Crisps: VAT is due on potato snacks, but maize and corn-based snacks are VAT free. (But Pringles are standard rated even though they contain corn, wheat and non-potato flours and the potato content is less than 50%).
Monthly Archives: August 2021
VAT: Construction of a dwelling – zero-rated? The CMJ (Aberdeen) case
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.
New VAT rate for hospitality
A reminder that a new VAT rate of 12.5% comes into force on 1 October 2021.
This is the first time this rate has been used and affected businesses should ensure that they are prepared.
The government announced on 8 July 2020 that it intended to legislate to apply a temporary 5% reduced rate of VAT to certain supplies relating to certain hospitality, supplies.
The reduced rate was initially introduced to last for a temporary period between 15 July 2020 and 12 January 2021. This period was subsequently extended to 31 March 2021.
The government then announced at Budget 2021 that the temporary reduced rate will be extended for a further six-month period at 5% until 30 September 2021.
A new reduced rate of 12.5% will then be introduced which will end on 31 March 2022. The scope of the relief will remain unchanged.
From 1 April 2022 the usual 20% standard rate will apply, unless there are further government concessions.
The 12.5% applies to
- hospitality: supplies in the course of catering including supplies of hot and cold food and drink to be consumed on the premises and supplies of hot takeaway food and drink to be consumed off the premises
- accommodation: the provision of hotel and holiday accommodation, pitch fees for caravan parks and tents and related facilities
- attractions: admission to attractions not covered by the cultural exemption.
The VAT Fractions
This is used to calculate the VAT element of a VAT inclusive figure.
5% = 1/21
12.5% = 1/9
20% = 1/6
Deposits
If a deposit is received, output tax will be calculated on the VAT rate in place at the time the deposit is received.
Other Issues
If a business supplies hospitality services and goods, but also makes sales not covered by the new rate, eg; alcohol, it must be able to identify the values at the different rates.
Does your accounting package have a defined 12.5% tax rate? It may be necessary to add this new rate to your software package.
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.
Check if an HMRC email is genuine
On 30 July 2021 HMRC published a list of emails which has sent taxpayers. Additionally, there is a check for genuine HMRC contact that uses more than one communication method.
It is clear that scammers are using the cover of tax authorities to obtain money by deception. I suspect that many of us have experienced this, to various of sophistication.
Consequently, HMRC have published this document which can be checked before any action is taken in respect of a purported communication from HMRC. If the email topic is not listed, caution should be exercised. The majority of the email subjects listed are VAT based.
VAT Investigations
Even in these days of increased contactless payments it may be interesting to look at HMRC’s methods of establishing underdeclarations.
HMRC have always taken an interest in cash businesses as they see them as a revenue risk. Such businesses are usually retail and commonly restaurants and take-aways (which I shall use as an example in this article). A retail business is obliged to keep certain records. For sales, this is a record of daily gross takings (DGT) and this is the area I will focus on as it is where “suppression” of income generally occurs. In a very crude example, the owner, or a member of staff does not ring up a sale and the payment is pocketed. There are more sophisticated ways in which suppression occurs, but this is the most common.
Even in this day and age where most payments are made by credit or debit cards, there is still significant scope for declarations to be inaccurate.
The methods
There are a number of ways in which HMRC can determine the accuracy of VAT declarations. These may be from the usual bank and accounts reconciliations, mark up exercises, to, say, counting take-away containers to build up a picture of the turnover. The following are also ways in which HMRC test the credibility of declarations:
- Compliance checks
These usually take place in the evenings when a restaurant is open for business (or soon after it closes). Officers gain entrance, question staff, examine records for that and previous days, and remove certain records. From this information they can build up a picture of trading. These visits are usually unannounced.
- Invigilation exercise
HMRC observe how the business operates and check that all sales of food and drinks are rung into the till. This is usually with the agreement of the business.
- Test meals
HMRC staff will purchase a test meal and at a later time check to see if it has been recorded correctly. It may be that this method will be repeated at a suspect restaurant by different HMRC staff, perhaps in the same evening. If any of the sales are not recorded correctly, it may be insufficient in itself to create an assessment, but it will confirm suspicions of suppression and lead to further action.
- Observation
While posing as customers, HMRC will also count the number of covers, the amount of take aways, the number of staff, how orders are taken and paid for, and how payments are made.
- Surveillance
Members of HMRC staff park outside a restaurant (usually in an unmarked van) and watch the activities of the restaurant. They count the number of people dining and the numbers of people exiting with take aways. This observation may also record the number of deliveries and other relevant information that they are able to obtain from what they can see. This exercise may be carried out over a number of days/nights or even weeks.
- Purchases
In more complex suppression, the value of purchases may also be suppressed in order to present a more credible picture to an inspector. This may be more common if the purchases are zero rated food (on which the business would not claim input tax). HMRC may attempt to build up a picture of sales by the volume of actual purchases made. They often check the restaurant’s suppliers’ records to get a full picture of trade.
Information obtained by one of the above methods may, on its own, be insufficient to raise an assessment, but combined with information obtained in different ways will more often than not result in one (should the exercises demonstrate an under-declaration of course).
Taxpayer’s rights
Attendance
HMRC do not have the right to attend a taxpayer’s premises at any time. The law says that inspections may be carried out “at any reasonable time”. This means that that if a business owner is busy, or the time is outside normal office hours, or there is not access to all of the relevant information, or the request is unreasonable for any other reason, the business owner (or his adviser) may request that an inspector leaves and makes an appointment at a future reasonable time. This is sometimes easier to do in theory than in practice, but a taxpayer’s rights are set out in The Finance Act 2009, Schedule 36, part II.
A business has no right to refuse a “regular” inspection but these are arranged for an agreed time in any case.
Records
The VAT Act 1994, Schedule 11 states that the requirement to produce records is limited to being provided at such time as HMRC “may reasonably require”. So, again, if HMRC are making demands that a business feels are unreasonable, it is within its rights to refuse to allow access and to make a mutually agreed and acceptable appointment to allow access to premises and records. This may lead to a discussion, but HMRC do not have unfettered rights to access premises or records.
Best judgement
Regardless of how HMRC have gathered information, any assessment must be made to the best of their judgement and must be “an honest and genuine attempt to make a reasoned assessment of the VAT payable”. If the business is able to demonstrate that this was not the case, the assessment must be removed. Broadly, this will entail demonstrating that things that ought to have been considered were ignored, or that things that have been included should not have been. Generally, the most common ways to challenge an assessment based on the above exercises are; that the period considered was not representative, or not long enough to be representative, or that the tests carried out were insufficient to demonstrate a consistent pattern of trading. There are usually specific facts in each case that may be used to challenge the validity and quantum of an assessment.
Action
Of course, it is hoped that no business which makes accurate declarations is troubled by such investigations. However, if a business feels that HMRC is being unreasonable with its demands it should seek professional advice before agreeing to permit HMRC access.
Matters change however, if HMRC have a Search Warrant or a Writ of Assistance in which case HMRC are able to compel a business to allow entry or inspection.
As always, we advise that any assessment is, at the very least, reviewed by a business’ adviser.