Tag Archives: latest-vat-news

Oops! – Top Ten VAT howlers

By   6 January 2015
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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 MOSS (Mini One-Stop Shop) Update – Small businesses

By   8 December 2014
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Further to my article on the introduction of new place of supply rules and the MOSS for B2C supplies of telecoms, broadcasting and other e-services HMRC have now stated its position on smaller businesses.

Under the initial rules, businesses which have income below the UK VAT registration turnover limit of (currently £81,000 pa) would be forced to either register for VAT in each EC Member State in which they made a sale (where the customer belongs), or registering for VAT in the UK in order to use the simplified MOSS procedure.

This would, of course, mean that such a business would lose the benefit of not being UK VAT registered and consequently having to do business in the UK with the addition of UK VAT.

HMRC has now indicated that these smaller businesses will be permitted to separate their UK and EC trading and register for VAT in the UK (so they can use the MOSS) without accounting for UK VAT on their domestic trading as long as their UK turnover remains below the VAT registration threshold.

This is curious (but welcome) since HMRC have always been against disaggregation.

For further information please see my new 2015 rules flowchart

Holding companies in VAT groups and input tax recovery

By   29 September 2014
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Care must be taken when considering the recoverability of input tax incurred by a holding company.

In the past holding companies which were members of a VAT Group were treated in the same way as any other member of the group. As a result, input tax incurred by the holding company were recoverable by reference the the VAT group’s (as a whole) recovery position.

As a result of the recent Court of Appeal judgement in the case of BAA Ltd HMRC have announced an updated policy HERE

The revised policy is that that input tax is only recoverable by holding companies where it is incurred in the course of an economic activity and there is a direct and immediate link to taxable supplies, This means that a passive holding company cannot now rely solely on its membership of a VAT group to recover input tax.  For recovery, the VAT must be incurred in respect of taxable supplies made by the holding company itself.

For information on the impacts on this change – please contact us.

Follower Notices – a new HMRC weapon with a potentially dire impact on taxpayers

By   17 July 2014
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From Royal Assent of Finance Bill 2014 (expected within the next week) HMRC has a new weapon which challenges a taxpayer’s basic right to have its case heard by a Court.

This is by the introduction of “Follower Notices”. The new power allows HMRC to order one taxpayer to settle their dispute when, in HMRC’s view, a decision in another case is relevant to the issues in the first taxpayer’s case.  Since taxpayer’s circumstances are unlikely to be identical to another’s, the question of which decisions are relevant involves difficult decisions on issues of interpretation and questions of fact. These are points that ought to be considered by the Court, not unilaterally by one of the parties to the litigation.

A Follower Notice gives the taxpayer 90 days to concede its dispute and pay HMRC’s estimate of the tax due. The taxpayer has only limited rights to challenge the notice, and even then any such challenge is considered by HMRC and not the Court.

If the taxpayer does not concede following HMRC’s issue of a Follower Notice, additional penalties are levied. These penalties not only significantly increase the amount which the taxpayer has at stake in the dispute but must be challenged separately.

It is clear that the changes intend to reduce the backlog of similar disputes. However, these new rules are completely one-sided and has created an environment for yet further litigation and acrimony.

Please contact Marcus if you would like to discuss this further.

Changes in VAT policy relating to the transfer of a going concern (TOGC) of buildings

By   16 July 2014
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HMRC has announced two important changes to the transfers of a businesses as a going concern (TOGC) rules as they relate to property after the case of Robinson Family Ltd.  These may be summarised as follows:

  1. Where the transferor of a property rental business grants a lease and retains a ‘sufficiently small’ reversionary interest in the property transferred the transaction will be a TOGC for VAT purposes if the usual conditions are satisfied. HMRC now accept that the surrender of a lease can be a TOGC for VAT purposes. This will apply where a tenant who is sub-letting premises subsequently surrenders its interest in the property together with the benefit of the sub-lease. In these cases HMRC accept the landlord has acquired the tenant’s business.
  1.  There is also a change in the treatment of TOGCs of new residential and relevant charitable buildings. The first grant of a major interest in residential or relevant charitable property by the ‘person constructing’ is zero-rated. HMRC has historically taken the view that ‘person constructing’ status does not move to a person acquiring a completed building that is the subject of a TOGC. HMRC now accepts that a person acquiring a completed residential or charitable development as part of a TOGC inherits ‘person constructing’ status and is capable of making a zero-rated first grant of a major interest in that building. This also applies in respect of ‘person converting’ status (for buildings converted from non-residential to residential use) and ‘person substantially reconstructing’ status (for substantially reconstructed listed buildings).

Please contact us if you have sold property in the past that may now benefit from TOGC treatment – claims are possible for overpaid VAT and SDLT.

For our property services please see here

VAT – Changes to the treatment of electronically-supplied services from 2015

By   24 March 2014
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Although it seems some time away, these changes, which come into effect on 1 January 2015, will have a significant impact on any business which provides e-services (wherever in the EC it is based). It is important for suppliers to understand and plan for the new rules; the sooner the better.

What are e-services for VAT purposes? – Broadly these are services usually obtained via the internet and may comprise; films, music, information, software for which the supplier makes a charge.

Are all of these services affected? – No, only B2C services (where the recipients are not in business, eg; an individual). The rules for B2B supplies will not change.

What are the changes? At present, suppliers based in the EC charge VAT at the rate applicable in the EC Member State in which the business is located. Currently, therefore, VAT planning insists that technology companies locate in countries with low VAT rates. However, to combat this, the EC will introduce a rule whereby the place of supply (where VAT is due) changes to where the customer is located (not where the supplier belongs). Consequently, a company currently based in Luxembourg supplying a service which is downloaded by an individual in the UK will charge VAT at 15% (the rate in Luxembourg). From 1 January 2015, the UK recipient will pay VAT at 20% (the UK rate).

Businesses will need to introduce these changes and manage budgets and forecasts to recognise what, on the whole, will be a significant increase in VAT payable. This will, for most businesses result in a reduction in profits or an increase in prices for customers.

As may be seen, this will add considerable complexity for businesses to deal with and with the current penalty regime care must be taken to avoid even further costs. Businesses affected must start to plan for these changes as soon as possible.

Are there any easements available? The new rules change would require EC suppliers to register and account for VAT in every EC Member State where their services are downloaded by non-business customers. In order to avoid this burden a “mini one stop shop” (MOSS) is also being introduced. This will allow suppliers to register just once in their own EU Member State. This single registration will then allow them to account for VAT due in other Member states. HMRC has indicated that businesses will be able to register under the MOSS from October 2014. How this will actually work in practice remains to be seen.

Good luck everybody!

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Agent or principal? Latest from The Supreme Court

By   13 March 2014
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There is a very important distinction in VAT terms between agent and principal as it dictates whether output tax is due on the entire amount received by a “middle-man” or just the amount which the middle-man retains (usually a commission). It is common for the relationship between parties to be open to interpretation and thus create VAT uncertainty in many transactions. It appears to me that this uncertainty has increased as a result of the increasing amount of on-line sales and different parties being involved in a single sale.

A very helpful recent case; Secret Hotels 2 Ltd (formerly Med Hotels) heard at the Supreme Court, has clarified some grey areas in agent/principal relationships.

Very broadly, in this case which the taxpayer won, the judgement tips the balance back into the favour of common law as opposed to civil law principles for UK taxpayers and that the nature of a supply is to be determined by the construction of the contract – unless it is a ‘sham’.

This Supreme Court Judgment helpfully indicates that we must place far greater emphasis on the form of the arrangement (contract) as opposed to the economic substance (as often argued by HMRC).

The full decision is available here: http://www.supremecourt.uk/decided-cases/docs/UKSC_2013_0036_PressSummary.pdf

Although there will always be disputes over agent/principal relationships, this decision goes some way to clarifying the analysis and demonstrating the importance of the contract over what HMRC describe as “economic reality”.

Please contact us if you are, or have been, in dispute with HMRC on this point as it provides additional ammunition for the taxpayer.

Please click here for information on disbursements for agents

 

Treatment of transactions using Bitcoin and other similar cryptocurrencies

By   13 March 2014
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HMRC have issued Revenue & Customs Brief 09/14 here: http://www.hmrc.gov.uk/briefs/vat/brief0914.htm
This provides guidance on the direct tax and VAT treatment of income received from, and charges made in connection with, activities involving Bitcoin and other similar cryptocurrencies. Bitcoin operates via a peer to peer network, independent of any central authority or bank. All functions such as issue, transaction processing and verification are managed collectively by this network.

The advent of cryptocurrencies such as Bitcoin is a new and evolving area. Bitcoin may be held as an investment (i.e. for trading with recognised currencies) or used to pay for goods or services at merchants where it is accepted. In the UK, there are already a number of outlets, including pubs, restaurants and internet retailers, that accept payment by Bitcoin.

In summary, the VAT treatment of Bitcoin activities will generally either be outside the scope of VAT or exempt from VAT (under Article 135(1)(d) of the VAT Directive), depending on the specific transaction involved. However, VAT will be due in the normal way on transactions involving any goods or services sold in exchange for Bitcoin or other similar cryptocurrency.

In the UK, as is the case with any other currency, the value of the supply of goods or services on which VAT is due will be the £sterling value of the cryptocurrency at the point the transaction takes place.

Please contact us if you would like more specific advice.

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