Tag Archives: vat-errors

Bad Debt Relief (BDR) – Avoiding the VAT burden

By   20 September 2016
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VAT Basics

Anything which can relieve the burden of VAT is to be welcomed. BDR is a useful tool if a business is aware of it and understand when it may be claimed.

It is at the very least frustrating when a client does not pay, and in some cases this situation can lead to the end of a business. At least the VAT charged to the client should not become a cost to a supplier.  The BDR mechanism goes some way to protect a business from payment defaulters.

Under the normal rules of VAT, a supplier is required to account for output tax, even if the supply has not been paid for (however, the use of cash accounting or certain retail schemes removes the problem of VAT on bad debts from the supplier).

There is specific relief however:

Conditions for claiming BDR

The supplier must have supplied goods or services for a consideration in money, and must have accounted for and paid VAT on the supply. All or part of the consideration must have been written off as a bad debt by making the appropriate entry in the business’ records (this does not have to be a “formal” procedure). At least six months (but not more than three years and six months) must have elapsed since the later of the date of supply or the due date for payment.

Records required

Various records and evidence must be kept (for four years from the date of claim), in particular to identify:

• The time and nature of the supply, the purchaser, and the consideration
• The amount of VAT chargeable on the supply
• The accounting period when this VAT was accounted for and paid to HMRC
• Any payment received for the supply
• Entries in the refund for bad debts account
• The accounting period in which the claim is made.

Procedure for claiming BDR

The claim is made by including the amount of the refund in Box 4 of the VAT Return for the period in which the debt becomes over six months old.

Repayment of refund

Repayment of VAT refunded is required where payment is subsequently received or where the above conditions have not been complied with.

Refund of input tax to debtor

Businesses are required to monitor the time they take to pay their suppliers, and repay input tax claimed if they have not paid the supplier within six months. Subsequent payment of all or part of the debt will allow a corresponding reclaim of input tax. This is an easy assessment for HMRC to make at inspections, so businesses should make reviewing this matter this a regular exercise.

Finally, there is tax point planning available to defer a tax point until payment is received for providers of continuous supplies of services. Please see here

VAT Latest from the courts – HMRC’s bad ‘phone service

By   18 August 2016
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As we know, late payment of VAT results in a Default Surcharge. Details of DS here

However, if a taxpayer has a reasonable excuse the DS will not be due. In the interesting recent case of McNamara Joinery Ltd here

The appeal was on the grounds that HMRC itself caused the default. The business was successful in the appeal on the grounds that its agent could not contact HMRC to arrange a time to pay agreement because of HMRC’s poor telephone service. Anyone who has attempted to contact HMRC by telephone will appreciate that this isn’t a one-off case!

Background

The appellant had a previous history of submitting returns on time, but making late payments late such that the period in question would give rise to a DS if the return or payment was late. Appreciating that the business would not have sufficient funds to meet the VAT payment due, it instructed its agent to contact HMRC on its behalf in an attempt to arrange a “time to pay” (TTP) agreement. The agent attempted to do this two days before the payment was due. However, there were significant problems with the telephone service and the agent was unable to get through as the line kept “going dead” (It appears from later comments made by HMRC that this was due to the volume of calls made at the end of the VAT period). A TTP agreement was subsequently reached, but only after the due date which HMRC argued was too late to avoid the DS.

Decision

On the subject of reasonable excuse, the FT Tribunal observed that “A reasonable excuse is normally an unexpected event, something unforeseeable, something out of the appellant’s control. Insufficiency of funds is not regarded as a reasonable excuse although the reason for the insufficiency might be. It is unfortunately part of the hazards of trade that debtors fail to keep promises to pay. These submissions cannot be regarded as establishing for the appellant a reasonable excuse for the late payment.”
It continued “However, faced with the problem of not having received promised payments, the appellant through its agent did all that it could do in the circumstances…., its agent tried repeatedly to contact HMRC by telephone but was unsuccessful until 12 February 2016 when a time to pay agreement was made and subsequently the arrangements made were adhered to. In the Tribunal’s view this repeated failure to contact HMRC was unexpected and unforeseeable”. Therefore the taxpayer had a reasonable excuse and the DS was removed.

The Judge did not accept HMRC’s submission that the appellant should have been aware that there was a likelihood that there would be a large volume of calls being made to HMRC on the days immediately prior to the due date and that as a result the appellant could reasonably have expected delays in being able to make contact. HMRC do not publish times when their lines are likely to be busy. Rather than expecting delays it is reasonable for a taxpayer to expect telephone calls to HMRC to be answered without delay. In the Tribunal’s view HMRC were in a better position than the appellant to know when there is a likelihood of a large volume of calls and they should have arrangements in place to deal with the higher volume of calls promptly.

So HMRC lost this case because they failed to answer the phone.

Lessons to be learned

  1. One cannot rely on HMRC answering their own phones, even though they are fully aware that there will be an increased demand at certain times. They do not have arrangements in place to deal with the known demand. They do not have a reasonable excuse for not dealing with taxpayers!
  2. When attempting to contact HMRC it is a very good idea to keep an accurate log.
  3. If it is likely that a business is experiencing cashflow issues, contact HMRC as soon as possible and do not leave it to the last moment.
  4. It is possible to arrange a TTP agreement with HMRC.
  5. A business should take advice from their advisers as soon as possible to avoid DSs. This may avoid both a TTP position and/or a DS.

VAT – The “business” of shooting; a tale

By   15 July 2016
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Sometimes one is involved in a dispute which goes to the core of the tax.  This is a case which highlights basic VAT principles, HMRC’s approach to an issue and the lengths to which a taxpayer has to go to defend his position.

Are you sitting comfortably?

A day out in the countryside; striding across beautiful landscape, amongst friends, enjoying each other’s’ company and a bit of sport – can this really be the subject of such intense debate with HMRC? Well, unfortunately this seems to be the case when it comes to the operation of a day’s shooting. In the eyes of the taxman, whether or not a profit or a surplus is achieved, shooting, conducted in the course of furtherance of a business is subject to VAT.

This is not usually an issue which shooting syndicates find themselves having to address; they are not concerned with the ins and outs of what constitutes a business for the purposes of the VAT legislation. However, HMRC was pursuing this issue in earnest and they have a team devoted solely to attacking shoots.

Who is HMRC targeting?

HMRC seem to be focusing on syndicate run shoots which are not registered for VAT but who HMRC believe are operating on business principles. If an organisation is operating as a business then it may be liable to register for VAT if certain income thresholds are exceeded. The shoot will then have to charge output VAT on the supplies it makes.  In my case there would have been a significant assessment plus penalties and interest which could double the past VAT bill.

How is HMRC attacking the issue?

HMRC is looking closely at the specific activities of syndicate shoots in order to build an argument demonstrating that the organisation of the shoot is run on “sound business principles”.  The reason that there is room for debate on this matter is that what constitutes a business is not explicitly defined anywhere in the VAT legislation either in UK or EC law. Rather, the issue has been defined in case law.

The defining case was Lord Fisher, which co-incidentally also concerned a shoot. This case is relied upon throughout the VAT world to give guidance on what constitutes a business – and not just in respect of shoots but for all types of activity.

Anyway, back to this syndicate…

I was involved in a battle lasting four years which concerned a local shoot run for over five decades by a group of friends and which was provided only for the benefit of the syndicate members. The shoot was not open to the common commercial market place or members of the public and the shoot did not advertise. HMRC spent a great deal of time trying to understand the finer details of the running of this shoot and concluded that it was a business

We advised The Shoot to appeal to the VAT Tribunal against HMRC’s decision to levy VAT on its activities.

They key to the syndicate’s defence was to demonstrate that no true business would operate commercially in the way that The Shoot does.  If it did, it would be completely unprofitable and would soon be out of business. To demonstrate this effectively, every aspect of the shoot was examined in detail and compared and contrasted with the way a commercial shoot operates. This involved everything from the lunch arrangements, CVs of the gamekeepers and how beautiful the land is, right through to whether chicks or poults are purchased and whether local deer were sold to the highest bidder. However, the most important factor was the demonstration that the syndicate does not have a profit built in to the cost structure and the amounts that the syndicate members contribute. The syndicate is run on a cost sharing basis and is not “an activity likely to be carried out by a private undertaking on a market, organised within a professional framework and generally performed in the interest of generating a profit.”

It all sounds so simple to those familiar with the industry but unfortunately from a VAT ‘business’ perspective it has been a long, stressful and costly argument for the appellant to make.  A few days before the case was to be heard at the Tribunal, HMRC withdrew their assessment and conceded the case.

HMRC had seen the many witness statements filed by the members of the syndicate waxing lyrical about how this was an age-old hobby run by a few friends and in no way could it be considered a commercial business. They had seen the expert witness report written by a specialist in the field. The distinctions made between commercial and syndicate shooting were made very clear. They had also seen the powerful argument which concluded that the shoot “cannot seriously be suggested to amount to a ‘business’ for the purpose of the VAT code”.

What this means?

Of course this victory over HMRC was a fantastic result for the members of the The Shoot, but from a practical point of view quite frustrating in that the case was not heard; denying other entities the benefit of the predicted victory.  Alas, it was one case that HMRC could not afford to lose.

It is therefore likely that HMRC will continue to target other shoots where they think they can ‘win’ or at least not be challenged.

Have you been affected? – What should you do next?

If this makes for frighteningly familiar reading and you or your local syndicate shoot are, or have been, under HMRC investigation then it is vital that you should take professional advice.  As we orchestrated the defence for The Shoot we are the leading advisers in such matters.

 For completeness, the six tests derived from the Lord Fisher case (and others) are: 
  1. Is the activity a serious undertaking earnestly pursued?
  2. Is the activity an occupation or function, which is actively pursued with reasonable or recognisable continuity?
  3. Does the activity have a certain measure of substance in terms of the quarterly or annual value of taxable supplies made?
  4. Is the activity conducted in a regular manner and on sound and recognised business principles?
  5. Is the activity predominantly concerned with the making of taxable supplies for a consideration?
  6. 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?
 The recent case of Lajvér Meliorációs Nonprofit Kft. and Lajvér Csapadékvízrendezési Nonprofit Kft is also helpful in looking at what a business is details here

VAT – Time of supply (Tax Point). The Rules

By   10 June 2016
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Although one of the “VAT basics”, it is sometimes quite difficult to establish the date for a tax point, and there is a great deal of case law which suggests that this seemingly straightforward exercise can throw up difficulties.

The time at which a supply of goods or services is deemed to take place is called the tax point. VAT must normally be accounted for in the VAT period in which the tax point occurs and at the rate of VAT in force at that time. Small businesses may, however, account for VAT on the basis of cash paid and received.

Although the principal purpose of the time of supply rules is to fix the time for accounting for, and claiming VAT, the rules have other uses including

  • calculating turnover for VAT registration purposes
  • establishing the period to which supplies (including exempt supplies) are to be allocated for partial exemption purposes, and
  • establishing when and if input tax may be deducted

The tax point for a transaction is the date the transaction takes place for VAT purposes. This is important because it crystallises the date when output tax should be declared and when input tax may be reclaimed. Unsurprisingly, get it wrong and there could be penalties and interest or VAT is declared too early or input tax claimed late – both situations are to be avoided, especially in large value and/or complex situations.

The time of supply rules

Basic tax point (Date of supply)

Goods

The basic tax point for a supply of goods is the date the goods are removed, ie; sent to, or taken by, the customer. If the goods are not removed, it is the date they are made available for his use.

Services

The basic tax point for a supply of services is the date the services are performed.

Actual tax point
In the case of both goods and services, where a VAT invoice is raised or payment is made before the basic tax point, there is an earlier actual tax point created at the time the invoice is issued or payment received, whichever occurs first.

14 Day Rule
There is also an actual tax point where a VAT invoice is issued within 14 days after the basic tax point. This overrides the basic tax point.

Continuous supply of services 
If services are supplied on a continuous basis and payments are received regularly or from time to time, there is a tax point every time:

  • A VAT invoice is issued
  • a payment is received, whichever happens first

Deposits

Care should be taken when accounting for deposits. The VAT rules vary depending on the nature of the deposit. In some circumstances deposits may catch out the unwary, these could be, inter alia; auctions, stakeholder/escrow/solicitor accounts in property transactions, and refundable/non-refundable deposits. There are also other special provisions for particular supplies of goods and services, for eg; TOMS.

Summary

The tax point may be summarised (in most circumstances) as the earliest of:

  • The date an invoice is issued
  • The date payment is received
  • The date title to goods is passed, or services are completed.

Some brief examples:

Situation Tax point
No invoice needed Date of supply
VAT invoice issued Date of invoice
VAT invoice issued 15 days or more after the date of supply Date the supply took place
Payment or invoice issued in advance of supply Date of payment or invoice (whichever is earlier)
Payment in advance of supply and no VAT invoice yet issued Date payment received

There are certain exceptions, so care should be taken when establishing a tax point.

Planning

Tax point planning can be very important to a business. the aims in summary are:

  • Deferring a supplier’s tax point where possible
  • Timing of a tax point to benefit both parties to a transaction wherever possible
  • Applying the cash accounting scheme (or withdrawal from it)
  • Using specific documentation to avoid creating tax points for certain supplies
  • Correctly identifying the nature of a supply to benefit from certain tax point rules
  • Generating positive cashflow between “related” entities where permitted
  • Broadly; generate output tax as early as possible in a VAT period, and incur input tax as late as possible
  • Planning for VAT rate changes
  • Ensure that a business does not incur penalties for errors by applying the tax point rules correctly.

Getting a tax point wrong by even one day can be very costly. This is particularly relevant in respect of property transactions. Also, a significant savings may be made by careful tax point planning.

In my next article I shall look at how the tax point rules may be used for beneficial VAT planning in a specific example.

VAT – Apportionment issues: complex and costly

By   24 May 2016
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The dictionary definition of the verb to apportion is “to distribute or allocate proportionally; divide and assign according to some rule of proportional distribution”.

So why is apportionment important in the world of VAT and where would a business encounter the need to apportion? I thought that it might be useful to take an overall look at the subject as it is one of, if not the most, contentious areas of VAT. If affects both output tax declarations and input tax claims, so I have looked at these two areas separately. If an apportionment is inaccurate it will either result in paying too much tax, or risking penalties and additional attention from HMRC; both of which are to be avoided!

The overriding point in all these examples is that any apportionment must be “fair and reasonable”.

Supplies

The following are examples of where a business needs to apportion the value of sales:

  • Retail sales

Retailers find it difficult to account for VAT in the normal way so they use what is known as a retail scheme. There are various schemes but they all provide a formula for calculating VAT on sales at the standard, reduced and zero rate. This is needed for shops that sell goods at different rates, eg; food, clothing and books alongside standard rated supplies.  As an example, in Apportionment Scheme 1 a business works out the value of its purchases for retail sale at different rates of VAT and applies those proportions to its sales.

  • Construction

A good example here is if a developer employs a contractor to construct a new building which contains retail units on the ground floor with flats above.  The construction of the commercial part is standard rated, but the building of the residential element is zero rated.  The contractor has to apportion his supply between the two VAT rates.  This apportionment could be made with reference to floorspace, costs, value or any other method which provides a fair and reasonable result.  The value of supplies relating to property is often high, so it is important that the apportionment is accurate and not open to challenge from HMRC.  I recommend that agreement on the method used is agreed with HMRC prior to the supply in order to avoid any subsequent issues.

  • Property letting

Let us assume that in the construction example above, when the construction is complete, the developer lets the whole building to a third party. He chooses to opt to tax the property in order to recover the attributable input tax.  The option has no effect on the residential element which will represent an exempt supply. Consequently, an apportionment must be made between the letting income in respect of the shops and flats.

  • Subscriptions

There has been a great deal of case law on whether subscriptions to certain organisations by which the subscriber obtains various benefits represent a single supply at a certain VAT rate, or separate supplies at different rates. A common example is zero rated printed matter with other exempt or standard rated supplies.

  • Take away

Most are familiar with the furore over the “pasty tax” and even with the U-turn, the provision of food/catering is often the subject of disputes over apportionment.  Broadly; the sale of cold food for take away is zero rated and hot food and eat in (catering) is standard rated.  There have been myriad cases on what’s hot and what’s not, what constitutes a premises (for eat in), and how food is “held out” for sale. The recent Subway dispute highlights the subtleties in this area. I have successfully claimed significant amounts of overpaid output tax based on this kind of apportionment and it is always worth reviewing a business’s position.  New products are arriving all the time and circumstances of a business can change.  A word of warning here; HMRC regularly mount covert observation exercises to record the proportion of customers eating in to those taking away.  They also carry out “test eats” so it is crucial that any method used to apportion sales is accurate and supportable.

  • Opticians

Opticians have a difficult time of it with VAT.  Examinations and advice services are exempt healthcare, but the sale of goods; spectacles and contact lenses, is standard rated.  Almost always a customer/patient pays a single amount which covers the services as well as the goods. Apportionment in these cases is very difficult and has been the subject of disagreement and tribunal cases for many years; some of which I have been involved in.  Not only is the sales value apportionment complex, but many opticians are partly exempt which causes additional difficulties. I recommend that all opticians review their VAT position.

Input tax recovery

  • Business/Non-Business (BNB)

If an entity is involved in both business and non-business activities, eg; a charity which provides free advice and also has a shop which sells donated goods. It is unable to recover all of the VAT it incurs.  VAT attributable to non-business activities is not input tax and cannot be reclaimed.  Therefore it is necessary to calculate the quantum of VAT attributable to BNB activities, that VAT which cannot be attributed is called overhead VAT and must be apportioned between BNB activities.  There are many varied ways of doing this as the VAT legislation does not specify any particular method.  Therefore it is important to consider all of the available alternatives. Examples of these are; income, expenditure, time, floorspace, transaction count etc.

  • Partial exemption

Similarly to BNB if a business makes exempt supplies, eg; certain property letting, insurance and financial products, it cannot recover input tax attributable to those exempt supplies (unless the value is de minimis). Overhead input tax needs to be apportioned between taxable and exempt supplies.  The standard method of doing this is to apply the ratio of taxable versus exempt supply values to the overhead tax. However, there are many “special methods” available, but these have to be agreed with HMRC.  Partial exemption is often complex and always results in an actual VAT cost to a business, so it is always worthwhile to review the position regularly.  Exemption is not a relief to a business.

  • Attribution

In both BNB and partial exemption situations before considering overheads all VAT must, as far as possible, be attributed to either taxable or exempt and non-business activities. This in itself is a form of apportionment and it is often not clear how the supply received has been used by a business, that is; of which activity is it a cost component?

  • Business entertainment

At certain events staff may attend along with other guests who are not employed. The recovery of input tax in respect of staff entertainment is recoverable but (generally) entertaining non staff members is blocked. Therefore an apportionment of the VAT incurred on such entertainment is required.

  • Business and private use of an asset

If a company owns, say, a yacht or a helicopter and uses it for a director’s own private use, but it is chartered to third parties when not being used (business use) an apportionment must be made between the two activities. The most usual way of doing this is on a time basis. Apportionment will also be required in the example of a business owning a holiday home used for both business and private purposes. Input tax relating to private (non-business) use is always blocked.

  • Motoring expenses

It is common for a staff member to use a car for both business and private purposes.  Input tax is only recoverable in respect of the business use so an apportionment is required.  This may be done by keeping detailed mileage records, or more simply by applying the Road Fuel Scale Charge which is a set figure per month which represents a disallowance for private use.

The above examples are not exhaustive but I hope they give a flavour to the subject.

If your business apportions, or should apportion, values for either income or expenditure I strongly recommend a review on the method.  There is often no “right answer” for an apportionment and I often find that HMRC impose unnecessarily harsh demands on a taxpayer.  Additionally, many business are unaware of alternatives or are resistant to challenging HMRC even when they have a good case.

New approach to VAT inspections by HMRC

By   16 May 2016
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A VAT quickie.

We understand that HMRC are about to introduce new plans to change the way some VAT inspections are carried out.

The intention is that when a business is selected to an inspection, rather than arranging and visiting the business in the traditional way, initial contact will be made with the responsible person. At this point a short telephone questionnaire will take place.  If this option is taken then it is possible that HMRC will reconsider the need for a full inspection.  This appears to be along the lines of some pre-credibility processes.  It is a pilot exercise and will be entirely voluntary for the taxpayer.

If this approach enables HMRC to focus on evasion and high risk business while reducing the burden for the majority of businesses who always try to be accurate with VAT declarations it is to be welcomed.  We shall see how the pilot goes and whether this is rolled out to more businesses.  HMRC expects that this will be a benefit for both them and taxpayers and it is to be hoped that this is the case.

We have no knowledge currently how “brief” the questionnaire will be and how much information and preparation will be required.  However, it is likely that they will focus on industry specific questions rather than on processes and controls.  

If contacted by HMRC our usual advice is to contact us to ensure everything is as it should be.  This may avoid penalties and ensure any enquires are concluded smoothly.

VAT – Disbursements Q&As

By   6 May 2016
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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.

A guide with helpful diagrams is available here

Ten Questions every business should ask about VAT

By   8 March 2016
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1. Am I sure that a VAT inspection would not find any errors?  

  • An inspection can result in significant assessments, penalties and interest, apart from a business becoming “known” to HMRC. Peace of mind is a valuable benefit for a business owner too!

 2. Am I sure that I am reclaiming as much VAT as possible?

  • We often find that businesses miss out on recovering input tax, this clearly results in an actual cost.

 3. Do I take full advantage all available VAT reliefs, customs exemptions and duty refund schemes? 

  • Failure to do so will create a tax cost and may be putting a business in a less competitive position.

4. Am I up to date on the indirect tax developments in my key markets?

  • Indirect tax changes rapidly, and so does the market place. Being unaware of changes that affect you may result in VAT being overpaid, or penalties being levied if you have underdeclared tax. It may also put you at a competitive disadvantage.

5. Have I considered the impact of tax rate changes on my pricing and margin, and have I taken the necessary measures?

  • Budgeting is affected by VAT.  Failure to consider indirect taxes may eat into profit.

6. Do I collect all the data about my customers and transactions that could be required by tax authorities?

  • As in many VAT circumstances, getting it wrong or missing something results in penalties.

7. Do I comply with all indirect tax requirements in the jurisdictions where I operate or where my customers belong?

  • VAT and GST does exist outside the UK and ignoring overseas indirect tax obligations may result in action being taken by foreign authorities which will prove to be very uncomfortable and expensive.  It is important to understand the rules for indirect tax in each country/area you trade. Don’t get caught out.

8. Do I have the tools to analyse my indirect tax flows and data?

  • Allocating sufficient technical and human resources to VAT is important.  Seeking professional advice at the appropriate time is also prudent.

9. Could changes in the way my business is structured or how transactions are organised improve my indirect tax position and/or reduce complexity?

  • Saving money and reducing tax complications must be near the top of every business’ wish list. Seeking professional advice on structuring a business or a transaction goes a long way to achieving this

10. Is my business using the right VAT scheme?

  • There are many special schemes that a business may use, from the Flat Rate Scheme to Margin Schemes. Most are optional, but some, like the Tour Operators’ Margin Scheme are compulsory. Choose the wrong one, or being unaware of a beneficial scheme could cost.

It is important to constantly monitor a business’ VAT position.  The nature of trade changes, technology changes, case law changes and the VAT rules are constantly in a state of flux.  It is easy to assume that everything is alright because it has always been done that way, but there may be significant exposures and missed opportunities out there.  We offer services from a basic healthcheck to a full technical review.  A review will let you rest easy in your bed if nothing else!

VAT Latest from the courts; can HMRC impose a higher value on a supply?

By   9 February 2016
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VAT Latest from the courts – Whether Open Market Value applies

HMRC has the power to direct that Open Market Value (OMV) is applied to the value of certain supplies between connected parties – VAT Act 1994 Schedule 6, paragraph 1. This power is used to avoid situations where one party is unable to recover all of the input tax incurred on purchases. Usually, the direction is used when one party purchase goods and services at OMV, recovers full input tax and then supplies these goods and services to a connected party at a lower price, thus reducing the amount of input tax lost by the recipient party.

HMRC deemed this to be the position in Temple Retail Limited and Temple Finance Limited (TC04840) where “TRL” purchased goods and services and resupplied them to “TFL”.  TFL was a company that was unable to recover all of its input tax as a result of partial exemption (it made supplies of exempt credit as it sold goods to consumers via HP agreements).  HMRC was concerned that TRL and TFL had an opportunity to improve their aggregate input tax recovery by charging fees for certain services below OMV and consequently issued an OMV direction.

HMRC later issued TRL with assessments for under-declared output tax for not complying with the direction and this, inter alia, was the subject of the appeal by the taxpayer.

The FT Tribunal was satisfied that the majority of TRL’s fees charged to TFL were charged at OMV. However, The Tribunal decided that advertising services were not calculated at OMV and held that these services should be recalculated by reference to a method which it specified.

The case is a useful reminder of HMRC’s powers to substitute a stated value of a supply with what it believes to be OMV between connected parties. Business which are connected and provide exempt services need to be aware of the position and ensure that relevant supplies do not fall foul of the OMV direction rules.  Care should be taken to document the values used and the reasons why they reflect the economic reality of the position in order to avoid a challenge from HMRC.  OMV is often an area that creates differences of opinion and therefore disputes.  Any structures which set out to deliberately reduce the value of supplies are likely to result in more serious actions from HMRC.

A definition of what constitutes connected parties is found here

If the case sets off any warning bells, please contact us as soon as possible.

VAT – Zero rating of charitable building; latest from the courts

By   25 January 2016
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A recent case at the Upper Tribunal (UT): Wakefield College here considered whether certain use of the property disqualified it from zero rating.

Background

In order to qualify for zero rating a building it has to be used for “relevant charitable purpose”

This means that it is used otherwise than in the course or furtherance of a business. In broad terms, where a charity has a building constructed which it can show it will use for wholly non business purposes then the construction work will be zero rated by the contractor. This is the case even if there is a small amount of business activity in the building as long as these can be shown to be insignificant (which is taken to be less than 5% of the activities in the whole building) This so called de-minimis of 5% can be of use to a charity. In order for zero rating to apply the charity must issue a certificate to the builder stating the building will be used for non-business purposes.

Although the UT supported HMRC’s appeal against the F-tT decision there was an interesting comment made by the UT.  The fact that students paid towards the cost of their courses (albeit subsidised) meant that business supplies were made, and the quantum of these fees exceeded the 5% de minimis meant that the construction works were standard rated. This decision was hardly surprising, however, a comment made by the Tribunal chairman The Honourable Mr Justice Barling Judge Colin Bishopp may provide hope for charities in a similar position to the appellant: he stated that it believed that the relevant legislation should be reconsidered, suggesting that;

“… it cannot be impossible to relieve charities of an unintended tax burden while at the same time protecting commercial organisations from unfair competition and preventing abuse …”.

 In my view, it is worth considering the summing up in its entirety as it helpfully summarises the current position and provides some much sought after common sense in this matter:

 “We cannot leave this appeal without expressing some disquiet that it should have reached us at all. It is common ground that the College is a charity, and that the bulk of its income is derived from public funds. Because that public funding does not cover all of its costs it is compelled to seek income from other sources; but its doing so does not alter the fact that it remains a charity providing education for young people. If, by careful management or good fortune, it can earn its further income in one way rather than another, or can keep the extent of the income earned in particular ways below an arbitrary threshold, it can escape a tax burden on the construction of a building intended for its charitable purpose, but if it is unable to do so, even to a trivial extent, it is compelled to suffer not some but all of that tax burden. We think it unlikely that Parliament intended such a capricious system. We consider it unlikely, too, that Parliament would consider it a sensible use of public money for the parties to litigate this dispute twice before the FTT and now twice before this tribunal. We do not blame the parties; the College is obliged to maximise the resources available to it for the pursuit of its charitable activities, just as HMRC are obliged to collect tax which is due. Rather, we think the legislation should be reconsidered. It cannot be impossible to relieve 16 charities of an unintended tax burden while at the same time protecting commercial organisations from unfair competition and preventing abuse”.

 Action

If any charities, or charity clients have been denied zero rating on a building project, it will be worthwhile monitoring this development.  Please contact us if you require further information.