Category Archives: Disputes

VAT legislation – relationship between EU and UK law. A guide

By Marcus Ward 22 January 2016

As most people will know, UK domestic VAT law is derived from EU legislation, but what is the actual relationship?

It is important to understand how both elements of legislation work in cases of dispute with HMRC as it often provides additional ammunition.

History

Most Member States already had a system of VAT before joining the EU but for some countries VAT had to be introduced together with membership of the EU. When the UK joined the EU in 1972 it replaced two taxes; purchase tax and selective employment tax with VAT.

In 1977, the Council of the European Communities sought to harmonise the national VAT systems of its Member States by issuing the Sixth Directive to provide a uniform basis of assessment and replacing the Second Directive promulgated in 1967.

Council Directive 2006/112/EC (the VAT Directive) sets out the infrastructure for a common VAT system which each Member State is required to implement by means of its own domestic legislation. This important Directive codifies into one piece of legislation all the amendments to the original Sixth Directive, thus clarifying EU VAT legislation currently in force.

Intention

The aim of the VAT Directive is to harmonise the indirect tax within the EU, and it specifies that VAT rates must be within a certain range. The basic aims are:

Harmonisation of VAT law
Harmonisation of content and layout of the VAT declaration
Regulation of; accounting, providing a common legal accounting framework
Common framework for detailed description of invoices and receipts
Regulation of accounts payable
Regulation of accounts receivable
Standard definition of national accountancy and administrative terms

EU Statements

There are four types of EU statements:

Regulations – Are binding in their entirety and have general effect to all EU Member States. They are directly applicable in the UK legal system.
Directives – Are binding as to result and their general effect is specific to named EU countries. The form and methods of compliance are left to the addressees.
Decisions – Are binding in their entirety and are specific to an EU country, commercial enterprise or private individual.
Recommendations and Opinions – Are not binding and are directed to specific subjects on which the Council’s or Commission’s advice has been sought.

EU Legislation as part of UK Legislation

EU law is made effective for UK legislation via European Communities Act 1972 section 2. The effects of EU law as regards UK VAT legislation is summarised as follows.

Direct effect

The Court of Justice has held “wherever the provisions of a directive appear … to be unconditional and sufficiently precise, those provisions may … be relied upon as against any national provision which is incompatible with the directive insofar as the provisions define rights which individuals are able to assert against the state” (Case: Becker). Also in UFD Ltd it was stated that “in all appeals involving issues of liability, the Tribunal should consider the relevant provisions of the Council directives to ensure that the provisions of the UK legislation are consistent therewith”.

Primacy of EU Directives over UK legislation

A UK court which is to apply provisions of EU law is under a duty to give full effect to those provisions, if necessary refusing of its own motion to apply any conflicting provision of national legislation.

Interpretation of UK law

If UK VAT legislation is unclear or ambiguous, Tribunals are “entitled to have regard to the provisions of the relevant EU Directive in order to assist in resolving any ambiguity in the construction of the provisions under consideration’ (Case: English-Speaking Union of the Commonwealth).

Legal principles

In implementing the common VAT structure, domestic legislation is required to recognise certain legal principles.

Examples of some of these are the principle of:

Equality of citizens
Subsidiarity and proportionality
Non-discrimination on grounds of nationality
Fiscal neutrality
Legal certainty and the protection of legitimate expectations.

Practical application for most taxpayers

Practically, a result of the above is that taxpayers are regularly able to recover VAT (plus interest) paid to HMRC in error in cases where the UK domestic legislation has not implemented EU law correctly. However, HMRC has no right to recovery where VAT has been under-collected as a result of inappropriate implementation of the EU legislation.

VAT – How To Survive The Enforcement Powers

By Marcus Ward 19 January 2016

Penalties for VAT infringements are draconian and there is still an alarming array of enforcement powers to trap the unwary. By being conscious of the problem areas and planning carefully, it should be possible to avoid becoming an unwitting victim of the system. This article focuses mainly on VAT compliance.

Late Registration

You must notify HMRC if your turnover exceeds £82,000 in twelve months, or if you believe it will exceed £82,000 in the next thirty days. The penalty for failing to notify liability falls within the single penalty system and it could be up to 100% of the VAT due. There is no penalty if the taxpayer has a reasonable excuse for not registering at the correct time.

After Registration

Every VAT registered business needs to ensure that it is organised to deal with VAT correctly and on time:

Is there someone in your business who controls VAT accounting and ensures that new products etc. are properly dealt with for VAT purposes?
Do your business systems ensure that all output tax and input tax are properly recorded?
Are systems in force to ensure that proper evidence is obtained to support VAT input tax claims?
Where VAT is not charged on supplies made, is this correct in law and is proper evidence retained?
Are there systems in force to ensure that non‐deductible input tax is not reclaimed, e.g. most VAT on motor cars, or business entertaining?
Is VAT always considered before contracts are made?

Default surcharge

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. .

Consequence of default

You receive a warning after the first default ‐ the Surcharge Liability Notice (SLN). Do not ignore this notice. If you fail to pay the VAT due on the due date within the next five quarters, the surcharge will be 2% of the outstanding tax. The surcharge increases to 5% for the next default, and then by 5% increments to a maximum of 15%. Each default, whether it is late submission of the return or late payment, extends the surcharge liability period, but only late payment incurs a surcharge.

Errors on returns and claims

Incorrect returns incur a penalty under the following penalties 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%.

If a taxpayer takes ‘reasonable care,’ then no penalty is due.

VAT Flat Rate Scheme (FRS)– New judgement on retrospective application

By Marcus Ward 14 January 2016

Latest from the courts

In the recent case of KDT Management Ltd an appeal against a decision by HMRC not to allow the appellant to retrospectively apply the percentage of turnover it says was appropriate to its business under the FRS instead of the one it says it mistakenly chose was considered.

HMRC issued an assessment to recover VAT which was alleged to have been omitted from the appellant’s returns because it did not apply certain increases of rate to its turnover under the FRS of accounting for VAT.

It was also an appeal against a decision by HMRC not to allow the appellant to retrospectively apply the percentage of turnover it says was appropriate to its business under the FRS instead of the one it says it mistakenly chose.

The decision was that the appeal against the assessments to VAT and interest were upheld. The appeal against the decision not to backdate was also upheld and the decision was cancelled.

Please contact us if you have been in dispute over the rate applicable on a FRS, or if you think you may be using an inappropriate percentage. This is likely to mainly affect small businesses.

Details of the FRS here

VAT – The Default Surcharge. What is it, is it fair and will the regime change?

By Marcus Ward 1 December 2015

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.

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) 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 rate is set at 2 per cent for the first default following the Surcharge Liability Notice, and rises to 5 per cent, 10 per cent and 15 per cent for subsequent defaults within the surcharge period. A surcharge assessment is not issued at the 2 per cent and 5 per cent rates if it is calculated at less than £200 but a default is still recorded and the surcharge period extended. At the 10 per cent and 15 per cent 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. The default surcharge is automatic and it is one of the few penalties that cannot be mitigated in any circumstances.

Defence against a surcharge

In order to have a surcharge withdrawn 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

Latest

A recent discussion document sought views from businesses and individuals on potential improvements to how HMRC applies penalties (including the default surcharge) for failing to pay what is owed or to meet deadlines for returns or registration.

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.

In the document HMRC highlight two issues with the current VAT default surcharge regime. The first is the concern that 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.

The second concern is the issue of proportionality which fails to distinguish between payments that are one or two days late or many months late.

In my view, it is likely that in the near future we will hear proposals for the system being amended. I think we may anticipate the introduction of mitigation and suspension.

VAT Compound Interest – Latest

By Marcus Ward 24 November 2015

Proposed introduction of a new tax.

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.

Action

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.

New claims

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.

The penalty regime……the dark side of VAT

By Marcus Ward 12 November 2015

VAT Penalties

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?

Overview

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%.

Reasonable care

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.

Assistance

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.

VAT – An important ECJ case which will affect charities – Sveda

By Marcus Ward 28 October 2015

A benefit to charities?

In the case of Sveda (C-126/14) which was recently heard by the European Court of Justice (ECJ) the issue was whether input tax was recoverable on the construction of a recreational woodland path which ended at a shop that Sveda owned and made taxable supplies from. Full case here

90% of the construction costs were met by Grant received from the Lithuanian Ministry of Agriculture on the condition that the path was made available free of charge to the public for a period of five years. There was no dispute that the grant was outside the scope income for Sveda.

The authorities disallowed the VAT claimed on 100% of the costs on the grounds there was no link to taxable supplies since free access is a non-economic activity because there was no consideration paid to use the path. Alternatively, there was a contention that only 10% of the VAT should be reclaimed, since the company only met 10% of the cost.

Sveda argued that, although the path could be used free of charge, the purpose was increase taxable sales from its shop (food, drink and souvenirs). This meant there was a link between the VAT incurred and its economic activity as a whole.

The ECJ rejected the view that the input tax should be blocked in its entirety or in part. Its view was that the expenditure was incurred with the intention of carrying out an economic taxable activity, even if there was no direct link to any one specific supply and use of the path was free. The VAT was overhead VAT. No exempt supplies (that would break the chain of deduction) took place.

So, although the path was used for a non-business activity (free access) the ECJ deemed that the input tax incurred on the costs of building the path was deductible. As there was a link to economic activities the VAT is treated as overhead and, in this case, fully recoverable.

Although Sveda is a commercial company and the decision will no doubt be of assistance to commercial entities, there may be a significant impact on charities and NFP organisations. This judgment highlights the basic right to deduct VAT where a link to taxable supplies made by a taxable person can be demonstrated. It does not matter whether the link is to one taxable supply or to all the taxable economic activities. The non-business use of the asset did not prevent recovery. The outcome would no doubt have been different if Sveda was only involved in building the path and just providing free access to it without also selling items form the shop.

On a personal note, this case has echoes of one I took to Tribunal for The Imperial War Museum – with a similar successful outcome. HMRC views here

Let’s hope it will be just as useful for the taxpayer as the landmark IWM decision.

If you think you, or a charity you are aware of, or a client of yours may be affected by this decision, please contact me. This may be the case if the charity undertakes both business and non-activities. I would always counsel that a charity should have its activities reviewed from a VAT perspective. There are usually savings that could be made.

VAT – Do as HMRC say…. and if you do… they may still penalise you!

By Marcus Ward 23 October 2015

Can you rely on a VAT ruling received from HMRC when they have been provided with full information in writing? You would like to think so wouldn’t you? And in the past, you have been able to.

However, the long standing protection from assessments for deemed underdeclared VAT as a result of incorrect advice or actions by HMRC has been withdrawn. This was commonly known as “Sheldon Statement” protection.

HMRC now state that there are some circumstances in which their primary duty is to collect tax according to the statute and it may mean that they can no longer be bound by advice they have given.

Despite all their publicity of their National Help Line and Advice Centre, plus the clearance procedures introduced to assist taxpayers with their obligations, HMRC can still renege on their advice!

Even if you are fortunate enough to actually get a decision from HMRC (which is increasingly difficult and frustrating) you can’t rely on it.

This makes it even more important to avoid errors and the increased risk of VAT penalties and interest.

This leaves the question as to whom businesses can rely on for accurate, cost effective VAT saving advice and guidance on getting VAT right? The answer, clearly, is to contact their friendly local VAT consultant…

VAT e-audits: A warning

By Marcus Ward 15 October 2015

The increase in the sophistication and use of data analysis software has enabled HMRC and tax authorities worldwide to increase the number of indirect tax VAT e-audits.

This has led to an increase in, and higher quantum of; assessments, penalties and interest. The use of more automated resources means that HMRC is capable of auditing a greater amount of information from a greater number of businesses.

Even greater care must be taken now with recording and reporting transactions and the application of calculations such as partial exemption. The need for accurate and timely records has never been more important. It’s crucial that the basics of compliance are taken care of, as well as seeking advice and reviews on specific issues.

These issues are summarised here

Please contact us if you feel that your VAT systems need to be checked, or if you have any doubts about the accuracy of your business’ indirect tax reporting.

We offer a full range of reviews, from a straightforward healthcheck to a full report on a business.

As the severe motto has it: Comply or die!

VAT – Latest from the courts on multiple or composite supplies

By Marcus Ward 14 October 2015

In the seemingly endless and conflicting series of cases on whether certain supplies are multiple (at different VAT rates) or single, the latest decision from the First Tier Tribunal (FTT) this week doesn’t really clarify matters.

In Metropolitan International Schools

The Appellant provided distance learning courses. The courses in question included various trade courses, such as electrical and plumbing courses. One single price was charged for the courses. Customers were provided with manuals that described the particular subject matter on a step-by-step basis. The Appellant’s aim was that the manuals should be entirely comprehensive, and that the information contained in them would be all that was required to enable customers to master the particular subjects. There was no additional provision of classroom tuition. Tutor support was provided via phone calls or emails. No examinations were provided, nor any degrees, qualifications or diplomas. The courses were generally designed to prepare customers to take third party examinations.

Both the appellant and HMRC contended that the supply of distance learning courses was a single supply. Unsurprisingly, the appellant thought that the supply was of zero rated printed matter, and HMRC contended that it was a single supply of (non-exempt) education so all of the supply was standard rated.

Among others, the main point was whether the Appellant’s supplies of distance learning courses were single or multiple supplies and, assuming that the provision was of one single composite supply, whether that supply was a supply of zero-rated books coupled with ancillary services or standard-rated education (with the books being ancillary).

This meant that, if a single supply, it was necessary to consider which element was predominant.

The FTT held that the end result sought by customers from the supply made by the Appellant was to learn, and to accomplish that aim essentially by reading the vast amount of printed material. The Appellant’s essential supply was the sale of manuals and all of the other features of the supply were appropriately regarded as add-on ancillary functions. The Tribunal therefore held that there was only one single supply in the present case and that it took its nature from that of the principal supply, namely the zero-rated provision of books. Accordingly, the Tribunal held that there was one single supply of zero-rated books.

It should be noted that The Tribunal found it difficult to rationalise all of the relevant case law authorities and to arrive, with confidence, at the correct tests to apply in identifying the nature of the single supply. Indeed, the Tribunal observed that this decision may well lead to appeals to a higher court, and quite possibly a referral to the Court of Justice of the European Union for guidance.

So… are we any further on with this matter? Not really.