Category Archives: VAT Payment

VAT: Postponed Accounting available for Section 33 bodies

By Marcus Ward 13 April 2021

HMRC has announced that bodies covered by The VAT Act 1994, Section 33 such as; Local Authorities, Academies, Transport Authorities and the Police can use Postponed Accounting for imports.

Normally, a body cannot account for import VAT on its VAT return if it import goods that it knows will be used solely for non-business purposes. However, this no longer applies to a body that is eligible to reclaim import VAT through a VAT refund scheme (Section 33). Section 33 entities when completing its customs declaration, should select the “making an immediate payment or using a duty deferment account” option.

Section 33 bodies

These entities have special VAT treatment which is effectively the opposite of normal VAT rules. To avoid a cost to the taxpayer, these entities are permitted to specifically recover input tax that relates to non-business activities. Nobody said that VAT was straightforward and in these cases, the VAT rules are inverted!

We act for many Local Authorities and Academies. Please contact us should you, or your clients, have any queries on this matter.

VAT – Top 10 Tax Point Planning Tips

By Marcus Ward 25 March 2021

VAT Tax Point Planning

If a business cannot avoid paying VAT to the HMRC, the next best thing is to defer payment as long as legitimately possible. There are a number of ways this may be done, dependent upon a business’ circumstances, but the following general points are worth considering for any VAT registered entity.

A tax point (time of supply) is the time a supply is “crystallised” and the VAT becomes due to HMRC and dictates the VAT return period in which VAT must be accounted for. Very broadly, this is the earliest of; invoice date, receipt of payment, goods transferred or services completed (although there are quite a few fiddly bits to these basic rules as set out in the link above).

The aims of tax point planning

1. Deferring a supplier’s tax point where possible. It is sometimes possible to avoid one of these events or defer a tax point by the careful timing of the issue of a tax invoice.

2. Timing of a tax point to benefit both parties to a transaction wherever possible. Because businesses have different VAT “staggers” (their VAT quarter dates may not be the co-terminus) judicious timing may mean that the recipient business is able to recover input tax before the supplier needs to account for output tax. This is often important in large or one-off transactions, eg; a property sale.

3. Applying the cash accounting scheme. Output tax is usually due on invoice date, but under the cash accounting scheme VAT is only due when a payment is received. Not only does this mean that a cash accounting business may delay paying over VAT, but there is also built in VAT bad debt relief. A business may use cash accounting if its estimated VAT taxable turnover during the next tax year is not more than £1.35 million.

4. Using specific documentation to avoid creating tax points for certain supplies. If a business supplies ongoing services (called continuous services – where there is no identifiable completion of those services) if the issue of a tax invoice is avoided, VAT will only be due when payment is received (or the service finally ends). More details here.

5. Correctly identifying the nature of a supply to benefit from certain tax point rules. There are special tax point rules for specific types of supplies of goods and services. Correctly recognising these rules may benefit a business, or present an opportunity for VAT planning.

6. Generate output tax as early as possible in a VAT period, and incur input tax as late as possible. This will give a business use of VAT money for up to four months before it needs to be paid over, and of course, the earlier a claim for repayment of input tax can be made – the better for cashflow.

7. Planning for VAT rate changes. Rate changes are usually announced in advance of the change taking place. There are specific rules concerning what cannot be done, but there are options to consider when VAT rates go up or down.

8. Ensure that a business does not incur penalties for errors by applying the tax point rules correctly. Right tax, right time; the best VAT motto! Avoiding penalties for declaring VAT late is obviously a saving.

9. Certain deposits create tax points, while other types of deposit do not. It is important to recognise the different types of deposits and whether a tax point has been triggered by receipt of one. Also VAT planning may be available to avoid a tax point being created, or deferring one.

10. And finally, use duty deferment for imports. As the name suggests, this defers duty and VAT to avoid it having to be paid up front at the time of import.

Always consider discussing VAT timing planning for your specific circumstances with your adviser. It should always be remembered that it is usually not possible to apply retrospective VAT planning as VAT is time sensitive, and never more so than tax point planning.

I have advised a lot of clients on how to structure their systems to create the best VAT tax point position. Any business may benefit, but I’ve found that those with the most to gain are; professional firms, building contractors, tour operators, hotels, hirers of goods and IT/internet businesses.

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: Postponed Accounting

By Marcus Ward 9 February 2021

VAT Basics

A quick look at Postponed Accounting (PA) and what it means for a business after Brexit

Pre-Brexit (if one remembers such halcyon days) acquisitions from other Member States crossed the UK border without any formalities as there was free movement of goods within all of the EU.

Now that GB is a third country, it is unable to take advantage of the benefits of a single market, so acquisitions become imports and are required to be declared when imported. However, gov.uk has announced he return of PA in an attempt to simplify matters.

PA is accounting for import VAT on a VAT return means a business declares and recovers import VAT on the same return, rather than having to pay it upfront and recover it later. This means neutral cash flow; which is to be welcomed.

The normal rules about what VAT can be reclaimed as input tax will apply.

PA also has the advantage that imported goods are not delayed at the entry port while VAT paperwork and payment is completed. Of course, as experience has demonstrated; there may be other reasons for delays to imports and exports.

Who can use PA?

From 1 January 2021, if a business is registered for VAT in the UK, it will be able to account for import VAT on its return for goods it imports into:

GB (England, Scotland and Wales) from anywhere outside the UK
Northern Ireland from outside the UK and EU

There will be no changes to the treatment of VAT for the movement of goods between Northern Ireland and the EU.

A business does not need approval to account for import VAT on its returns.

How does PA work practically?

VAT is payable on imports of over £135 arriving into the GB from any country in the world, which now includes the EU. Practically, PA is similar to the current Reverse Charge. Output and input VAT is accounted for on the same VAT return.

When completing a customs declaration a business may choose how to account for VAT on its return.

If the Customs Handling of Import and Export Freight (CHIEF) system is used:

On the declaration, the following needs to be entered:

the EORI number starting with ‘GB’ which includes the VAT registration number into box 8, or, if applicable, the VAT registration number in box 44h
‘G’ as the method of payment in Box 47e

If the Customs Declaration Service is used:

The VAT registration is entered number at header level in data element 3/40.

Returns

Box 1 – Include the VAT due in this period on imports accounted for via PA.

Box 4 – Include the VAT reclaimed in this period on imports accounted via PA.
Box 7 – Include the total value of all imports of goods included on your online monthly statement, excluding any VAT.

Using someone to import goods on your behalf

If a business uses a third party to import goods on its behalf (eg; a freight forwarder, customs agent, or fast parcel operator) it will need to inform them how it wants to account for VAT on those imports, so that they can complete the customs declaration correctly.

Alternatives

The use of PA is optional. The alternative is to pay VAT on goods when they enter the UK. This means the use of the “usual” C79 certificates sent by HMRC on which input tax may be reclaimed (rather than any other documentation, eg; invoices).

Northern Ireland

Goods moved to NI from the EU are not impots (NI remains part of the EU, so the old rules on acquisitions still apply and no import VAT is due).

Customs Duty

Alongside additional border formalities, Customs Duties may be payable on certain goods. This Duty is not reclaimable like VAT. Most of the complexities of Customs Duty relate to the rules of origin.

Commentary

PA is a relief for businesses importing from the EU. It is a simple system and will be familiar to any business which applies Reverse Charges. With all the varying changes applying post-Brexit, this is one area which should not affect a business importing from the EU in terms of port delays or negative cash flow. To date, there is no evidence on how well the system is working, but anecdotally, I understand that this part of Brexit changes has not thrown up any issues, unlike other problems which have been widely reported. I stand to be corrected though.

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: New HMRC guidance for using international post and merchandise in baggage

By Marcus Ward 19 January 2021

HMRC has published two new sets of guidance for international post users and importing merchandise in baggage. The changes are mainly due to Brexit.

International post users

HMRC has published new guidance for international post users.

The notice explains what happens when a business imports or exports goods by post through Royal Mail or Parcelforce Worldwide.

The arrangements set out in the notice do not apply when a full declaration on a single administrative document (SAD – Form C88) is required.

The information about sending a package overseas has been updated. This relates to the new need to compete a customs declaration for goods sent to the EU.

Bringing commercial goods into Great Britain in baggage

The guidance covers commercial goods (also known as Merchandise in Baggage) which will be used, or sold by a business, where: 

a commercial transport operator does not carry them for a business
a person has travelled to GB carrying goods either:
- in accompanied baggage
- in a small vehicle that can carry up to no more than 9 people and weighing 3.5 tonnes or less

A person must declare all commercial goods. There is no duty-free allowance for goods brought into GB to sell or use in a business.

My guide to importing and exporting post Brexit here.

VAT: Brexit outcomes – retailers

By Marcus Ward 19 January 2021

I been asked many times about the VAT position of UK residents buying goods online (and also by more traditional methods) so I thought a brief overview would be helpful.

It has been reported in the media that some overseas retailers have stopped selling to UK customers. This is a commercial decision and is not necessarily solely due to Brexit (although, clearly that hasn’t helped).

What has changed?

Pre Brexit, under the Distance Selling rules, VAT at the rate applicable in the seller’s country would be chargeable by overseas suppliers to UK recipients. This was in the same way as a domestic sale. There were then thresholds which, when breached, resulted in the seller registering in the customer’s country, but these were rarely exceeded by small or SME businesses. The Distance Selling rules still apply to EU Member States, but not the UK.

As the UK is now a ”third country” sales to the UK from the EU which were previously intra-community sales are now imports. From 1 January 2021, sellers of goods B2C (to UK individuals) with a value below £135 – so called low value consignments are required to VAT register in the UK – more details here. Clearly, many businesses are loath to do this hence their refusal to sell to UK customers. This change is not a result of Brexit but was a measure to level the playing field between EU and non-EU supplies (the latter often escaping the tax completely). From 1 July 2021 similar rules will apply to UK businesses selling to individuals in the EU, although there is likely to be a simplification measure; the so-called One Stop Shop (OSS).

Additionally, UK customers are usually responsible for the new post-Brexit import of goods, so there may be unexpected new VAT, duty and courier costs when buying certain goods from EU countries. This is similar to buying goods from any other country in the world.

It would appear that there will be a reduction in cross-border trade (in both directions) with the UK, and that is without factoring in shipping issues and delays at new borders.

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: Tour Operators’ Margin Scheme (TOMS) – changes ahead?

By Marcus Ward 12 January 2021

TOMS is complex, time consuming, potentially costly and a major headache for tour operators. It does aim to simplify VAT accounting as it avoids businesses having to VAT register in every EU Member State in which it provides services.

But, are there changes ahead? The European Commission has published a Factual summary report which looks at TOMS. The consultation was to gather evidence in order to evaluate the scheme in terms of ;

does it remain effective
to what extent existing rules remain relevant and aligned with stakeholders’ needs
identification of potential distortions of competition
the regulatory costs and benefits for businesses taxed under the scheme

Since Brexit, HMRC have stated that TOMS still applies in the UK, but supplies in the EU which were previously VATable were now zero rated. The result is that only supplies in the UK are subject to VAT on the margin achieved. The future is unclear however. There is no longer a level playing field between the UK and other EU countries as UK operators’ have an advantage. The potential outcomes(to my mind) are:

the position remains the same
UK operators will be required to VAT register in every Member State it sells holidays to (or at least some)
the above report will address the issues (but will not be binding on the UK

The rules of TOMS are not currently fully harmonised and there are variations in the way EU Member States treat non-EU travel companies (such as the UK now). There are also differences in the services which are, and are not, covered by TOMS. Watch this space…

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!

International post users

Bringing commercial goods into Great Britain in baggage

Bringing commercial goods into Great Britain in baggage