The sales of counterfeit (illegal) goods are subject to 20% VAT, but the sale of counterfeit banknotes is not.
Category Archives: Latest VAT news
VAT: Farm in business? The Babylon case
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: 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).
Refunds of UK VAT for non-UK businesses and EU VAT for UK businesses
HMRC has published updated guidance VAT Notice 723A which sets out how a business established outside the UK can claim a refund of VAT incurred here, and how to reclaim VAT incurred in the EU VAT if a business is established in the UK.
More details of how to make post-Brexit VAT claims here.
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: Report on Tax Tribunal performance published
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: 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: 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.