Tag Archives: vat-errors

VAT: Bad Debt Relief – Increase due to coronavirus. A guide

By   17 April 2020
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The current coronavirus pandemic has thrown up unprecedented difficulties for society as a whole and significant difficulties for commerce. We have considered UK Government’s VAT assistance in previous articles, here here here and here and this is clearly welcomed.

What has become clear is that businesses and consumers will fall into default in increasing numbers as the economy worsens and it is anticipated that the ability to settle of debts on time will significantly decrease and it is apparent that many debts will never be settled. Consequently, it appears timely to look at the available relief.

The VAT position

VAT registered businesses usually account for tax on an accruals basis (but see CAS) and will therefore be required to account for output tax in the same VAT period as an invoice is issued to a customer. If that invoice is not paid and a bad debt arises this would mean that tax has been accounted for on a payment which has not been received.

Relief

Anything which can relieve the burden of VAT is to be welcomed, especially in such trying times. So VAT Bad Debt Relief (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.

There is a relief however, as normal with tax, there are specific conditions:

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 and need not be notified to the customer). At least six months (but not more than four 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

This part is straightforward: 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. The amount of BDR is either set-off against output tax due, or may create a refund position with HMRC.

Repayment of refund

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

Adjustment of input tax for the 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

More on general VAT payment problems here.

VAT: Zero rated books? The Thorstein Gardarsson UT case

By   14 April 2020
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Latest from the courts

In The Thorstein Gardarsson T/A Action Day A Islandi Upper Tribunal (UT) case the issue was whether supplies of an “Action Day Planner” (ADP) were zero-rated as supplies of a book.

Legislation

The VAT Act 1994, Schedule 8, Group 3, item 1 zero rates – “Books, booklets, brochures, pamphlets and leaflets.”  The words in Group 3 are used in their ordinary, everyday sense.

Background

The Appellants (HMRC) appealed against a decision of the First Tier Tribunal (FTT) which determined that the ADP is a “book” with the result that supplies of it made by Thorstein Gardarsson (TG) were zero-rated for VAT purposes. TG belonged outside the EU but sold its products B2C via the Amazon platform to consumers in the UK.

HMRC argued that the ADP was properly to be considered a ‘diary’ and thereby stationery which is standard rated. Predictably, TG asserted that the ADP is not a diary and despite it having space in which the ‘student’ seeking to master skills of time management may enter information, doing so is merely part of the learning taught through the narrative sections of the book.

The FTT allowed TG’s earlier appeal and considered the judgment of the High Court in Colour Offset Ltd. [1995] BVC 31 to be binding. The FTT concluded that the main function of the ADP is to teach the user how to better or more effectively manage time. The writing space was no different from a student filling out answers to practice papers or someone completing a crossword puzzle. The ADP was therefore a book and zero rated.

Appeal

In this UT case HMRC appealed the FTT decision on the grounds that whilst Colour Offset was binding on the FTT, it failed to:

  • identify the correct test set out in Colour Offset
  • apply the test correctly to the facts it had found

The Product

The external appearance if the ADP is that of a black leather covered book. It had an elastic strap attached to the inside of the back cover that can be wrapped around the front to hold it closed. Inside it has 115 pages. The ADP is described as a time management tool developed to “help people to grow; to teach and instruct people time management skills”. The first 16 pages contain text setting out a narrative of the ethos articulated by the appellant for effective time management. The remainder of the ADP is taken up with 52 double page planners. At the back is a cardboard slip pocket.

Decision

The UT noted that the FTT had quoted from VAT Notice 701/10 and this had led the FTT into error. In the Notice ‘crossword books, exam study guides etc.’ are considered books although the statutory provisions do not mention these at all. The Notice only records HMRC’s practice in this regard and does not have force of law. However, the FTT concluded that because crossword books and exam study guides are referred to as books, it should follow that any item with the necessary physical characteristics ‘which has as its main function informing/educating or recreational enjoyment’ is also a book. The tests in Colour Offset do not refer at all to whether the main function of an item is to inform or educate; nor does it refer to recreational enjoyment.

The UT considered that the FTT approached its task by applying a test that was different from that articulated in Colour Offset and this had the ability to produce a different outcome from the correct test. In doing so, he FTT made an error of law. It also concluded that the ADP is not a book as its main function is to be written in (as distinct from being read or looked at) and that the comparison to crossword puzzles or revision guides is irrelevant. Therefore, ADPs were standard rated and output tax was due on the sale of them.

HMRC’s appeal was allowed, the FTT decision is set aside and directed the matter back to the FTT for reconsideration. It was directed that the FTT makes a decision predicated on the basis that the ADP is not a book.

Commentary

The zero rating of printed matter has long been a moot point in VAT and the amount of detail that the guidance goes into demonstrates this. It should be noted that HMRC guidance set out in Public Notice 701/10 is purely that, and does not have the force of law. This logic extends to all HMRC published guidance unless the narrative specifically states that it has the force of law. A lot of the guidance is based on case law, but certain definitions are unhelpful.

Even the FTT can get it wrong and apply the wrong tests, so if you or your clients have any doubts about the VAT liabilities of supplies made, it is worthwhile having these reviewed by a specialist.

VAT: Coronavirus latest – correction of errors

By   9 April 2020
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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:

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!

VAT: Crowdfunding – What is taxable?

By   9 April 2020
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What is crowdfunding?

Crowdfunding is the practice of funding a project or venture by raising many small amounts of money from a large number of people, typically via the internet on specifically designed platforms and is an alternative to traditional ways of raising finance. The model is usually based on three parties: the project initiator who proposes the idea or project to be funded, individuals or groups who support the idea, and a moderating organisation (the “platform”) that brings the parties together to launch the idea.

VAT Treatment

The VAT treatment of supplies that might potentially be made is no different to similar financing arrangements, for example; sponsorship, donations and investments made through more traditional routes. Whether a recipient of crowdfunding is liable to charge and pay VAT depends on the facts in each case.

Examples

Donations

  • where nothing is given in return for the funding, it will be treated as a donation and not liable to VAT – the position is the same where all that the funder receives is a bare acknowledgement, such as a mention in a programme or something similar

Goods and/or services

  • where the funder receives goods or services that have a real value associated with them, for example; clothing, tickets, DVDs, film viewings, output tax will be due

Combination

  • where the payment is for a combination of the two examples above, if it is clear that the donation element is optional then that part of the sponsorship can be treated as a non-taxable donation and the supply will be taxable. If a donation element cannot be carved out, it is likely that all of the payment will be considered as VATable

Investment

  • where the funding takes the form of an investment where the funder is entitled to a financial return such as; interest, dividends or profit share, any payment due to the funder is unlikely to be liable to output tax, The reason why most of these arrangements are outside the scope of VAT is that the provision of capital in a business venture is not seen as a supply for VAT purposes

Royalties

  • if the arrangement is that the funder receives royalties based on a supply of intellectual property or some other similar benefit the payment is likely to be consideration for a taxable supply and output tax will be due

VAT registration 

If income from the sources above which are deemed to be subject to VAT exceeds the VAT registration limit (currently £85,000 in any twelve-month period) the person, in whichever legal identity, such as; individual, company, partnership, Trust etc will be liable to register for VAT. If income is below this limit, it will be possible, but not mandatory to VAT register. The benefits of voluntary registration here.

Input tax recovery

If VAT registered, any input tax incurred on costs relating to crowdfunding is usually recoverable (see here for exceptions). However, if the costs relate to donations or some types of investment then input tax claims are specifically blocked as they would relate to non-business activities.

Commentary

There can be difficulties in establishing the tax liability of crowdfunding and in a broader sense “sponsorship” in general. However, experience insists that the biggest issue is initially identifying that there may be a VAT issue at all. If you, or your clients are involved in crowdfunding, or have sponsors, it would be prudent to review the VAT treatment of the activities.

VAT and Duty on exports and imports post Brexit – a guide

By   7 April 2020
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Exports and Imports – post Brexit

VAT and Duty on exports and imports

With Brexit soon to become a reality, it is important that UK business understand the importance of exporting and importing goods. As matters stand, the UK will become a “third country” and as such will need to go through all the processes that apply to non-EU countries when goods cross borders to sales and purchases to/from existing EU countries. This mainly means customs duties applying to goods that have, to date, been duty free as the EU is a single market.

Whether importing or exporting, there are important VAT and duty rules and procedures. A business must ensure that it charges and pays the right amount of VAT and duty. The first step for moving goods into, or out of, the UK will be to obtain an EORI number. Details here.

Responsibilities for importers

  • the importer is normally responsible for clearing the goods through UK customs and paying any taxes
  • the supplier needs to provide the documentation an importer needs to clear the goods through customs (and to make payment to the supplier)
  • now, if you are importing (even from EU countries) you are likely to have to pay import duty. This cannot be reclaimed from HMRC
  • a business’ responsibilities depend on what it has agreed in the contract. To minimise the risk of disputes, your contract should use one of the internationally recognised Incoterms. These are explained here
  • check what import duty applies – import duty is based on the type of goods you are importing, the country they originate from and their value
  • HMRC’s Integrated Tariff sets out the classification of goods and the rates of duty in detail. Your Trade Association or your import agent may be able to assist with classification. You can find reputable freight forwarders through the British International Freight Association here 
  • an importer may need proof of the origin of the goods to claim reduced import duty for goods from certain countries
  • a valuation document is also normally required for imports above a set value
  • complete an import declaration. This is normally done using the Single Administrative Document (SAD)
  • pay VAT and duty to get the goods released
  • the VAT applicable is the normal UK rate for the imported goods when sold in the UK
  • regular importers can defer payment of VAT and duty by opening a deferment account with HMRC. A security payment will need to be provided and payments must be via Direct Debit
  • From 1 January 2021 Postponed Accounting for import VAT to be introduced for all goods including those from the EU
  • account for VAT on returns
  • HMRC will send a C79 certificate showing the import VAT you have paid
  • VAT on imports (supported by C79 evidence) may be claimed in the same way as reclaims of input tax incurred on purchases in the UK
  • import duty cannot be reclaimed

Responsibilities for exporters

    • the exporter is normally responsible for clearing goods outwards through UK customs
    • the customer is normally responsible for overseas customs clearance and taxes (depending on the Incoterms). Further details on how other countries handle import duties and taxes are available from the Department for International Trade
    • the exporter will need to provide its customer with the documentation they need to clear goods into their country (and to pay you)
    • the exporter’s responsibilities depend on what it has agreed in the contract (see Incoterms above)
    • the exporter will need to provide its customer with the documents they need to import the goods into their country. These documents can also be part of the process of getting paid
    • as a minimum, the seller will need documents recording details of the:
    • exporter
    • customer
    • goods and their value
    • export destination
    • how the goods will be transported
    • route they will take
  • keep copies of all documents giving details of all the sales which have been made.
  • record the value of your exports on your VAT return
  • consider any responsibility you have for overseas customs clearance and taxes. Normally, as an exporter, you will have agreed that your customer handles this. However, take specialist advice, or use an expert agent, if you are responsible – this will depend on Incoterms

Tips

  • freight forwarders can handle customs clearance as well as transport
  • exporting can be simpler if you choose to sell to a single agent or distributor in an overseas country. However, this may not suit your export strategy
  • exports are usually zero-rated. However, exporters must keep proof that the goods have been physically exported along with normal commercial documentation
  • the exporter must declare the export. This is usually done by completing a Single Administrative Document (SAD), also known as form C88

Excise duty

  • check whether any goods being purchased are subject to excise duty
  • excise duty is payable on; fuel, alcohol and tobacco products
  • if goods are subject to excise duty, it is paid at the same time as payments for VAT and import duty are made
  • VAT is charged on the value of the goods plus excise duty

Customs warehouses

If you expect to store imports for a long time it will be worth considering using a Customs warehouse.

  • goods stored in a customs warehouse, will not be subject to import duty and VAT until they are removed from the warehouse
  • storage ‘in bond’ is often used for products subject to excise duty, such as wine and cigarettes, although it is not limited to these goods

Relief for re-exported goods

  • it may be possible to take advantage of Inward Processing Relief (IPR) rules so that no import duty and VAT is payable
  • IPR can apply to imports that you process before re-exporting them

If you import or export regularly, find out about alternative procedures

  • For example, businesses that import regularly and in large volumes can use processes such as Customs Freight Simplified Procedures.

Summary

If you are new to acquisitions, importing or exporting, it may be worthwhile talking to an expert. This article only scratches the surface of the subject. There can be significant savings made by accurately classifying goods, and applying the correct procedures and rates will avoid assessments and penalties being levied. Planning may also be available to defer when tax is paid on imports and acquisitions.

VAT: Events cancelled due to coronavirus

By   18 March 2020
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Coronavirus measures

In these difficult times things aren’t as they usually are. While there have been no specific government announcements of any VAT reliefs, one issue has arisen.

Refunds

If a venue is required to cancel an event as a result of the government’s advice on coronavirus eg; live performances, seminars, weddings, festivals etc, and the venue suggests that ticket holders might like to donate the money previously paid to charity rather than receive a refund – we can confirm that no VAT is due on any of the transactions.

This is the case in situations where the;

  • event does not take place
  • customer is entitled to a full, unfettered refund
  • refund changes to a genuine voluntary donation

Adjustment

If output tax has been accounted for the next return may be adjusted to credit the tax previously paid. if a refund is made directly to the customer, again, no supply will have been made for VAT purposes and no output tax is due.

Commentary

In these difficult times we appreciate that tax is way down the list of people’s priorities. Many businesses will suffer and many will not survive. If we can help in any way possible, please let us know.

Also, we will report if there are any concessions on VAT payments or similar as soon as we are aware. We recommend that the HMRC guidance on coronavirus should be monitored for the latest news.

Good luck out there and stay safe.

VAT: Extent of exemption for healthcare. The X-GmbH CJEU case

By   10 March 2020
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Latest from the courts

In the CJEU case of X, a German business, the issue was whether services provided by telephone could be treated as exempt. The decision is not available in English in the link above, so thanks to Google translate and very rusty schoolboy language skills!

Background

X provided a healthcare hotline to people covered by certain insurance. The types of services carried out where in respect of medical issues; medical advice, answers to queries, explanations of possible diagnoses and treatments, and patient support programmes for certain conditions. The service was provided by suitably qualified nurses, medical staff and doctors.

The issue

Was this service exempt from VAT as personal care considering it was “support” provided by telephone? He relevant legislation is Article 132(1)(c) of the VAT Directive. A separate issue was whether the staff required additional proof of their professional qualifications to qualify as an exempt service by telephone. The advice was provided via a computer assisted assessment, using targeted questions allowing X to assess the patient’s situation and to advise accordingly. Consequently, there was a degree of automation involved.

The German authorities considered that the supplies fell short of the exemption and raised assessments for output tax due on the services.

Decision

The CJEU has ruled that personal care is not dependent on where it is carried out and there is no bar to it being conducted by telephone. X contended that its services were directly connected with illness and was medical care and, as a result of its activities, the cost of subsequent treatment was reduced.

The court established that the supply was exempt if it met two tests:

  • it must be a service of personal care, and
  • it must be carried out within the framework of the exercise of the medical and paramedical professions as defined by the Member State concerned

Therefore, healthcare services carried out by telephone may fall within the exemption, but only if they meet all the conditions for applying this exemption. The test was not how the services were delivered.

Whether X’s services met the exemption conditions depended on case law and whether they were to;

  • diagnose, treat and cure illnesses or health anomalies
  • protect (including maintaining or restoring) the health of individuals.
  • explain diagnosis and therapies
  • propose modifications to treatments and medication

Such services were likely to have a ‘therapeutic purpose’. However, simply; directing patients to factsheets, providing specialists’ contact details and communicating information is insufficient to qualify for exemption and would be regarded as of a (taxable) administrational nature.

Summary

The services provided by telephone, consisting of providing advice on health and illness, were likely to be exempt, if they pursue a ‘therapeutic aim’. However, this was for the German referring court to verify. On the “additional qualifications” point, EU law does not define medical professions, so it is the responsibility of each Member State to determine the necessary qualifications. In the UK, these qualifications are set out at VAT Act 1994, Schedule 8, Group 7, item 1 (mainly; registered or enrolled as a doctor, optician, osteopath, chiropractor, nurse or midwife). It was decided that Article 132(1)(c) does not require that those X’s staff which provide telephone services to obtain additional professional qualifications.

Commentary

There is often significant uncertainty when businesses provide “healthcare”, This has mainly manifested in questions of whether staff or medical services are actually provided (and in more wide-ranging cases, whether the provision of staff is by way of agent or principal). However, with technology moving faster than ever, it is helpful to have these guidelines and the understanding that it is not just “old-fashioned” medical services which are covered by the exemption.

VAT: Interaction of Clawback and the Capital Goods Scheme – The Stichting Schoonzicht case

By   10 March 2020
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Latest from the courts

The difference between intended use and first actual use of an asset.

In the Dutch case of Stichting Schoonzicht (C‑791/18) the AG was asked to provide an opinion on the interaction between clawback and the Capital Goods Scheme (CGS) via Directive 2006/112/EC, Articles 185 and 187. Details of the CGS here. In the UK clawback is set out in The General Regulations 1995, Reg 108.

Background

Stichting Schoonzicht constructed a number of apartments which it intended to sell on completion. This would have been a taxable supply and afforded full input tax recovery on the costs incurred on the development. Unfortunately, due to market conditions, the business was unable to find buyers at the appropriate sale price. Therefore, a decision was made to let some of the flats on a short-term basis until the market picked up. This was done and created an exempt supply. The intention to make taxable supplies remained, but in the meantime, exempt supplies had actually been made. This could affect the original input tax claim. Details of partial exemption here.

Technical 

The Dutch referring court entertained doubts about the compatibility of the ‘first-use full adjustment’ requirement provided for under Netherlands law and the CGS.

So the issue was whether the CGS (Article 187 of the VAT Directive) applied such that any required adjustments to the initial input tax claim could be made via a CGS calculation, or whether, as the Dutch authorities contended, there should be a one-off clawback of the input tax previously claimed.

Decision

In the AG’s opinion, the Dutch tax authorities could clawback 4/7 of the input tax on the construction (as four of the flats were let and three remained unoccupied). The AG decided that the CGS could co-exist with clawback and that EU Member States are allowed to adjust the initial deduction of input tax using clawback where actual use varies from intended use. A distinction was made between clawback and the CGS. The CGS is intended to adjust input tax claims as a result of fluctuations in the taxable use of capital assets over a period of time (ten years for buildings in the UK).

Commentary

In the UK, there are published easements for input tax recovery in similar circumstances: “VAT: Partial Exemption – adjustments when house builders let their dwellings”. However, this is an interesting AG opinion, is worth a read and it will be interesting to see how this develops. However, with prior planning, this situation may be avoided in the UK (where new house sales are zero rated).

VAT: EC AG’s Opinion – Are aphrodisiacs food?

By   2 March 2020
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Latest from the courts

It’s rare to come across anything vaguely sexy about VAT, but hey ho, aphrodisiacs were the subject of the AG’s opinion in the case of “X” – the name of the Dutch business. The document was published by the European Commission (EC) and is here but unavailable in the English language, presumably as a result of Brexit, unless anyone knows of any other reason.

Opinion

 The AG, M. Maciej Szpunar decided that no, aphrodisiacs cannot be treated as food via Directive 2006/112/CE – Article 98 and are therefore not subject to a reduced rate (which would have been zero rated in the UK). The relevant element was:

“Foodstuffs” intended for human consumption “refers to products containing nutrients, and which are in principle consumed for the purpose of supplying said nutrients to the human body”. Products which are normally used to supplement or replace foodstuffs “Means products which are not foodstuffs, but which contain nutrients and are consumed in place of foodstuffs to supply these nutrients to the body, as well as products ingested in order to stimulate the nutritional functions of food or products used to replace them.

Therefore, in the AG’s opinion, the powders and capsules sold by X are different to foodstuffs and supplements and were not subject to the reduced rate. The fact that they may contain elements of nutrition did not override that they were intended to stimulate sexual desire and it was not the intention of the legislation that such products should be subject to the reduced rate as they were not “essential goods”.

That, of course, does not mean that foods which are said to contain aphrodisiac properties such as; asparagus, oysters, watermelons, celery and pomegranates are not reduced rated.

I doubt that Aphrodite – the Greek goddess of love and beauty, knew that ultimately there would be a court case on the rate of indirect tax applicable to such, err; “stimulants”.

AG’s Opinion

The Court of Justice of the European Union (CJEU) consists of one judge from each member state, assisted by eleven Advocates General whose role is to consider the written and oral submissions to the court in every case that raises a new point of law, and deliver an impartial opinion to the court on the legal solution.

VAT overpayments – HMRC to consider changes

By   24 February 2020
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VAT overpayments – New direct claims?

If a recipient of a supply makes an overpayment of VAT (usually as a result of standard rated tax being charged when a supply is reduced rated, zero rated or exempt) the remedy for the customer is to go to the supplier to obtain a new invoice/VAT only credit note and. repayment of the VAT paid. However, this can cause practical problems, disputes and an actual cost if a supplier has ceased business or become insolvent. HMRC has recognised that if the supplier has paid output tax on the supply then there is an inherent unfairness.

Following the decision in PORR Építési Kft. (C 691/17) which considered the principles of; proportionality, fiscal neutrality and effectiveness, HMRC invited interested parties to discuss a direct HMRC claim process where the taxpayer has pursued a refund via its supplier for overpaid incorrectly charged VAT but where, as stated in the cases, “recovery is impossible or excessively difficult”. In such cases the taxpayer “must be able to address its application for reimbursement to the tax authority directly”. In the past, HMRC has directed that such claims from them are pursued via the High Court (or County Court if under £30,000). The meeting discussed the new route to direct claims without initial court action including guidance, time limits and claim processes.

We await the outcome eagerly as this situation is quite common, I have found it is an issue particularly in; property and construction supplies, Financial Services and cross-border transactions (place of supply issues). If HMRC are minded to introduce a “direct claim” this will bring welcome relief to taxpayers and introduce fairness for all parties and do away with windfalls received by HMRC.