Category Archives: Small Businesses

VAT – What is a caravan? Latest from the courts

By   27 January 2017
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Motorhomes versus caravans…

In the Upper Tribunal (UT) case of Oak Tree Motorhomes Limited the simple issue was whether motorhomes may be considered to fall within the definition of a “caravan” and thus benefit from certain zero rating provisions.  Oak Tree sold certain vehicles commonly called ‘motor homes’, ‘motor caravans’ and ‘campervans’

The VAT Act 1994, Section 30(2) provides that supplies of goods of a description specified in Schedule 8 are zero-rated. At the relevant time this was VAT Act 1994, Schedule 8, Group 9, item 1 which described the following goods: “Caravans exceeding the limits of size for the time being permitted for the use on roads of a trailer drawn by a motor vehicle having an unladen weight of less than 2,030 kilogrammes.” Oak Tree contended that the sales of their vehicles were covered by this item and thus should have been zero rated rather than standard rated.

So what is a caravan?

The term is not defined in the VAT legislation, but HMRC base its interpretation on the definitions in the Caravan Sites and Control of Development Act 1960 and the Caravans Sites Act 1968 as set out in Public Notice 701/20 para 2.1.  In that Notice HMRC state that:

“A caravan is a structure that:

  • is designed or adapted for human habitation
  • when assembled, is physically capable of being moved from one place to another (whether by being towed or by being transported on a motor vehicle so designed or adapted), and
  • is no more than:
  • 20 metres long (exclusive of any drawbar)
  • 8 metres wide, or
  • 05 metres high (measured internally from the floor at the lowest level to the ceiling at the highest level)”

(Note: No reference is made to engine here).

The Decision

It was accepted by HMRC that the vehicles were large enough to qualify as caravans, so the matter turned on the interpretation of a “caravan” and whether the fact that the relevant vehicles incorporated an engine disbarred them. The UT did not appear to waste much time in agreeing with the First Tier Tribunal that a motorhome was not a caravan.  This was so even though accommodation in a motorhome and a qualifying caravan might be almost identical. The UT considered that the First Tier Tribunal’s interpretation of “caravan” by reference to the Oxford English Dictionary was appropriate. An important definition being one which refers to a caravan as generally “…able to be towed”. It was also decided that an engine represented “…an obvious and significant distinction” between a caravan and a motorhome.  It is also interesting that despite HMRC’s Notice referring to the Caravan Act 1960, the UT considered that this should not be used in determining whether a vehicle should be regarded as a caravan

Commentary

This was almost a foregone conclusion, but the appellant obviously thought it was worth another bite at the cherry as the claim was worth over £1.1 million (and an ongoing saving). There are lots of areas involving caravans that throw up VAT oddities, including, but not limited to; pitches, skirts, contents, holiday homes and compound/multiple supplies here 

It may also mean that HMRC will have to consider redrafting Notice 701/20

If a business is involved in any transactions involving caravans it would be prudent to consider whether all of the available reliefs are being taken advantage of, and whether VATable supplies have been correctly identified.

VAT – Overseas Holiday Lets: A Warning

By   16 January 2017
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Do you, or your clients, own property overseas which you let to third parties when you are not using it yourself?

It is important to understand the VAT consequences of owning property overseas.

The position of UK Holiday Lets

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 £83,000 pa. and this is only likely if a number of properties are owned.

It should be noted that, unlike other types of rental of homes, holiday lettings are always taxable for VAT purposes.

Overseas Holiday Lets

Other EC Member States have nil thresholds for foreign entrepreneurs.  This means that if any rental income is received, VAT registration is likely to be compulsory. Consequently, a property owner that rents out a property abroad will probably have a liability to register for VAT in the country that the property is located.  Failure to comply with the domestic legislation of the relevant Member State may mean; payment of back VAT and interest and fines being levied. 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.  This may be restricted if the home is used for periodical own use.

Given that every EC Member State has differing rules and/or procedures to the UK, it is crucial to check all the consequences of letting property overseas. Additionally, if any other services are supplied, eg; transport, this gives rise to a whole new (and significantly more complex) set of VAT rules.

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 local 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 if you are affected by this matter; we have the resources to advise and act on a worldwide basis.

www.marcusward.co

VAT Self-billing and latest from the courts

By   6 January 2017
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Self-billing: where the customer issues the invoice (and how this can go wrong).

A recent case Court of Appeal case: GB Housley here has highlighted the inherent dangers of using the self-billing system.  Self-billing is a very useful mechanism for a lot of businesses, especially in respect of activities like royalties and scrap purchases where the supplier may not know (or know immediately) the value of the supply.  Before we look at the case, it may be useful to recap the rules for self-billing.

Self-billing is an arrangement between a supplier and a customer. Both customer and supplier must be VAT registered. The customer prepares the supplier’s invoice and forwards a copy to the supplier with the payment.  There is no requirement to notify HMRC or get approval for using the arrangement.

If you are the customer

You issue the documentation and you are able to reclaim as input tax the VAT shown on the self-billing invoice.

In order to set up self-billing arrangements with your supplier you are required 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 required information and are correctly issued

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. Your self-billing arrangement with that supplier is no longer covered by the VAT regulations.

Self-billing agreements

You can only operate a self-billing arrangement 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, and you won’t be able to reclaim the input tax shown on them.

Both parties 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
  • details of any third party you intend to outsource the self-billing process to

Reviewing self-billing agreements

Self-billing agreements usually last for 12 months. At the end of this you will 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.

Record keeping

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

  • 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.

All self-billed invoices must include the statement “The VAT shown is your output tax due to HMRC”.

It is important that a business does not add VAT to self-billed invoices that it issues to suppliers who are not VAT-registered.

A business will only be able to reclaim  input tax shown on self-billed invoices if it meets all the record keeping requirements.

If you are a VAT registered supplier

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

For VAT purposes you will be required to do all of the following:

  • 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

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.

The Case

The issues were whether the lack of formalised self-billing agreements disqualified the use of self-billing, and if that was the case, whether alternative evidence should have been accepted to support a claim for input tax. The CoA discharged HMRC’s assessment which was issued to GB Housley – a scrap metal merchant.

The assessment was based on input tax claims made on the basis of the self-billed documents.  It was ruled that although the self-billing was used in error, HMRC should have considered alternative evidence and used its discretion on whether to allow the claims on transactions which took place. For this reason, as it is unclear whether HMRC would have assessed if they had considered other information, the assessment should be removed.

A timely warning to ensure that all of the conditions of self-billing arrangements are met, and that this is clearly demonstrable.  Ongoing monitoring is crucial for businesses operating self-billing as an overlooked change can affect the VAT treatment.

In this case, it looks like the applicant was rather fortunate, but this outcome cannot be relied on if self-billing is applied incorrectly.

We are able to advise on such agreements, arrangements and accounting.

Oops! – Top Ten VAT howlers

By   16 December 2016
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I am often asked what the most frequent VAT errors made by a business are. I usually reply along the lines of “a general poor understanding of VAT, considering the tax too late or just plain missing a VAT issue”.  While this is unquestionably true, a little further thought results in this top ten list of VAT horrors:
  1. Not considering that HMRC may be wrong. There is a general assumption that HMRC know what they are doing. While this is true in most cases, the complexity and fast moving nature of the tax can often catch an inspector out. Added to this is the fact that in most cases inspectors refer to HMRC guidance (which is HMRC’s interpretation of the law) rather to the legislation itself. Reference to the legislation isn’t always straightforward either, as often EC rather than UK domestic legislation is cited to support an analysis. The moral to the story is that tax is complicated for the regulator as well, and no business should feel fearful or reticent about challenging a HMRC decision.
  2. Missing a VAT issue altogether. A lot of errors are as a result of VAT not being considered at all. This is usually in relation to unusual or one-off transactions (particularly land and property or sales of businesses). Not recognising a VAT “triggerpoint” can result in an unexpected VAT bill, penalties and interest, plus a possible reduction of income of 20% or an added 20% in costs. Of course, one of the basic howlers is not registering at the correct time. Beware the late registration penalty, plus even more stringent penalties if HMRC consider that not registering has been done deliberately.
  3.  Not considering alternative structures. If VAT is looked at early enough, there is very often ways to avoid VAT representing a cost. Even if this is not possible, there may be ways of mitigating a VAT hit.
  4.  Assuming that all transactions with overseas customers are VAT free. There is no “one size fits all” treatment for cross border transactions. There are different rules for goods and services and a vast array of different rules for different services. The increase in trading via the internet has only added to the complexity in this area, and with new technology only likely to increase the rate of new types of supply it is crucial to consider the implications of tax; in the UK and elsewhere.
  5.  Leaving VAT planning to the last minute. VAT is time sensitive and it is not usually possible to plan retrospectively. Once an event has occurred it is normally too late to amend any transactions or structures. VAT shouldn’t wag the commercial dog, but failure to deal with it at the right time may be either a deal-breaker or a costly mistake.
  6.  Getting the option to tax wrong. Opting to tax is one area of VAT where a taxpayer has a choice. This affords the possibility of making the wrong choice, for whatever reasons. Not opting to tax when beneficial, or opting when it is detrimental can hugely impact on the profitability of a project. Not many businesses can carry the cost of, say, not being able to recover VAT on the purchase of a property, or not being able to recover input tax on a big refurbishment. Additionally, seeing expected income being reduced by 20% will usually wipe out any profit in a transaction.
  7.  Not realising a business is partly exempt. For a business, exemption is a VAT cost, not a relief. Apart from the complexity of partial exemption, a partly exempt business will not be permitted to reclaim all of the input tax it incurs and this represents an actual cost. In fact, a business which only makes exempt supplies will not be able to VAT register, so all input tax will be lost. There is a lot of planning that may be employed for partly exempt businesses and not taking advantage of this often creates additional VAT costs.
  8.  Relying on the partial exemption standard method to the business’ disadvantage. A partly exempt business has the opportunity to consider many methods to calculate irrecoverable input tax. The default method, the “standard method” often provides an unfair and costly result. I recommend that any partly exempt business obtains a review of its activities from a specialist. I have been able to save significant amounts for clients simply by agreeing an alternative partial exemption method with HMRC.
  9.  Not taking advantage of the available reliefs. There are a range of reliefs available, if one knows where to look. From Bad Debt Relief, Zero Rating (VAT nirvana!) and certain de minimis limits to charity reliefs and the Flat Rate Scheme, there are a number of easements and simplifications which could save a business money and reduce administrative and time costs.
  10.  Forgetting the impact of the Capital Goods Scheme. The range of costs covered by this scheme has been expanded recently. Broadly, VAT incurred on certain expenditure is required to be adjusted over a five or ten year period. Failure to recognise this could either result in assessments and penalties, or a position whereby input tax has been under-claimed. The CGS also “passes on” when a TOGC occurs, so extra caution is necessary in these cases.

So, you may ask: “How do I make sure that I avoid these VAT pitfalls?” – And you would be right to ask.

Of course, I would recommend that you engage a VAT specialist to help reduce the exposure to VAT costs!

VAT – A Christmas Tale

By   12 December 2016
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Well, it is Christmas….

Dear Marcus

My business, if that is what it is, has become large enough for me to fear that HMRC might take an interest in my activities.  May I explain what I do and then you can write to me with your advice?  If you think a face to face meeting would be better I can be found in most decent sized department stores from mid September to 24 December.

First of all I am based in Greenland but I do bring a stock of goods, mainly toys, to the UK and I distribute them.  Am I making supplies in the UK?

The toys are of course mainly for children and I wonder if zero rating might apply?  I have heard that small T shirts are zero rated so what about a train set – it is small and intended for children. Does it matter if adults play with it?

My friend Rudolph has told me that there is a peculiar rule about gifts.  He says that if I give them away regularly and they cost more than £150 I might have to account for VAT.  Is that right?

My next question concerns barter transactions.  Dads often leave me a food item such as a mince pie and a drink and there is an unwritten rule that I should then leave something in return.  If I’m given Tesco’s own brand sherry I will leave polyester underpants but if I’m left a glass of Glenfiddich I will be more generous and leave best woollen socks.  Have I made a supply and what is the value please?  My feeling is that the food items are not solicited so VAT might not be due and, in any event; isn’t food zero-rated, or is it catering? Oh, and what if the food is hot?

Transport is a big worry for me.  Lots of children ask me for a ride on my airborne transport.  I suppose I could manage to fit 12 passengers in.  Does that mean my services are zero-rated?  If I do this free of charge will I need to charge air passenger duty?  Does it matter if I stay within the UK?  My transport is the equivalent of six horse power and if I refuel with fodder in the UK will I be liable for fuel scale charges?  After dropping the passengers off I suppose I will be accused of using fuel for the private journey back home.  Somebody has told me that if I buy hay labelled as animal food I can avoid VAT but if I buy the much cheaper bedding hay I will need to pay VAT.  Please comment.

Can I also ask about VAT registration?  I know the limit is £83,000 per annum but do blips count?  If I do make supplies at all, I do nothing for 364 days and then, in one day (well night really) I blast through the limit and then drop back to nil turnover.  May I be excused from registration?  If I do need to register should I use AnNOEL Accounting?  At least I can get only one penalty per annum if I get the sums wrong.

I would like to make a claim for input tax on clothing.  I feel that my red clothing not only protects me from the extreme cold but it is akin to a uniform and should be allowable.  These are not clothes that I would choose to wear except for my fairly unusual job.  If lady barristers can claim for black skirts I think I should be able to claim for red dress.  And what about my annual haircut?  That costs a fortune.  I only let my hair grow that long because it is expected of me.

Insurance worries me too.  You know that I carry some very expensive goods on my transport.  Play Stations, Mountain Bikes, i-pads and Accrington Stanley replica shirts for example.  My parent company in Greenland takes out insurance there and they make a charge to me.  If I am required to register for VAT in England will I need to apply the reverse charge?  This seems to be a daft idea if I understand it correctly.  Does it mean I have to charge myself VAT on something that is not VATable and then claim it back again?

Next you’ll be telling me that Father Christmas isn’t real……….

HAPPY CHRISTMAS EVERYBODY!

VAT Splitting a business to avoid registration: Disaggregation

By   8 December 2016
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I have a cunning plan to avoid registering for VAT…….

….I’ll simply split my business into separate parts which are all under the VAT registration turnover limit – ha!

I’ve heard this said many a time in “bloke in the pub” situations. But is it possible?

You will not be surprised to learn that HMRC don’t like such schemes and there is legislation and case law for them to use to attack such planning known as “disaggregation”. This simply means artificially splitting a business.

What HMRC will consider to be artificial separation:

HMRC will be concerned with separations which are a contrived device set up to circumvent the normal VAT registration rules. Whether any particular separation will be considered artificial will, in most cases, depend upon the specific circumstances. Accordingly it is not possible to provide an exhaustive list of all the types of separations that HMRC will view as artificial. However, the following are examples of when HMRC would at least make further enquiries:

Separate entities supply registered and unregistered customers

In this type of separation, the registered entity supplies any registered customers and the unregistered part supplies unregistered customers.

Same equipment/premises used by different entities on a regular basis

In this type of situation, a series of entities operates the same equipment and/or premises for a set period in any one-week or month. Generally the premises and/or equipment is owned by one of the parties who charges rent to the others. This situation may occur in launderettes and take-aways such as fish and chip shops or mobile catering equipment.

Splitting up of what is usually a single supply

This type of separation is common in the bed and breakfast trade where one entity supplies the bed and another the breakfast. Another is in the livery trade where one entity supplies the stabling and another, the hay to feed the animals. There are more complex examples, but the similar tests are applied to them too.

Artificially separated businesses which maintain the appearance of a single business

A simple example of this type of separation includes; pubs in which the bar and catering may be artificially separated. In most cases the customer will consider the food and the drinks as bought from the pub and not from two independent businesses. The relationship between the parties in such circumstances will be important here as truly franchised “shop within a shop” arrangements will not normally be considered artificial.

One person has a controlling influence in a number of entities which all make the same type of supply in diverse locations

In this type of separation a number of outlets which make the same type of supplies are run by separate companies which are under the control of the same person. Although this is not as frequently encountered as some of the other situations, the resulting tax loss may be significant.

The meaning of financial, economic and organisational links

Again each case will depend on its specific circumstances. The following examples illustrate the types of factors indicative of the necessary links, although there will be many others:

Financial links

  • financial support given by one part to another part
  • one part would not be financially viable without support from another part
  • common financial interest in the proceeds of the business

Economic links

  • seeking to realise the same economic objective
  • the activities of one part benefit the other part
  • supplying the same circle of customers

Organisational links

  •  common management
  • common employees
  • common premises
  • common equipment

HMRC often attack structures which were not designed simply to avoid VAT registration, so care should be taken when any entity VAT registers, or a conscious decision is made not to VAT register. Registration is a good time to have a business’ activities and structure reviewed by an adviser.

As with most aspects of VAT, there are significant and draconian penalties for getting registration wrong, especially if HMRC consider that it has been done deliberately to avoid paying VAT.

VAT – EC proposal for new rules for e-commerce and online businesses

By   1 December 2016
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The EC has announced measures to simplify VAT for e-commerce businesses in the EU. The proposals will purportedly allow consumers and businesses to buy and sell goods and services more easily online.

 New VAT rules for sales and goods and services online

Currently, online traders have to register for VAT in all the Member States to which they sell goods. Often cited as one of the biggest barriers to cross-border e-commerce, these VAT obligations cost businesses around €8,000 for every EU country into which they sell. We are now proposing that businesses make one simple quarterly return for the VAT due across the whole of the EU, using the online VAT One Stop Shop. This system already exists for sales of e‑services such as mobile phone apps, and has been proven successful with more than €3 billion in VAT being collected through the system in 2015. Administrative burdens for companies will be reduced by a staggering 95%, giving an overall saving to EU business of €2.3 billion and increasing VAT revenues for Member States by €7 billion.

Simplifying VAT rules for micro-businesses and start-ups

A new annual threshold of €10,000 in online sales will be introduced under which businesses selling cross-border can continue to apply the VAT rules they are used to in their home country. This will make complying with VAT rules easier for 430,000 companies across the EU, representing 97% of all micro-business trading cross‑border. A second new yearly threshold of €100,000 will make life easier for SMEs when it comes to VAT, with simplified rules for identifying where their customers are based. The thresholds could be applied as early as 2018 on e‑services, and by 2021 for online goods. Other simplifications would allow the smallest businesses to benefit from the same familiar VAT rules of their home country, such as invoicing requirements and record keeping. The first point of contact will always be with the tax administration where the business is located and businesses will no longer be audited by each Member State where they have sales.

VAT fraud from outside the EU – Removal of Low Value Consignment (LVC) relief

Small consignments imported into the EU that are worth less than €22 are currently exempt from VAT. With around 150 million parcels imported free of VAT into the EU each year, the EC says that this system is open to massive fraud and abuse, creating major distortions against EU business. Firstly, EU businesses are put at a clear disadvantage since unlike their non-EU competitors, they are liable to apply VAT from the first eurocent sold. Secondly, imported high-value goods such as smartphones and tablets are consistently undervalued or wrongly described in the importation paperwork in order to benefit from this VAT exemption. The Commission has therefore decided to remove LVC relief

Equal rules for taxing e-books, e-newspapers and their printed equivalents

Current rules allow Member States to tax printed publications such as books and newspapers at reduced rates or, in some cases, super-reduced or zero rates. The same rules exclude e-publications, meaning that these products must be taxed at the standard rate. Once agreed by all Member States, the new set-up will allow (but not oblige) Member States to align the rates on e-publications to those on printed publications.

Action

Please contact us if any of the above affects your business or your client’s businesses.

VAT – Autumn Statement. Unwelcome changes to the Flat Rate Scheme

By   24 November 2016
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Autumn Statement

The Flat Rate Scheme (FRS) is a very helpful simplification of VAT for smaller businesses. It reduces paperwork and can result in a tax benefit for those who use the scheme. Details of the FRS are at the end of this article.

In the Autumn Statement, the Chancellor has announced changes to the FRS to be introduced from 1 April 2017. Under the misleading heading: “Tackling aggressive abuse of the VAT Flat Rate Scheme” the technical note here

This sets out a new FRS rate for businesses with “ with limited costs”.

Broadly, if a business has VAT inclusive expenditure on goods of either:

  • less than 2% of their VAT inclusive turnover in a prescribed accounting period
  • greater than 2% of their VAT inclusive turnover but less than £1000 per annum if the prescribed accounting period is one year

The above excludes capital expenditure, food or drink for consumption by the business or its employees, and vehicles, vehicle parts and fuel.

Then they will be required to use a FRS rate of 16.5% rather than the rate currently applicable.

There will be anti-forestalling provisions in place to avoid manipulation of timing.

What this means

Assume a business is currently using the 12% flat rate:

100 + 20% VAT = 120 x 12% = 14.4 VAT due

120 x 16.5% = 19.8 VAT due at the new rate

Outside the FRS VAT due = 20 VAT due (but input tax recovery available to offset)

Commentary

This will unfortunately affect many small businesses who have no intention and are certainly not involved in “aggressive abuse”. It appears just another example of, as The Times leader once said of the Rolling Stones case “Who breaks a butterfly upon a wheel?”*

 

Flat Rate Scheme
The Flat Rate Scheme is designed to assist smaller businesses reduce the amount of time and complexity required for VAT accounting. The Flat Rate Scheme removes the need to calculate the VAT on every transaction. Instead, a business pays a flat rate percentage of its VAT inclusive turnover. The percentage paid is less than the standard VAT rate because it recognises the fact that no input tax can be claimed on purchases. The flat rate percentage used is dependent on a business’ trade sector.
A business is eligible for this scheme if its estimated taxable turnover in the next year will not exceed £150,000. Once using the scheme, a business is permitted to continue using it until its income exceeds £230,000.
If eligible, a business may combine the Flat Rate Scheme with the Annual Accounting Schemes, additionally, there is an option to effectively use a cash basis so there is no need to use the Cash Accounting Scheme. There has been recent case law on the percentage certain businesses’ use for the FRS, so it is worth checking closely.  There is a one percent discount for a business in its first year of trading.
Advantages
  • Depending on trade sector and circumstances may result in a real VAT saving
  • Simplified record keeping; no requirement to separate out gross, VAT and net in accounts
  • Fewer rules; no issues with input tax a business can and cannot recover on purchases
  • Certainty of knowing how much of income is payable to HMRC
Disadvantages
  • No reclaim of input tax incurred on purchases
  • If you buy a significant amount from VAT registered businesses, it is likely to result in more VAT due
  • Likely to be unattractive for businesses making zero-rated or exempt sales because output tax would also apply to this hitherto VAT free income
  • Low turnover limit

* For those of a literary bent, the original quote is from Alexander Pope’s Epistle to Dr Arbuthnot of January 1735.

VAT Latest from the courts – more on agent or principal

By   2 November 2016
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Whether a business acts as agent or principal in respect of hotel accommodation

In the First Tier Tribunal (FTT) case of Hotels4U.com Limited (H4U) further consideration was given to the relationship of parties in travel/accommodation services.  This follows on from the recent Supreme Court case of Secret Hotels 2 Ltd which we considered here

Background

H4U entered into contracts with suppliers of hotel rooms and displayed details of the hotels on its website. Travellers and travel agents are able to book online, pay a deposit and receive a voucher which enabled them to occupy the relevant accommodation when presented to the hotel.

The FTT was required to decide whether H4U was acting as agent or principal in respect of these supplies made to travellers and travel agents.  If acting as principal, output tax would be due via the Tour Operators’ Margin Scheme (TOMS).  If acting as agent, the place of supply (POS) would be outside the UK and no UK VAT would be due.  We are aware that many of our clients are in a similar position so this decision will be important to them.

Decision

H4U contended that that its position was indistinguishable from the Secret Hotels 2 Ltd case such that it should be regarded as an agent.  The FTT upheld this contention for most of the relevant transactions (based on contracts which contained sufficient evidence to enable the Tribunal to reach a decision in UK law) so H4U could be seen as acting as agent.  H4U also argued that HMRC’s intention to seek a reference to the CJEU in respect of the interpretation of the EU Principal VAT Directive Article 306 on the meaning of “acting solely as an intermediary”’ (whether that is different from an agent in English law) was an attempt to re-argue the matter before the CJEU and should be resisted. The FTT stated that it was only considering the position under UK law.

Commentary

We understand that there are a number of similar ongoing appeals and this decision may be of benefit to them.  It also underlines the fact that documentation, and how each party acts, is important in determining the relationship.  No one piece of evidence on its own may be decisive but goes to form part of the overall picture.  As always in agent/principal cases, it is crucial that the documentation accurately represents the actual transaction.  Contracts can play a big part, as can the Terms & Conditions and wording on websites and advertisements.  Broadly, as a starting point, it must be clear to the customer that an agent is acting on behalf of a named principal; without this information, HMRC will likely form the view that there is no agency arrangement and that the “intermediary” party is acting as an undisclosed agent (for all intents and purposes acting as principal).  This means that any supply would be seen to be made to, and by the agent, such that (in this case) output tax would be due using TOMS.

Action

We shall have to wait and see whether HMRC is successful in making a reference on the possible distinction between the meaning of agent in UK and EC law.

In the meantime, any businesses which are involved in agency/principal relationships, not just in the travel field, may benefit from taking advice on whether their arrangements are affected by these two cases and whether there may be value in putting planning in place.

VAT – Cash businesses: Investigations

By   25 October 2016
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HMRC’s methods of establishing underdeclarations

HMRC have always taken interest in cash businesses as they see them as a revenue risk.  We have heard, anecdotally, that there is an ongoing campaign to target cash businesses which HMRC suspect are under-declaring takings. Such businesses are usually retail and commonly restaurants and take aways (which I shall use as an example in this article).  A retail business is obliged to keep certain records.  For sales, this is a record of daily gross takings (DGT) and this is the area I will focus on as it is where “suppression” of income generally occurs.  In a very crude example, the owner, or a member of staff does not ring up a sale and the payment is pocketed.  There are more sophisticated ways in which suppression occurs, but this is the most common.

Even in this day and age where most payments are made by credit or debit cards, there is still significant scope for declarations to be inaccurate.

The methods

There are a number of ways in which HMRC can determine the accuracy of VAT declarations.  These may be from the usual bank and accounts reconciliations, mark up exercises, to, say, counting take-away containers to build up a picture of the turnover.  The following are also ways in which HMRC test the credibility of declarations:

  • Compliance checks

These usually take place in the evenings when a restaurant is open for business (or soon after it closes). Officers gain entrance, question staff, examine records for that and previous days, and remove certain records. From this information they can build up a picture of trading.  These visits are usually unannounced.

  • Invigilation exercise

HMRC observe how the business operates and check that all sales of food and drinks are rung into the till. This is usually with the agreement of the business.

  • Test meals

HMRC staff will purchase a test meal and at a later time check to see if it has been recorded correctly.  It may be that this method will be repeated at a suspect restaurant by different HMRC staff, perhaps in the same evening.  If any of the sales are not recorded correctly, it may be insufficient in itself to create an assessment, but it will confirm suspicions of suppression and lead to further action.

  • Observation

While posing as customers, HMRC will also count the number of covers, the amount of take aways, the number of staff, how orders are taken and paid for, and how payments are made.

  • Surveillance

Members of HMRC staff park outside a restaurant (usually in an unmarked van) and watch the activities of the restaurant.  They count the number of people dining and the numbers of people exiting with take aways. This observation may also record the number of deliveries and other relevant information that they are able to obtain from what they can see.  This exercise may be carried out over a number of days/nights or even weeks.

  • Purchases

In more complex suppression, the value of purchases may also be suppressed in order to present a more credible picture to an inspector.  This may be more common if the purchases are zero rated food (on which the business would not claim input tax). HMRC may attempt to build up a picture of sales by the volume of actual purchases made.  They often check the restaurant’s suppliers’ records to get a full picture of trade.

Information obtained by one of the above methods may, on its own, be insufficient to raise an assessment, but combined with information obtained in different ways will more often than not result in one (should the exercises demonstrate an under-declaration of course).

Taxpayer’s rights

Attendance

HMRC do not have the right to attend a taxpayer’s premises at any time.  The law says that inspections may be carried out “at any reasonable time”. This means that that if a business owner is busy, or the time is outside normal office hours, or there is not access to all of the relevant information, or the request is unreasonable for any other reason, the business owner (or his adviser) may request that an inspector leaves and makes an appointment at a future reasonable time.  This is sometimes easier to do in theory than in practice, but a taxpayer’s rights are set out in The Finance Act 2009, Schedule 36, part II.

A business has no right to refuse a “regular” inspection but these are arranged for an agreed time in any case.

Records

The VAT Act 1994, Schedule 11 states that the requirement to produce records is limited to being provided at such time as HMRC “may reasonably require”. So, again, if HMRC are making demands that a business feels are unreasonable, it is within its rights to refuse to allow access and to make a mutually agreed and acceptable appointment to allow access to premises and records.  This may lead to a discussion, but HMRC do not have unfettered rights to access premises or records.

Best judgement

Regardless of how HMRC have gathered information, any assessment must be made to the best of their judgement and must be “an honest and genuine attempt to make a reasoned assessment of the VAT payable”.   If the business is able to demonstrate that this was not the case, the assessment must be removed.  Broadly, this will entail demonstrating that things that ought to have been considered were ignored, or that things that have been included should not have been.  Generally, the most common ways to challenge an assessment based on the above exercises are; that the period considered was not representative, or not long enough to be representative, or that the tests carried out were insufficient to demonstrate a consistent pattern of trading. There are usually specific facts in each case that may be used to challenge the validity and quantum of an assessment.

Action

Of course, it is hoped that no business which makes accurate declarations is troubled by such investigations.  However, if a business feels that HMRC is being unreasonable with its demands it should seek professional advice before agreeing to permit HMRC access.

Matters change however, if HMRC have a Search Warrant or a Writ of Assistance in which case HMRC are able to compel a business to allow entry or inspection.

As always, we advise that any assessment is, at the very least, reviewed by a business’ adviser.