Tag Archives: vat-penalty

VAT: Payment handling charges – The Virgin Media case

By   5 February 2020
0

Latest from the courts

In the Virgin Media Ltd First Tier Tribunal (FTT) case a number of issues were considered. These were:

  • whether payment handling charges were exempt via: The VAT Act 1994, Schedule 9, Group 5, items (1) and (5)
  • whether the supply was separate from other media services
  • which VAT group member made the supply?
  • whether there was an intra-group supply
  • whether there was an abuse of rights

Background

Virgin Media Limited (VML) provided cable TV, broadband and telephone services (media services) to members of the public. It was the representative member of a VAT Group which also contained Virgin Media Payment Limited (VMPL).

If customers choose not to pay by direct debit, they were required to pay a £5 “handling charge”. The handling charge was paid to VMPL and passed to VML on a daily basis. The issue was; what was the correct VAT treatment of the charge?

Contentions

The appellant argued that the £5 charge was optional for the customer and the collection of it was carried out by VMPL and was exempt as the transfer or receipt of, or any dealing with, money. Further, that, despite being members of the same VAT group, there was nothing in the legislation which forced the VAT group to treat supplies by separate entities within that group as a single supply to a recipient outside the group.

HMRC contended that there was a single taxable supply and thus no exempt services were provided and, in fact, VMPL was not making a supply at all (and therefore not to VML as the group representative member).  In the first alternative, if it were decided that there was a supply, such a supply was an ancillary component of a single taxable supply by VML as representative group member and not by VMPL as per the Card Protection Plan case. In the second alternative, if both decisions above went against HMRC, that the service provided by VMPL fell outside the exemption so that it was taxable in its own right.

Decision

It was found that:

  • there was a single supply made to customers
  • the supply was made by VML as the representative member of the VAT group
  • the £5 handling charge was an integral part of the overall supply
  • if not integral, the handling charge was an ancillary supply such that it took on the VAT treatment of the substantive supply
  • therefore, VMPL does not make any supply to the end users of the overall service
  • if VMPL does make a supply, it is an intra-group supply to VML which s disregarded for VAT purposes
  • VMPL does not have a free-standing fiscal identity for VAT purposes
  • if the FTT is wrong on the above points and VMPL does make a supply of payment handling services to customers, these supplies are taxable and not exempt (per Bookit and NEC) as the supply is simply technical and administrative and does not amount to debt collection
  • the arrangements do not constitute an abusive practice. The essential aim of the transactions are not to secure a tax advantage so HMRC’s argument on abuse fails

Therefore, the appeal was dismissed and a reference to the CJEU was considered inappropriate and output tax was due on the full amount received by the group from customers.

Summary

This was a complex case which suffered significant delays. It does help clarify a number of interconnected issues and demonstrates the amount of care required when planning company structures and the VAT analysis of them.

VAT: The Default Surcharge. Is it fair and proportionate?

By   6 January 2020
0

What is the Default Surcharge? 

Default Surcharge is a civil penalty to “encourage” businesses to submit their VAT returns and pay the tax due on time the charge is introduced via VATA 1994 s 59(A).

When will a Default Surcharge be issued?

A business is in default if it sends in its VAT return and or the VAT due late. No surcharge is issued the first time a business is late but a warning – a Surcharge Liability Notice (SLN) is issued. Subsequent defaults within the following twelve months – the “surcharge period” may result in a surcharge assessment. Each time that a default occurs the surcharge period will be extended. There is no liability to a surcharge if a nil or repayment return is submitted late, or the VAT due is paid on time but the return is submitted late (although a default is still recorded).

How much is the surcharge?

The surcharge is calculated as a percentage of the VAT that is unpaid at the due date. If no return is submitted the amount of VAT due will be assessed and the surcharge based on that amount. The rates are:

  • 2% for the first default following the SLN, and rises to
  • 5%
  • 10%
  • 15% for subsequent defaults within the surcharge period.

A surcharge assessment is not issued at the 2%  and 5% rates if it is calculated at less than £200 but a default is still recorded and the surcharge period extended. At the 10% and 15% the surcharge will be the greater of the calculated amount or £30.

Specific issues

The default surcharge can be particularly swingeing for a fast-growing company. Let’s say that a small company grows quickly. In the early days the administration was rather haphazard, as is often the case, and a number of returns and payments were submitted late. Fast forward and the turnover, and the VAT payable, has grown significantly. Being late at this time means that the amount of default surcharge is considerably higher than when the original default which created the surcharge took place.  This leads us onto whether the surcharge is proportionate.

A business with cashflow difficulties may well ask whether it should be penalised by HMRC for having those difficulties; which of course will add to the problem.

Proportionality

The existing, long-standing default surcharge regime has always had issues with the principle of proportionality. The regime has regularly been challenged in the Courts.

Is it proportionate that a same penalty is applied for a payment which is one day late and one which is one year late? This is a matter which has concerned both HMRC and the Courts for a number of years.

In the Upper Tribunal case of Total Technology (Engineering) Ltd the Judge concluded that it was possible for an individual surcharge to be disproportionate, but that the system as a whole was not fundamentally flawed. It is also worth noting that in In Equoland judgment the judge stated that a penalty which is automatic and does not take into account the circumstances is at the least tending towards being disproportionate.

Disagreement over a surcharge

If you disagree with a decision that you are liable to surcharge or how the amount of surcharge has been calculated, it is possible to:

  • ask HMRC to review your case
  • have your case heard by the Tax Tribunal

If you ask for a review of a case, a business will be required to write to HMRC within 30 days of the date the Surcharge Liability Notice Extension was sent. The letter should give the reasons why you disagree with the decision.

Defence against a surcharge

In order to have a surcharge withdrawn (it cannot be reduced, as it is one of the few penalties that cannot be mitigated in any circumstances) it is necessary to demonstrate that a business had a reasonable excuse for the default.  This is a subject of an article on its own.  Certain factors, like relaying on a third party are not accepted as a reasonable excuse. HMRC state that a business will not be in default if they, or the independent tribunal, agree that there is a reasonable excuse for failing to submit a VAT Return and/or payment on time.

There is no legal definition of reasonable excuse but HMRC will look closely at the circumstances that led to the default.

If the circumstance that led to the default were unforeseen and inescapable and a business is able to show that its conduct was that of a conscientious person who accepted the need to comply with VAT requirements, then it may amount to a reasonable excuse.

What sort of circumstances might count as reasonable excuse?

HMRC provide guidelines on circumstances where there might be a reasonable excuse for failing to submit a VAT Return and/or payment on time. These include:

  • computer breakdown
  • illness
  • loss of key personnel
  • unexpected cash crisis – where funds are unavailable to pay your tax due following the sudden reduction or withdrawal of overdraft facilities, sudden non-payment by a normally reliable customer, insolvency of a large customer, fraud or burglary. A simple lack of money is unlikely to be accepted as a reasonable excuse.
  • loss of records

Ongoing issues

HMRC is considering whether and how it should differentiate between those who deliberately and persistently fail to meet administrative deadlines or to pay what they should on time, and those who make occasional and genuine errors for which other responses might be more appropriate. This has been a lengthy process to date.

A previous HMRC document highlighted two issues with the current VAT default surcharge regime.

  • while the absence of penalty for the initial offence in a 12-month period gives business the chance to get processes right, some customers simply ignore this warning
  • is there an issue of proportionality, ie; the failure to distinguish between payments that are one or two days late or many months late?

It is possible that in the future we may hear proposals for the system being amended. if this is the case, I think we can anticipate the introduction of mitigation and suspension.

VAT: Issue of zero-rating certificate – The Westow Cricket Club case

By   18 December 2019
0

Issue an incorrect certificate to obtain zero rated building work at your peril! Don’t get caught out – A warning.

In the First Tier Tribunal (FTT) case of Westow Cricket Club (WCC) the appeal was against a penalty levied by HMRC for issuing a certificate to a contractor erroneously under The VAT Act 1994, Section 62 (1).

Background

WCC was an entity run by volunteers but was not a charity, although it was a Community Amateur Sports Club (“CASC”). It decided to build a new pavilion and wished to take advantage of certain zero rating which was available for the construction of a building that the

“…organisation (in conjunction with any other organisation where applicable) will use the building, or the part of the building, for which zero-rating is being sought …..solely for

a relevant charitable purpose, namely by a charity in either or both of the following ways:

….(b) As a village hall or similarly in providing social or recreational facilities for a local community.”

– Public Notice 708 para 14.7.1.

To ensure that the issue of such a certificate was appropriate, the appellant wrote to HMRC giving details about the building project and seeking guidance on the zero rating of supplies to WCC in the course of the construction of the pavilion. The response was important in this case as WCC sought to rely on it as a reasonable excuse. Part or the reply stated:

“HM Revenue & Customs policy prevents this Department from providing a definitive response where we believe that the point is covered by our Public Notices or other published guidance, which, in this case, I believe it is. In view of the above, please refer to section 16 of Public Notice 708 Buildings and construction. This explains when you can issue a certificate. Section 17 includes the certificates. Furthermore, I would refer you to sub-paragraph 14.7.4 which covers what is classed as a village hall or similar building. Providing the new pavilion meets the conditions set out, and it appears to do so, the construction work will be zero-rated for VAT purposes…”

Decision 

Regrettably, the FTT found that, despite HMRC’s letter expressing a ‘non definitive’ view; which was wrong, this was insufficient to provide reasonable excuse and could not be relied upon. The FTT made references to the fact that the club was not a charity and could not therefore issue the certificate. Consequently, the 100% penalty was applicable and not disproportionate (the penalty imposed is nothing more than the VAT that would have been paid by any other CASC seeking to build a pavilion incurring a vatable supply of a similar sum).

Commentary

HMRC was criticised for potentially leaving taxpayers in ‘no man’s land’ by expressing a view whilst at the same time saying that this was not a definitive response. This is a common tactic used by HMRC and one which many commentators, including myself, have criticised.

Tribunal’s unease

The judge commented that he trusted that HMRC will take note of his concerns and if this is a matter of policy to revisit it in light of the comments made in this decision. Let us hope HMRC listens. It is also an important case for charities (and others) to note when considering if they are able to obtain the construction of buildings VAT free. This is not a straightforward area, and the penalty for getting it wrong is clearly demonstrated here.

Always get proper advice – and don’t rely on vague rulings from HMRC!

VAT: HMRC Requirement for security – The BPF Tanks Ltd case

By   1 November 2019
0

Latest from the courts

The BPF Tanks Ltd First Tier Tribunal (FTT) case considered whether the imposition of a Notice Of Requirement (NOR) to provide security in respect of VAT was appropriate.

What is a NOR?

If HMRC decide that a business’s past history presents a risk to the revenue, it may issue a NOR via The VAT Act 1994, Schedule 11 para 4. Such a bond (or cash deposit) can cover a number of taxes, but if one is received for VAT it is as a result of HMRC believing that a business represents a risk of non-payment of its liability.

A NOR is commonly issued in situations where a business and/or a previous business connected to the same individual(s) has failed to meet its VAT obligations, eg; submitting returns or not paying VAT due. If no action is taken by the business in respect of the NOR, HMRC will issue a penalty and prevent the business trading until the security is paid. Continuing to trade when HMRC have prevented this via the NOR rules is a criminal offence.

Amount of security

The amount of security is be based on the estimated VAT liability of six months plus any existing arrears from a previous business. If the new business is yet to submit any VAT returns, these estimates will be based on turnover levels in the previous business.

Penalties

If a business continues to trade without settling the NOR matter, the penalty is £5,000 for every transaction carried without paying security.

Case background

The sole director of the appellant had also been a director of two previous companies in the same business. The first went into administration owing a significant amount of VAT. The second bought the assets of the first out of the administration but was wound up two years later, also owing HMRC a substantial amount of VAT. Because of the appellant’s compliance history, unsurprisingly, HMRC issued a NOR to the latest company.

The appellant essentially argued that HMRC had been ‘unreasonable’ in demanding the security and that no commissioners, properly directed, could have reached the decision to issue a NOR. He contended that it was unreasonable to require security when he had a time to pay (TTP) arrangement with HMRC and unreasonable to take into account the two previous companies.

NB: Unfortunately for the appellant, the TTP agreement was in respect of PAYE and not VAT, despite what the appellant understood.

Decision

The judge accepted that the appellant misunderstood the terms of the TTP but that misunderstanding did not mean that HMRC was unreasonable in reaching the conclusion to issue the NOR.

On the previous companies point; it was decided that it was not unreasonable for HMRC to take into account the two predecessor companies. This was because they;

  • were both run by the appellant
  • traded in the same industry
  • were run from the same address
  • traded in the same financial climate and
  • had the same customers

Consequently, there was sufficient links to the previous two companies to be taken into account and the history of them to be a relevant consideration when considering the risk presented by the appellant to the revenue.

For the above reasons the appeal was dismissed.

Commentary

An obvious outcome and the judge didn’t really have any other option. It does underline that to ignore the mantra; right tax, right time is a recipe for disaster and can lead to HMRC ending a business. It is worth bearing this in mind if you have clients that may be “reluctant” to meet their VAT obligations.

If you, or a client receives a NOR, the options are to:

  • pay the security in full
  • negotiate a TTP arrangement
  • appeal against the NOR. (This is usually a very difficult route and there must be genuine grounds to contend that HMRC’s decision either contained an error of law or was so unreasonable that no Commissioner could have reached those decisions).
  • cease the business

Clearly, the best thing is to avoid one in the first place!

VAT: Disaggregation – The Caton case

By   12 September 2019
0

Latest from the courts.

In the Charles John Caton First Tier tribunal (FTT) case the issue was whether HMRC were correct in deciding that a business was artificially split to avoid VAT registration (so called disaggregation, details here).

Background 

The appellant ran a café known as The Commonwealth for a number of years. Subsequently, his wife opened a restaurant in adjoining premises. HMRC decided that this was a single business and required a backdated VAT registration. This resulted in a retrospective VAT return and associated penalties for late registration.

HMRC pointed to the leases, the liability insurance and the alcohol licence, which are all in Mr Caton’s name, together with the fact he signed a questionnaire stating that he was sole proprietor of the restaurant, and the fact that the washing up area is shared, and say that these show that there was only one business. They also said that the fact that Mrs Caton did not have a bank account and therefore card takings from the restaurant went into Mr Caton’s bank account further bolsters their case.

The appellant proffered the following facts to support the contention that there were two separate businesses: There were separate staff in the restaurant and the café. Those for the cafe were hired by Mr Caton, and are his responsibility, and those for the restaurant were hired by Mrs Caton and are her responsibility. The cooking is done completely separately, by different people using different cooking areas. The menus are completely different, and when the café sells the restaurant ‘specials’ they are rung up on the till with a marker that shows they are restaurant sales. Although the majority of the food is ordered from the same place, there are separate orders (even though these orders are placed at the same time and paid for using Mr Caton’s bank account). Mrs Caton decides on the menu for the restaurant and the prices. She keeps the cash generated from the sales in the cafe, and this is not banked in Mr Caton’s account. Depending on the ratio of cash sales to card sales in any given month, she may need to pay some of it to Mr Caton for the rent, rates etc, but any surplus she keeps.There were two tills, one for the restaurant and one for the cafe.

The Law

The VAT Act 1994, Schedule 1 para 1A provides that:

(1)  Paragraph 2 below is for the purpose of preventing the maintenance or creation of any artificial separation of business activities carried on by two or more persons from resulting in an avoidance of VAT.

(2) In determining for the purposes of sub-paragraph (1) above whether any separation of business activities is artificial, regard shall be had to the extent to which the different persons carrying on those activities are closely bound to one another by financial, economic and organisational links.

VAT Act 1994, Schedule 1 para 2 provides that:

(1)… if the Commissioners make a direction under this paragraph, the persons named in the direction shall be treated as a single taxable person carrying on the activities of a business described in the direction…

Decision

The judge decided that she considered the facts that point to the businesses being run and owned as two separate operations were significantly stronger that facts that point to a joint ownership. And the appeal was allowed.

Commentary

These types of cases are decided on the precise facts. I think that this one must have been a close call. It appears the fact that may have swung it was that the judge commented “We find it extremely surprising, in this case, that HMRC have never met with Mrs Caton or, in correspondence, asked her for any details. Mr Caton and HMRC have both told us that he has consistently maintained from the first meeting the fact that Mrs Caton runs the restaurant. We find it impossible that HMRC could be in possession of facts sufficient to make a reasonable decision on this case without hearing from Mrs Caton.” That approach by HMRC is never going to play well in court. It strikes me that this type of approach is increasing in the department. Whether this is down to lack of training, resources or simple corner cutting to save time I cannot say.

If HMRC issue a direction under VAT Act 1994, Schedule 1 para 2 that two or more businesses should be treated as one, it is always worth having that decision reviewed. This is especially relevant in cases such as this where customers are the final consumers making the VAT sticking tax.

VAT – What is Reasonable Care?

By   12 April 2018
0

What is reasonable care and why is it so important for VAT?

HMRC state that “Everyone has a responsibility to take reasonable care over their tax affairs. This means doing everything you can to make sure the tax returns and other documents you send to HMRC are accurate.”

If a taxpayer does not take reasonable care HMRC will charge penalties for inaccuracies.

Penalties for inaccuracies 

HMRC will charge a penalty if a business submits a return or other document with an inaccuracy that was either as a result of not taking reasonable care, or deliberate, and it results in one of the following:

  • an understatement of a person’s liability to VAT
  • a false or inflated claim to repayment of VAT

The penalty amount will depend on the reasons for the inaccuracy and the amount of tax due (or repayable) as a result of correcting the inaccuracy.

How HMRC determine what reasonable care is

HMRC will take a taxpayer’s individual circumstances into account when considering whether they have taken reasonable care. Therefore, there is a difference between what is expected from a small sole trader and a multi-national company with an in-house tax team.

The law defines ‘careless’ as a failure to take reasonable care. The Courts are agreed that reasonable care can best be defined as the behaviour which is that of a prudent and reasonable person in the position of the person in question.

There is no issue of whether or not a business knew about the inaccuracy when the return was submitted. If it did, that would be deliberate and a different penalty regime would apply, see here  It is a question of HMRC examining what the business did, or failed to do, and asking whether a prudent and reasonable person would have done that or failed to do that in those circumstances.

Repeated inaccuracies

HMRC consider that repeated inaccuracies may form part of a pattern of behaviour which suggests a lack of care by a business in developing adequate systems for the recording of transactions or preparing VAT returns.

How to make sure you take reasonable care

HMRC expects a business to keep VAT records that allow you to submit accurate VAT returns and other documents to them. Details of record keeping here

They also expect a business to ask HMRC or a tax adviser if it isn’t sure about anything. If a business took reasonable care to get things right but its return was still inaccurate, HMRC should not charge you a penalty. However, If a business did take reasonable care, it will need to demonstrate to HMRC how it did this when they talk to you about penalties.

Reasonable care if you use tax avoidance arrangements*

If a business has used tax avoidance arrangements that HMRC later defeat, they will presume that the business has not taken reasonable care for any inaccuracy in its VAT return or other documents that relate to the use of those arrangements. If the business used a tax adviser with the appropriate expertise, HMRC would normally consider this as having taken reasonable care (unless it’s classed as disqualified advice)

Where a return is sent to HMRC containing an inaccuracy arising from the use of avoidance arrangements the behaviour will always be presumed to be careless unless:

  • The inaccuracy was deliberate on the person’s part, or
  • The person satisfies HMRC or a Tribunal that they took reasonable care to avoid the inaccuracy

* Meaning of avoidance arrangements

Arrangements include any agreement, understanding, scheme, transaction or series of transactions (whether or not legally enforceable). So, whilst an arrangement could contain any combination of these things, a single agreement could also amount to an arrangement.  Arrangements are `avoidance arrangements’ if, having regard to all the circumstances, it would be reasonable to conclude that the obtaining of a tax advantage was the main purpose, or one of the main purposes of the arrangements.

NB: We at Marcus Ward Consultancy do not promote or advise on tax avoidance arrangements and we will not work with any business which seeks such advice.

Using a tax adviser

If a business uses a tax adviser, it remains that business’ responsibility to make sure it gives the adviser accurate and complete information. If it does not, and it sends HMRC a return that is inaccurate, it could be charged penalties and interest.

None of us are perfect

Finally, it is worth repeating a comment found in HMRC’s internal guidance “People do make mistakes. We do not expect perfection. We are simply seeking to establish whether the person has taken the care and attention that could be expected from a reasonable person taking reasonable care in similar circumstances…”