Tag Archives: marcus-ward-tax

VAT: Is dog grooming taught in schools? The Dogs Delight case

By   15 February 2022
0

Latest from the courts

In the Julie Lalou t/a Dogs Delight First Tier Tribunal (FTT) case the issue was whether the teaching of dog grooming qualified as private tuition and was therefore exempt.

Background

The Appellant operated a business providing dog grooming and dog grooming courses. The appeal was concerned only with the supplies of dog grooming tuition as it was accepted that dog grooming in itself is taxable.

Technical

The sole issue in dispute in this appeal was whether the supplies fall within the private tuition exemption as for provided by The Value Added Tax Act 1994, Schedule 9, Group 6, item 2 “The supply of private tuition, in a subject ordinarily taught in a school or university, by an individual teacher acting independently of an employer”.

HMRC’s view was that “to be eligible for exemption dog grooming would need to be a course that is ‘ordinarily’ taught in schools and universities which it is not…”

The appellant wrote to HMRC giving a list of seven “local Colleges and Universities where the Level 3 Dog Grooming Diploma is ordinarily taught”. The appellant went on to state “There are many more within the UK” which were said to represent around 30% of English colleges. Further it was stated that the business was a City & Guilds approved centre and that the courses were not recreational.

Decision

It was accepted that the courses that the appellant taught involved her making supplies of tuition in that she transferred to her students skills and knowledge.

But, unsurprisingly, the appeal was dismissed. The appellant had failed to demonstrate that dog grooming is taught at a wide number of schools and universities

The court also determined that the appellant needed to provide some evidence of whether dog grooming was taught at schools and universities in the EU (again, something she had failed to do).

Commentary

The exemption for private tuition is fraught with complexities and the amount of case law on the subject is significant, which indicates the difficulties in analysing the VAT position.  An example here. It is important to establish what is being provided and that research is carried out to consider the degree of ubiquity of the subject in education. A general guide to education here. The phrase “ordinarily taught” is rather nebulous and it would be prudent to obtain as much evidence as possible that a subject is s commonly or ordinarily taught in schools and universities if a supply is treated as exempt.

VAT: Latest on early termination and compensation payments

By   8 February 2022
1

HMRC has published a new Revenue and Customs Brief 2(2022) which replaces Revenue and Customs Brief 12 (2020): VAT early termination fees and compensation payments.

It introduces a revised policy on early termination payments and compensation fees. Following representations from industry the Brief issued in September 2020 was suspended in January 2021. HMRC has reviewed the policy in the light of those representations and is adopting a revised policy which will take effect from 1 April 2022. The new policy will result in fewer early termination payments being subject to VAT than in the 2020 guidance.

The new Brief also advises businesses that adopted the treatment outlined in Brief 12 (2020) on what action they should now take.

Background

Whether a payment is for a VAT supply depends on whether anything is being done in return for a consideration. Where a party agrees to do something in return for a fee there is a supply. How that fee is described does not affect whether there is a supply for VAT. What matters is whether something is done and if there is a direct link between what is done and the payment received, and reciprocity between the supplier and the customer (see VATSC05100).

Previous HMRC guidance stated that when customers are charged to withdraw from agreements to receive goods or services, these charges were not generally for a supply and were outside the scope of VAT.

Following the Court of Justice of the European Union (CJEU) judgments in Meo (C-295/17) and most recently in Vodafone Portugal (C-43/19), it is evident that some of these charges are additional consideration for the supply of goods or services. Most early termination fees and some cancellation fees are therefore liable for VAT if the goods or services for which the fees have been paid are liable for VAT, even if they are described as compensation or damages.

The main impact of the revised policy is that fees charged when customers terminate a contract early will be regarded as further consideration for the contracted supply. For example, if a customer is charged a fee for exiting a mobile phone contract early, or if they terminate a car hire contract early, it will be liable for VAT.

The new guidance can be found at VATSC05910, VATSC05920 and VATSC05930.

VAT: Bad Debt Relief. The Regency Factors case

By   7 February 2022
0

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.

VAT: New penalty regime delayed

By   17 January 2022
0

The new system for the way penalties and interest is charged due to be introduced on 1 April this year has been deferred to 1 January 2023.

The new points-based regime has been delayed to allow HMRC to implement the necessary IT changes.

I wonder if that represents a reasonable excuse for HMRC being late…

VAT Inspections …and how to survive them

By   5 January 2022
0

VAT Inspections

The first point to make is that inspections are usually quite standard and routine and generally there is nothing to worry about.  They are hardly enjoyable occasions, but with planning they can be made to go as smoothly as possible. As an inspector in my previous life, I am in a good position to look at the process from “both sides”.  If you are concerned that the inspection is not routine (for any reason) please contact us immediately.

Background

Typically, the initial meeting will begin with an interview with the business owner (and/or adviser) to go through the basic facts.  The inspector will seek to understand the business and how it operates and will usually assess the answers with specific tests (further tests will be applied to the records).  After the interview the inspector(s) will examine the records and will usually have further queries on these. More often than not they will carry out; bank reconciliations, cash reconciliations, mark-up exercises, and often “references” which are the testing of transactions using information obtained from suppliers and customers.  There are many other exercises that may be carried out depending on the type of business.  Larger businesses have more regular inspections where one part of the business is looked at each meeting.  The largest businesses have more or less perpetual inspections (as one would expect).  The length of the inspection usually depends on:

  • Size of the business
  • Complexity of the business
  • Type of business (HMRC often target; cash businesses, the construction industry, property investment, partially exempt businesses, charities and NFP entities, cross-border transactions and financial services providers amongst others)
  • Compliance history
  • Associated/past businesses
  • Intelligence received
  • Errors found
  • Credibility of the business owner and records

The above measurements will also dictate how often a business is inspected.

More details on certain inspections/investigations here

The initial inspection may be followed by subsequent meetings if required, although HMRC state that they aim is to conclude matters at the time of the first meeting.

The inspection – how to prepare

  • Ensure that both the person who completes the VAT returns and the person who signs the VAT returns will be available for all of the day(s) selected
  • Arrange with your adviser, to be available to you and the inspector on the days of the inspection
  • Thoroughly review your VAT declarations and have ready, if relevant, any disclosures or other declarations you consider you need to make to HMRC at the start of the inspection (this should avoid penalties)
  • Have available all VAT returns and working papers for the last four years or the period since you were registered for VAT including:
    • Annual accounts
    • The VAT account and all related working papers
    • All books and accounts, cashbook, petty cashbook, sales and purchases day books
    • Sales and purchase invoices
    • All supporting documentation, eg; contracts, correspondence, etc.
    • Bank statements
    • VAT certificate and certificate of registration
    • Any other documentation relating to “taxable supplies”
  • Have available the full VAT correspondence files ensuring that they are fully up-to-date
  • Ensure you have full information on any; one-off, unusual or particularly high value transactions

The inspection – during the visit

  • Ask the inspector(s) to identify themselves by name on arrival (they carry identity cards)
  • Be polite, friendly and hospitable as far as possible
  • Make a desk or space available for them to work near to you – in this way you can oversee/overlook what they do
  • Only allow access to the files that form part of your “VAT Records”
  • Enable the VAT inspector, if they ask, to inspect your business premises (and have someone accompany them)
  • Be cautious with your answers to seemingly “innocent” questions and comments. If in doubt ask for time to check, or that the question be put in writing (never guess or provide an answer which you think HMRC want)
  • If something inconsistent is found (or suggested) ask for full details and take note of all of the documentation to which the query relates – this will enable you to provide necessary information to your adviser

The inspection – at the end of the visit

The inspector should:

  • Explain the main work they have done. For example which VAT accounting periods they reviewed
  • Explain any areas of concern they have, discuss them and seek to agree any future action that needs to be taken; and
  • Illustrate as fully as possible the size and reason for any adjustment to the VAT payable, and describe how the adjustment will be made

You should:

  • Obtain a summary of the inspection from HMRC (not always an easy task)
  • Ask the inspector to put all of HMRC’s concerns about your business to you in writing
  • Confirm with the inspector all time limits for providing additional information to HMRC

After the inspection

HMRC will write to you confirming:

  • Any issues identified
  • Further information required
  • Improvements required to record keeping
  • Any corrections required
  • Whether VAT has been over or under paid
  • Any penalties and interest which will be levied
  • Deadlines for payment.

On a final point: Never simply assume that the inspector is correct in his/her decision.  It always pays to seek advice and challenge the decision where possible.  Even if it is clear that an error has been made, mitigation may be possible.

We can provide a pre-inspection review as well as attending inspections if required.  It is quite often the case that many HMRC enquiries may be nipped in the bud at the time of the inspection rather than becoming long drawn out sagas. We can also act as negotiator with HMRC and handle disputes on your behalf.

VAT Registration

By   4 January 2022
0

VAT Basics

A business must register for VAT with HMRC if its VAT taxable turnover is more than £90,000 in a 12 month period.

Taxable Turnover

Taxable turnover means the total value of everything that a business sells that is not exempt or outside the scope of VAT.

Registration is mandatory if turnover exceeds the current registration threshold in a rolling 12-month period. This is not a fixed period like the tax year or the calendar year – at the end of every month a business is required to calculate income (not profit) over the past year.

A business may also register voluntarily, which may be beneficial if it wants to reclaim input tax it has incurred.

Catches

There are some transactions that must be included in the turnover calculation which can easily be missed:

  • goods a business hired or loaned to customers
  • business goods used for personal reasons
  • goods which were bartered, part-exchanged or given as gifts
  • services a business receives from suppliers in other countries which are subject to a reverse charge
  • zero-rated items (these are still taxable although no VAT is charged)

Timing

A business must register within 30 days of the end of the month when it exceeded the threshold. The effective date of registration (EDR) is the first day of the second month after a business goes over the threshold.

Future test

A business must mandatorily register for VAT if it expects its VAT taxable turnover to be more than £90,000 in the next 30-day period. This may be because of a new contract or a other known factors.

Registration exception

If a business has a one-off increase in income it can apply for a registration ‘exception’. If its taxable turnover goes over the threshold temporarily it can write to HMRC with evidence showing why the taxable turnover will not exceed the deregistration threshold (currently £88,000 in the next 12 months). HMRC will consider an exception and write confirming if a business will receive one. If not, HMRC will compulsory register the business for VAT.

Transfer of a going concern (TOGC)

If a VAT-registered ongoing business is purchased the buyer must register for VAT from the purchase date. It cannot wait until its turnover exceeds the threshold.

Businesses outside the UK

If a business belongs outside the UK, there is a zero threshold. It must register as soon as it supplies any goods and services to the UK (or if it expects to in the next 30 days).

Late registration

If a business registers late, it must pay the VAT due from when it should have registered (the EDR). Further, it will receive a penalty depending on how much it owes and how late the registration is. The rates based on the VAT due are:

  • up to 9 months late – 5%
  • between 9 and 18 months – 10%
  • over 18 months = 15%.

How to register

A business can register online. By doing this it will register for VAT and create a VAT online account via which it will submit VAT returns.

Between application and receiving a VAT number

During the wait, a business cannot charge or show VAT on its invoices until it receives a VAT number. However, it will still be required to pay the VAT to HMRC for this period. Usually, a business will increase its prices to allow for this and tell its customers why. Once a VAT number is received, the business can then reissue the invoices showing the VAT.

Purchases made before registration

There are time limits for backdating claims for input tax incurred before registration. These are:

  • four years for goods still on hand at the EDR
  •  
  • six months for services

Once registered

A business’ VAT responsibilities. From the EDR a business must:

  • charge the right amount of VAT
  • pay any VAT due to HMRC
  • submit VAT Returns
  • keep appropriate VAT records and a VAT account
  • follow the rules for ‘Making Tax Digital for VAT’
  • keep business details up to date (there are penalties for failing to inform HMRC of changes)

VAT groups

VAT grouping is a facilitation measure by which two or more entities can be treated as a single taxable person (a single VAT registration). There are pros and cons of grouping set out here.

VAT stats 2020-21

By   20 December 2021
0

HMRC has published UK VAT statistics for 2020 to 2021.

Headlines

The total VAT receipts in the tax year ending March 2021 decreased by 22% (£24.1 billion) from the previous year. There was a downward impact on receipts from the VAT deferral measure which took effect from 20 March 2020.

The Wholesale and Retail sector continued to be the largest contributor to net Home VAT liabilities.

Import VAT receipts was also lower: £4.2 billion (13%) for the year compared to the year ending March 2020. This was mainly due to postponed VAT accounting.

68% of total net home VAT declared was paid by traders with an annual turnover greater than £10 million.

VAT population – income

Incorporated companies accounted for the largest share of the VAT population and annual turnover. Companies accounted for 73% of taxpayers, and 92% of annual taxable turnover in the year ending March 2021. Sole proprietors were the second largest group in terms of VAT population; this group accounted for 16% of VAT traders.

Businesses with an annual turnover greater than £10 million declared £67 billion in net VAT, 68% of the total for the tax year. This group only accounted for 1% of businesses.

52% of businesses declared annual turnover below the VAT registration threshold of £85,000.

VAT population – trade sectors

The wholesale and retail sector was the largest in terms of contribution to VAT liabilities. Net VAT liabilities were £29 billion (30%) of the total for the tax year ending March 2021. The financial and insurance sector has replaced the arts, entertainment and recreation sector and accommodation and food services sector in the top ten trade sectors from the previous year.

The construction sector increased by £650 million (12%), the largest year-on-year change. The only other sectors to see increases were wholesale and retail sectors which increased by £30 million (2%) and professional, scientific, and technical activities which increased by £19 million (2%). Of the top VAT contributing sectors, the financial and insurance sector saw the largest decrease of £560 million (25%).

VAT registrations

New registrations increased from the tax year ending March 2013 to the tax year ending March 2017 where it decreased by 33,666 (8%). Since the tax year ending March 2018, there has been an upward trend in new registrations – 300,000 in the year to 2021.

Deregistrations were below 200,000 a year from the tax year ending March 2014 to the tax year ending March 2016, but increased above that level in the tax year ending March 2017, increasing further in the tax year ending March 2018. This increase in deregistrations was likely to be linked to policy changes in relation to the Flat Rate Scheme.

The freeze in the VAT registration and deregistration thresholds has increased the number of registrations and decreased the number of deregistrations progressively from the year ending March 2019.

Uber to charge VAT

By   7 December 2021
0

Latest from the courts

Further to my article on the Supreme Court case, Uber went to the High Court seeking to challenge this decision, but the High Court has now upheld it.

This means it is very likely that Uber will be required to charge VAT on its supplies as the court found that taxi firms make contracts directly with their customers because Uber drivers should be treated as workers not contractors. This means that Uber make to supply of taxi services to the fare and not the individual drivers.

The High Court agreed with the Supreme Court and stated that: “… in order to operate lawfully under the Private Hire Vehicles (London) Act 1998 a licensed operator who accepts a booking from a passenger is required to enter as principal into a contractual obligation with the passenger to provide the journey which is the subject of the booking.”

A spokesperson for Uber said: “Every private hire operator in London will be impacted by this decision, and should comply with the verdict in full.”

Although not a VAT case itself, this decision is the latest in a long list of VAT agent/principal cases, the most important being:

Secret Hotels 2 Ltd

Hotels4U.com Ltd

Low Cost Holidays Ltd

Adecco

All Answers Limited

It is crucial that businesses review their position if there is any doubt at all whether agent status applies to their business model.