Category Archives: Small Businesses

VAT Latest from the courts: Stocks Fly Fishery – single or multiple supply?

By Marcus Ward 19 April 2016

As many will know, there is a significant amount of case law concerning what may be treated as a composite supply at one VAT rate, and what are separate supplies at different VAT rates. The latest in this series is the First Tier Tribunal case of Stocks Fly Fishery

The appellant is a trout fishery in the Forest of Bowland. They argued that they supplied standard rated fishing and a distinct zero rated supply of fish for human consumption.

They provided two types of daily ticket which was required to fish the reservoir. The first was a sporting ticket, which entitled an angler to fish, but any fish caught must be returned to the water. The second was a take ticket which also enabled a person to fish but any fish caught (up to a certain number) may be taken away for food. A take ticket was more expensive than a sporting ticket. The more fish that were taken away, the more expensive the take ticket was. The taxpayer formed the opinion that it made two supplies; one of fishing which was agreed to be standard rated, and one of food for human consumption (the trout) which was zero rated. The value of the zero rated element was said to be the difference between the sporting ticket price and that of the take ticket.

The issue was whether the ability to take away the fish for food was a separate supply, or ancillary to the substantive supply of fishing.

The appellant cited Hughes v Pendragon Sabre Ltd (t/a Porsche Centre Bolton) while HMRC relied on Chalk Springs Fisheries (1987) (LON/86/706) Roger Cambrai Haynes (1988) (LON/87/624) and Card Protection Plan Ltd v Commissioners of Customs and Excise.

As an observation, the chairman in the Chalk Springs Fisheries case stated “…No trout is, in my view, supplied to him at all. Instead the fisherman must go out and catch them, if he can.” This was obviously quite unhelpful to the appellant. Additionally, the chairman was obliged to follow the well-known Card Protection Plan case which sets out guidance on matters such as this.

Decision

The FTT decided that the essential feature of the transaction was fishing and the dominant motive of anglers going to the fishery was to fish, regardless of which type of ticket was purchased. Therefore, the right to fish had to be regarded as constituting the principal service and the right to kill and keep the trout fish, if caught, should be regarded as ancillary to that principal purpose. Therefore there was a single standard rated supply of fishing.

It is always worth reviewing whether supplies made by a business can, and ought, to be treated separately, or as a single bundle. The existence of such a massive amount of case law on this subject indicates that this issue will continue to run and run.

Please contact us should this matter raise any concerns or present a possible opportunity.

VAT Self-billing. What is it? The pros and cons

By Marcus Ward 24 March 2016

Self-billing is an arrangement between a supplier and a customer. Both customer and supplier must be VAT registered. Rather than the supplier issuing a tax invoice in the normal way, the recipient of the supply raises a self-billing document. The customer prepares the supplier’s invoice and forwards a copy to the supplier with the payment.

If a business wants to put a self-billing arrangement in place it does not have to tell HMRC or get approval from them, but it does have to get its supplier or customer to agree to the arrangement and meet certain conditions.

The main advantage of self-billing is that it usually makes invoicing easier if the customer (rather than the supplier) determines the value of the purchase after the goods have been delivered or the services supplied. This could apply more in certain areas such as; royalties, the construction industry, Feed-In-Tariff, and scrap metal. A further benefit is that accounting staff will be working with uniform purchase documentation.

However, there is a high risk of errors, significant confusion and audit trail weaknesses. The wrong rate of VAT may easily be applied, documents can go missing, invoices may be raised as well as self-billing documents, the conditions for using self-billing may easily be breached (a common example is a supplier deregistering from VAT) and essential communication between the parties can be overlooked. As the Tribunal chairman in UDL Construction Plc observed: “I regard the self-billing procedure as a gross violation of the integrity of the VAT system. It permits a customer to originate a document which enables him to recover input tax and obliges his supplier to account for output tax. It goes without saying that such a dangerous procedure should be strictly controlled and policed.”

The rules

For the customer

You can set up self-billing arrangements with your suppliers as long as you can meet certain conditions, you’ll need to:

Enter into an agreement with each supplier
Review agreements with suppliers at regular intervals
Keep records of each of the suppliers who let you self-bill them
Make sure invoices contain the right information and are correctly issued. This means including all of the details that make up a full VAT invoice – details here

If a supplier stops being registered for VAT then you can continue to self-bill them, but you can’t issue them with VAT invoices (and you cannot claim any input tax). Your self-billing arrangement with that supplier is no longer covered by the VAT regulations.

The Agreement

A self-billing arrangement is only valid if your supplier agrees to put one in place. If you don’t have an agreement with your supplier your self-billed invoices won’t be valid VAT invoices – and you won’t be able to reclaim the input tax shown on them.

You’ll both need to sign a formal self-billing agreement. This is a legally binding document. The agreement must contain:

Your supplier’s agreement that you, as the self-biller, can issue invoices on your supplier’s behalf
Your supplier’s confirmation that they won’t issue VAT invoices for goods or services covered by the agreement
An expiry date – usually for 12 months’ time but it could be the date that any business contract you have with your supplier ends
Your supplier’s agreement that they’ll let you know if they stop being registered for VAT, get a new VAT registration number or transfer their business as a going concern
Details of any third party you intend to outsource the self-billing process to.

An example of an agreement here

Reviewing self-billing agreements

Self-billing agreements usually last for 12 months. At the end of this you’ll need to review the agreement to make sure you can prove to HMRC that your supplier agrees to accept the self-billing invoices you issue on their behalf. It’s very important that you don’t self-bill a supplier when you don’t have their written agreement to do so.

Records

If you are a self-biller you’ll need to keep certain additional records:

Copies of the agreements you make with your suppliers
The names, addresses and VAT registration numbers of the suppliers who have agreed that you can self-bill them

If you don’t keep the required records, then the self-billed invoices you issue won’t be proper VAT invoices.

Invoices

Once a self-billing agreement is in place with a supplier, you must issue self-billed invoices for all the transactions with them during the period of the agreement.

As well as all the details that must go on a full VAT invoice you will also need to include your supplier’s:

name
address
VAT registration number

All self-billed invoices must include the statement “The VAT shown is your output tax due to HMRC” and you must clearly mark each self-billed invoice you raise with the reference: ‘Self Billing’ (This rule has the force of law). Details required on invoice here

Input tax

You’ll only be able to reclaim the input tax shown on self-billed invoices if you meet all the record keeping requirements. When you can reclaim the input tax depends on the date when the supply of the goods or services takes place for VAT purposes. This is known as the the tax point, details here

For the supplier

If one of your customers wants to set up a self-billing arrangement with you, they will be required to agree to this with you in writing. If you agree, they’ll give you a self-billing agreement to sign.

The terms of the agreement are a matter between you and your customer, but there are certain conditions you’ll both have to meet to make sure you comply with VAT regulations:

Sign and keep a copy of the self-billing agreement
Agree not to issue any sales invoices to your customer for any transaction during the period of the agreement
Agree to accept the self-billing invoices that your customer issues
Tell your customer at once if you change your VAT registration number, deregister from VAT, or transfer your business as a going concern.

Accounting for output tax

The VAT figure on the self-billed invoice your customer sends you is your output tax.

You are accountable to HMRC for output tax on the supplies you make to your customer, so you should check that your customer is applying the correct rate of VAT on the invoices they send you. If there has been a VAT rate change, you will need to check that the correct rate has been used.

Tips

As a supplier, take care not to treat self-billed invoices as purchase invoices and reclaim the VAT shown as input tax
As a customer, carry out an instant check of VAT registration numbers here
As a supplier or customer regularly check that the conditions for self-billing continue to be met and ensure good communications
As a supplier or customer ensure that the documentation accurately reflects the relevant transactions and the correct VAT rate is applied
As a supplier or customer ensure that there is a clear audit trial and that all documentation is available for HMRC inspection
It is possible to use self-billing cross-border intra-EC, but additional rules apply.

VAT – New road fuel scale charges from 1 May 2016

By Marcus Ward 22 March 2016

If a VAT registered business purchases fuel for business use of its vehicles, but there is also private use of cars and other vehicles, an adjustment is required to ensure no VAT is claimed on the private consumption of fuel. This is called the VAT fuel scale charge

To make accounting for VAT on private use of fuel by car drivers a business may apply a VAT fuel scale charge, this adds back a fixed sum, per VAT period, to account of private consumption of fuel.

The scale charge is calculated according to a car’s CO2 emissions and the charge is added to Output VAT it reflects a charge for the private use of the fuel. The road fuel scale charges are amended at each Budget. The new rates come into effect from 1 May 2016 and may be found here

Businesses must use the new scale charges from the start of the next prescribed accounting period beginning on or after 1 May 2016.

Other Budget changes

Apart from the VAT registration limit being raised by £1,000 to £83,000 and the deregistration limit has been increased to £81,000 both with effect 1 April 2016, there were few VAT changes in the budget.

Ten Questions every business should ask about VAT

By Marcus Ward 8 March 2016

1. Am I sure that a VAT inspection would not find any errors?

An inspection can result in significant assessments, penalties and interest, apart from a business becoming “known” to HMRC. Peace of mind is a valuable benefit for a business owner too!

2. Am I sure that I am reclaiming as much VAT as possible?

We often find that businesses miss out on recovering input tax, this clearly results in an actual cost.

3. Do I take full advantage all available VAT reliefs, customs exemptions and duty refund schemes?

Failure to do so will create a tax cost and may be putting a business in a less competitive position.

4. Am I up to date on the indirect tax developments in my key markets?

Indirect tax changes rapidly, and so does the market place. Being unaware of changes that affect you may result in VAT being overpaid, or penalties being levied if you have underdeclared tax. It may also put you at a competitive disadvantage.

5. Have I considered the impact of tax rate changes on my pricing and margin, and have I taken the necessary measures?

Budgeting is affected by VAT. Failure to consider indirect taxes may eat into profit.

6. Do I collect all the data about my customers and transactions that could be required by tax authorities?

As in many VAT circumstances, getting it wrong or missing something results in penalties.

7. Do I comply with all indirect tax requirements in the jurisdictions where I operate or where my customers belong?

VAT and GST does exist outside the UK and ignoring overseas indirect tax obligations may result in action being taken by foreign authorities which will prove to be very uncomfortable and expensive. It is important to understand the rules for indirect tax in each country/area you trade. Don’t get caught out.

8. Do I have the tools to analyse my indirect tax flows and data?

Allocating sufficient technical and human resources to VAT is important. Seeking professional advice at the appropriate time is also prudent.

9. Could changes in the way my business is structured or how transactions are organised improve my indirect tax position and/or reduce complexity?

Saving money and reducing tax complications must be near the top of every business’ wish list. Seeking professional advice on structuring a business or a transaction goes a long way to achieving this

10. Is my business using the right VAT scheme?

There are many special schemes that a business may use, from the Flat Rate Scheme to Margin Schemes. Most are optional, but some, like the Tour Operators’ Margin Scheme are compulsory. Choose the wrong one, or being unaware of a beneficial scheme could cost.

It is important to constantly monitor a business’ VAT position. The nature of trade changes, technology changes, case law changes and the VAT rules are constantly in a state of flux. It is easy to assume that everything is alright because it has always been done that way, but there may be significant exposures and missed opportunities out there. We offer services from a basic healthcheck to a full technical review. A review will let you rest easy in your bed if nothing else!

What VAT CAN’T you claim?

By Marcus Ward 2 March 2016

The majority of input tax incurred by most VAT registered businesses may be recovered. However, there is some input tax that may not be. I thought it would be helpful if I pulled together all of these categories in one place:

Blocked VAT Claims

A brief overview

No supporting evidence

In most cases this evidence will be an invoice (or as the rules state “a proper tax invoice)” although it may be import, self-billing or other documentation in specific circumstances. A claim is invalid without the correct paperwork. HMRC may accept alternative evidence, however, they are not duty bound to do so (and rarely do). So ensure that you always obtain and retain the correct documentation.

Incorrect supporting evidence

Usually this is an invalid invoice, or using a delivery note/statement/pro forma in place of a proper tax invoice. To support a claim an invoice must show all the information set out in the legislation. HMRC are within their rights to disallow a claim if any of the details are missing. A full guide is here: https://www.marcusward.co/vat-invoices-a-full-guide/

Input tax relating to exempt supplies

Broadly speaking, if a business incurs VAT in respect of exempt supplies it cannot recover it. If a business makes only exempt supplies it cannot even register for VAT. There is a certain easement called de minimis which provide for recovery if the input tax is below certain prescribed limits. Input tax which relates to both exempt and taxable activities must be apportioned. More details of partial exemption may be found here: https://www.marcusward.co/wp-content/uploads/2014/03/Partial-Exemption-Guide.pdf

Input tax relating to non-business activities

If a charity or NFP entity incurs input tax in connection with non-business activities this cannot be recovered and there is no de minimis relief. Input tax which relates to both business and non-business activities must be apportioned. Business versus non-business apportionment must be carried out first and then any partial exemption calculation for the business element if appropriate. More details here: https://www.marcusward.co/wp-content/uploads/2014/03/Charities-and-Not-For-Profit-Entities-A-Brief-VAT-Guide.pdf

Time barred

If input tax is not reclaimed within four years of it being incurred, the capping provisions apply and any claim will be rejected by HMRC.

VAT incurred on business entertainment

This is always irrecoverable unless the client or customer being entertained belongs overseas. The input tax incurred on staff entertainment costs is however recoverable.

Car purchase

In most cases the VAT incurred on the purchase of a car is blocked. The only exceptions are for when the car; is part of the stock in trade of a motor manufacturer or dealer, or is used primarily for the purposes of taxi hire; self-drive hire or driving instruction; or is used exclusively for a business purpose and is not made available for private use. This last category is notoriously difficult to prove to HMRC and the evidence to support this must be very good.

Car leasing

If a business leases a car for business purposes it will normally be unable to recover 50% of the VAT charged. The 50% block is to cover the private use of the car.

A business using certain schemes

For instance, a business using the Flat rate Scheme cannot recover input tax except for certain large capital purchases, also there are certain blocks for recovery on TOMS users

VAT charged in error

Even if you obtain an invoice purporting to show a VAT amount, this cannot be recovered if the VAT was charged in error; either completely inappropriately or at the wrong rate. A business’ recourse is with the supplier and not HMRC.

Goods and services not used for your business

Even if a business has an invoice addressed to it and the services or goods are paid for by the business, the input tax on the purchase is blocked if the supply is not for business use. This may be because the purchase is for personal use, or by anther business or for purposes not related to the business.

VAT paid on goods and services obtained before VAT registration

This is not input tax and therefore is not claimable. However, there are exceptions for goods on hand at registration and services received within six months of registration if certain conditions are met.

VAT incurred by property developers

Input tax incurred on certain articles that are installed in buildings which are sold or leased at the zero rate is blocked.

Second hand goods

Goods sold to you under one of the VAT second-hand schemes will not show a separate VAT charge and no input tax is recoverable on these goods.

Transfer of a going concern (TOGC)

Assets of a business transferred to you as a going concern are not deemed to be a supply for VAT purposes and consequently, there is no VAT chargeable and therefore no input tax to recover.

Disbursements

A business cannot reclaim VAT when it pays for goods or services to be supplied directly to its client. However, in this situation the VAT may be claimable by the client if they are VAT registered. For more on disbursements see here: https://www.marcusward.co/disbursements-vat/

VAT incurred overseas

A business cannot reclaim VAT charged on goods or services that it has bought from suppliers in other EC States. Only UK VAT may be claimed on a UK VAT return. There is however, a mechanism available to claim this VAT back from the relevant VAT body in those States. However, in most cases, supplies received from overseas suppliers are VAT free, so it is usually worth checking whether any VAT has been charged correctly.

Input tax incurred on expenditure is one of the most complex areas of VAT. It also represents the biggest VAT cost to a business if VAT falls to be irrecoverable. It is almost always worthwhile reviewing what VAT is being reclaimed. Claim too much and there could well be penalties and interest, and of course, if a business is not claiming as much input tax as it could, this represents a straightforward cost.

VAT – Residential Property Triggerpoints

By Marcus Ward 17 February 2016

VAT and property transactions are uneasy bedfellows at the best of times. Getting the tax wrong, or failing to consider it at all can result in a loss of income of 20% on a project, or forgoing all input tax incurred on a development. Even a simple matter of timing can affect a transaction to a seller’s detriment. Here I take a brief look at issues that can impact residential property transactions. It is important to recognise when VAT may affect a project so I hope that some of these triggerpoints may prove useful.

General points

The following are very general points on residential properties. No two cases are the same, so we strongly recommend that specific advice is obtained.

Refurbishing “old” residential properties

Broadly speaking, the VAT incurred on such work is not reclaimable as the end use of the property will be exempt (either sale or rent). There is no way round this as it is not possible to opt to tax residential dwellings. It may be possible to use the partial exemption de minimis limits if there are any other business activities in the same VAT registration. If this is the only activity of a business, it will not even be permitted to register for VAT. There are special rules if the number of dwellings change as a result of the work (see below).

New residential builds

The first sale (or the grant of a long lease 21 years plus) of a newly constructed dwelling by “the person constructing” is zero rated. This means that any VAT incurred on the construction is recoverable. Care should be taken if the new dwelling is let on a short term basis rather than/before being sold as this will materially affect input tax recovery. Advice should always be taken before such a decision is made as there is planning available to avoid such an outcome. VAT incurred on professional and legal costs of the development may also be recovered such as; architects, solicitors, advisers, agents etc. VAT registration is necessary in these cases and our advice is to VAT register at the earliest stage possible.

The construction of new dwellings is zero rated, along with any building materials supplied by the contractor carrying out the work. The zero rating also extends to sub-contractors. It is not necessary for a certificate to be provided in order to zero rate such building works.

Conversions

There are special rules for refurbishments which create a different number of dwellings (eg; dividing up a single house into flats, or changing the total number of flats in a block, or making one dwelling by amalgamating flats). Generally, it is possible for contractors to invoice for their building work at the reduced rate of 5%. This rate may also apply to conversions. A conversion is defined as work undertaken on a non-residential property, such as a barn, office or church, into one or more self-contained dwellings. Once converted the sale of the residential property will be zero rated and all of the input tax incurred on associated costs is recoverable (similar to a new build).

Renovation of empty residential premises

Reduced rating at 5% is also available for the renovation or alteration of empty residential premises. Such a premises is one that has not been lived in during the two years immediately before the work starts. HMRC will insist on documentary evidence that the property has been empty for that time.

Purchase of a commercial property intended for conversion

If it is intended to convert a commercial property into residential use and the vendor indicates that (s)he will charge VAT (as a result of the option to tax having been exercised) it is possible for the purchaser to disapply the option to tax by the issue of a certain document; form VAT 1614D. This means that the sale will become exempt. Advice should always be sought on this issue by parties on each side of the transaction as it very often creates difficulties and significant VAT and other costs (mainly for the vendor).

Mixed developments

If what is being constructed is a building that is only in part a zero-rated dwelling, a contractor can only zero-rate its work for the qualifying parts. For example, if a building containing a shop with a flat above is constructed, only the construction of the flat can be zero-rated. An apportionment must be made for common areas such as foundations and roof etc. The sale of the residential element when complete is zero rated and the sale of the commercial part will be standard rated if under three years since completion. If the commercial part is over three years old at the date of sale, or is rented rather than sold, the supply will be exempt with the option to tax available – details here. If an exempt supply is made, the recovery of input tax incurred on the development will be compromised and it is important that this recognised and planning put in place to avoid this outcome.

DIY building projects

There is a specific scheme for DIY Housebuilders to recover input tax incurred on the construction of a dwelling for the constructor to live in personally. Details here https://www.marcusward.co/?s=diy

Sale of an incomplete residential development

There are two possible routes to relief if a project is sold before dwellings have been completed (either new build or conversion). This can often be a complex area, however, there is some zero rating relief which may apply, and also it may be possible to apply TOGC (Transfer Of a Going Concern) treatment to the sale. In both cases, it is likely that input tax previously claimed by the developer should not be jeopardised.

Overview

There are VAT complications for the following types of transactions/developments and issues:

work on listed properties
definition of a dwelling
arrangements where consortiums or syndicates are used/profit share
transactions in connection with nursing or children’s homes or similar
“granny flats” in the garden of existing houses
work on charitable buildings/ for charities
converting specific commercial property into residential property – particularly ex-pubs
sales to Housing Associations
sales of “substantially reconstructed protected buildings”
buying VATable buildings
date of completion – zero rating cut off
supplies by members of VAT groups
definition of building materials
input tax on white goods and similar
alterations for people with disabilities
garages with dwellings
land supplied with a property
buying property with existing, continuing leases
beneficial owner versus legal owner supplies
change of intention (buying land/property with the intention of using it for one purpose, but the intention changes after purchase)
where professional/architect’s fees are incurred
planning gains
own use of a property
mobile homes
reverse premiums/surrenders/reverse surrenders re; leases
holiday lets
hotels
business use by purchaser/tenant
contract stage of a property purchase where VAT is potentially chargeable by vendor
timing of supplies
work re; schools, churches, village halls, hospitals, or any other “unusual” structures

This list is not exhaustive, but I hope it gives a broad idea of where VAT needs to be considered “before the event”. As always, I am available to assist.

VAT – Overseas Holiday Lets; a warning

By Marcus Ward 8 February 2016

It is important to understand the VAT consequences of owning property overseas. It may not be commonly known that the UK has the highest VAT threshold in the EC. This means that for many ‘sideline’ businesses such as; the rental of second or holiday properties in the UK, the owners, whether they are; individuals, businesses, or pension schemes, only have to consider VAT if income in relation to the property exceeds £82,000 pa. and this is only likely if a number of properties are owned.

However, other EC Member States have nil thresholds for foreign entrepreneurs meaning that if any rental income is received, VAT registration may be compulsory. Consequently, a property owner that rents out a property abroad will probably have a liability to register for VAT there. Failure to comply with the domestic legislation of the relevant Member State means; payment of back VAT and interest and fines being levied. It is also not a good idea to provoke the interest of overseas tax authorities. VAT registration however, does mean that a property owner can recover input tax on expenditure in connection with the property, eg; agent’s fees, repair and maintenance and other professional costs. Such claims may be restricted if the home is used for own use.

It should be noted that, unlike other types of rental of homes, holiday lettings are always standard-rated. Also, the letting of holiday homes is always treated as a business activity unless lettings are very infrequent. If lettings are a one-off or rare, evidence should be retained to evidence this fact. There is no set number of times a property can be let before it is treated as a business, and the interpretation may differ between different Member States. Details of taxable supplies and being in business here

Given that every EC Member State has differing rules to the UK, it is crucial to check all the consequences of letting property overseas.

A final word of warning; I quite often hear the comment “I’m not going to bother – how will they ever find out?”

If an overseas property owner based in the UK is in competition with local letting businesses, those businesses generally do not have any compulsion in notifying the authorities. In addition, I have heard of authorities carrying out very simple initiatives to see if owners are VAT registered. In many resorts, income from tourism is vital and this is a very important revenue stream for them so it is well policed.

Please contact us for further details. We have experience in dealing with overseas VAT matters on our clients’ behalf.

Monthly VAT Round-Up

By Marcus Ward 29 January 2016

We produce a free monthly email update on all VAT things great and small. It covers events for the last month and flags up significant changes as a result of changes to legislation, HMRC announcements and case law. It also looks at specific VAT issues that may affect a business.

Please contact us you would like to subscribe.

marcus.ward@consultant.com

07748 117935

Twitter: @mw_vat

Linked In; Marcus Ward

Linked In Group – Marcus Ward Consultancy VAT

VAT – How To Survive The Enforcement Powers

By Marcus Ward 19 January 2016

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

Late Registration

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

After Registration

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

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

Default surcharge

A default occurs if HMRC has not received your return and all the VAT due by the due date. The relevant date is the date that cleared funds reach HMRC’s bank account. If the due date is not a working day, payment must be received on the last preceding working day. .

Consequence of default

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

Errors on returns and claims

Incorrect returns incur a penalty under the following penalties apply:

An error, when reasonable care not taken: 30%;
An error which is deliberate, but not concealed: 70%;
An error, which is deliberate and concealed: 100%.

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

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

By Marcus Ward 14 January 2016

Latest from the courts

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

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

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

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

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

Details of the FRS here