Chocolate body paint is zero rated, but a bar of chocolate is standard rated.
Tag Archives: Tax-law
A VAT Did you know?
Frozen foods are zero-rated, but ice cream, frozen yoghurt, ice lollies and sorbets are subject to standard rate VAT (although they are frozen).
VAT: The tax gap was £35bn in 2019/20
HMRC has published details of the tax gap for 2019/20. This is the gap between the expected tax that should be paid to HMRC and what is actually paid. The headline was that the tax gap was 5.3%. which represents an estimated £35 billion.
Total tax liabilities for the year were £674 billion.
What is the tax gap?
The tax gap is the difference between the amount of tax that should, in theory, be paid to HMRC, and what is actually paid.
Why is it measured?
The tax gap provides tool for understanding the relative size and nature of non-compliance. This understanding can be applied in many different ways:
- it provides a foundation for HMRC’s strategy – considering the tax gap helps the government to understand how non-compliance occurs and how it can be addressed
- the analysis provides insight into which strategies are most effective at reducing the tax gap
- it provides important information which helps HMRC understand its long-term performance
- provides information to the public on tax compliance, creating greater transparency in the tax system.
Why is there a tax gap?
The tax gap arises for a number of reasons. Some taxpayers make simple errors in calculating the tax that they owe, despite their best efforts, while others don’t take enough care when they submit their returns. Legal interpretation, evasion, avoidance and criminal attacks on the tax system also result in a tax gap.
Analysis
Around £3.7 billion of the gap is estimated to be due to error and £3 billion due to the hidden economy.
The tax gap for wealthy individuals fell from £1.6 billion in 2018/19 to £1.5 billion in 2019/20
£15.1 billion of the gap is attributed to small businesses and £6.1 billion is attributed to large businesses, with £5 billion attributed to medium-sized firms.
Taxpayers paid more than £633.4 billion in tax during 2019/20, an increase of more than £100 billion since 2015/16, when the total revenue paid was £532.5 billion.
The tax gap for Income Tax, National Insurance contributions and Capital Gains Tax is 3.5% in 2019 to 2020 at £12.6 billion which represents the largest share of the total tax gap by type of tax.
VAT
The VAT gap was estimated to be £12.3 billion in tax year 2019 to 2020. This equates to 8.4% of net VAT total theoretical liability.
The VAT gap has increased from 7.0% in tax year 2018 to 2019 to 8.4% in 2019 to 2020. Growth in VAT receipts (1.8%) was slower than the growth in the net VAT total theoretical liability (3.3%).
Behaviour
HMRC estimate that the causes of the tax gap are:
- Failure to take reasonable care £6.7bn 19%
- Legal interpretation £5.8bn 16%
- Evasion £5.5bn 15%
- Criminal attacks £5.2bn 15%
- Non-payment £4bn 11%
- Error £3.7bn 10%
- Hidden economy £3bn 8%
- Avoidance £1.5bn 4%
Taxpayers
Tax gap by taxpayer groups:
- Small businesses £15.1bn 43%
- Large businesses £6.1bn 17%
- Criminals £5.2bn 15%
- Mid-sized businesses £5.0bn 14%
- Individuals £2.6bn 7%
- Wealthy £1.5bn 4%
The impact on the tax gap from the coronavirus lockdowns and economic downturn is likely to be first seen in the 2020/21 figures, which will be released next year. It will also be interesting to see how the fallout from Brexit is covered (if at all).
Autumn Budget – date announced
HM Treasury has announced that government spending plans will be set out at the Spending Review on 27 October 2021 alongside an Autumn Budget.
The Spending Review will set out the plan for how public spending will be carried out over the next three years.
VAT: New rules for Uncertain Tax Treatments
The government have released draft legislation and guidance in respect of Uncertain Tax Treatments (UTT). In addition to VAT, this legislation also covers; corporation tax, income tax and PAYE.
Who is affected?
Large businesses with a:
- turnover of more than £200 million per annum
- balance sheet total over £2 billion
Threshold
A business must notify HMRC in cases of UTT where the tax advantage of the treatment is £5 million or more in a twelve-month period.
Start date
The new rules will be introduced from 1 April 2022.
Notification
There are three triggers for notification:
- Provision made in the accounts
The amount relates to a transaction which a provision has been made in the accounts, in accordance with GAAP, to reflect the probability that a different tax treatment will be applied to the transaction
2. HMRC’s known interpretation of the law
Reliance was placed on an interpretation or application of the law that is different to HMRC’s known interpretation or application.
3. Substantial possibility amount would be found to be incorrect
It is reasonable to anticipate that, if a court were to consider the way in which the amount was arrived at, there is a substantial possibility that the treatment would be found to be incorrect.
Tax advantage
The definition of tax advantage for VAT is:
- Less output tax is accounted for or is accounted for later, than would otherwise be the case
- If there is an input tax claim which would otherwise not be obtained; a larger claim, or a claim earlier than would otherwise be the case
- If input tax is recovered as a recipient of a supply before the supplier accounts for the output tax; the period between the time when the input tax is recovered or the time when the output tax is accounted for is greater than would otherwise be the case
- The amount of non-deductible tax is less than it otherwise would be
- An obligation to account for VAT is avoided
Exemptions
There are exemptions from notification. For VAT, exemption will apply where it is reasonable to conclude that HMRC is already aware of the information which would otherwise be required to be notified or in circumstances where a business has previously requested clearance and where HMRC agrees with the proposed treatment.
Penalties
The penalty for failure to make a notification will be £5k initially, £25k for
a second failure and £50k for a third failure within a three-year period. There
will be an opportunity to advance a reasonable excuse argument to avoid a
penalty.
VAT: Fraudster ordered to pay £37 million
Latest from the courts
A high level fraudster who skipped his trial and fled to Dubai has been ordered to pay more than £37 million. Failure to do so will result in ten years in prison. He played a major role in this missing trader fraud (MTIC) which involves the theft of Value Added Tax from HMRC. He was part of a conspiracy to use a network of companies and a huge number of transactions to cover up the theft of VAT.
Adam Umerji, 43, was convicted in his absence of offences of conspiracy to cheat the government’s revenue and conspiracy to transfer criminal property, in a prosecution conducted by the CPS Specialist Fraud Division after a complex criminal investigation by HMRC.
Background
Missing trader fraud (also called missing trader intra-community fraud or MTIC fraud) involves the theft of VAT from a government by fraudsters who exploit VAT rules, most commonly the EU rules which provide that the movement of goods between Member States is VAT free. There are different variations of the fraud but they generally involve a trader charging VAT on the sale of goods and absconding with the VAT (instead of paying the VAT to the government’s taxation authority). The term “missing trader” is used because the fraudster has gone missing with the VAT.
A common form of missing trader fraud is carousel fraud. In carousel fraud, VAT and goods are passed around between companies and jurisdictions.
VAT: Land and property exemptions
Further to my article on VAT: Land and property simplification and HMRC’s call for evidence the ICAEW has reiterated its call for all VAT land and property exemptions to be abolished and recommends the removal of all VAT options.
ICAEW also concludes that following the UK’s departure from the EU the government is in the best position since the introduction of VAT to thoroughly review the structure of the tax.
ICAEW also suggests that all land and property transactions should subject to VAT at either the standard rate or reduced rate, other than those relating to domestic property which should remain zero rated. This approach would remove many of the complexities of the current regime, it concludes.
Commentary
This is one area of the tax that is crying out for simplification and the case put forward by ICAEW has its merits. In my view, the Government should go further and review many complexities of the tax. As one example, the rules in respect of the sale of food products is ridiculously complex and produces odd and unexpected outcomes. Also, other exemptions would benefit from reconsideration, particularly financial services and insurance, but I suspect that the current government has a lot on its plate, much of it of its own making.
VAT: Input tax recovery – whether a taxable supply. The Door Specialist case
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”.
VAT: What is open market value? The Jupiter case
Latest from the courts
In the First Tier tribunal (FTT) case of Jupiter Asset Management Group Ltd the issue was the value of management services to an associated third party VAT group.
Background
The value is important because if HMRC believe that a supply between two connected parties (as defined by The Income and Corporation Taxes Act 1988 Section 839) is undervalue and the recipient cannot recover the relevant input tax in full, it is permitted via The VAT Act 1994, Schedule 6, PART 2, para 1 (1) to substitute open market value (OMV) by way of a Notice.
This paragraph is specifically intended to counter tax avoidance. If a supply between connected persons is made below open market value for a legitimate reason that the trader can substantiate, and which is unconnected with avoidance HMRC has the discretion not to issue a Notice. In Jupiter, HMRC directed that OMV be used to calculate the charge as it considered that value was too low and issued an assessment for underdeclared output tax.
Decision
In the absence of comparable supplies, OMV was to be determined by reference to:
- the full cost of making the supplies;
- the full cost included the costs incurred on goods and services used in making the supplies and general overhead costs the input tax in respect of which had been recovered
- the remuneration paid to the executive directors to the extent that that remuneration related to activities performed by the executive directors in making the supplies of the management services
Consequently, the appeal against the output tax assessment was dismissed.
Commentary
An expected outcome, but ne which emphasises that care should be taken with transactions between connected parties, management charges and inter-company charges in general. This is even more relevant since the decision in the Norseman Gold plc case
VAT – The Capital Goods Scheme
A brief guide to the Capital Goods Scheme (CGS)
If a business acquires or creates a capital asset it may be required to adjust the amount of VAT it reclaims. This mechanism is called the CGS and it requires a business to spread the initial input tax claimed over a number of years. If a business’ taxable use of the asset increases it is permitted to reclaim more of the original VAT and if the proportion of the taxable supplies decreases it will be required to repay some of the input tax initially claimed. The use of the CGS is mandatory.
How the CGS works
Normally, VAT recovery is based on the initial use of an asset at the time of purchase (a one-off claim). The CGS works by applying a longer period during which the initial recovery may be adjusted if there are changes in the use of the asset. Practically, the CGS will only apply in situations where there is exempt or non-business use of the asset. A business using an asset for fully taxable purposes will be covered by the scheme, but it is likely that full recovery up front will be possible with no subsequent adjustments required. This will be the position if, say, a standard rated property is purchased, the option to tax taken, and the building let to a third party. The CGS looks at how capital items have been used in the business over a number of intervals (usually, but not always; years). It adjusts both for taxable versus exempt use and for business versus non business use over the lifetime of the asset. Example; a business buys a yacht that is hired out (business use) and it is also used privately by a director (non-business use). However, a more common example is a business buying a property and occupying it while its trade includes making some exempt supplies.
Which businesses does it affect?
Purchasers of certain commercial property, owners of property who carry out significant refurbishment or carry out civil engineering work, purchasers of computer hardware, aircraft, ships, and other vessels over a certain monetary value who incur VAT on the cost. (As the CGS considers the recovery of input tax, only VAT bearing assets are covered by it).
Assets not covered by the scheme
The CGS does not apply if a business;
- acquires an asset solely for resale
- spends money on assets that it acquired solely for resale
- acquires assets, or spends money on assets that are used solely for non-business purposes.
Limits for capital goods
Included in the CGS are:
- Land, property purchases – £250,000 or over
- Refurbishment or civil engineering works costing £250,000 or over
- Computer hardware costing £50,000 or over (single items, not networks)
- From 2011, aircraft, ships, and other vessels costing £50,000 or more.
Assets below these (net of VAT) limits are excluded from the CGS.
The adjustment periods
- Five intervals for computers
- Five intervals for ships and aircraft
- Ten intervals for all other capital items
Changes in your business circumstances
Certain changes to a business during a CGS period will impact on the treatment of its capital assets. These changes include:
- leaving or joining a VAT group
- cancelling your VAT registration
- buying or selling your business
- transferring a business as a going concern (TOGC)
- selling an asset during the adjustment period
Specific advice should be sought in these circumstances.
Examples
- A retailer purchases a brand new property to carry on its fully taxable business for £1 million plus £200,000 VAT. It is therefore above the CGS limit of £250,000. The business recovers all of the input tax on its next return. It carries on its business for five years, at which time it decides to move to a bigger premises. It rents the building to a third party after moving out without opting to tax. Under the CGS it will, broadly, have to repay £100,000 of the initial input tax claimed. This is because the use in the ten year adjustment period has been 50% taxable (retail sales) for the first five years and 50% exempt (rent of the property for the subsequent five years).
- A company purchases a helicopter for £150,000 plus VAT of £30,000. It uses the aircraft 40% of the time for hiring to third parties (taxable) and 60% for the private use of the director (non-business). The company reclaims input tax of £12,000 on its next return. Subsequently, at the next interval, taxable use increases to 50%. It may then make an adjustment to increase the original claim: VAT on the purchase £30,000 divided by the number of adjustment periods for the asset (five) and then adjusting the result for the increase in business use: £30,000 / 5 = 6000 50% – 40% = £600 additional claim
Danger areas
- Overlooking CGS at time of purchase or the onset of building works
- Not recognising a change of use
- Selling CGS as part of a TOGC
- Failing to make required CGS adjustments at the appropriate time
- Overlooking the option to tax when renting or selling a CGS property asset
- Sale during adjustment period (not a TOGC)
- Complexities re; first period adjustments and pre-VAT registration matters
- Interaction between CGS and partial exemption calculations
Summary
There is a lot of misunderstanding about the CGS and in certain circumstances it can produce complexity and increased record keeping requirements. There are also a lot of situations where overlooking the impact of the CGS or applying the rules incorrectly can be very costly. However, it does produce a fairer result than a once and for all claim, and when its subtleties are understood, it quite often provides a helpful planning tool.