Tag Archives: vat-tribunal

VAT: Avoiding a Default Surcharge. Reasonable Excuse – Update

By Marcus Ward 14 March 2022

I have looked at the Default Surcharge regime in detail here but as statistics show more business to be in default (which is probably accurately attributable, inter alia, to the pandemic) I consider how a penalty may be mitigated, by the provision of a “Reasonable Excuse”. HMRC has updated its internal guidance on Reasonable Excuse this month.

Specifically: HMRC state that “…where a person has not been able to meet an obligation on time due to the impact of COVID-19, HMRC will usually accept that they will have a reasonable excuse.”

What is a Default Surcharge?

The Default Surcharge is a civil penalty issued by HMRC to encourage businesses to submit their VAT returns and pay the tax due on time.

A default occurs if HMRC has not received your return and all the VAT due by the due date. The relevant date is the date that cleared funds reach HMRC’s bank account. If the due date is not a working day, payment must be received on the last preceding working day.

More on late returns here and on late payments here.

New rules forthcoming

It is noted that there is a new regime for penalties, details here although these changes have been delayed until 1 January 2023

Reasonable Excuse

If a business has a reasonable excuse for failing to pay on time, and it remedies this failure without unreasonable delay after the excuse ends, it will not be liable to a surcharge. The onus is on a business to satisfy HMRC that it has a Reasonable Excuse.

Definition

There’s no statutory definition of Reasonable Excuse and it will depend on the particular circumstances of a case. A Reasonable Excuse is something that prevented the business meeting a tax obligation on time which it took reasonable care to meet. There is a great deal of case law on this particular issue. Please contact us should there be doubt about a Reasonable Excuse.

What may count as a Reasonable Excuse?

HMRC give the following examples:

“your partner or another close relative died shortly before the tax return or payment deadline
you had an unexpected stay in hospital that prevented you from dealing with your tax affairs
you had a serious or life-threatening illness
your computer or software failed just before or while you were preparing your online return
service issues with HMRC online services
a fire, flood or theft prevented you from completing your tax return
postal delays that you could not have predicted
delays related to a disability (including mental health) you have”

This list is not exhaustive.

What is NOT a reasonable excuse

Statute identifies two specific situations that are not a reasonable excuse:

lack of funds to pay any VAT due, or
reliance on any other person to perform a task, where there has been a delay or inaccuracy on that person’s part.

There can be exceptions to these two exclusions. For example, an insufficiency of funds may be a reasonable excuse where the insufficiency is a result of events outside the person’s control.

HMRC also states that these situations would not normally be accepted, on their own, as a reasonable excuse:

pressure of work
lack of information
lack of a reminder from HMRC

Facts

HMRC will establish what facts the business believes gave rise to a Reasonable Excuse. The facts may include:

the taxpayer’s beliefs
the taxpayer’s own experiences and relevant attributes
the situation of the taxpayer at any relevant time
acts carried out by the taxpayer or someone else
acts that the taxpayer or someone else should have carried out but did not.

Case Law

Although not a VAT issue, in the Upper Tribunal (UT) case of Christine Perrin [2018] UKUT 156 [TC], the judge provided guidance on how the Tribunal should approach a Reasonable Excuse defence. There are four steps:

establish what facts the taxpayer asserts give rise to a reasonable excuse
decide which of those facts are proven
if those proven facts amount to an objectively reasonable excuse for the default
having decided when any reasonable excuse ceased, decide whether the taxpayer remedied the failure without unreasonable delay after that time

Appeal

If HMRC refuse to accept an advance of a Reasonable Excuse and the Default Surcharge is maintained, there are two potential remedies:

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

ask HMRC to review your case (A Statutory Review)
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 (SLNE) was sent. The letter should give the reasons why a business disagrees with the decision.

We are able to assist with all disputes with HMRC and have an enviable record of succeeding in having Default Surcharges removed.

VAT: Is dog grooming taught in schools? The Dogs Delight case

By Marcus Ward 15 February 2022

Latest from the courts

In the Julie Lalou t/a Dogs Delight First Tier Tribunal (FTT) case the issue was whether the teaching of dog grooming qualified as private tuition and was therefore exempt.

Background

The Appellant operated a business providing dog grooming and dog grooming courses. The appeal was concerned only with the supplies of dog grooming tuition as it was accepted that dog grooming in itself is taxable.

Technical

The sole issue in dispute in this appeal was whether the supplies fall within the private tuition exemption as for provided by The Value Added Tax Act 1994, Schedule 9, Group 6, item 2 “The supply of private tuition, in a subject ordinarily taught in a school or university, by an individual teacher acting independently of an employer”.

HMRC’s view was that “to be eligible for exemption dog grooming would need to be a course that is ‘ordinarily’ taught in schools and universities which it is not…”

The appellant wrote to HMRC giving a list of seven “local Colleges and Universities where the Level 3 Dog Grooming Diploma is ordinarily taught”. The appellant went on to state “There are many more within the UK” which were said to represent around 30% of English colleges. Further it was stated that the business was a City & Guilds approved centre and that the courses were not recreational.

Decision

It was accepted that the courses that the appellant taught involved her making supplies of tuition in that she transferred to her students skills and knowledge.

But, unsurprisingly, the appeal was dismissed. The appellant had failed to demonstrate that dog grooming is taught at a wide number of schools and universities

The court also determined that the appellant needed to provide some evidence of whether dog grooming was taught at schools and universities in the EU (again, something she had failed to do).

Commentary

The exemption for private tuition is fraught with complexities and the amount of case law on the subject is significant, which indicates the difficulties in analysing the VAT position. An example here. It is important to establish what is being provided and that research is carried out to consider the degree of ubiquity of the subject in education. A general guide to education here. The phrase “ordinarily taught” is rather nebulous and it would be prudent to obtain as much evidence as possible that a subject is s commonly or ordinarily taught in schools and universities if a supply is treated as exempt.

Is room hire subject to VAT? – The Errol Willy Salons case

By Marcus Ward 24 January 2022

Latest from the courts

In the First Tier Tribunal (FTT) case of Errol Willy Salons Ltd (2022) TC 08370 the issue was whether the rent of two rooms were an exempt right over land, or the standard rated supply of facilities.

Background

Room hire is usually exempt from VAT unless it is subject to an option to tax. However, it can be subsumed into a different rated another supply if something more than a “bare” room is provided. In such cases, it would follow the VAT treatment of the composite supply.

The Issue

In the Errol Willy Salons case, HMRC formed the view that what was being supplied was facilities (the room occupation being a minor part of the supply) and therefore subject to VAT. In its opinion the economic and social reality was that the beauticians were provided with a licence to trade from the premises. The appellant occupied the ground floor – operating a hairdressing business. The rooms over the saloon were rented to third party beauticians. The occupants furnished the rooms themselves, provided their own equipment, set their own pricing and opening hours. They did have use of certain services and facilities; a receptionist and toilets, but it was understood that the services were rarely used. Unsurprisingly, the appellant disagreed and contended that the other services were incidental or subsidiary to the exempt supply of the room rental.

The decision

The Tribunal allowed the appeal against the assessment. It found that “non-rent” services provided to the beauticians were limited in nature and not essential to the beauticians’ businesses Consequently, the arrangements amounted to a supply of property (a licence to occupy the rooms) rather than a supply of taxable facilities and was therefore exempt.

Commentary

This is the latest in a long line of issues on composite/separate supplies and room hire/facilities disputes, especially in relation to weddings. It is important to establish precisely what is being provided to establish the correct VAT treatment and advice should be ought if there is any doubt about the VAT liability.

The CIOT has long advocated that it is not the case that every package of supplies involving room hire and other things must be a composite supply of something other than an exempt letting of land.

NB: This case is different to hairdresser chair rentals which remain standard rated.

VAT: Input tax recovery. The Mpala Mufwankolo case

By Marcus Ward 15 November 2021

Latest from the courts

In the First Tier Tribunal (FTT) case of Mr Mufwankolo the dispute was whether the appellant was able to recover VAT charged by the landlord of the property from which he ran his business – a licenced retail outlet on Tottenham High Road.

Background

The landlord had opted to tax the commercial property and charged VAT on the rent. The appellant was a sole proprietor; however, the lease was in the name of Mr Mufwankolo’s wife, and the rent demands showed her name and not that of the sole proprietor. It was contended by the appellant, but not evidenced, that the lease had originally been in both his and his wife’s names, despite his wife being the sole signatory.

The issues

Could the appellant recover input tax?

Did the business receive the supply?
Was there appropriate evidence?

It was clear that the business operated from the relevant property and consequently, in normal circumstances, the rent would be a genuine cost component of the business.

The Decision

The FTT found that there was no entitlement to an input tax claim and the appeal was dismissed. The lease was solely in the wife’s name and the business was the applicant as a sole proprietor. (There was an obvious potential for a partnership and an argument that a partnership was originally intended was advanced. The status of registration was challenged in 2003, but, crucially, not pursued).

It was possible for the property to be sub-let by the wife to the husband, however, this did not affect the VAT treatment as matters stood. Additionally, there was no evidence that the appellant actually paid any of the rent, as this was done by the tenant. There were no VAT invoices addressed to the sole proprietor.

Given the facts, there was no supply to the appellant, so there was no input tax to claim, and the issue of acceptable evidence fell away.

It was a certainty that the appeal could not succeed.

Commentary

There were a number of ways that this VAT cost could have easily been avoided had a little thought been given to the VAT arrangements. An oversight that created an avoidable tax hit.

A helpful guide to input tax considerations here: Care with input tax claims.

Legislation

The VAT Act 1994 Section 3 – Taxable person

The VAT Act 1994 Section 4 – Taxable supply

The VAT Act 1994 Section 24 (1) – Input tax

The VAT Act 1994 Section 24 (6) – Input tax claim evidence

VAT: DIY housebuilders can make more than one claim – The Ellis case

By Marcus Ward 18 October 2021

Latest from the courts

In the First Tier Tribunal (FTT) case of Andrew Ellis and Jane Bromley [2021] TC08277, the issue was whether a person constructing their own house can make more than one claim for VAT incurred.

Background

The DIY Housebuilder’s Scheme enables a DIY housebuilder to recover VAT incurred on the construction of a house in which the constructor will live. Details here.

In this case, the specific issue was whether, despite the HMRC guidance notes on the scheme claim form explicitly stating that only one claim can be made, whether two claims may be submitted and paid by the respondent.

The appellant constructed a house over a period of five years (he was a jobbing builder and the work was generally only undertaken at weekends and holidays). To aid cash flow, an initial claim was made, followed by a second two years later.

The relevant legislation is The VAT Act 1994 section 35.

Decision

The appeal was allowed. The FTT found that HMRC’s rule that only one claim could be made under the DIY housebuilder’s scheme was ultra vires and that multiple claims should be permitted.

The judge stated that “…there is no express indication that only one claim may be made. Like many provisions, section 35 VATA is drafted in the singular. Drafting in the singular is an established technique to assist in clarity and to enable the proposal to be dealt with succinctly. As there is no express indication to the contrary in section 35 VATA, section 6 Interpretation Act 1978 applies to confirm that the reference to “a claim” in section 35 VATA must be read as including “claims”.

Commentary

This is good news for claimants who often must wait a number of years for a house to be built and therefore carry the VAT cost until the end of the project.

This case presumably means that it is possible to make claims as the project progresses and there is no need to wait until completion.

We await comment on this case from HMRC, but it is hoped that clarification will be forthcoming on whether the result of this case will be accepted.

VAT: Farm in business? The Babylon case

By Marcus Ward 21 September 2021

Latest from the courts

In the Upper Tribunal (UT) case of Babylon Farm Ltd (the farm) the issue was whether the appellant was in business and consequently was able to recover certain input tax.

Background

Yet another case on whether there was any business activity in a company. Please see here, here, here and here for previous cases on this issue. The farm sold hay which it cut from another person’s fields to a connected party. The value of the one-off annual sale was £440 pa. The appellant also contended that it was also undertaking preparatory acts for the new business activities and that it would be able to levy management charges. Another new business activity was the creation of an investment and insurance product.

The farm built a new barn on which it claimed input tax of £19,760.

HMRC considered that no business was being carried on and decided to deregister the farm thus refusing to pay the input tax claim. The farm challenged this decision and contended that taxable supplies were being made, and there was also an intention to make taxable supplies in the future.

Legislation

Paragraph 9 of Schedule 1 of the VAT Act 1994 requires HMRC to be satisfied that a person is either making taxable supplies or is carrying on a business and intends to make such supplies in the course or furtherance of a business in order to be registered for VAT. There are a number of tests set out in case law (mainly The Lord Fisher case) to establish whether a person is in business:

Is the activity a serious undertaking earnestly pursued?
Is the activity an occupation or function, which is actively pursued with reasonable or recognisable continuity?
Does the activity have a certain measure of substance in terms of the quarterly or annual value of taxable supplies made?
Is the activity conducted in a regular manner and on sound and recognised business principles?
Is the activity predominantly concerned with the making of taxable supplies for a consideration?
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?

Decision

The appeal was dismissed. The farm was not in business and could not recover input tax on the costs of the new barn.

The judge stated that he could see no legal basis for the farm to be in business. The hay that the farm sold was taken from the customer’s own land and therefore belonged to him already. It was also noted that no invoices were raised, no payment for the hay had been made for a number of years and the single customer was a director of Babylon Farm Limited so the farm was not operating in an open market. The sale of hay had not been conducted on a basis that followed sound and recognised business principles or on a basis that was predominantly concerned with the making of taxable supplies for consideration. As a consequence, the farm was not operating as a business during the relevant period.

On the intention point; neither of the intended activities had yet resulted in any chargeable services being provided and both were to be carried on through companies that had been formed for these purposes (not the farm). Both businesses remained at a formative stage and neither company has generated any revenue. This was insufficient to retain the VAT registration.

Commentary

The decision was hardly a surprise and one wonders how it reached the UT. HMRC were always going to challenge an input tax claim of that quantum with no output tax (and such a low value of sales which may not have been made in any event).

VAT: Report on Tax Tribunal performance published

By Marcus Ward 7 September 2021

A new report reviewing the performance of the Tax Chamber of the First-tier Tribunals (FTT) has been published. It identifies the FTT’s strengths and areas for improvement It has been published by the independent the Tax Law Review Committee (TLRC)

The major causes of dissatisfaction among FTT users include:

delay
lack of communication by the FTT administration
a lack of engagement by some judges during the hearing
the allocation of cases to judges with the appropriate knowledge or skill.

Delay is the overriding concern among tribunal users surveyed: both delay between the hearing and the release of the decision (which sometimes is over one year) and delay caused by the FTT administration. Especially in relation to the FTT administration, the underlying cause of these problem seems to be a lack of funding, as there is a rapid staff-turnover with staff leaving for better renumerated jobs in other parts of the Civil Service.

Area of strength:

how litigants in person are often assisted by judges taking an inquisitorial approach.

The report identifies potential for further improvements to access to justice for litigants in person, including allowing remote video-hearings as an alternative to having cases determined on paper without a hearing, and the possible establishment of a pro-bono advocacy scheme.

VAT: Construction of a dwelling – zero-rated? The CMJ (Aberdeen) case

By Marcus Ward 18 August 2021

Latest from the courts

The First-Tier tribunal (FTT) considered the case of CMJ (Aberdeen) Limited (CMJ) and whether the supply of building services in respect of the construction of a dwelling were correctly zero rated by the appellant. HMRC deemed that the construction services were standard rated on the basis that the works were not carried out in accordance with the terms of the relevant statutory planning consent.

Background

HMRC’s view was that, although planning consent was in place at the time the construction services were supplied by the appellant, that planning consent permitted only the alteration or enlargement of a dwelling and did not allow for the construction of a dwelling. HMRC accept that the property was constructed as a new building, but that this was not permitted by the planning consent and so the construction was not carried out in accordance with it.

CMJ contended that statutory planning consent had been obtained for the construction via a combination of the planning consent and a construction building warrant which it had obtained from the relevant authority, and which allowed for the construction of a new building.

Legislation

The zero rating for the construction of new dwellings is contained in The VAT Act 1994, Schedule 8, Group 5, item 2

“The supply in the course of the construction of

(a) a building designed as a dwelling…”

Note 2 to Group 5 of Schedule 8 to the VAT Act include the following:

“(2) A building is designed as a dwelling or a number of dwellings where in relation to each dwelling the following conditions are satisfied…

…(d) statutory planning consent has been granted in respect of that dwelling and its construction or conversion has been carried out in accordance with that consent.

Decision

The appeal was dismissed. It was judged that the building warrant did not comprise statutory planning consent for the purposes of note 2 (d) because:

Planning consent and building warrants operate under different statutory regimes.

Breach of planning consent is dealt with separately from a breach of the building warrant legislation, and each is dealt with by the specific statutory regime . If there is a breach of planning consent, it would not affect the validity of the building warrant, and vice versa.

The Building Standards Handbook states that the purpose of the building standards system is setting out the standards to be met when building work takes place. This is different from planning consent which is consent to allow the authority to permit development on a piece of land. They are distinct and separate regimes aimed at distinct and separate issues. While planning permission is about how the house will look, a building warrant is about whether it meets building standards.

Both planning permission and a building warrant is required. One is no substitute for the other.

It is possible to obtain retrospective planning consent, the judge did not believe it is possible to get a retrospective building warrant.

It was not possible to carry out works of construction in accordance with a valid statutory consent, since no such consent had been given for construction at the time that the building works were carried out.

Commentary

The legislation covering building work is complex and there are many traps for the unwary. Even the seemingly straightforward matter of whether a new dwelling is constructed can produce difficulties, as in this case. We always counsel that proper VAT advice is sought in such circumstances.

VAT: Day-care services by private bodies are taxable

By Marcus Ward 22 June 2021

Latest from the courts

Following the Supreme Court decisions in Life Services Ltd and The Learning Centre (Romford) Ltd HMRC have published guidance in Revenue & Customs Brief 9 (2021).

NB: This guidance applies to bodies in England and Wales only – Scotland and Northern Ireland have different rules.

The relevant cases concerned the VAT liability of day-care services provided by private bodies to vulnerable adults in England. They confirmed that HMRC’s interpretation of the legislation is correct; that providers of day-care must be charities, public bodies or regulated by the relevant authority (“approved, licensed, registered or exempted from registration by any Minister or other authority pursuant to a provision of a public general Act”) in order to be able to exempt these services.

The legislation is: The VAT Act 1994, Schedule 9, group 7, item 9.

It is understood that there were a significant number of claims stood behind the Supreme Court cases and these will now fail.

HMRC state that providers who have not accounted for VAT on supply of these services must do so with immediate effect.

Commentary

This is a further example of the VAT complexity in the provision of health and welfare services. It has always been an area ripe for disputes and such bodies and their advisers would be prudent to review the tax treatment of their supplies. There are usually two discrete areas of potential problems; whether services are business or non-business, and if business – do they fall within the various exemptions found at Schedule 9, group 7, items 1 to 11.

VAT: Input tax recovery – whether a taxable supply. The Door Specialist case

By Marcus Ward 9 June 2021

Latest from the courts

In the First Tier Tribunal case of The Door Specialist Limited (TDSL) the issue was whether an HMRC assessment for overclaimed input tax was correct.

Background

The appellant recovered input tax on the import of goods (doors). The company did not sell the doors, but simply gave the goods (no consideration provided) to a separate company called Just Doors (JD). It was JD who made the sales of the doors to third party customers. TDSL and JD were under common ownership but no VAT group in place at the relevant time. TDSL was VAT registered as it made separate, unrelated taxable supplies of property rental

Arguments

HMRC contended that as there was no onward taxable supply of the doors by TDSL, no input tax was recoverable per The VAT Act 1994 section 24 (1). TDSL relied on HMRC’s published guidance (Notices 700 and 700/7) in relation to gifts and proposed that it would be proper to assess for output tax on the “supply” to JD rather than denying the input tax claim.

Issues

The issues may therefore be summarised as whether;

the relevant goods were used for the purpose of any economic activity by TDSL
the doors could be treated as business gifts as contended by the applicant such that the input tax was recoverable.

Further cases on economic activity/business here, here and here

Decision

It was decided that as there was no direct and immediate link between the purchase of the goods and any onward taxable supply in the course of business or economic activity by TDSL (as required by the outcome of the cases of BAA Ltd JDI International Leasing Ltd) the disallowance of the input tax was appropriate. The advancement of the business gifts contention did not assist the taxpayer as this was not an economic activity in itself. The appeal was therefore dismissed.

Commentary

A clear example of not considering the VAT implications when carrying out transactions. This tax cost could have easily been avoided if TDSL had sold the doors to JD. As both parties were fully taxable, there would have been no VAT hit. Business gifts and promotional activities are also often a complex area of VAT and as one former colleague once remarked “If you have a marketing department you have a VAT issue”.