn to a dwelling”.
The court emphasised that completion for VAT purposes must align with original planning permissions and agreed with HMRC’s position that extensions to existing dwellings do not qualify for refunds under the scheme.
Legislation
Commentary
This case highlights how important both timing and adhering precisely to the rules of the scheme are. The cost of a self-build can be significant and recovering any VAT incurred is important to ensure budgets are met as far as possible.
Further reading
Background to the scheme here, ten top tips here and further information and other cases on the scheme:
- Changes to the DIY Housebuilders’ Scheme
- DIY Housebuilders’ Scheme – deadline for claims extended
- The Spani case
- The Dunne case
- The Ellis case
VAT Schemes Guide – Alternative ways of accounting for tax
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 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 on sales which customers have not yet paid for.
The VAT cash accounting scheme (CAS) 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 CAS 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 to pay
- output tax is not payable at all if a business has a bad debt (other bad debt relief here)
Disadvantages
- it 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)
- it is 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 (FRS) is designed to assist smaller businesses reduce the amount of time and complexity required for VAT accounting. The FRS 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 FRS with the Annual Accounting Scheme, additionally, there is an option to effectively use a cash basis so there is no need to use CAS. Unfortunately, changes to the scheme 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 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 (however, if an item is sold for less than the purchase price, a business cannot offset losses against the profits of other items to reduce the overall VAT liability).
There is a special margin schemes for auctioneers and a variation of the Margin Scheme (Global Accounting) 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 CAS and Annual Accounting but it cannot combine a Retail Scheme with the FRS. However, retailers may choose to use the FRS 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. A business must still issue a VAT invoice to any customer who requests one. It is a requirement of any scheme choice that HMRC must consider it fair and reasonable.
A business can join a retail scheme at the beginning of any VAT period and HMRC does not need to be notified.
Examples of Retail Schemes
- Apportionment
- Direct calculation
- The point of sale scheme
The required calculations vary for each scheme.
NB: 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. There are also some schemes which are compulsory, like the Tour Operators’ Margin Scheme (TOMS).
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 Groups – updated guidance on penalties
VAT penalties for late submissions
HMRC has updated its Internal Guidance VGROUPS01530 on penalties for late submissions,
Penalties for late submissions are calculated on the basis of points.
For VAT groups the representative member has a single liability for these points covering the whole group. If the representative member changes, the existing liability is transferred to the new representative member. A new member joining the group will not affect the points total of the group, even if the member joining had points before. If a business leaves the group and registers for VAT separately they will start with zero points, even if the group that they left had a penalty point balance.
For divisions, each one is liable for its own separate points and penalties. Each division will have its own maximum points total.
A VAT did you know?
If you buy a flapjack* from a vending machine in the corridor at work it is VAT free. However, if you buy the same product from a machine in the staff canteen it will be standard rated.
* Of course, zero rating only applies to a “traditional” flapjack and not cereal or energy/sports nutrition bars…
VAT: Second-hand goods scheme and best judgement – The Ancient & Modern Jewellers Limited case
Latest from the courts
The second-hands of time.
In the First-tier Tribunal (FTT) case, the issue was whether the second-hand goods margin scheme (margin scheme) was applicable and whether HMRC’s assessments for £5,474,249 (later reduced to £5,004,595) of underdeclared of output tax were issued in best judgement.
Background
The Ancient & Modern Jewellers Limited (A&M) sold second-hand wristwatches with the majority of the sales properly accounted for via the margin scheme. However, from information obtained from Italian tax authorities in respect of supply chain fraud, HMRC issued the assessments on the basis that supplies of certain goods did not meet the conditions of the margin scheme so that output tax was due on the full value of the watches rather than the difference between the purchase and sale values. HMRC decided to penalise A&M because the errors were deliberate and prompted and subsequently to issue a PLN on the basis that such conduct was attributable to the director. A&M is a “High Value Dealer” for anti-money laundering purposes.
Contentions
Appellant
The appellant claimed that HMRC did not use best judgement on the grounds that:
- the inspector did not impartially consider the evidence
- HMRC lacked sufficient evidence to raise an assessment thereby failing to meet the Van Boeckel test
- the calculated amounts were no more than unreasonable and random guesses
- the inspector did not approach the investigation with an open mind to such an extent that it could not be said that the assessments and penalties were the product of the reasonable behaviours of HMRC
- put in terms of the case law: HMRC had acted in a way which no reasonable body of commissioners could have acted or, put another way, had been vindictive, dishonest or capricious
so the assessments and penalties were invalid.
Whilst accepting that a best judgment challenge is a high bar A&M contended that the conduct and mindset of HMRC’s investigating and assessing officer was so unreasonable that it vitiated the whole assessment.
Respondent
HMRC contended that the assessments were based on best judgement and that its focus was not on the supply chain fraud claims (as claimed by A&M). Additionally, a previous inspection in 2014 had raised prior concerns which provided adequate grounds for the assessments. Moreover, A&M was aware of the terms of operation of the second-hand margin scheme and considered that A&M had wilfully misused the scheme in several regards. The scheme had been incorrectly used for goods purchased by way of intracommunity supplies – which had been imported with the appellant claiming input tax on the imports and then including them in the margin scheme. A&M wilfully failed to carry out due diligence on its suppliers.
Best Judgement
It may be helpful if we consider what the words “best judgement” mean. This was best described by Woolf J in Van Boeckel v CEC [1981] STC 290
“What the words ‘best of their judgement’ envisage, in my view, is that the commissioners will fairly consider all material before them and, on that material, come to a decision which is one which is reasonable and not arbitrary as to the amount of tax which is due. As long as there is some material on which the commissioners can reasonably act, then they are not required to carry out investigations which may or may not result in further material being placed before them.”
Technical
The second-hand margin scheme is provided for under The VAT Act 1994, Section 50A, The Value Added Tax (Special Provisions) Order 1995 and certain paragraphs of VAT Notice 718 which have force of law.
Decision
The appeal was dismissed. It was found that A&M deliberately rendered inaccurate VAT returns. The director of the company was aware both of how the margin scheme worked and that the terms of the scheme had to be complied with if a supply was to be taxed under the it. A&M was found to have acted deliberately in misusing the scheme by including ineligible supplies. A&M had been lax in the completion of its stock book, and it had not met the record-keeping requirements necessary to use the scheme for the relevant transactions. Additionally, some of its EU suppliers were not registered for VAT, a fact A&M did not take steps to discover, and so related purchases could not qualify for the scheme. Also, it was likely that some of the purchases were of new watches which made them ineligible for the margin scheme.
Re, evidence; the FTT found much of the A&M director’s evidence to have been self-serving and, in parts, evasive and that it did not consider that the integrity of HMRC could be impugned. The court determined that; the inspector was diligent and thorough, HMRC had legitimate concerns regarding A&M’s use of the margin scheme generally and specifically and there was a wider concern that the company was a participant in fraudulent supply chains. The FTT considered that the investigation was proportionately carried out considering these concerns and the assessments raised in exercise of best judgment.
Penalties and PLN
The case further considered penalties: whether the appellant’s conduct was deliberate (yes – appeal dismissed). Whether the Personal Liability Notice (PLN) [Finance Act 2007, Schedule 24, 19(1)] was appropriate for the conduct attributed to the director – whether his conduct led to penalty (yes – appeal dismissed).
Commentary
This case is a long read, but worthwhile for comments on; the margin scheme use, HMRC’s inspection methods, best judgement, evidence and MTIC amongst other matters.
UK e-invoicing initiative and consultation
The future for e-invoicing
E-invoicing is a long-accepted form of commercial data exchange and is becoming important for regulatory authorities.
HMRC will initiate a consultation process to gather feedback on fostering investment in e-invoicing. The consultation date has not yet been specified, but we recommend that businesses should prepare for potential mandatory e-invoicing. This consultation will seek input from businesses on how HMRC can support investment in and uptake of e-invoicing.
The initiative reflects global trend towards e-invoicing and HMRC’s focus on digital transformation.
Further information on, and a glossary for, e-invoicing here.
New VAT guidelines for compliance
A newly published (18 September 2024) set of guidelines: Guidelines for Compliance GfC8 are aimed at helping businesses with VAT compliance controls and set out what HMRC considers good practice for accounting and compliance processes.
HMRC says that these Guidelines for Compliance (GfC) set out its recommended approach and are designed to help businesses understand HMRC expectations as they plan, carry out, and review the accounting and compliance processes that ensure VAT is accurately declared by a business.
The guide covers:
General approach to VAT compliance controls
VAT reporting – manual adjustments
Next steps — correcting errors and guidance
The guidelines are aimed at those responsible for the governance, controls, processing and submitting of the VAT return. Such roles may include:
- VAT and tax managers
- finance and IT professionals involved in VAT and tax
- senior management with VAT and tax oversight, such as the designated senior accounting officer
- VAT specialists who process and submit returns, whether in-house or within third party providers including shared service centres
- agents
VAT: HMRC manual on supply and consideration updated
HMRC internal manual – VAT Supply and Consideration has been updated.
The manual provides guidance on determining the liability of the supply of goods or services effected for a consideration including:
- basic principles and underlying law
- identifying a supply
- consideration
- illegal supplies
- goods or services
- supplies of goods for both consideration and no consideration
- supplies of services for both consideration and no consideration
- definition of consideration
- indicators of consideration
- off-setting
- compensation
- payments which are not consideration
- payments in specific sectors
- settlement of disputes
The amendments are in respect of payments that are not consideration: Carbon offsetting which adds two new pages giving examples of outside the scope activities and commentary on other ecosystem services.