Popcorn is standard rated, but microwavable popcorn is VAT free.
Category Archives: Penalties
VAT: Is a cosmetic treatment exempt medical care? The Illuminate Skin Clinics Ltd case
Latest from the courts
In the Illuminate Skin Clinics Ltd First-Tier Tribunal (FTT) case the issue was whether cosmetic procedures qualified as exempt medical treatment.
Background
The Appellant runs a private, ie; non-NHS clinic offering a range of aesthetic, skincare and wellness treatments advertised as: fat freezing, thread lifts, chemical peels, fillers, facials, intravenous drips and boosters. The Appellant’s sole director and shareholder, Dr Shotter, complies with Item 1 (below) in terms of qualifications, ie; she is enrolled on the register of medical professionals.
The list of treatments included:
- Botox
- Dermal fillers
- CoolSculpting
- Microsclerotherapy
- Prescription skincare
- Chemical peels
- Microdermabrasion
- Thread lifting
- Thermavein
- Aqualyx
- Platelet-rich plasma treatment.
HMRC contended that these supplies were standard rated because there is no medical purpose behind the treatments, and they are carried out for purely cosmetic purposes. An assessment was raised for output tax on this income.
The Appellant argued that what it provided was exempt medical care via The VAT Act 1994, Schedule 9, Group 7, item 1 – “The supply of services consisting in the provision of medical care by a person registered or enrolled in any of the following:
- The register of medical practitioners…”
And its contention was that the primary purpose of the treatments was “the protection, maintenance or restoration of the health of the person concerned”
In the Mainpay case it was established that “medical” care means “diagnosing, treating and, in so far as possible, curing diseases or health disorders”
Decision
Although there may have been a beneficial psychological impact on undergoing such treatments and this may have been the reason for a patient to proceed (and they may be recommended by qualified medical professionals) this, in itself, was insufficient to persuade the judge that the services were exempt. Consequety, the appeal was rejected and the assessment was upheld.
The FTT found that there was very little evidence of diagnosis. This was important to the overall analysis because diagnosis is the starting point of medical care. Without diagnosis, “treatment”, in the sense of the exemption, is not something which is being done responsively to a disease or a health disorder.
The fact that people go to the clinic feeling unhappy with some aspect of their appearance, and (at least sometimes) are happier when something is done at the clinic about that aspect of their appearance, does not mean that the treatment is medical, or has a therapeutic aim.
It was telling that the differentiation, in Dr Shotter’s own words, between what the clinic does from what “a GP or other health professional” does is; diagnosis. It also highlighted the general trend or purpose of the clinic’s activity – helping people to feel better about their appearance, in contexts where their appearance is not itself a health condition, or threatening to their health in a way which mandates treatment of their appearance by a GP or another health professional.
Helping someone to achieve goals in relation to their appearance, which is what this clinic did, is not treating someone’s mental health status, but is going to their self-esteem and self-confidence. It is a misuse of language to say that this is healthcare in the sense that it would fall within Item 1 of Group 7.
Commentary
There has been an ongoing debate as to what constitutes medical care. Over 20 years ago I was advising a large London clinic on this very point and much turned on whether patients’ mental health was improved by undergoing what many would regard as cosmetic procedures. We were somewhat handicapped in our arguments by the fact that many of the patients were lap dancers undergoing breast augmentation on the direction of the owner of the club…
It is worth remembering that not all services provided by a medically registered practitioner are exempt. The question of whether the medical care exemption is engaged in any given case will turn on the particular facts.
Further recent cases on medical exemption here and here.
VAT: New HMRC guidance on error reporting
HMRC has published new guidance to assist taxpayers on how to deal with errors discovered on submitted VAT returns. The catchy title is: Check if you need to report errors in your VAT Return – Check if you need to notify HMRC about errors that are over the threshold on your VAT Return and find out how to report them.
The guidance sets out how to report errors of £10,000 or more (net of all errors). This broadly comes down to using the online service by completing a form VAT652 or adjusting a current VAT return.
Please see our flowchart on error reporting Error Reporting Flowchart
New portal for VAT payment plans
VAT is normally due on the relevant due date*. However, HMRC has launched a new self-service portal for businesses to set up payment plans.
We look at managing VAT debt in detail here.
A business can set up a VAT payment plan online if it:
- has filed its latest tax return
- owes £20,000 or less
- is within 28 days of the payment deadline
- does not have any other payment plans or debts with HMRC
- plans to pay off its debt within the next six months
A taxpayer cannot set up a VAT payment plan online if it uses the Cash Accounting Scheme, Annual Accounting Scheme, or makes payments on account.
If a business cannot set up a payment plan online it will need to contact HMRC.
HMRC will ask:
- if you can pay in full
- how much you can repay each month
- if there are other taxes you need to pay
- how much money you earn
- how much you usually spend each month
- what savings or investments you have
If you have savings or assets, HMRC will expect you to use these to reduce your debt as much as possible.
* For businesses that pay their VAT monthly or quarterly, the deadline for both submitting a return and paying the VAT owing is usually one calendar month plus seven days after the VAT period has ended
VAT payment deadline calculator here.
Recovery of VAT on company cars
Further to our guide to the recovery of input tax on motoring expenses we are often asked about the specifics of a business acquiring a motor car. So, this article sets out the different rules.
Purchase of a car
If a business purchases a car outright, regardless of how this is funded, no input tax is claimable at all. However, If the taxpayer is either a taxi or driving instructor business, VAT falls to be 100% recoverable.
Hire Purchase (HP)
This is treated as a supply of goods as the ownership of the car passes at the end of the agreement. Similarly, to an outright purchase, input tax is blocked for all taxpayers except taxi and driving instructor businesses.
Lease hire
If the car is ‘qualifying car’, and is returned at the end of the agreement it is a supply of services; a lease. There is a specific rule which means that 50% of the VAT is recoverable on the rental payments if it is used for business purpose. The 50% block is to cover the private use of the car. Again, a 100% reclaim is possible if it is to be used for hire with a driver for carrying passengers or providing driving instruction.
The 50% block applies to all the VAT on charges paid for the rental of the car. This includes:
- optional services — unless they’re supplied and identified separately from the leasing supply on the tax invoice
- excess mileage charge — if it forms part of a supply of leasing but not if it was incurred on an excess mileage charge that forms part of a separate supply of maintenance
Personal Contract Purchase (PCP)
This is a little more complex because a PCP can either be treated as a supply of goods (the car), or a supply of services (a lease) depending on the terms of the contract. The following treatment is based on the Mercedes Benz Financial Services case.
The difference between services or goods:
This distinction depends on the level of the final payment. This is known as the Guaranteed Minimum Future Value (GMFV).
Services
- If the final optional payment (known as a balloon payment) is set at or above the anticipated market value (the GMFV) of the car at the time the option is to be exercised, the contract will be deemed a supply of leasing services with VAT on each instalment. A business can therefore recover 50% of input tax on each monthly payment. A balloon payment is the final “lump sum” which the agreement sets out is to be paid if a customer chooses to own the car at the end of the agreement.
Goods
- If the final optional payment is set below the anticipated market value, such that any rational customer would choose to buy the car, the contract is a supply of goods with a separate supply of finance. VAT is therefore due on the supply of goods in full at the beginning of the contract and the finance element is exempt. In such cases input tax is 100% blocked.
The distinction
It is often difficult to distinguish between services and goods in relation to PCP cars. We find that the wording of contracts is often arcane and unhelpful (and not particularly drafted with VAT in mind). If the supply is not determinable by reference to the agreement documentation, a simple and practical solution is to consider the invoice. Broadly, if it is a lease the supplier will charge VAT on the monthly payments, but a purchase would mean VAT is charged in full up front at the tax point.
Input tax on repairs
If a vehicle is used for business purposes, there is a 100% reclaim of the VAT charged on repairs and maintenance as long as the business paid for the work and the vehicle is used for some business purposes. It does not matter if the vehicle is used for some private motoring or if a business has chosen not to reclaim input tax on road fuel.
VAT: How long do I have to keep records?
Record keeping is a rather dry subject, but it is important not to destroy records which HMRC may later insist on seeing! I have looked at what VAT records a business is required to keep here, but how long must they be kept for?
This is seemingly a straightforward question, but as is usual with VAT there are some ifs and buts.
The basic starting point
The usual answer is that VAT records must be kept for six years. However, there are circumstances where that limit is extended and also times when it may be reduced. Although the basic limit is six years, unless fraud is suspected, HMRC can only go back four years to issue assessments, penalties and interest.
Variations to the six year rule
One Stop Shop (OSS)
If a business is required to use the OSS then its records must be retained for ten years (and they should be able to be sent to HMRC electronically if asked).
Capital Goods Scheme (CGS)
If a business has assets covered by the CGS, eg; certain property, computers, aircraft and ships then adjustments will be required up to a ten year period. Consequently, records will have to be retained for at least ten years in order to demonstrate that the scheme has been applied correctly.
Land and buildings
In the case of land and buildings you might need to keep documents for 20 years. We advise that records are kept this long in any event as land and buildings tend to be high value and complex from a VAT perspective, However, it is necessary in connection with the option to tax as it is possible to revoke an option after 20 years.
Transfer Of a Going Concern (TOGC)
This is more of a ‘who” rather than a what or a how long. When a business is sold as a going concern, in most circumstances the seller of the business will retain the business records. When this happens, the seller must make available to the buyer any information the buyer needs to comply with his VAT obligations. However, in cases where the buyer takes on the seller’s VAT registration number, the seller must transfer all of the VAT the records to the buyer unless there is an agreement with HMRC for the seller to retain the records. If necessary, HMRC may disclose to the buyer information it holds on the transferred business. HMRC do this to allow the buyer to meet his legal obligations. But HMRC will always consult the seller first, to ensure that it does not disclose confidential information.
How can a business cut the time limits for record keeping?
It is possible to write to HMRC and request a concession to the usual time limits. HMRC generally treat such a request sympathetically, but will not grant a concession automatically. If a concession is granted there is still a minimum allowance period of preservation which is in line with a business’ commercial practice.
Computer produced records
Where records are stored in an electronic form, a business must be able to ensure the records’ integrity, eg; that the data has not changed, and the legibility throughout the required storage period. If the integrity and legibility of the stored electronic records depends on a specific technology, then the original technology or an equivalent that provides backwards compatibility for the whole of the required storage period must also be retained.
How to keep records
HMRC state that VAT records may be kept on paper, electronically or as part of a software program (eg; bookkeeping software). All records must be accurate, complete and readable.
Penalties
If a business’ records are inadequate it may have to pay a record-keeping penalty. If at an inspection HMRC find that records have deliberately been destroyed your they will apply a penalty of £3,000 (this may be reduced to £1,500 if only some of the records are destroyed). In addition, there will be questions about why they have been destroyed!
VAT refunds guidance
VAT Claims
HMRC has completely rewritten its manual VRM7000 on VAT repayments and set-off.
When a business makes a claim for VAT (for whatever reason) HMRC have the power to set-off a payment against other amounts due.
HMRC also has a discretion to take account of any taxpayer liabilities in other regimes HMRC administers such as corporation tax or excise duty.
In summary, the new guidance covers:
- Inherent set-off via The VAT General Regulations 1995, Section 80(2A) and Regulation 29. This is where, say, a supply was incorrectly treated as standard rated when it was exempt. It would not be possible to claim the overcharged output tax (subject to unjust enrichment) without recognising the potential overclaim of input tax as a result of partial exemption.
- Set-off under The VAT Gen Regs 1995, Section 81(3) HMRC. This covers HMRC liability to only pay a claim after setting off any VAT, penalties, interest or surcharge owed to it. Section 81(3) is mandatory and applies to the current liabilities of a taxpayer, regardless of the period incurred.
- Set-off under section 81(3A). This is a special provision which requires HMRC to set any liabilities that would otherwise be out-of-time to assess, against any amounts for which HMRC is liable under a claim. It does this by disregarding the assessment time limit, to undo all the consequences of a mistake.
- VAT group set-offs. When a company leaves a VAT group, it is still jointly and severally liable under section 43(1) VAT Act 1994 for any outstanding debts of the group incurred while the company was a member. Any VAT claim by the ex-member will be subject to set-off against these group debts.
- Set-offs against other taxes and duties. HMRC has the discretion under Section 130 of the Finance Act 2008 to set-off debts due from any other tax regimes HMRC is responsible for. This is subject to the insolvency rules in section 131 Finance Act 2008. A taxpayer should always check that no further liabilities have arisen since the claim was made.
- Transfers of rights to claim to another person (Section 133 of the Finance Act 2008) – A claim will be subject to set-off of any outstanding liabilities to HMRC from both transferor and transferee. NB: HMRC policy is to make reasonable efforts to recover outstanding debts from the original creditor before applying set-off to the current creditors claim.
Updated Notice 700 – The VAT guide
HMRC updated Notice 700 on 9 June 2023.
Changes
VAT MOSS references to credit notes for supplies of digital services, the annual accounting scheme, and monthly tax periods have been removed.
Updates also reflect the introduction of VAT late submission and late payment penalties, as well as the new interest regime in paragraphs 2.7, 19.9, 21.1, 21.2.1, 21.6, 27.1 and 28.
VAT – What is reasonable care?
HMRC state that “Everyone has a responsibility to take reasonable care over their tax affairs. This means doing everything you can to make sure the tax returns and other documents you send to HMRC are accurate.”
If a taxpayer does not take reasonable care HMRC will charge penalties for inaccuracies.
Penalties for inaccuracies
HMRC will charge a penalty if a business submits a return or other document with an inaccuracy that was either as a result of not taking reasonable care, or deliberate, and it results in one of the following:
- an understatement of a person’s liability to VAT
- a false or inflated claim to repayment of VAT
The penalty amount will depend on the reasons for the inaccuracy and the amount of tax due (or repayable) as a result of correcting the inaccuracy.
How HMRC determine what reasonable care is
HMRC will take a taxpayer’s individual circumstances into account when considering whether they have taken reasonable care. Therefore, there is a difference between what is expected from a small sole trader and a multi-national company with an in-house tax team.
The law defines ‘careless’ as a failure to take reasonable care. The Courts are agreed that reasonable care can best be defined as the behaviour which is that of a prudent and reasonable person in the position of the person in question.
There is no issue of whether or not a business knew about the inaccuracy when the return was submitted. If it did, that would be deliberate and a different penalty regime would apply, see here It is a question of HMRC examining what the business did, or failed to do, and asking whether a prudent and reasonable person would have done that or failed to do that in those circumstances.
Repeated inaccuracies
HMRC consider that repeated inaccuracies may form part of a pattern of behaviour which suggests a lack of care by a business in developing adequate systems for the recording of transactions or preparing VAT returns.
How to make sure you take reasonable care
HMRC expects a business to keep VAT records that allow you to submit accurate VAT returns and other documents to them. Details of record keeping here
They also expect a business to ask HMRC or a tax adviser if it isn’t sure about anything. If a business took reasonable care to get things right but its return was still inaccurate, HMRC should not charge you a penalty. However, If a business did take reasonable care, it will need to demonstrate to HMRC how it did this when they talk to you about penalties.
Reasonable care if you use tax avoidance arrangements*
If a business has used tax avoidance arrangements that HMRC later defeat, they will presume that the business has not taken reasonable care for any inaccuracy in its VAT return or other documents that relate to the use of those arrangements. If the business used a tax adviser with the appropriate expertise, HMRC would normally consider this as having taken reasonable care (unless it’s classed as disqualified advice)
Where a return is sent to HMRC containing an inaccuracy arising from the use of avoidance arrangements the behaviour will always be presumed to be careless unless:
- The inaccuracy was deliberate on the person’s part, or
- The person satisfies HMRC or a Tribunal that they took reasonable care to avoid the inaccuracy
* Meaning of avoidance arrangements
Arrangements include any agreement, understanding, scheme, transaction or series of transactions (whether or not legally enforceable). So, whilst an arrangement could contain any combination of these things, a single agreement could also amount to an arrangement. Arrangements are `avoidance arrangements’ if, having regard to all the circumstances, it would be reasonable to conclude that the obtaining of a tax advantage was the main purpose, or one of the main purposes of the arrangements.
NB: We at Marcus Ward Consultancy do not promote or advise on tax avoidance arrangements and we will not work with any business which seeks such advice.
Using a tax adviser
If a business uses a tax adviser, it remains that business’ responsibility to make sure it gives the adviser accurate and complete information. If it does not, and it sends HMRC a return that is inaccurate, it could be charged penalties and interest.
Evidence
Before any question of reasonable excuse comes into play, it is important to remember that the initial burden lies on HMRC to establish that events have occurred as a result of which a penalty is, prima facie, due. A mere assertion of the occurrence of the relevant events in a statement of case is not sufficient. Evidence is required and unless sufficient evidence is provided to prove the relevant facts on a balance of probabilities, the penalty must be cancelled without any question of reasonable excuse becoming relevant.
None of us are perfect
Finally, it is worth repeating a comment found in HMRC’s internal guidance “People do make mistakes. We do not expect perfection. We are simply seeking to establish whether the person has taken the care and attention that could be expected from a reasonable person taking reasonable care in similar circumstances…”
VAT agents and advisers – Updated HMRC standards
HMRC has published updated standards for agents and advisers. It sets out HMRC’s expectations of tax agents. Tax agents are agents and advisers, who are acting professionally in relation to the tax affairs of others. This includes third party agents and advisers, whether acting in respect of UK or offshore tax affairs, and to all dealings they have with HMRC. Most agents are members of professional regulatory bodies that publish and endorse standards for behaviour. All the directors and staff of Marcus Ward Consultancy who provide professional advice are members of CIOT and/or ATT and are covered by their principles and ethics. Our approach to tax planning is set out here and is summarised below.
Summary
HMRC’s standard for dealing with agents: HMRC states that it wants to provide agents with a service that is fair, accurate and based on mutual trust and respect.
What HMRC expects from agents
- Integrity
- Professional competence and due care
- Professional behaviour
- Standards for tax planning – tax planning must
- be lawful
- be disclosed and transparent
- agents must not create, encourage or promote tax planning arrangements or structures that:
- set out to achieve results that are contrary to the clear intention of Parliament in enacting relevant legislation
- are highly artificial or highly contrived and seek to exploit shortcomings in the relevant legislation
- HMRC will monitor agent standards
Agents who do not follow the standard are considered to be in breach of it. HMRC has a range of different approaches, policies and powers to deal with breaches of the standard. For more information, HMRC has published a review of its powers to uphold its standard for agents.
Our approach to planning and HMRC
Marcus Ward Consultancy Ltd does not market, advise on, or advocate aggressive schemes. The company provides bespoke solutions to an individual business and does not believe in “one size fits all” mass-marketed schemes. We will always work within the law and the spirit of the law. We operate a full disclosure policy and may refuse to work with you if you do not subscribe to this attitude. We will, on occasion, cross swords with HMRC if we believe we are correct and that HMRC is being unreasonable and we will fight to uphold our clients’ rights against any unfair accusations.