Category Archives: Latest VAT news

With the Scottish vote approaching….

By Marcus Ward 10 September 2014

What happens if Scotland gains independence?

A VAT what if….

If the Scots vote for, and gain, full independence from the UK, it is likely that the country will become a separate Member State of the EU. According to David Cameron; It’s currency will become the Euro and it will need to form its own authority for administering VAT. Although cross border controls will not be introduced, the VAT treatment of cross-border transactions will change significantly. Apart from the usual currency exchange issues, UK businesses will also be required to complete additional EC Sales Lists, Intrastat Declarations, and potentially a lot of other administrative and statistical documentation.

UK businesses will also need to determine the status of its Scottish customer, which in turn will establish the place of supply, which will dictate whether UK VAT, Scottish VAT, or no VAT is chargeable. Then there are the Distance Selling rules to consider. Some UK businesses will be required to register in Scotland as well as the UK if they sell goods by mail order. And don’t forget the changed VAT treatment of goods and services purchased from Scotland; in most cases a UK reverse charge will be applicable. Depending on circumstances though, UK businesses and residents will incur Scottish VAT and if they do, only some will be able to recover it. This will not be via a usual UK VAT return, but via an alternative VAT claim method which also adds complexity. Then there is the increase in triangulation cases, never the most straightforward VAT subject!

A simple supply from Carlisle to Ayr would will need to be analysed with a massive amount more information required plus the additional bureaucratic form filling. This added complexity will also increase the possibility of errors on which penalties will be levied.

John Swinney, the cabinet secretary for finance in the Scottish Government has pointed out that an independent Scotland would be able to choose its own levels of income tax and VAT, as well as taking control of other sources of revenue such as alcohol and tobacco duty, air passenger duty and landfill tax.

From a practical point of view, will shops and other business establishments in the North of England start accepting both Sterling and Euros? Will invoices routinely show both Sterling and Euro values? Will excise and duty rates be similar to the UK? Will there be opportunities for enterprising individuals to take advantage of any differences? Will we see smugglers coming up against modern day Robert Burns in his Exciseman incarnation? At what rate will the Scots set VAT? Will it be possible that cross border VAT rate shopping will take place? Will the Scots lose the zero rating reliefs which they currently enjoy as part of the UK? Will the Scottish people be forced to pay VAT on new houses, food, books and children’s clothing after independence? One thing is for sure, the Scots will need a whole new set of domestic legislation to cover VAT and indirect taxes.

Also: What about groups of companies with Scottish and English subsidiaries currently in the same UK VAT Group? Were independence to happen, it would be a riot unpicking that lot.

Good luck everybody!

Follower Notices – a new HMRC weapon with a potentially dire impact on taxpayers

By Marcus Ward 17 July 2014

From Royal Assent of Finance Bill 2014 (expected within the next week) HMRC has a new weapon which challenges a taxpayer’s basic right to have its case heard by a Court.

This is by the introduction of “Follower Notices”. The new power allows HMRC to order one taxpayer to settle their dispute when, in HMRC’s view, a decision in another case is relevant to the issues in the first taxpayer’s case. Since taxpayer’s circumstances are unlikely to be identical to another’s, the question of which decisions are relevant involves difficult decisions on issues of interpretation and questions of fact. These are points that ought to be considered by the Court, not unilaterally by one of the parties to the litigation.

A Follower Notice gives the taxpayer 90 days to concede its dispute and pay HMRC’s estimate of the tax due. The taxpayer has only limited rights to challenge the notice, and even then any such challenge is considered by HMRC and not the Court.

If the taxpayer does not concede following HMRC’s issue of a Follower Notice, additional penalties are levied. These penalties not only significantly increase the amount which the taxpayer has at stake in the dispute but must be challenged separately.

It is clear that the changes intend to reduce the backlog of similar disputes. However, these new rules are completely one-sided and has created an environment for yet further litigation and acrimony.

Please contact Marcus if you would like to discuss this further.

Changes in VAT policy relating to the transfer of a going concern (TOGC) of buildings

By Marcus Ward 16 July 2014

HMRC has announced two important changes to the transfers of a businesses as a going concern (TOGC) rules as they relate to property after the case of Robinson Family Ltd. These may be summarised as follows:

Where the transferor of a property rental business grants a lease and retains a ‘sufficiently small’ reversionary interest in the property transferred the transaction will be a TOGC for VAT purposes if the usual conditions are satisfied. HMRC now accept that the surrender of a lease can be a TOGC for VAT purposes. This will apply where a tenant who is sub-letting premises subsequently surrenders its interest in the property together with the benefit of the sub-lease. In these cases HMRC accept the landlord has acquired the tenant’s business.

There is also a change in the treatment of TOGCs of new residential and relevant charitable buildings. The first grant of a major interest in residential or relevant charitable property by the ‘person constructing’ is zero-rated. HMRC has historically taken the view that ‘person constructing’ status does not move to a person acquiring a completed building that is the subject of a TOGC. HMRC now accepts that a person acquiring a completed residential or charitable development as part of a TOGC inherits ‘person constructing’ status and is capable of making a zero-rated first grant of a major interest in that building. This also applies in respect of ‘person converting’ status (for buildings converted from non-residential to residential use) and ‘person substantially reconstructing’ status (for substantially reconstructed listed buildings).

Please contact us if you have sold property in the past that may now benefit from TOGC treatment – claims are possible for overpaid VAT and SDLT.

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VAT implications of renewable energy sources

By Marcus Ward 8 July 2014

If you own land and install solar panels (which we shall use as an example, although the rules apply equally to any way of generating renewable power), it is relatively straightforward; as you are either consuming the power, or are the provider supplying electricity back to the National Grid.

Where the position may get slightly more complicated is where a solar panel business buy the ‘space’ to install energy producing equipment from someone else. Many businesses are renting the roof space from others upon which to install the solar panels. The businesses may pay the roof owners with ‘free’ electricity in return for renting out this space. Supply of electricity to the owners of the site

For a solar panel business leasing a site, the supply of electricity to the owners of that site is deemed to be a supply of goods.

The business installing the solar panels is the taxable person (if they are, or should be registered for VAT) and they are supplying the owners of the site with a ‘cheap’ supply of electricity in the course of the furtherance of their business.

The supply of electricity for domestic use is a reduced-rate supply under Group 1 of Schedule 7A VATA 1994. The reduced rate of VAT is 5%. If the site owner is using the electricity for domestic purposes then the reduced rate of 5% should apply. If the electricity is being used for business purposes then the supply becomes standard-rated at 20%. However, if there is mixed use, then so long as more than 60% of the use is domestic then the whole supply will be treated as ‘qualifying use’ ie; domestic, and the 5% will apply to the entire amount. Generally speaking, VAT charged at 5% is fully or partly irrecoverable by the recipient.

So in this scenario, the land owner is providing something in exchange for this electricity use; the land owner is giving the solar panel business the use of his land. Therefore this is ‘consideration’ for a service; even if it is ‘non-monetary’ consideration.

This means that the solar panel business will have to calculate a value for this consideration and then charge 5% (or 20%) VAT as necessary, on this amount if they are VAT registered.

The value placed on this non-monetary consideration is not usually a concern for the land owner making the supplies of this land, as this land supply is itself exempt from VAT.

The supply of the land
This is a supply of land by the owner of the site. Unless the land has been ‘opted to tax’ (OTT) then this supply will be exempt from VAT. If the land has been OTT by the landowner – the parties will need to look at the valuation of the (non-monetary) consideration as this will be subject to VAT at 20%. If there is no OTT and the supply is exempt; for a non-VAT registered person, this will have no impact, and this income will not be included in taxable supplies which count towards the VAT registration threshold. If a VAT registered entity makes exempt supplies of land, consideration must be given to his partial exemption position.

VAT consequences of the Feed-In Tariff
In recognition of the higher cost of producing electricity in this manner, people participating in the Feed in Tariff scheme will receive payment under a “generation tariff”. This payment is not consideration for any supply and it is therefore outside the scope of VAT.

Supply of electricity to the electricity board
In addition to the Feed-In Tariff there is the additional income which you may receive from the electricity board ie; the “Export Tariff”. These payments are “consideration for supplies of electricity by people participating in the Feed in Tariff scheme to the electricity company, where they are made by taxable persons in the course of their business”. The export tariff is not outside the scope of VAT and therefore it is a supply of electricity made in the course of the furtherance of your business to the electricity supplier. It will attract standard rated VAT as it is not the supply for domestic use.

Update

A recent Court of Justice of the European Union (CJEU – the EU’s highest court) case has ruled in favour of the taxpayer after he argued that solar panels installed on his house constituted a business for VAT purposes. This is good news for any people who supply any energy into the grid and are paid a feed-in tariff (FiT) for doing so.

It means that anyone receiving the FiT can VAT register and reclaim (at least some) VAT incurred on the purchase and installation of solar panels plus input tax incurred on any other goods and services relating to the panels.

The supply and installation of “energy saving materials”, including solar panels, is currently subject to a reduced VAT rate of 5% in the UK. The European Commission is currently challenging this policy, arguing that the tax incentive goes beyond the scope of the law. The VAT Directive only allows member states to apply reduced VAT rates to a limited number of goods and services, which are specified in an annex to the directive. So the cost of buying and installing solar panels may increase in the future.

It is anticipated that HMRC will need to deal with “thousands” of extra registration applications resulting in significant additional VAT repayments.

Court of Appeal judgement on Subway hot food case

By Marcus Ward 11 June 2014

The CoA has just released its judgement in the Subway hot food case. It concerns the liability of toasted sandwiches (known as Subs) with a hot filling; meatball marinara.

This is a lead case for a large number of claims submitted on the basis that VAT has been over declared on certain supplies of hot takeaway food, that are (it was argued) essentially the same as supplies that have obtained zero rating. The Court has dismissed the taxpayer’s appeal.

If you have any “hot food” claims lodged – please contact us for further information.

New house builds to be subject to 20% VAT?

By Marcus Ward 9 June 2014

Reports that a recently issued EC consultation document is proposing to harmonise VAT rates across Europe thus removing the UK’s zero rate have stirred up something of a hornet’s nest. Clearly, in this delicate (although slowly improving) climate for house builders an additional 20% cost could damage the market irrevocably adding £50,000 to the cost of a £250,000 house. Commentators in the trade have announced that it would be a disaster for new home buyers, the construction sector, and the UK economy in general.

However, are these reports in the national press all that they seem? Or is this another tabloid attack on the EC? Such consultation documents are issued regularly and they consider many aspects of VAT across the EC. An EC spokesman, when questioned about this issue, stated “the consultation was not pre-empting a move and considering VAT ‘in general’” Additionally, a spokesman for the Treasury announced “’The UK government has no intention of agreeing to such a proposal, and there is no consultation to change the zero tax rate”. Historically, UK authorities have fought doggedly to retain all of the UK’s zero rates because once they are removed, it is not possible under EC legislation, to reinstate them. The UK is unique in applying the zero rate to items such as food, new houses, books and newspapers and while it is not possible to widen or extend the scope of the zero rating, the UK is permitted, for the time being, to retain those which are in place. So, is there any truth in these “rumours”? It appears that the report was published by the Daily Mail, which in turn appears to have obtained the story from The Daily Express. Although there is a continuing will to harmonise VAT across the EC, I would be very surprised indeed if the UK was to be forced to standard rate new house builds. My personal view is that there appears to be a little mischief making here and the house building industry has enough to worry about rather than this imposed 20% price hike.

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Alternative Dispute Resolution (ADR) – What is it? How does it work?

By Marcus Ward 31 March 2014

ADR is the involvement of a third party (a facilitator) to help resolve disputes between HMRC and taxpayers. It is mainly used by SMEs and individuals for VAT purposes. Its aim is to reduce costs for both parties (the taxpayer and HMRC) when disputes occur and to reduce the number of cases that reach statutory review and/or Tribunal.

Practically, a typical process is; HMRC officials and the facilitator meet with the taxpayer and adviser in a room, and agree on what the disputes are. They then retire to two separate, private rooms, and the facilitator goes between the two parties and mediates on a resolution.

ADR is a free service from HMRC and the only costs the taxpayer will incur are fees from their advisers on preparation and any representation they require on the day.

Taking a case to Tribunal is often an expensive, complicated and time consuming option, but until recently, it has been the only option open to a taxpayer to challenge a decision made to HMRC. From personal experience, the number of cases from which HMRC withdraw “on the steps of the court” illustrate a weakness in their legal procedures and possibly a lack of confidence in presenting their cases. This is very frustrating for our clients as they have already incurred costs and invested time when HMRC could have pulled out a lot earlier. Of course, our clients cannot apply for costs. The sheer number of cases going through the Tribunal process means that there are often very long and frustrating delays getting an appeal heard.

Therefore, should we welcome ADR as a watered down version of a Tribunal hearing? Or is it actually something else entirely?

HMRC say that “ADR provides an excellent opportunity for Local Compliance to handle disputes in a modern and collaborative way. It is not intended to replace statutory internal review which is an already established process aimed at resolving disputes without a tribunal hearing. Review looks at legal challenges to decisions whereas ADR is more suitable for disputes where there might be more than one tenable legal outcome”.

After a two-year pilot which shaped the final programme, and was guided by a Working Together group that included CIOT, AAT, ICAEW and legal representatives HMRC concluded that “ADR has shown that many disputes, where an impasse has been reached, can be resolved quickly without having to go to tribunal.” And “ADR is a fair and even-handed way of resolving tax disputes between HMRC and its customers and helps save time and costs for everyone.” Ignoring the dreadful use of the word “customers”… what has the profession made of the scheme?

Hui Ling McCarthy – Barrister has reported “HMRC’s ADR pilot studies have produced extremely encouraging and positive results – owing in large part to HMRC’s willingness to engage with taxpayers, advisers and the professional bodies and vice versa. Taxpayers involved in a dispute with HMRC would be well-advised to take advantage of ADR wherever appropriate”.

So what was the outcome of the two year scheme? The headline is that 58% of cases were successfully resolved, 8% were partially resolved and 34% were unresolved.

Of the fully resolved facilitations –

33% were resolved by educating the taxpayer/agent about the correct tax position.
24% were resolved due to the facilitator obtaining further evidence.
23% were resolved by educating the HMRC decision maker about the correct tax position.
20% were resolved through facilitators restoring communication between both parties.

These figures are encouraging and the conclusion that; well planned, constructive meetings, with the intervention of an HMRC facilitator, do increase the chances of dispute resolution – appear to be well founded.

Further, the fact that the project team saw no evidence of any demand from HMRC, taxpayers or their agents for access to external mediators and that there is also conclusive evidence from taxpayers that HMRC facilitators have acted in a fair and even-handed manner add to the feeling that ADR is a useful new tool.

Features of ADR:

Without prejudice discussions – “anything said or documents produced during the ADR process cannot be used in future proceedings without the express consent of both parties subject to the obligations placed on the parties by the operation of English law”
Appropriate place for ADR in the lifecycle of a compliance check – Evidence is that ADR can work for both VAT and Direct Taxes disputes both before and after an appealable decision or assessment has been made. However, ADR for VAT disputes is more suited to post appealable decision and assessments.
Memorandum of Understanding (MOU) and a Code of Conduct – a MOU is created to commit customers/agents to the requirements of the ADR process. The project team are exploring the introduction of a Code of Conduct for HMRC staff.
Elapsed time – The average elapsed time for all closed ADR cases is 61 days. This figure is from application to resolution or the papers being returned to either the caseworker or the review team. The average elapsed time for VAT it is 53 days.
The average age of VAT disputes entering the project was 8 months.
At the time of writing there have been 334 applications in both stages. Excluding applications currently in process, the ADR Panel has rejected fewer than 30% of applications.
ADR Panel – An ADR Panel has been created to accept or reject applications for ADR. This is in order to strengthen procedures and reduce dependency on the project manager. It screens all applications and not just those where ADR was thought to be inappropriate.
Customer / Agent Questionnaire Summary – Findings from customers and agents included:
- An appreciation of the personal interaction that the ADR process allowed.
- Facilitators were even handed and impartial in all cases and kept the taxpayer well informed
- ADR was particularly well suited to resolution of long standing disputes.

Conclusion of the HMRC pilot scheme:

Project objectives have been met.
HMRC facilitators have proven to be objective and even-handed for all types of taxpayers.
External stakeholders strongly support the project and its roll-out to business as usual.
Successful facilitations have ensured that the right amount of tax has been identified and secured with less delay for both parties.
A better understanding of disputes has been gained.
Resource savings have been identified.

The commentary from HMRC on ADR is (probably understandable) positive. However, reactions from the profession and taxpayers who have gone through the process are equally generous on ADR as a mechanism for settling disputes.

My view is that any alternative to a Tribunal hearing is welcome and even if ADR works half as well as reports conclude then it should certainly be explored. It should definitely be considered as an alternative to simply accepting a decision from HMRC with which a taxpayer disagrees.

Agent or principal? Latest from The Supreme Court

By Marcus Ward 13 March 2014

There is a very important distinction in VAT terms between agent and principal as it dictates whether output tax is due on the entire amount received by a “middle-man” or just the amount which the middle-man retains (usually a commission). It is common for the relationship between parties to be open to interpretation and thus create VAT uncertainty in many transactions. It appears to me that this uncertainty has increased as a result of the increasing amount of on-line sales and different parties being involved in a single sale.

A very helpful recent case; Secret Hotels 2 Ltd (formerly Med Hotels) heard at the Supreme Court, has clarified some grey areas in agent/principal relationships.

Very broadly, in this case which the taxpayer won, the judgement tips the balance back into the favour of common law as opposed to civil law principles for UK taxpayers and that the nature of a supply is to be determined by the construction of the contract – unless it is a ‘sham’.

This Supreme Court Judgment helpfully indicates that we must place far greater emphasis on the form of the arrangement (contract) as opposed to the economic substance (as often argued by HMRC).

The full decision is available here: http://www.supremecourt.uk/decided-cases/docs/UKSC_2013_0036_PressSummary.pdf

Although there will always be disputes over agent/principal relationships, this decision goes some way to clarifying the analysis and demonstrating the importance of the contract over what HMRC describe as “economic reality”.

Please contact us if you are, or have been, in dispute with HMRC on this point as it provides additional ammunition for the taxpayer.

Please click here for information on disbursements for agents

Treatment of transactions using Bitcoin and other similar cryptocurrencies

By Marcus Ward 13 March 2014

HMRC have issued Revenue & Customs Brief 09/14 here: http://www.hmrc.gov.uk/briefs/vat/brief0914.htm
This provides guidance on the direct tax and VAT treatment of income received from, and charges made in connection with, activities involving Bitcoin and other similar cryptocurrencies. Bitcoin operates via a peer to peer network, independent of any central authority or bank. All functions such as issue, transaction processing and verification are managed collectively by this network.

The advent of cryptocurrencies such as Bitcoin is a new and evolving area. Bitcoin may be held as an investment (i.e. for trading with recognised currencies) or used to pay for goods or services at merchants where it is accepted. In the UK, there are already a number of outlets, including pubs, restaurants and internet retailers, that accept payment by Bitcoin.

In summary, the VAT treatment of Bitcoin activities will generally either be outside the scope of VAT or exempt from VAT (under Article 135(1)(d) of the VAT Directive), depending on the specific transaction involved. However, VAT will be due in the normal way on transactions involving any goods or services sold in exchange for Bitcoin or other similar cryptocurrency.

In the UK, as is the case with any other currency, the value of the supply of goods or services on which VAT is due will be the £sterling value of the cryptocurrency at the point the transaction takes place.

Please contact us if you would like more specific advice.

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