Category Archives: VAT Debt

New portal for VAT payment plans

By Marcus Ward 4 July 2023

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.

New VAT penalties and interest charges

By Marcus Ward 18 May 2022

Further to my article explaining the changes to late returns and payment penalties, HMRC has now published further guidance on new regime.

These changes, originally intended to be introduced on I April 2022 have been delayed until 1 January 2023 (for VAT periods starting on, or after, this date).

From 1 January 2023, HMRC will charge late-payment interest from the day a VAT payment is overdue to the day the VAT is paid, calculated at the Bank of England base rate plus 2.5%.

Period of familiarisation

HMRC say that to give businesses time to get used to the changes, it will not be charging a first late payment penalty for the first year from 1 January 2023 until 31 December 2023, if the tax is paid in full within 30 days of the payment due date.

More on late returns here and on late payments here.

VAT: Mind the gap

By Marcus Ward 28 March 2022

HMRC has published details of the VAT gap for 2020 – 2021.

The VAT Gap

The VAT gap is measured by comparing the net VAT total theoretical liability with tax actually paid. This is comparing the amount of VAT HMRC expected to receive in the UK and the VAT HMRC actually received.

The figures

The net VAT theoretical liability £129 billion

Net VAT received £101.7 billion

Net VAT receipts related to net VAT total theoretical liability £120.4 billion

VAT gap £8.6 billion

The VAT gap is therefore 6.7%.

Notes

The 2020 to 2021 net receipts figure in the VAT gap includes an adjustment for payments that were deferred in 2020 under the VAT Payments Deferral Scheme in response to Covid-19. They also reflect reduced VAT rates for the hospitality sector, holiday accommodation and attractions, and zero rate for personal protective equipment.

Methodology

Information on the method used to estimate the VAT gap is here for those interested (I don’t imagine that there will be that many…).

Reduction

The estimate of the VAT gap for 2020 to 2021 £8.6 billion shows a reduction compared with the estimate of the VAT gap for 2019 to 2020 which was £12.3 billion.

Previous year’s VAT gap figures for comparison here.

This seems to be an awful amount of tax which has “gone missing”.

VAT: Bad Debt Relief. The Regency Factors case

By Marcus Ward 7 February 2022

Latest from the courts

In the Regency Factors plc Court Of Appeal (CoA) case the issue was the validity of the appellant’s claim for Bad Debt Relief (BDR) on amounts it had not received after the issue of an invoice.

Technical

BDR is a mechanism which goes some way to protect a business from payment defaulters. Under the normal rules of VAT, a supplier is required to account for output tax, even if the supply has not been paid for (however, the use of cash accounting or certain retail schemes removes the problem of VAT on bad debts from the supplier). The specific relief for unpaid VAT is via the BDR scheme.

A guide to BDR here.

Commentary on the Upper Tribunal (UT) hearing in this case here.

Background

In the CoA case the issue was whether the appellant met the conditions in The VAT General Regulations 1995, Reg 168 for claiming BDR via The VAT Act 1994, section 36.

Regency provided a factoring service to its clients for which it is paid a fee. VAT invoices for those fees were issued to clients when the invoices which are being factored are assigned to Regency for collection.

Regency appealed against a decision of the Upper Tribunal (UT) which dismissed Regency’s appeal against VAT assessments made by HMRC to withdraw BDR which Regency had claimed in its VAT returns.

The UT held that the BDR claim was not valid because

there was no bad debt; and
Regency had failed to comply with the procedural requirements for the making of a claim.

Regency appealed against the decision of the UT on the second point.

Decision

The CoA decided that as Regency’s record keeping was insufficient to support a BDR claim. Specifically, although it did keep the records required by Regulation 168 (2), it did not keep a single VAT BDR account which is required by Regulation 168 (3). The ruling commented that this requirement was a legitimate feature of the scheme as it enables an inspector to check the claim easily. It is not acceptable for a claimant to simply have a pile of unsorted documents which may, or may not, evidence a valid claim.

The court also said that it was possible for HMRC to allow a discretionary claim (clearly, they did not use that discretion in this case) and that the legal requirement was not a barrier to Regency making a proper BDR claim. The appeal was dismissed.

“In short, Regency had the opportunity to prove its claim for bad debt relief in the FTT… but it failed to do so. It is not entitled to a second opportunity”.

Commentary

As always with VAT, accurate record-keeping is essential. As the tax is transaction based, it is vital to keep comprehensive evidence of those transactions and associated payments. Failure to do so may result in:

assessments and penalties
give HMRC the opportunity to refuse otherwise legitimate input tax recovery
refuse other VAT claims (in this case BDR).
confusion and uncertainty which often creates costs in time and other resources, and extended relations with HMRC, which is in no business’ interest.

If Regency had taken “one step further” with its record keeping, BDR would have been paid by HMRC.

Businesses still owe £Billions after VAT deferral

By Marcus Ward 27 July 2021

Over 25% of VAT registered businesses that were permitted to delay VAT payments as a result of the pandemic still owe HMRC the tax deferred.

The now closed payment scheme permitted VAT registered persons to defer VAT payments due between March and June 2020 and around 600,000 businesses took advantage of the relief. The deadline was 30 June 2021, and it has been stated that over a quarter of business have failed to contact HMRC about their debts and have not made the necessary payments.

The total outstanding, according to The Treasury, is £2.7 billion which represents circa 9% of the VAT take. Of the tax deferred under the scheme, £17.8 billion has been paid and around £13 billion is being paid via monthly instalments.

HMRC have announced its approach to collection VAT debt after Covid19.

It has also become clear is that businesses and consumers have fallen into default during and after the pandemic. It is anticipated that the ability to settle of debts on time will decrease and it is apparent that many debts will never be settled. Consequently, it appears timely to look at the available relief. An article on VAT Bad Debt Relief here.

We would urge, that even if a business cannot make a payment, that it still submits VAT returns on time. It is tempting to accept a centrally issued assessment if it is for a lesser amount than the actual VAT due for the period. However, such action can, and often does, lead to penalties and increased interest from HMRC.

VAT: Collection of tax debts

By Marcus Ward 8 July 2021

HMRC has announced its approach to collecting debts after Covid-19.

The Policy Paper explains that the government’s priority is protecting livelihoods and keeping people in work. It states that HMRC has been central to this, for example by pausing many of its debt collection activities and delivering support packages.

However, HMRC is restarting its collection of outstanding debts and will be contacting taxpayers who have fallen behind with VAT and other taxes as a result of the pandemic.

HMRC action

If there is a VAT debt, HMRC will contact a business by phone, post or text message so that they can discuss the situation and agree a way forward. It is important for businesses to respond to these communications as soon as possible because, if there is no reply, HMRC cannot establish whether support is needed or there is a simple refusal to pay.

Time To Pay

HMRC usually discuss payment options, such as a payment plan (called Time to Pay – TTP), which is paying off the debt in affordable instalments.

NB: HMRC typically have more than half a million of TTP arrangements in place and more than nine out of ten of them complete successfully.

As part of agreeing Time to Pay arrangements with businesses, HMRC may also discuss other forms of support available. For example, exploring the range of government-backed lending support like Bounce Back loans and Coronavirus Business Interruption Loans, and agreeing repayment holidays or extending repayment terms.

More information about payment arrangements (Time to pay) is available at How HMRC supports customers who have a tax debt.

Deferral

If a business cannot make a payment immediately, by getting in touch with HMRC it may be possible to arrange a short-term VAT deferral. This means nothing would need to be paid for a set period of time, and no further action to collect the tax debt would be taken until that time has lapsed.

Further powers

Although HMRC state that it will take an “understanding and supportive approach” to tax debt, from September 2021, where businesses are unwilling to discuss a payment plan, or where they ignore attempts to contact them, HMRC may start the process of collecting the debt using its enforcement powers. These powers include; taking control of goods, summary warrants and court action including insolvency proceedings.

As may be seen, ignoring tax debts is not a good policy. Talk to HMRC and see if the various support schemes available are suitable.

VAT: Changes to late returns and payments penalties announced

By Marcus Ward 8 March 2021

HMRC have announced changes to the penalties applied to failure to submit VAT returns on time. Similar changes will be made for late payment penalties. it is anticipated that these changes will apply from 1 April 2022. Changes will also be made to the way interest is charged.

The new penalty regime replaces the existing default surcharges. The new penalties use a points based system . Businesses will no longer receive an automatic financial penalty if they make a late return. Instead, it will incur penalty points for missed obligations before a financial penalty is levied.

Penalties for late submission of returns

VAT registered businesses will receive a point every time they miss a submission deadline. At a certain threshold of points, a financial penalty of £200 will be charged and the business will be notified. A penalty will be charged for that failure and every subsequent failure to make a submission on time, but the points total will not increase.

The penalty thresholds will be:

Annual returns – 2 points
Quarterly returns – 4 points
Monthly returns – 5 points

Points expiry

Points will have a lifetime of two years calculated from the month after the month in which the failure occurred.

However, points will not expire when a business is at the penalty threshold to ensure an achievement of a period of compliance to reset the points.

Penalties for late payment and interest harmonisation

The new Late Payment Penalties regime will replace the the Default Surcharge, which served as a combined late submission and late payment sanction.

There are two late payment penalties applicable; a first penalty and then an additional or second penalty, with an annualised penalty rate.

First Penalty

A business will not incur a penalty if the outstanding tax is paid within the first 15 days after the due date. If VAT remains unpaid after Day 15, the business incurs the first penalty. This penalty is set at 2% of the tax outstanding after Day 15. If any of this tax is still unpaid after Day 30, the penalty increases to 4% of the tax outstanding after Day 30.

Second Penalty

If tax remains unpaid on Day 31, a business will begin to incur an additional penalty on the VAT that remains outstanding. It accrues on a daily basis, at a rate of 4% per annum on the outstanding amount. This additional penalty will stop accruing when the taxpayer pays the tax that is due.

Time-to-Pay arrangements

HMRC offers the option of requesting a Time To Pay arrangement. This will enable a business to stop a penalty from accruing any further by approaching HMRC and agreeing a schedule for paying their outstanding tax.

Interest Harmonisation

HMRC will charge interest on tax that is outstanding after the due date, regardless of whether any Late Payment Penalties have been charged. Interest will apply from the date the payment was due until the date on which it is paid. It will be calculated as simple interest at a rate of 2.5% + the Bank of England base rate.

Where a business has overpaid tax, HMRC will pay Repayment Interest on any VAT due to be repaid either from the last day the payment was due to be received or the day it was received, whichever is later, until the date of repayment. Interest will be paid at the Bank of England base rate less 1% (with a minimum rate of 0.5%).

Reviews and appeals

Businesses will be able to challenge a point or penalty through both an internal HMRC review process and an appeal to the courts (in a similar way to assessments for VAT are challengeable).

More on late returns here and on late payments here.

VAT: Bad Debt Relief – The Regency UT case

By Marcus Ward 3 February 2021

Bad Debt Relief (BDR) is a mechanism which goes some way to protect a business from payment defaulters. Under the normal rules of VAT, a supplier is required to account for output tax, even if the supply has not been paid for (however, the use of cash accounting or certain retail schemes removes the problem of VAT on bad debts from the supplier).

The specific relief for unpaid VAT is via the BDR scheme.

Background

In the Regency Factors plc Upper tribunal (UT) case the issue was whether the appellant met the conditions in The VAT General Regulations 1995, Reg 168 for claiming BDR via The VAT Act 1994, section 36.

Regency provides a factoring service to its clients for which it is paid a fee. VAT invoices for those fees were issued to clients when the invoices which are being factored are assigned to Regency for collection.

Regency appealed against a decision of the First-Tier Tribunal (FTT) in which it dismissed Regency’s appeal against VAT assessments made by HMRC to withdraw BDR which Regency had claimed in its VAT returns.

Regency contended that it is entitled to BDR for the VAT element on the fees that were unpaid by its clients. HMRC contended that Regency is not entitled to BDR because the consideration for the supply was received by Regency and there was no bad debt to write off.

Decision

The UT deliberated on when consideration is received for factoring services and accepted that some debts were bad. However, it decided that Regency had not maintained a bad debt account as required for Reg 168. Consequently, HMRC was correct in refusing to pay the BDR claim.

Commentary

As always with VAT, it is important to keep complete and accurate records, as this case demonstrates. Reg 168 states (where relevant):

(2) Save as the Commissioners may otherwise allow, the record referred to in paragraph (1) above shall consist of the following information in respect of each claim made

(a) in respect of each relevant supply for that claim—

(i) the amount of VAT chargeable,

(ii) the prescribed accounting period in which the VAT chargeable was accounted for and paid to the Commissioners,

(iii) the date and number of any invoice issued in relation thereto or, where there is no such invoice, such information as is necessary to identify the time, nature and purchaser thereof, and

(iv) any payment received therefore,

(b) the outstanding amount to which the claim relates,

(d) the prescribed accounting period in which the claim was made.

(3) Any records created in pursuance of this regulation shall be kept in a single account to be known as the “refunds for bad debts account”.

VAT: Unjust enrichment. The Deluxe case

By Marcus Ward 13 January 2021

Latest from the courts

In the Deluxe Property Holdings Limited High Court case (Deluxe) the issue was whether a VAT claim needed to be passed back to the supplier after a correction – whether the unjust enrichment applied.

Background

Deluxe employed SCL Construction Limited (SCL) to carry out building works. SCL raised invoices in respect of the construction of student accommodation at 20%. It was, however, common ground that the works were in fact zero-rated. SCL recovered the overcharged VAT from HMRC via a VAT Act 1994 Section 80 claim. SCL undertook to repay the amount of VAT to Deluxe via section 10 of VAT Notice 700/45. Without such written reimbursement undertaking, HMRC would have been entitled to refuse the claim. SCL did not make the payment to Deluxe.

Issue

The issue between the parties was whether:

SCL holds the accounting credit obtained from HMRC on trust for Deluxe, or;
the claim is only in debt, in which case SCL sought to set-off such the claim against other monies that it alleges are owed by Deluxe

Decision

The court ruled that SCL had undertaken to reimburse its customer all of the amount credited by HMRC without any deduction, for whatever purpose. Further, SCL had undertaken that it could not use the credit for any other purpose. It was a payment made by HMRC for the sole and express purpose of allowing SCL to reimburse the mistakenly charged VAT to Deluxe and was clearly intended to restrict SCL’s freedom of disposal so that the credit was to be exclusively used for the stated purpose without set-off.

Although SCL gave its undertaking to HMRC rather than to Deluxe to pass on the money, it held the repayment on trust for Deluxe and gave rise to a Quistclose Trust*

Additionally, a constructive trust arose because it would be unacceptable for SCL to derive a benefit of the VAT repayment.

The court found that SCL has acted in breach of trust and is liable as trustee to restore the trust fund and transfer to Deluxe the balance of the trust property without offsetting it against amounts that it claimed it was owed by Deluxe.

Commentary

This is a logical and expected decision and the reasoning is helpful for similar disputes.

* A trust may arise where one person, A, advances money to another, B, on the understanding that B is not to have the free disposal of the money and that it may only be applied for the purpose stated by A. The effect of the trust is to reserve in A the beneficial interest in the money, so providing him with some proprietary security for his advance.

VAT: Fiscal representation in the UK

By Marcus Ward 12 January 2021

As Brexit is all completely finished * * hollow laugh * * I look at what overseas businesses operating in the UK need to know in respect of compliance.

What is fiscal representation?

It is a safeguard for the authorities responsible for VAT in the EU (and UK). If it is not possible to collect tax from the taxable person, they can go to the representative who is usually jointly and severally responsible for the debt.

Each EU Member State has its own rules on representatives, but here I look at what overseas businesses need to do in the UK, and what the responsibilities are for a business acting in such a role. A representative must meet a set of tests to ensure that it is fit and proper in order for it to be allowed to act in a representative capacity.

In most cases, overseas businesses with no place of belonging in the UK register as a Non-Established Taxable Person (NETP).

Choices

If a business is a NETP, it will have a choice in how it registers and accounts for VAT in the UK (although in certain circumstances, HMRC have the power to direct a business appoint a tax representative).

Deal with UK VAT itself

In most cases an overseas business can deal with VAT without third party assistance. However, it must be able to:

register for VAT at the correct time
keep a record of everything it buys and sells in the UK
keep all the records needed to complete its VAT Return
produce records and accounts to HMRC for inspection
keep a note of all VAT paid and charged for each period covered by the return
pay the right amount of tax on time

Tax representative

A NETP may appoint a tax representative who:

must keep its principal’s VAT records and accounts and account for UK VAT on its behalf
is jointly and severally liable for any VAT debts the NETP incurs

A NETP is obliged to provide all of the information required to fulfil its obligations.

Tax Agent

A NETP may appoint a tax agent to act on its behalf. Such an arrangement will be subject to whatever contractual agreement the NETP and the agent decide. The significant difference to a tax representative is that HMRC cannot hold the agent responsible for any of the NETP’s VAT debts. This is clearly a better position for a UK business acting on behalf of a NETP. HMRC can decide not to deal with any particular agent appointed. Also, in some circumstances, if HMRC think it is necessary, it may still insist that a tax representative is appointed – this is usually in cases where there is a risk to the revenue. Additionally, HMRC can ask for a financial security.

As with the appointment of tax representatives a NETP:

may only appoint one person at a time to act as its agent (although an agent may act for more than one principal)
must still complete the appropriate form to apply for registration
HMRC require a NETP’s authority before it can deal with an agent
Needs to give the agent enough information to allow them to keep the VAT account, make returns and pay VAT

It is possible to appoint an employee to act as a VAT agent.

Penalties

As is to be expected, get any of the above wrong and there are penalties!