Eels, salmon and trout are VAT free when sold dead or alive, but bream, perch, pike and tench are standard rated.
Category Archives: Law
VAT: Credit notes – what are they and how are they treated?
VAT Basics
There can be confusion about credit notes and how they are used and accounted for, so I thought it worthwhile to pull together, in one place, an overview of the subject.
What are credit notes for?
A VAT credit note is a document issued by a supplier to a customer. It amends or corrects a previously issued invoice. Invoices are documents which evidence a taxable supply. The credit note is documentary evidence of a change to that supply, or of a decrease in the consideration for that supply. A reduction in consideration may be as a result of; cancellation, discount, refund, prompt payment, bulk order or other commercial reasons.
Why are VAT credit notes important?
The information given on a credit note is the basis for establishing the adjusted VAT figure on the supply of taxable goods or services. It also enables the customer to adjust the figures for the total VAT charged to them on their purchases.
If a business issues a credit note showing a lesser amount of VAT than is correct, it is liable for the deficiency.
Legislation
The UK Law that covers credit notes is found in VAT Regulations 1995, Regulations 15, 24 and 38 of. Regulation 24A defines the term “increase (or decrease) in consideration”.
Conditions of a valid credit note
Requirements for a credit note to be considered valid:
- be issued to the customer
- correct a genuine mistake or overcharge
- reflect an agreed reduction in the value of a supply
- give value to the customer
- not be issued for a bad debt
- be issued in good faith
HMRC also require for credit notes to:
- be issued within 14 days of the decrease in consideration
- contain all the details specified in Notice 700, Paragraph 18.2.2.
Accounting
HMRC has issued guidance on how to correct VAT errors and make adjustments or claims – VAT Notice 700/45.
When you issue a credit note you must adjust:
- the records of the taxable supplies you have made
- your output tax
The accounts or supporting documents must make clear the nature of the adjustment and the reason for it.
Where the adjustment is not in respect of an error in the amount of VAT declared on a VAT return, you should make any VAT adjustment arising from the issue or receipt of a credit or debit note in the VAT account in the accounting period in which the decrease in price occurs.
This will be the accounting period where the refunded amount is paid to the customer.
If you have charged an incorrect amount of VAT and have already declared it on a VAT return you can only correct an error in your declaration by adopting the appropriate method of error correction procedures.
Specific cases
Credits and contingent discounts
When a business allows a credit or contingent discount to a customer who can reclaim all the tax on the relevant supply, it does not have to adjust the original VAT charge – provided both it and its customer agree not to do so. Otherwise, both parties should both adjust the original VAT charge. A business should issue a credit note to its customer and keep a copy.
Prompt payment discounts
If the discount is taken up within the specified time you may adjust the consideration and amount of VAT accounted for by issuing a credit note. If you choose not to use a credit note, the original invoice must have the following information:
- the discount terms (which must include, but need not be limited to, the time by which the discounted price must be paid)
- a statement that the customer can only recover as input tax the VAT paid to the supplier
VAT rate change
Where a VAT invoice showed VAT at the old higher rate, then a credit note should be issued for the element of overcharged VAT. However, there is no way to charge VAT at the lower rate if:
- VAT invoices for supplies were issued before the lower rate took effect, and
- the supplies were actually made (delivered or performed) before then.
In such circumstances, VAT cannot be saved by issuing a credit note for the old VAT invoice and then issuing a new invoice charging VAT at the lower rate.
The deadline for issuing a credit note following a rate change is 45 days. Any credit notes issued after this 45-day deadline are invalid, so the old higher rate would apply to the affected supplies.
Case law – further reading
There is a significant amount of case law on credit notes as this is an area that often creates disputes. Some of the most salient cases are:
- British United Shoe Machinery Company Ltd (1977 VATTR p187)
- Silvermere Golf and Equestrian Centre Ltd (1981 VATTR p 106)
- Robin Seamon Brindley Macro (MAN/83/100)
- Highsize Ltd (LON 90/945)
- Kwik Fit (GB) Ltd (1992 VATTR p427)
- British Telecommunications plc (LON/95/3145)
- The Robinson Group of Companies Ltd (MAN/97/348)
- General Motors Acceptance Corporation UK Ltd (GMAC)(LON/01/242)
NB: A business can only reduce the output VAT on its return if it has made an actual refund. This could be by making a payment to the customer or offsetting the credit against other invoices.
Finally
Failing to issue a credit note is a mistake that needs to be corrected under the error correction procedures.
VAT: Was an option to tax valid? The Rolldeen Estates Ltd case
Latest from the courts
In the First-Tier tribunal (FTT) case of Rolldeen Estates Ltd there were a number of issues, inter alia; whether the appellant’s option to tax (OTT) was valid, if not, whether HMRC had the power to deem it valid, whether HMRC acted unreasonably and whether appellant estopped from relying on earlier meeting with an HMRC officer.
Background
The letting of property is an exempt supply, however, a landlord the owner can OTT the property and charge VAT on that supply. If the OTT is exercised, the supplier is able to reclaim input VAT on costs such as repairs and maintenance, but charges output VAT on its supplies. The OTT provisions are set out at The VAT Act 1994, Schedule 10.
The appellant in this case had previously submitted an OTT form VAT1614A and charged VAT on the rent to its tenant. Subsequently, the property was sold without charging VAT. HMRC issued an assessment for output tax on the sale value.
Schedule 10
A taxpayer does not need HMRC’s permission to OTT, unless that person has already made exempt supplies in relation to that property – in particular, if the property has already been let without VAT having been charged. In that scenario, the person must apply to HMRC for permission to exercise the OTT, and permission will only be given if HMRC are satisfied that the input tax is fairly attributed as between the exempt period and the taxable period. When OTT the company stated that no previous exempt supplies of the relevant property had been made and this was also confirmed in subsequent correspondence with HMRC.
Appellant’s contentions
The company informed HMRC that the OTT was invalid so that no VAT was due on the sale. Evidence was provided which demonstrated that Rolldeen had made exempt supplies before the date of the OTT so that HMRC’s permission had therefore been required before it could be opted. No permission had been given and therefore there was no valid OTT in place even though the appellant had purported to exercise that option. Also, the appellant submitted that it was unreasonable of HMRC to have exercised the discretion to deem the OTT to have effect, because they had failed to take into account the fact that during an inspection, HMRC had known that Rolldeen had made exempt supplies before OTT.
HMRC’s view
VATA, Schedule 10, para 30 allows HMRC retrospectively to dispense with the requirement for prior permission, and to treat a “purported option as if it had instead been validly exercised”. HMRC issued a decision stating that it was exercising its discretion under Schedule 10, para 30 to treat the relevant property as opted with effect from the date of the VAT1614A and that VAT was due on the sale and the assessment was appropriate.
Decision
The FTT found that:
- after an inspection by HMRC it knew that prior exempt supplies had been made
- although HMRC knew exempt supplies had already been made Rolldeen was estopped* from relying on that fact, because both parties had shared a “common assumption” that the OTT had been valid
- para 30 could be used to retrospectively validate the OTT (albeit only in relation to supplies made after 1 June 2008). In this case that was sufficient as the sale of the property occurred on in March 2015
- HMRC had not acted unreasonably because they had not taken into account their own failure to carry out a compliance check
- this is exactly the sort of situation for which para 30 was designed
- it was entirely reasonable and appropriate of HMRC to deem the purported option to have been validly exercised
The appeal was rejected and the assessment was valid.
Commentary
Again, proof, if proof is needed, that OTT can be a complex and costly area of the tax and care must always be taken. Advice should always be sought, as once an OTT is made, there is usually no going back.
An interesting point in this case was that no case law was cited on this issue and the FTT was unable to identify any.
* The principle of “estoppel” means that a person may be prevented from relying on a particular fact or argument in certain circumstances.
VAT: New guidance on zero rating exports
HMRC has published updated guidance on the evidence required to zero rate the export of goods. VAT Notice 703 sets out the following changes on the documentation which is required for proof of export:
- Para 6.1 – For VAT zero rating purposes a business must produce official evidence or commercial evidence. Both types generally have equal weight but, if the commercial evidence is found to be lacking sufficient detail, a business will be expected to provide official evidence. An exporter must also provide supplementary evidence to show that a transaction has taken place, and that the transaction relates to the goods physically exported. If the evidence of export provided is found to be unsatisfactory, VAT zero rating will not be allowed and the supplier of the goods will be liable to account for the VAT at the appropriate UK rate.
- Para 6.5 – What must be shown on export evidence (extract from the Notice)
“An accurate description of the exported goods and quantities are required, for example ‘2000 mobile phones (Make ABC and Model Number XYZ2000), value £50,000’.
If the evidence is found to be unsatisfactory you as the supplier will become liable for the VAT due.
If you’ve described goods inaccurately on an export declaration you may be liable for a customs penalty.
The rest of this paragraph has force of law.
The evidence you obtain as proof of export, whether official or commercial, or supporting must clearly identify:
-
- the supplier
- the consignor (where different from the supplier)
- the customer
- an accurate and full description of the goods including quantities
- an accurate and consistent value of the good
- the export destination, and
- the mode of transport and route of the export movement
Vague descriptions of good, quantities or values are not acceptable. An accurate value must be shown and not excluded or replaced by a lower or higher amount”.
- Paras 7.3 and 7.4 on merchandise in baggage and direct exports of personal goods in accompanied baggage have also be amended.
Overview
It is vitally important that exporters obtain the correct evidence that goods have physically left the UK and that all descriptions of the goods are accurate and satisfy HMRC requirements. There has been a significant amount of case law on export documentation (an example here) which illustrates that this is often an area of dispute.
VAT: Evidence for retrospective claims – new guidance
HMRC has updated its Manual VRM9300 on historic VAT claims.
These types of claims are often called “Fleming” claims and refer to those made before the introduction of the four (once three) year time cap. Such claims extend beyond the period that businesses were required to keep business records and so these were less likely to have remained available.
Where detailed records are unavailable it does not mean there is a lower standard of proof for a claim. The civil standard of proof (on a balance of probabilities) remains.
However, taxpayers’ estimates, assumptions and extrapolations must be sufficiently robust to support a claim. HMRC and the Tribunals must have regard to the evidence that is available, and each claim must be considered on its individual merits.
HMRC state that it “…is not obliged to accept a figure simply because some input tax is due or because it is the claimant’s ‘best guess’ based on the material available”. The claimant must first establish that its method of valuing the claim is reasonable and provide an identifiable repayable amount.
The guidance considers the judgement in the NHS Lothian [2022] UKSC 28 case and its impact on claims where full evidence is unavailable.
Alternative evidence
It is also worth noting that HMRC have the discretion to accept alternative evidence.
VAT: Change of a business’ registration details – Form VAT484
Change in VAT registration details
New HMRC guidance explains how to use form VAT484 to change business details.
You can use this form to change a business’:
- contact details
- bank details
- return dates
- and if a new person takes over VAT responsibilities
If you take over someone else’s VAT responsibilities
You must use the form VAT484 to tell HMRC within 21 days if you take over the VAT responsibilities of someone who has died or is ill and unable to manage their own affairs.
You must include the details of the date of death or the date the illness started.
Failure to notify HMRC of changes may lead to penalties via The VAT Act 1994, section 69.
VAT: Apportionment of output tax – updated guidance
HMRC has published new guidance (para 31) on apportioning output tax. More on apportionment here.
Summary
The guidance gives examples of how to apportion output tax in certain situations.
There are two basic methods of apportioning output tax:
- one based on selling prices
- the other based on cost values
HMRC provide worked examples of both of these methods, including an example of apportionment where a business can only determine the cost of one of the supplies.
Both methods can be adapted to apply to either tax-inclusive or tax-exclusive amounts.
A business does not have to use any of the methods set out in the guidance but, if a different method is used it must still give a fair result.
Apportionment is only necessary if the price charged is the only consideration for the supplies. If the consideration is not wholly in money VAT must be accounted for on the open market value* of the supplies.
* Open Market Value
The VAT Act 1994, section 19 (5) states that “…the open market value of a supply of goods or services shall be taken to be the amount that would fall to be taken as its value …if the supply were for such consideration in money as would be payable by a person standing in no such relationship with any person as would affect that consideration”.
VAT: The Windsor Framework
While we await the fine details, trade between GB and Northern Ireland is likely to be subject to new rules. These are set out under the heading of The Windsor Framework published by HM Government.
(Very) General
Via the Northern Ireland Protocol (NIP), Northern Ireland operated under the EU VAT rules. There are revised VAT rules set out in The Windsor Framework. The EU rules on VAT rates will not apply to a list of goods for consumption in Northern Ireland in certain circumstances.
The Windsor Framework amends the legal text of the NIP to ensure that Northern Ireland will be subject to the same VAT and excise rules that apply in the rest of the UK.
The Framework means that legislation to apply the zero-rate of VAT to energy saving materials can be introduced. A number of other flexibilities should enable UK-wide VAT changes to apply in Northern Ireland. It is anticipated that future VAT issues can be addressed in order to manage any divergences in policy between GB and Northern Ireland.
A bit more detail
The Windsor Framework sets up a new UK internal trade scheme, based on commercial data-sharing rather than traditional international customs processes.
Under the NIP, a framework exists that allows goods to move from GB to Northern Ireland tariff-free. If the goods do not fall within that framework, they are treated as if moving across an international border and full customs declarations are required.
This Framework introduces arrangements through a new UK internal market system (colloquially called the “Green Lane”) for internal trade. Goods being sold in Northern Ireland will not be subject to “unnecessary paperwork, checks and duties”.
The new scheme will significantly expand the number of businesses able to move goods using the Green Lane by being classed as internal UK traders.
The Changes
To ensure that internal UK trade is protected, the agreement expands the number of businesses able to be classed as internal UK traders and move goods as ‘not at risk’ of entering the EU through three changes:
- businesses throughout the UK will now be eligible – moving away from the previous restrictions that required a physical premises in Northern Ireland.
- the turnover threshold below which companies involved in processing can move goods under the scheme which they can show stay in Northern Ireland is increased from the current £500,000 limit up to £2 million (this means that four-fifths of manufacturing and processing companies in Northern Ireland who trade with GB will automatically be in scope).
- if businesses are above that threshold, they will be eligible to move goods under the scheme if those goods are for use in the animal feed, healthcare, construction and not-for-profit sectors.
Businesses in the scheme that can show their goods will stay in Northern Ireland will gain access to a simplified process for goods movements, using ordinary commercial data rather than customs data.
Goods moving to the EU will be subject to normal third-country processes and requirements.
Reduction in so-called frictions
The Framework seeks to address a range of issues that added frictions or costs for internal UK trade:
- safeguarded tariff-free movements of all types of steel into Northern Ireland .
- a forward process for ensuring that Northern Ireland businesses can access other goods subject to Tariff Rate Quotas in the future, dealing with the unique disadvantages under the existing system.
- where businesses cannot be certain of the end destination of their goods when first moving them into Northern Ireland, a new tariff reimbursement scheme for those who can show the goods were ultimately not destined for the EU.
VAT: Updated guidance on deliberate behaviour
HMRC has published updated guidance on deliberate behaviour. It clarifies the definition of these actions in respect of extended time limits.
What is deliberate behaviour?
A deliberate inaccuracy in a document occurs when a person (or another person acting on behalf of that person) knowingly gives HMRC an inaccurate document.
“A person who submits a document containing a deliberate inaccuracy might assert that they did not intend to cause a loss of tax. For the purpose of assessing this loss of tax, the person or any persons acting on their behalf will be treated as deliberately causing the loss of tax if they consciously intended to mislead HMRC”.
Examples
- knowingly failing to record all sales
- describing transactions inaccurately or in a way likely to mislead
- lodging a VAT return that includes a figure of net VAT due that is too low because the person does not have the cash at that time to pay the full amount, and later telling HMRC the true figure when he has the funds to pay
- similarly declaring less tax due for aggregates levy, climate change levy, landfill tax or excise duty because the person does not have the funds at that time to pay the full amount
(This list is not exhaustive and HMRC provide more examples in the guidance).
Why is it important?
Mainly, there are different time limits within which HMRC can take action.
A 20 year time limit applies where tax has been underdeclared, or over-repaid, as a result of a deliberately inaccurate return or other document. The normal cap is four years.
Other action
Although HMRC can make assessments to recover any tax lost, it also have a criminal investigation policy and will refer the most serious cases for consideration of criminal proceedings where appropriate.
If you or your clients are subject to an investigation, please seek professional advice immediately. There is a dark side to VAT.
VAT: Exemption of fund management services
HM Treasury has published a consultation paper on the treatment of the service of management of special investment funds (SIFs).
SIF meaning in VAT terms
There is no definition of a SIF in existing legislation.
Morgan Fleming Claverhouse Trust plc (case C-363/05) ruled on the interpretation of the term ‘Special Investment Funds as defined by Member States’.
The key points in this judgment are:
- the term ‘special investment funds’ is capable of including closed-ended investment funds, such as investment trust companies (ITCs)
- Member States have a discretion to define ‘special investment funds’ for the VAT exemption but, in doing so, must pay due regard to:
- the purpose of the exemption
- the principle of fiscal neutrality.
According to the Court, the purpose of the exemption is to facilitate investment in securities for investors through investment undertakings. This requires there to be VAT neutrality between the direct investment in securities and investment through collective investment undertakings, as the latter incurs a management charge. Furthermore, there must be equality of VAT treatment for funds which are similar to, and in competition with, funds falling within the scope of the exemption.
As a result of the case, the exemption was extended so that there was a level VAT playing field for all similar collective investment undertakings which compete in the UK retail market. This includes closed and open-ended collective investment undertakings, umbrellas and sub-funds, as well as some pension schemes.
The fund management exemption is limited to the management of SIFs. Consequently, the management of other investment funds will generally be standard-rated.
Legislation
The current VAT fund management regime is provided for by UK legislation, retained EU law and case law. The VAT Act 1994 implemented the Directive. Schedule 9, Group 5, Items 9 and 10 of the Act lists specific types of funds, the management of which is exempted from VAT.
Place of supply
This is important for SIFs management as if the supply is in respect of overseas funds the services are excluded from the exemption (they are outside the scope of UK VAT) when received overseas. This means that there is no output tax on the supply, but unlike exemption, it affords full recovery on input tax incurred in the UK. The perfect VAT outcome.
HMRC Consultation
The technical consultation sets out proposed reform of the legislation that provides for the VAT treatment of fund management. This is required because the fund management industry continues to innovate and introduced new types of funds to the marketplace, and the existing approach has struggled to keep pace with the evolution of the industry and proliferation of fund types.
The purpose of the exercise is to improve the legislative basis of the current VAT treatment of fund management.
Danger?
It is proposed that the following criteria for a fund to be considered a SIF would be legislated for:
a) the fund must be a collective investment
b) the fund must operate on the principle of risk-spreading
c) the return on the investment must depend on the performance of the investments, and the holders must bear the risk connected with the fund; and
d) the fund must be subject to the same conditions of competition and appeal to the same circle of investors as a UCITS (Undertakings for Collective Investment in Transferable Securities), that is funds intended for retail investors
There is a danger that if the exemption is broadened, fund managers which can now recover input tax may be denied so in the future.
If you have any queries, please contact us.