In today’s Autumn Statement, the Chancellor announced that Sixth Form Colleges will be able to convert to academies. This means that colleges which do convert will need to review their VAT position. There are immediate decisions to make on how to structure and deal with VAT. This Statement is great news for colleges and there will be an immediate and ongoing VAT benefit if they become an academy. However, as with all things VAT, there are also pitfalls. As with schools converting to academy status, it is usual that the Trustees and relevant staff will need to consider VAT for the first time. We are able to guide academies through the VAT maze and help them maximise this new beneficial tax position. We have considerable experience in dealing with VAT and academies and advise over 50 across the country. Please contact us if these changes affect you, or you would like to discuss the implications. Please see our academy services here
The Littlewoods case is slowly making its way through the court system with the CJEU ruling that there is a right to the taxpayer of adequate indemnity in respect of tax incorrectly collected via a mistake of law. There are myriad claims to which this will apply, especially “Fleming” claims where they covered a significant period of time a number of years ago.
HMRC has now applied to Supreme Court’s decision for permission to appeal the decision and we expect the Supreme Court’s verdict within the next month.
HMRC appear very concerned that it will ultimately be required to pay large amounts of interest to taxpayers who have suffered as a result of HMRC applying the relevant law incorrectly. Consequently, it has announced that the Summer Finance Bill 2015 will impose a 45% corporation tax charge on compound interest. There will be no right of set off or deduction for other losses. HMRC will withhold the corporation tax from any payment of interest made. This will take effect on 21 October 2015 (although the relevant legislation will not become law until 2016 indicating that HMRC is indeed running scared).
It is understood that there are a number of parties currently working on ways to challenge the legality of the proposed legislation.
Claims already submitted
No immediate action is required, although it may be beneficial to review the basis of the claim, how it was made and what the status of it is currently.
For businesses which have received repayments due to HMRC error, it may be worthwhile reviewing the position to determine whether a claim for compound interest is appropriate and if so, to make a claim as soon as possible. We would, of course, be happy to advise on this and assist where necessary.
VAT grouping is a facilitation measure by which two or more bodies corporate can be treated as a single taxable person (a single VAT registration) for VAT purposes. “Bodies Corporate” includes; companies of all types and limited liability partnerships.
It is important to recognise the difference between a corporate group and a VAT group – these are two different things and it should not be assumed that a corporate group is automatically a VAT group.
There are detailed rules on who can VAT group, which is an article in itself for another day, but it is worth remembering that it is possible to VAT group where no taxable supplies are made outside the group.
- Only one VAT return per quarter – less administration.
- The representative member accounts for any tax due on supplies made by the group to third parties outside the group. This is particularly helpful if your accounting is centralised
- No VAT on supplies between VAT group members. No need to invoice etc, or recognise supplies on VAT return.
- Usually improves the partial exemption position if exempt supplies are made between group companies.
- May improve input tax recovery if taxable supplies are made to a partly exempt group company.
- If assets are hived up or down into a group company before a company sale to a non-grouped third party, the VAT consequences of the intra-group movement may be ignored.
- May provide useful planning opportunities/convenience at a later date.
- Sales invoices issued, or purchase invoices received, in the wrong company name would not require time-consuming amendment.
- There may be cashflow benefits in respect of intra-group charges.
- Reduced chance of penalties on intra-group charges.
- All members of the group are jointly and severally liable for any VAT due.
- Former VAT group members are also liable for any VAT debts due during the period of VAT group membership.
- Only one partial exemption de-minimis limit for group – which decreases the ability to fully recover input tax.
- Obtaining all relevant data to complete one return may take time thus possibly missing filing deadlines.
- A new VAT number is issued.
- The representative member needs all of the necessary information to submit a VAT return for the group by the due date.
- Via anti-avoidance provisions, assessments can be raised on the representative member relating to earlier periods when it was not the representative member and even when it was not a member of the group at that time.
- The limit for voluntary disclosures of errors on past returns applies to the group as a whole (rather than each company having its own limit).
- The payments on account (POA) limits apply to the group as a whole. This applies to a business whose VAT liability is more than £2 million pa. This adversely affects a business’s cashflow.
- The cash accounting limit of £1,350,000 applies to the group as a whole (rather than each company having its own limit).
- Transfers of Going Concerns (TOGCs) acquired by a partly exempt VAT group may result in an irrecoverable VAT charge as a result of a deemed self-supply.
- An option to tax made by a VAT group member is binding on all present and future members of the VAT group. This is so even after a company has left the VAT group.
We strongly recommend that professional advice is taken when a business is either considering forming a VAT group, or when thought is being given to disbanding one. Making the wrong decision could be very expensive indeed. Specific matters that dictate VAT advice are when:
- property is involved
- inter-company charges are made
- TOGCs are involved
- costs in respect of restructuring are incurred (a current hot potato in the courts)
- there is an international aspect to a group
- a reverse charge applies
- a company has been involved in the penalty regime
- companies become insolvent
- a VAT group is subject to POA
- a company, or the VAT group, makes exempt supplies.
A relevant business person `belongs’ in the relevant country. A `relevant country’ means:
- the country in which the person has a business establishment, or some other fixed establishment (if it has none in any other country);
- if the person has a business establishment, or some other fixed establishment or establishments, in more than one country, the country of the relevant establishment (ie; the establishment most directly concerned with the supply); and
- otherwise, the country of the person’s usual place of residence (in the case of a body corporate, where it is legally constituted).
A person who is not a relevant business person `belongs’ in the country of his usual place of residence. The `belonging’ definition applies equally to the recipient of a supply, where relevant.
Business establishment is not defined in the legislation but is taken by HMRC to mean the principal place of business. It is usually the head office, headquarters or ‘seat’ from which the business is run. There can only be one such place and it may take the form of an office, showroom or factory.
Fixed establishment is not defined in the legislation but is taken by HMRC to mean an establishment (other than the business establishment) which has both the technical and human resources necessary for providing and receiving services on a permanent basis. A business may therefore have several fixed establishments, including a branch of the business or an agency. A temporary presence of human and technical resources does not create a fixed establishment in the UK.
Usual place of residence. A body corporate has its usual place of residence where it is legally constituted. The usual place of residence of an individual is not defined in the legislation. HMRC interpret the phrase according to the ordinary usage of the words, ie; normally the country where the individual has set up home with his/her family and is in full-time employment. An individual is not resident in a country if only visiting as a tourist.
More than one establishment. Where the supplier/recipient has establishments in more than one country, the supplies made from/received at each establishment must be considered separately. For each supply of services, the establishment which is actually providing/receiving the services is normally the one most directly connected with the supply but all facts should be considered including
- for suppliers, from which establishment the services are actually provided;
- for recipients, at which establishment the services are actually consumed, effectively used or enjoyed;
- which establishment appears on the contracts, correspondence and invoices;
- where directors or others who entered into the contract are permanently based; and
- at which establishment decisions are taken and controls are exercised over the performance of the contract.
However, where an establishment is actually providing/receiving the supply of services, it is normally that establishment which is most directly connected with the supply, even if the contractual position is different.
A VAT group is treated as a single entity. This also applies when applying the ‘place of belonging’. As a result, a group has establishments wherever any member of the group has establishments.
This is an area which often leads to uncertainty, and therefore VAT issues. It is also an area where VAT planning may; save time, resources and avoid unexpected VAT costs, either in the UK or another country.
For more on our International Services
I have made a lot of references to penalties in other articles over the years. So I thought it would be a good idea to have a closer look; what are they, when are they levied, rights of appeal, and importantly how much could they cost if a business gets it wrong?
Broadly, a penalty is levied if the incorrect amount of VAT is made, either by understating output tax due, or overclaiming input tax, or accepting an assessment which is known to be too low.
Amount of penalty
HMRC detail three categories of inaccuracy. These are significant, as each has its own range of penalty percentages. If an error is found to fall within a lower band, then a lower penalty rate will apply. Where the taxpayer has taken ‘reasonable care,’ even though an error has been made, then no penalty will apply.
- An error, when reasonable care not taken: 30%;
- An error which is deliberate, but not concealed: 70%;
- An error, which is deliberate and concealed: 100%.
There is no definition of ‘reasonable care’. However, HMRC have said that they would not expect the same level of knowledge or expertise from a self-employed person, as from a large multi-national.
HMRC expect that, where an issue is unclear, advice is sought, and a record maintained of that advice. They also expect that, where an error is made, it is adjusted, and HMRC notified promptly. They have specifically stated that merely to adjust a return will not constitute a full disclosure of an error. Therefore a penalty may still be applicable.
What the penalty is based on
The amount of the penalty is calculated by applying the appropriate penalty rate (above) to the ‘Potential Lost Revenue’ or PLR. This is essentially the additional amount of VAT due or payable, as a result of the inaccuracy, or the failure to notify an under-assessment. Special rules apply where there are a number of errors, and they fall into different penalty bands.
Defending a penalty
The percentage penalty may be reduced by a range of ‘defences:’
– Telling; this includes admitting the document was inaccurate, or that there was an under-assessment, disclosing the inaccuracy in full, and explaining how and why the inaccuracies arose;
– Helping; this includes giving reasonable help in quantifying the inaccuracy, giving positive assistance rather than passive acceptance, actively engaging in work required to quantify the inaccuracy, and volunteering any relevant information;
– Giving Access; this includes providing documents, granting requests for information, allowing access to records and other documents.
Further, where there is an ‘unprompted disclosure’ of the error, HMRC have power to reduce the penalty further. This measure is designed to encourage businesses to review their own VAT returns.
A disclosure is unprompted if it is made at a time when a person had no reason to believe that HMRC have discovered or are about to discover the inaccuracy. The disclosure will be treated as unprompted even if at the time it is made, the full extent of the error is not known, as long as fuller details are provided within a reasonable time.
HMRC have included a provision whereby a penalty can be suspended for up to two years. This will occur for a careless inaccuracy, not a deliberate inaccuracy. HMRC will consider suspension of a penalty where, given the imposition of certain conditions, the business will improve its accuracy. The aim is to improve future compliance, and encourage businesses which genuinely seek to fulfil their obligations.
Appealing a penalty
HMRC have an internal reconsideration procedure, where a business should apply to in the first instance. If the outcome is not satisfactory, the business can pursue an appeal to the First Tier Tribunal. A business can appeal on the grounds of; whether a penalty is applicable, the amount of the penalty, a decision not to suspend a penalty, and the conditions for suspension.
The normal time limit for penalties to four years. Additionally, where there is deliberate action to evade VAT, a 20 year limit applies. In particular, this applies to a loss of VAT which arises as a result of a deliberate inaccuracy in a document submitted by that person.
These are just the penalties for making “errors” on VAT returns. HMRC have plenty more for anything from late registration to issuing the wrong paperwork.
My advice is always to check on all aspects of a penalty and seek assistance for grounds to challenge a decision to levy a penalty. We have a very high success rate in defending businesses against inappropriate penalties. It is always worth running a penalty past us.
The Flat Rate Scheme (FRS) was introduced to simplify VAT accounting for small businesses (with an annual turnover under £150,000) and does away with the concept of input and output tax. Instead a flat rate is applied to a business’ VAT inclusive turnover. This means a business in the FRS cannot reclaim any VAT incurred on its purchases, but a lower (than 20%) rate of VAT is applied to its VAT inclusive income.
Additionally, there is an option to only account and pay VAT when the business itself has been paid by its customers; doing away with VAT bad debt issues and improving cashflow.
Now this certainly has its attractions in terms of reducing the administrative burden and some business find that it reduces the amount of VAT payable. However care should be taken to select the appropriate business category/rate. A simple exercise to compare VAT declared under the “normal” rules to that due under the FRS is clearly prudent. But, as with all things VAT, there can be a catch.
The two drawbacks to the scheme
1) If a business incurs a significant amount of input tax then, unless the flat rate percentage benefit outweighs the loss of input tax, then the FRS is not for them.
2) If a business makes any supplies at the zero rate, or that are exempt, or outside the scope of VAT this income is also included in the turnover for the FRS. The result is then that VAT has to be accounted for on sales that would be VAT free under the normal VAT rules.
This is a bad thing!
Examples of businesses which need to be particularly aware are ones which:
– Export goods or services
– Provide goods or services cross-border to other EC member States
– Sell books, food, or children’s clothes
– Build new homes
– Provide transport
– Let property
– Are charities or Not For Profit entities
– Provide financial or insurance services or brokerage
– Provide health and/or welfare services
– Provide education and/or training
– Offer subscriptions to membership organisations
– Provide sport services
– Are usually in a repayment position with HMRC
(This list is not exhaustive).
The FRS should certainly be considered for smaller businesses especially start-ups; since a first year discount is available for those that are in their first year of VAT registration. These get a one per cent reduction in the flat rate percentage until the day before their first anniversary of becoming VAT registered.
It is important for advisers to consider whether a client would benefit from being in the FRS, or indeed, whether continuation of the scheme remains advantageous to the business.
The VAT flat rates
The VAT flat rate you use depends on the type of business. If the rate changes, a business must apply the new rate from the date it changes. Also, if the nature of a taxpayer’s business changes it is important to review its FRS position.
The applicable rates here
The detailed rules of the FRS here
The original idea was to assist businesses which are required to submit returns in different jurisdictions in different languages by harmonising the information required and standardising the methodologies across Member States.
Although the intention is/was laudable, it would have likely increased complexity for the UK VAT return which is one of the most straightforward.
The changes to VAT reporting was due to be introduced in 2017.
The original plan has met with little support and the Commission has decided to focus on other harmonisation measures.
Assuming a business is not partly exempt or not subject to a restriction of recovery of input tax due to non-business activities (and the claim is not for a motor car or business entertainment) the answer is usually yes.
However, HMRC is now, more than ever before, concerned with irregular, dishonest and inaccurate claims. It is an unfortunate fact that some people see making fraudulent claims as an “easy” way to illegally obtain money and, as is often the case, honest taxpayers are affected as a result of the (understandable) concerns of the authorities. Missing Trader Intra-Community (MTIC) or “carousel” fraud has received a lot of publicity over recent years with an estimate of £Billions of Treasury money being obtained by fraudsters. While this has been generally addressed, HMRC consider that there is still significant leakage of VAT as a consequence of dishonest claims. HMRC’s interest also extends to “innocent errors” which result in input tax being overclaimed.
In order to avoid unwanted attention from HMRC, what should a business be watching for when claiming credit for input tax? Broadly, I would counsel making “reasonable enquiries”. This means making basic checks in order to demonstrate to HMRC that a business has taken care to ensure that a claim is appropriate. This is more important in some transactions than others and most regular and straightforward transactions will not be in issue. Here are some pointers that I feel are important to a business:
Was there a supply?
This seems an obvious question, but even if a business holds apparently authentic documentation; if no supply was made, no claim is possible. Perhaps different parts of a business deal with checking the receipt of goods or services and processing documents. Perhaps a business has been the subject of fraud by a supplier. Perhaps the supply was to an individual rather than to the business. Perhaps a transaction was aborted after the documentation was issued. There may be many reasons for a supply not being made, especially when a third party is involved. For example, Co A contracts with Co B to supply goods directly to Co C. Invoices are issued by Co B to Co A and by Co A to Co C. It may not be clear to Co A whether the goods have been delivered, or it may be difficult to check. A lot of fraud depends on “correct” paperwork existing without any goods or services changing hands.
Is the documentation correct?
The VAT regulations set out a long list of details that a VAT invoice must show. Full details on invoicing here If any one of these required items is missing HMRC will disallow a claim. Beware of “suspicious” looking documents including manually amended invoices, unconvincing quality, unexpected names or addresses of a supplier, lack of narrative, “copied” logos or “clip-art” additions etc. One of the details required is obviously the VAT number of the supplier. VAT numbers can be checked for validity here
Additionally, imports of goods require different documentation to support a claim and this is a more complex procedure (which extends to checking whether supplies of goods have been made and physical access to them). A lot of fraud includes a cross border element so extra care should be taken in checking the validity of both the import and the documentation.
Ultimately, it is easy to create a convincing invoice and HMRC is aware of this.
It is important to claim input tax in the correct period. Even if a claim is a day out it may be disallowed and penalties levied.
Is there VAT on a supply?
If a supplier charges VAT when they shouldn’t, eg; if a supply is zero rated or exempt or subject to the Transfer of A Going Concern rules, it is not possible to reclaim this VAT even if the recipient holds an apparently “valid” invoice. HMRC will disallow such a claim and will look to levy penalties and interest. When in doubt; challenge the supplier’s treatment.
Place of supply
Only UK VAT may be claimed on a UK return, so it is important to check whether UK VAT is actually applicable to a supply. The place of supply (POS) rules are notoriously complex, especially for services, if UK VAT is shown on an invoice incorrectly, and is claimed by the recipient, HMRC will disallow the claim and look to levy a penalty, so enquiries should be made if there is any uncertainty. VAT incurred overseas can, in most cases be recovered, but this is via a different mechanism to a UK VAT return. Details on claiming VAT in other EC Member States here
One-off, unusual or new transactions
This is the time when most care should be taken, especially if the transaction is of high value. Perhaps it is a new supplier, or perhaps it is a property transaction – if a purchase is out of the ordinary for a business it creates additional exposure to mis-claiming VAT.
To whom is the supply made?
It is only the recipient of goods or services who may make a claim; regardless of; who pays or who invoices are issued to. Care is required with groups of companies and multiple VAT registrations eg; an individual may be registered as a sole proprietor as well as a part of a partnership or director of a limited company, As an illustration, a common error is in a situation where a report is provided to a bank (for example for financing requirements) and the business pays the reporting third party. Although it may be argued that the business pays for the report, and obtains a business benefit from it, the supply is to the bank in contractual terms and the business cannot recover the VAT on the services, in fact, in these circumstances, nobody is able to recover the VAT. Other areas of uncertainty are; restructuring, refinancing or acquisitions, especially where significant professional costs are involved.
There are additional rules for electronically issued invoices. Details here
A business may issue invoices electronically where the authenticity of the origin, integrity of invoice data, and legibility of invoice content can all be ensured, and thestomer agrees to receive invoices electronically.
- ‘Authenticity of the origin’ means the assurance of the identity of the supplier or issuer of the invoice
- ‘Integrity of content’ means that the invoice content has not been altered
- ‘Legibility’ of an invoice means that the invoice can be easily read.
A business is free to choose a method of ensuring authenticity, integrity, and legibility which suits its method of operation. e-invoicing provides additional opportunities for fraudsters, so a business needs to ensure that its processes are bulletproof.
If a claim is significant, or unusual for the business’ trading pattern, it is likely that HMRC will carry out a “pre-credibility” inspection where they check to see if the claim is valid before they release the money. Another regular check is for HMRC to establish whether the supplier has declared the relevant output tax on the other side of the transaction (a so-called “reference”). Not unsurprisingly, they are not keen on making a repayment if, for whatever reason, the supplier has not paid over the output tax.
What should a business do?
In summary, it is prudent for a business to “protect itself” and raise queries if there is any doubt at all over making a claim. It also needs a robust procedure for processing invoices. If enquiries have been made, ensure that these are properly documented for inspection by HMRC as this is evidence which may be used to mitigate any potential penalties, even if a claim is an honest mistake. A review of procedures often flushes out errors and can lead to increased claims being made.