HMRC has updated its guidance to businesses on VAT. The helpful instruction includes: email updates, videos and seminars which cover such subjects as:
A Warning
There has been a great deal of debate on the subject of VAT and influencers, with HMRC issuing assessments for underdeclared output tax on “gifts” received by them.
What is an influencer?
An influencer is someone who has certain power to affect the purchasing decisions of others because of their; authority, knowledge, position, or relationship with their audience. These individuals are social relationship assets with which brands can collaborate to achieve their marketing objectives.
In recent years the growth of social media means that influencers have grown in importance. According to recent statistics, the projected number of global social media users in 2023 was 4.89 billion. This is a 6.5% rise from the previous year.
What is the VAT issue?
Business gifts to influencers
A business is not required to account for VAT on certain dealings if they meet certain conditions. For free gifts, the condition is that the total cost of all gifts to the same person is less than £50 in a 12-month period. Further, if the goods are “free samples” – used for marketing purposes and provided in a quantity that lets potential customers test the product, then the £50 rule does not apply. If an influencer receives free gifts or samples, there are no VAT implications for them.
HMRC Action
However, we understand that HMRC has decided that, in the majority of cases, the supply of goods to influencers were not ‘free gifts” but rather consideration for a taxable supply of marketing or advertising. They were also not considered free samples as, generally, influencers would not be in the position to test the goods, having no expertise in the field. It is also concluded that influencers, in most cases were “in business“.
The payment for the marketing, promotion or advertising services (the VAT treatment is similar, regardless of how the services are categorised) is by way of the supply of goods, rather than monetary consideration. That is; consideration is flowing in both directions. Consequently, output tax is due on this amount if the influencer is, or should be, VAT registered.
What is the value of the supply?
Non-monetary consideration
Non-monetary consideration includes goods or services supplied as payment, for example in a “barter” (including part exchange) agreement. If the supply is for a consideration not consisting or not wholly consisting of money, its value shall be taken to be such amount in money as, with the addition of the VAT chargeable, is equivalent to the consideration. Where a supply of any goods or services is not the only matter to which a consideration in money relates, the supply is deemed to be for such part of the consideration as is properly attributable to it.
In determining the taxable amount, the only advantages received by a supplier that are relevant are those obtained in return for making the supply should be recognised. Non-monetary consideration has the value of the alternative monetary payment that would normally have been given for the supply.
VAT Registration
If an influencer receives gifts valued at over £90,000 in any 12-month period, or these gifts plus other monetary consideration, VAT registration is mandatory.
More on business promotions here.
Latest from the courts
In the H Ripley & Co Limited First Tier Tribunal (FTT) case the issue was whether the appellant had satisfactory evidence to support the zero rating of the export of goods (scrap metal).
Background
HMRC denied zero rating on the basis that the appellant did not provide satisfactory evidence to support the fact that the scrap metal was removed from the UK.
The requirements are set out in VAT Notice 725 para 5 and acceptable documentary evidence may include:
or a combination of the above.
HMRC advised the appellant that it had received an information request from the Belgian tax authorities in respect of certain transactions and consequently, HMRC required information on the company’s documents in connection with the supplies. On receipt of the information HMRC concluded that the evidence was insufficient to support zero-rating so the sales were treated as standard rated and the appellant’s repayment claim was reduced to reflect this.
In these circumstances the burden of proof is on the appellant to show that it has satisfied the conditions set out in Notice 725 to zero-rate its supplies and provide documentation to show that the goods were removed from the UK.
Decision
The court noted that it was not HMRC’s position that supplementary evidence could not be provided post the required three-months period but that it was entitled to decline the additional evidence when it was provided some 18 to 30 months after the three-month period. It was clear that the evidence of removal must be obtained within three months and not that the valid evidence is brought into existence within the three-month time limit and obtained at some future date.
Notice 725 sets out the conditions which attach to the entitlement to zero-rate supplies. The FTT considered it to be clear from paragraph 4.3 and 4.4 (which have the force of law) that the onus is on the exporter company claiming zero-rating to gather sufficient evidence of removal within three months of the date of the supply. If it does not do so, it is not entitled to zero-rate the supplies.
Specifically, the court considered:
The appeal was dismissed, and the assessments were upheld because none of the documents either individually or taken as a whole, were sufficient evidence to support zero-rating.
Commentary
Yet another case illustrating the importance of insuring correct documentation is held. It is not sufficient that goods leave the UK, but the detailed evidence requirements must always be met.
HMRC has updated its guidance on when repayment interest is due.
If a business has claimed more input tax than it has declared output tax (a repayment return) HMRC will repay the difference by making a VAT repayment. HMRC will also repay any VAT that has been overpaid in error. Repayments are usually made within 30 days. The 30 days starts from the day HMRC receives the VAT Return and ends the day your repayment is approved (not the day it is received). HMRC does not count days taken to check the return is accurate and legitimate, and to correct any errors or omissions, as part of this 30-day period.
If HMRC is late in paying, a business may be entitled to repayment interest on any VAT that it is owed. For accounting periods starting on or after 1 January 2023, repayment interest replaces the repayment supplement.
A business, or its agent can track a VAT repayment online.
Update
Information on eligibility criteria for repayment interest on overpayments and start dates when VAT is not paid to HMRC has been amended. Information on repayment interest end dates when HMRC sets it off against your debts has also been updated.
Latest from the courts
In this First-Tier Tribunal (FTT) case the issue was whether serviced apartments qualify for exemption.
Background
Realreed owns a property called Chelsea Cloisters in Sloane Avenue, London. The property comprises; 656 self-contained apartments and some commercial units. 421 of these apartments are let on long leases (no VAT issues arise from these supplies). The appeal concerned the VAT treatment of the letting of the remaining 235 apartments, which include studio, one-bedroom or two-bedroom self-contained rooms. The appellant has, at all times, received a significant number of occupiers from corporate customers when they relocate their employees to London for a specified period, such as a secondment.
The contentions
Realreed argued that the letting of the apartments is a supply of accommodation which is exempt under The VAT Act 1994, Schedule 9, Group 1, Item 1. Chelsea Cloisters operates like a ‘home from home’ for its tenants: it provides residential accommodation. The physical appearance of the building is very similar to that of other residential buildings in the vicinity. It does not have signage suggesting the serviced accommodation is a hotel or similar establishment. It is rare for hotels (or similar establishments) at the booking point to offer long-term availability in the same way as Realreed does. Chelsea Cloisters does not offer room service, or catering of any form. Tenants have fully functioning kitchens and other self-catering facilities within their apartments and have washing machines and dryers to do all their own laundry. Tenants can, and do, stay for extended periods of time (one for around 20 years). The business has always involved the provision of residential accommodation on a longer-term basis than would typically be found in a hotel, with a much higher degree of personal autonomy for the occupant.
HMRC contended that the use of the Apartments is carved out of the exemption in Item 1 by excepted item (d), which applies to “the provision in an hotel, inn, boarding house or similar establishment of sleeping accommodation”. Note 9 to Group 1 provides that “similar establishment” “includes premises in which there is provided furnished sleeping accommodation whether with or without the provision of board or facilities for the preparation of food, which are used or held out as being suitable for use by visitors or travellers”.
Decision
The court considered that Realreed provided sleeping accommodation in an establishment which is similar to a hotel. The two hallmarks of short-term accommodation coupled with additional services (daily maid service, linen changing, cleaning at the end of a stay, residents bar, concierge) mean that Chelsea Cloisters is an establishment in potential competition with the hotel sector, which also offers short-term accommodation with services.
The FTT found that Realreed provided furnished sleeping accommodation, so the remaining question was whether Chelsea Cloisters is used by or held out as being suitable for use by “visitors or travellers” per Note 9.
The FTT interpreted ‘visitor or traveller’ as referring to a person who is present in a particular place without making it their home, ie; they are not staying there with any degree of permanence. The average length of visit was less than a fortnight which must mean that the apartments were indeed made available to visitors or travellers.
The supplies were therefore standard rated.
Commentary
There is a distinction between leases and other room lettings for VAT. The most important issue is the degree of “permanence”, although other factors have a bearing. Businesses which let rooms should consider the nature of their supplies with reference to this case which helpfully sets out which factors need to be considered.
HMRC has published new guidance on ESS and information on how to make a disclosure.
What is ESS?
ESS is also known as till fraud or till manipulation. It is where a business manipulates their till systems to hide or reduce the true value or number of sales. This is carried out through the use of ESS tools such as misusing built in till functions or installing software specifically designed to suppress sales. HMRC call this sales suppression and it is done either at, or after, the point of sale (POS). The records then appear to be correct and complete.
Businesses do this to reduce their turnover so that they pay less tax. They also do this to try to appear compliant.
Misusing a till system reduces the recorded turnover of the business and the amount of VAT payable, whilst providing what appears to be an accurate and complete record.
ESS is tax fraud. You are involved with ESS if you have made, supplied, promoted, possess or have access to an ESS tool.
You are also involved in ESS if:
What is an ESS tool?
An ESS tool is a piece of software, computer code script or hardware. It allows a business to hide or reduce the value of individual transactions on its electronic sales records. This includes using and/or configuring a till, or point of sale system, in a way that suppresses sales.
You do not have to have used an ESS tool to suppress sales or pay less VAT for HMRC to charge a penalty for being involved in ESS, it is fraud regardless.
HMRC powers
Finance Act 2022, Schedule 14 allows HMRC to issue an information notice for ESS. This means HMRC can ask for certain information that only applies to ESS. It allows the issue of a Notice to a ‘relevant person’ for a ‘relevant purpose’.
A ‘relevant person’ is any person who HMRC think it might be able to charge a penalty for being involved in ESS.
A ‘relevant purpose’ is the reason that HMRC is asking for information about ESS and ESS Tools. The law allows HMRC to do this in three types of situations which are to help it:
Disclosure
HMRC is offering an opportunity for those involved in ESS to make a disclosure. Early voluntary disclosure could lead to a reduction in financial penalties. Use the ‘Make a disclosure about misusing your till system’ form to tell HMRC that you have been using your till system to reduce your tax bill.
Further reading and more detailed information on penalties here.
What is a Certificate of Origin (CO)?
A CO is a formal, official document which evidences in which country a good or commodity was manufactured. The certificate of origin contains information regarding the product, its destination, and the country of export.
A CO is required for most treaty agreements for cross-border trade and have become more important since Brexit (no more single market alas).
Why is a CO important?
The CO is an important document because it determines whether certain goods are eligible for import, or whether goods are subject to duties.
CO – General
Customs officials expect the CO to be a separate document from other commercial documents such as invoices or packing lists. Officials may also expect it to be signed by the exporter, the signature notarised, and the document subsequently signed and stamped by a Chamber of Commerce. Additionally, the destination Customs authority may request proof of review from a specific Chamber of Commerce.
Some countries accept electronically issued COs which have been electronically signed by a Chamber of Commerce.
Types of CO
A CO can be either in paper or digital format and must be approved by the requisite Customs Authority.
There is no standard CO document for global trade, but a CO prepared by the exporter, has at least the basic details about the product being shipped.
Non-preferential COs, also known as “ordinary COs” indicate that the goods do not qualify for reduced tariffs or tariff-free treatment under trade arrangements between countries. If an exporting country does not have in place a treaty or trade agreement with the importing country, an ordinary CO will be needed.
This is for shipments between countries with a trade agreement or reduced tariffs and proves the goods qualify for reduced import duties.
Some countries require additional information to demonstrate the authenticity of the information in the CO. A Legalised CO is an ordinary CO that has been further authenticated. The legalisation process usually involves the CO being validated by various appropriate authorities to give more evidence to its authenticity.
A Certified CO is similar to a n ordinary CO. However, it has been certified by a Chamber of Commerce, government agency or other relevant authority to confirm its authenticity.
Certification involves an in-depth review of all of the information declared on the CO, as well as a thorough side-by-side comparison with the requirements of the trade agreement and regulations of the country of import to ensure full compliance.
A EUR1 certificate is used in trade between the UK and partner countries. It is used to confirm that goods originate in the EU or a partner country so that the importer can benefit from a reduced rate of import duty.
EUR1 certificates are issued by Chambers of Commerce or Customs offices.
Contents of a CO
A CO will typically contain the following information:
* A waybill is a document issued by a carrier giving details and instructions relating to the shipment of a consignment of cargo. It shows the names of the consignor and consignee, the point of origin of the consignment, its destination, and route.
A business will need to check with its local Chamber of Commerce.
HMRC have updated its payments on account (POA) guidance.
What are POA?
These are advance payments towards a business’s VAT bill. They are mandatory.
HMRC will notify a taxpayer to make POA if a business renders VAT returns quarterly, and it owes more than £2.3 million in any period of 12 months or less.
Under the POA arrangement, businesses make interim payments at the end of months two and three for each return quarter. The interim payment is intended to cover part of the overall VAT liability for the that quarter. The balancing payment for the return’s VAT liability will be settled when the business submits its VAT return payment. Quarterly VAT returns are filed online as normal.
POA calculation
HMRC will calculate POA based on a business’s annual VAT liability in the period that it goes over the threshold. The annual VAT liability in that period will be divided by 24 to arrive at an instalment amount.
A taxable person who has been in business for less than 12 months will have POA calculated by HMRC on a pro rata basis.
The payments on account cycle starts in the first quarter after a business exceeds the £2.3 million threshold.
The payments will remain the same until the start of the next annual cycle.
The annual cycle begins in April, May or June depending on which VAT return ‘stagger’ a business is on. HMRC bases the amount of payments during the annual cycle on the liability in the period known as the ‘reference year’.
POA due dates
The due dates for POA are the last working day of the second and third months of every VAT quarter no matter what the period end date is. The seven-day extension for paying electronically does not apply to POA.
POA that are not paid on time will be subject to late payment interest.
Balancing payments are due with the VAT return and must clear HMRC’s bank account by the last working day of the month if standard period end dates are used.
If a business does not make POA or the balancing payment in full and on time HMRC will:
If a business’s VAT liability falls below £2.3 million in the reference year HMRC will remove it from the arrangement six months later.
Alternative to payments on account
If making POA and submitting quarterly VAT returns does not suit a business, it can choose to make VAT returns and payments monthly.
Commentary
As may be seen, it is important to recognise the POA limit and to make payments on time. There is an obvious cash flow impact and plans should be put in place if the VAT turnover is nearing the threshold.
We know that size matters for VAT – see marshmallows. Also, if you buy a small amount of bicarbonate of soda it is VAT free. However, bigger tubs are VATable.
If HMRC carry out an inspection and decide that VAT has been underdeclared (eg: either by understating sales, applying the incorrect VAT rate, or overclaiming input tax) an inspector has the power to issue an assessment to recover VAT that it is considered underdeclared. This is set out in The VAT Act 73(1)
“Where a person has failed to make any returns … or where it appears to the Commissioners that such returns are incomplete or incorrect, they may assess the amount of VAT from him to the best of their judgment and notify it to him”.
So, the law requires that when an inspector makes an assessment (s)he must ensure that the assessment is made to the best of their judgement, otherwise it is invalid and will not stand.
Guidance to surviving a VAT inspection here.
HMRC’s methods of assessing cash businesses here.
Definition of best judgment
Per Van Boeckel vs HMCE (1981) the judge set out three tests:
If any of these three tests are failed, then best judgement has not been employed. However, the onus is on the appellant to disprove the assessment.
There were further comments on the matter:
“There are…obligations placed on the Commissioners to properly come to a view on the amount of tax that was due to the best of their judgement. In particular:
This means that the assessing inspector must fairly consider all material placed before them and, on that material, come to a decision that is reasonable and not arbitrary, taking into account the circumstances of the business. In some cases, some “guesswork” may be required, but it should be honestly made based on the information available and should not be spurious, but HMRC must be permitted a margin of discretion.
Experience insists that it is usually more successful if the quantum of a best judgement assessment is challenged.
Where a business successfully disputes the amount of an assessment and the assessment is reduced, it will rarely fail the best judgement test.
In the case of MH Rahman (Khayam Restaurant) CO 2329/97 the High Court recognised the practice whereby the tribunal adopts a two-step approach, looking initially at the question of best judgement and then at the amount of the assessment. The message of the High Court appeared to be that the Tribunal should concern itself more with the amount of an assessment rather than best judgement.
Arguments which may be employed to reduce a best judgement assessment are, inter alia:
HMRC’s guidance to its own officers states that: Any assessments made must satisfy the best judgement criteria. This means that given a set of conditions or circumstances, “you must take any necessary action and produce a result that is deemed to be reasonable and not arbitrary”.
In other words, best judgement is not the equivalent of the best result or the most favourable conclusion. It is a reasonable process by which an assessment is successfully reached.
In the case of CA McCourtie LON/92/191 the Tribunal considered the principles set out in Van Boeckel and put forward three further propositions:
Tribunals will not treat an assessment as invalid merely because they disagree as to how the judgement should have been exercised. It is possible that a Tribunal may substitute its own judgement for HMRC’s in respect of the amount of the assessment. However, this does not necessarily mean that because a different quantum for the assessment was arrived at that the assessment failed the best judgement test.
Further, it is not the function of the Tribunal to engage in a process that looks afresh at the totality of the evidential material before it (M & A Georgiou t/a Mario’s Chippery, QB October 1995 [1995] STC 1101).
It should be also noted that even if one aspect of an assessment is found not to be made to best judgement this should not automatically invalidate the whole assessment – Pegasus Birds [2004] EWCA Civ1015.
Summary
There are significant difficulties in arguing that an inspector did not use best judgement and it is a high bar to get over.
In order to succeed on appeal, it would be required to be demonstrated, to the judge’s satisfaction, that the assessment was raised:
and that this action applies to the assessment in its entirety.