Tag Archives: tax-point

VAT – Tour Operators’ Margin Scheme (TOMS) A Brief Guide

By   11 April 2018
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VAT and TOMS: Complex and costly

Introduction

The tour operators’ margin scheme (TOMS) is a special scheme for businesses that buy in and re-sell travel, accommodation and certain other services as principals or undisclosed agents (ie; that act in their own name). In many cases, it enables VAT to be accounted for on travel supplies without businesses having to register and account for VAT in every EU country in which the services and goods are enjoyed. It does, however, apply to travel/accommodation services enjoyed within the UK, within the EU but outside the UK, and wholly outside the EU.

Under the scheme:

  • VAT cannot be reclaimed on margin scheme supplies bought in for resale. VAT on overheads outside the TOMS can be reclaimed in the normal way.
  • A UK-based tour operator need only account for VAT on the margin, ie; the difference between the amount received from customers and the amount paid to suppliers.
  • There are special rules for determining the place, liability and time of margin scheme supplies.
  • VAT invoices cannot be issued for margin scheme supplies.
  • In-house supplies supplied on their own are not subject to the TOMS and are taxed under the normal VAT rules. But a mixture of in-house supplies and bought-in margin scheme supplies must all be accounted for within the TOMS.
  • No VAT is due via TOMS on travel/accommodation/tours enjoyed outside the EU.

Who must use the TOMS?

TOMS does not only apply to ‘traditional’ tour operators. It applies to any business which is making the type of supplies set out below even if this is not its main business activity. For example, it must be used by

  • Hoteliers who buy in coach passenger transport to collect their guests at the start and end of their stay
  • Coach operators who buy in hotel accommodation in order to put together a package
  • Companies that arrange conferences, including providing hotel accommodation for delegates
  • Schools arranging school trips
  • Clubs and associations
  • Charities.

The CJEC has confirmed that to make the application of the TOMS depend upon whether a trader was formally classified as a travel agent or tour operator would create distortion of competition. Ancillary travel services which constitute ‘a small proportion of the package price compared to accommodation’ would not lead to a hotelier falling within the provisions, but where, in return for a package price, a hotelier habitually offers his customers travel to the hotel from distant pick-up points in addition to accommodation, such services cannot be treated as purely ancillary.

Supplies covered by the TOMS

The TOMS must be used by a person acting as a principal or undisclosed agent for

  • ‘margin scheme supplies’; and
  • ‘margin scheme packages’ ie single transactions which include one or more margin scheme supplies possibly with other types of supplies (eg in-house supplies).

‘Margin scheme supplies’ are those supplies which are

  • bought in for the purpose of the business, and
  • supplied for the benefit of a ‘traveller’ without material alteration or further processing

by a tour operator in an EU country in which he has established his business or has a fixed establishment.

A ‘traveller’ is a person, including a business or local authority, who receives supplies of transport and/or accommodation, other than for the purpose of re-supply.

Examples

If meeting the above conditions, the following are always treated as margin scheme supplies.

  • Accommodation
  • Passenger transport
  • Hire of means of transport
  • Use of special lounges at airports
  • Trips or excursions
  • Services of tour guides

Other supplies meeting the above conditions may be treated as margin scheme supplies but only if provided as part of a package with one or more of the supplies listed above. These include

  • Catering
  • Theatre tickets
  • Sports facilities

Of course, who knows how Brexit will impact TOMS. It may be that UK businesses will be unable to take advantage of this easement and will be required to VAT register in every Member State that it does business * shudder *

This scheme is extremely complex and specialist advice should always be sought before advising clients.

VAT: Latest from the courts – option to tax, TOGC and deposits

By   26 March 2018
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Timing is everything

The First Tier Tribunal (FTT) case of Clark Hill Ltd (CHL) illustrates the detailed VAT considerations required when selling property. Not only are certain actions important, but so is timing.  If a business is one day late taking certain actions, a VAT free sale may turn into one that costs 20% more than anticipated. That is a large amount to fund and will obviously negatively affect cashflow and increase SDLT for the buyer, and may result in penalties for the seller.

The case considered three notoriously difficult areas of VAT, namely: the option to tax, transfers of going concerns and deposits.

Background

CHL owned four commercial properties which had opted to tax. CHL sold the freehold of these properties with the benefit of the existing leases. As a starting point VAT would be due on the sale because of the option.  However, the point at issue here was whether the conditions in Article 5 of the Value Added Tax (Special Provisions) Order 1995 were met so that the sale could be treated as a transfer of a business as a going concern (TOGC) and could therefore be treated as neither a supply of goods nor a supply of services for VAT purposes, ie; VAT free. The point applied to two of the four sales. The vendor initially charged VAT, but the purchasers considered that the TOGC provisions applied. CHL must have agreed and consequently did not charge VAT. HMRC disagreed with this approach and raised an assessment for output tax on the value of the sale.

TOGC

In order that a sale may qualify as a TOGC one of the conditions is that; the assets must be used by the transferee in carrying on the same kind of business, whether or not as part of any existing business, as that carried on by the transferor in relation to that part. It is accepted that in a property business transfer, if the vendor has opted to tax, the purchaser must also have opted by the “relevant date”.  If there is no option in place at that time HMRC do not regard it as “the same kind of business” and TOGC treatment does not apply.

Relevant date

If the purchaser opts to tax, but, say, one day after the relevant date, there can be no TOGC. The relevant date in these circumstances is the tax point. Details of tax points here

Basically put, a deposit can, in some circumstances, create a tax point. In this case, the purchaser had paid a deposit and, at some point before completion of the transfer of the property, the deposit had been received by the seller or the seller’s agent. The seller notified HMRC of the option to tax after a deposit had been received (in two of the relevant sales). The issue here then was whether a deposit created a tax point, or “relevant date” for the purposes of establishing whether the purchaser’s option to tax was in place by that date.

Decision

The judge decided that in respect of the two properties where the option to tax was not notified until after a deposit had been paid there could not be a TOGC (for completeness, for various other reasons, the other two sales could be treated as TOGCs) and VAT was due on the sale values. It was decided that the receipt of deposits in these cases created a relevant date.

Commentary

There is a distinction between opting to tax and notifying that option to HMRC which does not appear to have been argued here (there may be reasons for that). However, this case is a timely reminder that VAT must be considered on property transactions AND at the appropriate time. TOGC is an unique situation whereby the seller is reliant on the purchaser’s actions in order to apply the correct VAT treatment. This must be covered off in contracts, but even if it is, it could create significant complications and difficulties in obtaining the extra payment. It is also a reminder that VAT issues can arise when deposits are paid (in general) and/or in advance of an invoice being issued.

We recommend that VAT advice is always taken on property transactions ad at an early stage. Not only can situations similar to those in this case arise, but late consideration of VAT can often delay sales and can even cause such transactions to be aborted.

VAT – A Christmas Tale

By   12 December 2017
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Well, it is Christmas…. and at Christmas tradition dictates that you repeat the same nonsense every year….
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?

If I do this for philanthropic reasons, am I a charity, and if so, does that mean I do not pay VAT?

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, or the EU?  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 £85,000 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!

Deregistration – When a business leaves the VAT club

By   11 December 2017
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This article considers when and how to deregister from VAT and the consequences of doing so.

General points

Deregistration may be mandatory or voluntary depending on circumstances. Although it may be attractive for certain businesses too deregister if possible, this is not always the case. The main reason to remain registered is to recover input tax on purchases made by a business. This is particularly relevant if that business’ sales are:

  • to other VAT registered businesses which can recover any VAT charged
  • supplies are UK VAT free (eg; zero rated)
  • made to recipients outside the UK and in some cases the EU

Businesses which make sales to the public (B2C) are usually better off leaving the VAT club even if this means not being able to recover input tax incurred.

A business applies for deregistration online through its VAT account, or it can also complete a form VAT7 to deregister by post.

NB: These rules apply to businesses belonging in the UK.  There are different rules for overseas business which are outside the scope of this article.

The Rules

Compulsory deregistration

A business must deregister if it ceases to make taxable supplies. This is usually when a business has been sold, but there may be other circumstances, eg; if a business starts to make only exempt supplies, or a charity stops making business supplies and continues with only non-business activities or when an independent body corporate joins a VAT group. In such circumstances there is a requirement to notify HMRC within 30 days of ceasing to make taxable supplies.

We have seen, on a number of occasions, HMRC attempting to compulsorily deregister a business because either; it has not made any taxable supplies (although it has the intention of doing so) or it is only making a small amount of taxable supplies. In the first example, as long as the business can demonstrate that it intends to make taxable supplies in the future it is entitled to remain VAT registered. This is often the position with; speculative property developers, business models where there is a long lead in period, or business such as exploration/exploitation of earth resources.

Voluntary deregistration

A business may apply for deregistration if it expects its taxable turnover in the next twelve to be below the deregistration threshold. This is currently £83,000 which was unchanged in this month’s Budget. It must be able to satisfy HMRC that this is the case. Such an application may be made at any time and the actual date of leaving the club is agreed with HMRC. It should be noted that when calculating taxable income, certain supplies are excluded. These are usually exempt supplies but depending on the facts, other income may also be ignored.

Consequences of deregistration

  • Final return

A deregistered business is required to submit a final VAT return for the period up to and including the deregistration date. This is called a Period 99/99 return.

  • Output tax

From the date of deregistration a business must stop charging VAT and is required to keep its VAT records for a minimum of six years. It is an offence to show VAT on invoices when a business is not VAT registered.

  • Input tax

Once deregistered a business can no longer recover input tax. The sole exception being when purchases relate to the time the business was VAT registered. This tends to be VAT on invoices not received until after deregistration, but were part of the business’ expenses prior to deregistration. Such a claim is made on a form VAT427

  • Self-supply (Deemed supply)

An often overlooked VAT charge is the self-supply of assets on hand at the date of deregistration. A business must account for VAT on any stock and other assets it has on this date if:

  1. It could reclaim VAT when it bought them (regardless of whether such a claim was made)
  2. the total VAT due on these assets is over £1,000

These assets will include items such as; certain land and property (usually commercial property which is subject to an option to tax or is less than three year old), un-sold stock, plant, furniture, commercial vehicles, computers, equipment, materials, etc, but does not include intangible assets such as patents, copyrights and goodwill. The business accounts for VAT on the market value of these assets but cannot treat this as input tax, thus creating a VAT cost.

We usually advise that, if commercially possible, assets are sold prior to deregistration. This avoids the self-supply hit and if the purchaser is able to recover the VAT charged the position is VAT neutral to all parties, including HMRC. It is worth remembering that the self-supply only applies to assets on which VAT was charged on purchase and that there is a de minimis limit. We counsel that care is taken to ensure planning is in place prior to deregistration as it is not possible to plan retrospectively and once deregistered the position is crystallised.

  • Re-registration

HMRC will automatically re-register a business if it realises it should not have cancelled (eg; the anticipated turnover exceeds the deregistration threshold). It will be required to account for any VAT it should have paid in the meantime.

  • Option To Tax

An option to tax remains valid after a registration has been cancelled. A business must monitor its income from an opted property to see whether it exceeds the registration threshold and needs to register again.

  • Capital Goods Scheme (CGS)

If a business owns any capital items when it cancels its registration, it may, because of the rules about deemed supplies (see self-supply above) have to make a final adjustment in respect of any items which are still within the adjustment period. This adjustment is made on the final return.

  • Cash Accounting

A business will have two months to submit its final return after it deregisters. On this return the business must account for all outstanding VAT on supplies made and received prior to deregistration. This applies even if it has not been paid. However, it can also reclaim any VAT provided that you have the VAT invoices. If some of the outstanding VAT relates to bad debts a business may claim relief.

  • Partial exemption

If a business is partly exempt its final adjustment period will run from the day following its last full tax year to the date of deregistration.  If a business has not incurred any exempt input tax in its previous tax year, the final adjustment period will run from the first day of the accounting period in the final tax year in which it first incurred exempt input tax to the date of deregistration.

  • Flat Rate Scheme

If a business deregisters it leaves this scheme the day before its deregistration date. It must, therefore, account for output tax on its final VAT return for sales made on the last day of registration (which must be accounted for outside of the scheme).

  • Self-Billing

If your customers issue VAT invoices on your behalf under self-billing arrangements (or prepare authenticated receipts for you to issue) a deregistering business must tell them immediately that it is no longer registered. They must not charge VAT on any further supplies you make. There are financial penalties if a business issues a VAT invoice or a VAT-inclusive authenticated receipt for supplies it makes after its registration has been cancelled.

  • Bad Debt Relief (BDR)

A business can claim relief on bad debts it identifies after it has deregistered, provided it:

  • has previously accounted for VAT on the supplies
  • can meet the usual BDR conditions 

No claim may be made more than four years from the date when the relief became claimable.

Summary

As may be seen, there is a lot to consider before applying for voluntary deregistration, not all of it good news. Of course, apart from not having to charge output tax, a degree of administration is avoided when leaving the club, so the pros and cons should be weighed up.  Planning at an early stage can assist in avoiding in nasty VAT surprises and we would always counsel consulting an adviser before an irrevocable action is taken. As usual in VAT, if a business gets it wrong there may be an unexpected tax bill as well as penalties and interest.

VAT: Time limit for claiming input tax

By   4 December 2017
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Latest from the courts.

In the helpful CJEU case of Biosafe (this link is in French, so with thanks to Mr Lees – for my schoolboy French and more helpfully; a translation website) the issue was the date at which input tax can be reclaimed in cases where VAT was charged at an incorrect rate (lower than should have been applied) and this is subsequently corrected by the issue of an additional VAT only invoice.

Background

The two parties to a transaction believed that a reduced rate of VAT applied to the supply of certain goods. The Portuguese tax authorities subsequently determined the correct VAT rate applicable was higher. The recipient refused to pay the additional tax on the grounds that the recovery of the input tax may be time barred.

Decision

Broadly, the CJEU held that VAT may be recovered on the date when a “correcting” (VAT only) invoice is issued, rather than when the initial tax point was created. So the capping provisions applicable in this case where not an issue.

Commentary

This is often an issue, and I come across it usually in the construction industry (where various VAT rates may be applicable). It is an important issue as in the UK we have a four year capping provision. If the initial supply was over four years ago, any claim for input tax will be time barred if this was deemed to be the only tax point.

In my experience, this issue does create some “confusion” in HMRC and is a helpful point of reference if there are any future disagreements on this matter.  It must be correct that the right to recover input tax only arises when there is a document (invoice) issued to support such a claim as it would not be possible to make a claim without evidence to support it. If the original tax point is used as a one-off date which cannot be subsequently moved, it means that the claim for the difference in the two rates of tax (the original incorrect rate and the later, higher rate) could not be made after the capping period; which seems, at the very least, unfair. The later correcting invoice therefore creates a new tax point.

Please contact us if you have any similar input tax claims disallowed as being time barred, or you are currently in a dispute with HMRC on this matter.

VAT: Distinction between goods and services. Mercedes Benz Financial Services case

By   17 October 2017
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In the CJEU case of Mercedes Benz Financial Services (MBFS) the issue was whether certain supplies where of goods or services.

Technical Background

Before looking at the case, it is worthwhile considering the difference between goods and services and why the distinction is important. For most transactions the difference is clear, although sometimes (such as in this case) it is not immediately apparent. A starting point is that services are “something other than supplying goods”. Difficulties can arise in areas such as; provision of; information, software and, as MBFS discovered, Hire Purchase (HP)/leasing.

The distinction is important for two main reasons:

  • VAT liability – Goods and services may have different VAT rates applicable
  • Tax point – goods and services have different tax point rules, see here

The difference between HP and Leasing arrangements:

In an HP agreement the intention is usually for the ownership of the goods to pass when the final payment has been made. The transaction therefore relates to a supply of goods. If title to goods does not pass, this is leasing and represents a supply of services.

Case Background

MBFS offered certain contract purchases which were similar to many personal contract purchase deals for vehicles. These featured regular monthly payments with a final balloon payment. In the MBFS arrangements in question a significant difference to “usual” personal contract purchase agreements was that the balloon payment represented over 40% of the price of the car and payment of this fee was entirely optional.

The EU rules set out that there is a supply of goods where “in the normal course of events” ownership will pass at the latest upon payment of the final instalment. Consequently, the focus here was on whether the optional final payment meant that in the normal course of events the ownership of the car would pass to the customer.

Decision

The CJEU decided that the supplies were those of services rather than goods. This was based on the fact that, although the ownership transfer clause is an indicator of the transaction representing a supply of goods, there was a  genuine economic alternative to the option being exercised. The circa 40% of the car price was a significant amount and it did not immediately follow that all customers would make this final payment. It was observed that in a “traditional” HP arrangement making the final payment was the “only economically rational choice”.  This meant that the supply was one of services.

VAT Impact

As this was ruled to be a supply of services, output tax was not due from MBFS at the start of the contract (as would have been the case if the supply had been one of goods). This results in a significant cashflow saving.

Commentary

Any business which provides vehicles via HP or leasing arrangements should review its supplies and contracts to determine whether it can take advantage of this CJEU ruling. We are able to assist in this process.

VAT: Extent of zero rating for a construction by a charity

By   9 October 2017
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Latest from the courts

In the First Tier Tribunal (FTT) case of The Trustees of Litton & Thorner Community Hall the issue was whether certain construction works were a completion of an initial build or whether they were an extension or an annex to a pre-existing building. And if an annex, whether it was capable of functioning independently from the existing building and whether there is a main access to the annex.

Background

The appellant began construction of a hall in 2008. It was intended that the hall would be available for a school to use and also for it to be available at for village use and other activities, such as by local youth clubs and a scout group. There was no dispute that the original construction was zero rated via VAT Act 1994, Schedule 8, Group 5, item 2  (The supply in the course of the construction of a building designed for a relevant charitable purpose).

A decision was made to install ground source heat pumps to feed the heating system. However the space occupied to accommodate the system meant that there was insufficient storage space in the hall. So at the time of construction, but before planning permission was obtained, it was decided with the builder that a steel joist should be incorporated within the east wall of the hall in order to facilitate the necessary support and access when the envisaged storage facility was added.  The additional planning permission was granted in November 2011, three years after building work commenced. The facility was eventually able to be used when work was completed in 2014. The delay was caused (not surprisingly) by funding issues. It was the VAT treatment of work relating to the addition of the storage area which was the subject of the appeal, with HMRC considering that it was either standard rated work to the building or was a standard rated extension to it.

Technical background

The provisions relevant to the appeal are VAT Act 1994, Schedule 8, Group 5, Notes 16 and 17. It is worthwhile taking a moment to consider these in their entirety:

Note 16

For the purpose of this Group, the construction of a building does not include

(a ) the conversion, reconstruction or alteration of an existing building; or

(b) any enlargement of, or extension to, an existing building except to the extent the enlargement or extension creates an additional dwelling or dwellings; or

(c) subject to Note (17) below, the construction of an annexe to an existing building.

Note 17

Note 16(c) above shall not apply where the whole or a part of an annexe is intended for use solely for a relevant charitable purpose and;

(a) the annexe is capable of functioning independently from the existing building; and

(b) the only access or where there is more than one means of access, the main access to:

(i) the annexe is not via the existing building; and

(ii) the existing building is not via the annexe.

The Appeal

The Trustees appealed on two separate and distinct bases:

(1) That the additional building was the completion of the original building and neither an extension nor an annex to it. It was their case that the temporal disconnect between the two building processes must be seen in the factual context, with particular reference to the decision to put in a lintel to allow the building to be completed when additional monies and planning permission were available. Additionally, alongside this fact was that the appellant was a non-commercial organisation and so things could not progress as expeditiously as they might have done if those things were being undertaken by a commercial organisation.

(2) The second basis is that, in any event, the additional building is zero rated by reference to paragraphs 16(c) and 17 of Group 5 to Schedule 8. It was the appellant’s case that the additional building is an annex intended for use solely for relevant charitable purposes and it meets the conditions set out in paragraph 17(a) & (b).

Decision

The FTT decided that the work was subject to zero rating. Not only was it part of the original construction (albeit that there was a significant time period between the building original work and the work on the storage area) but also, even if the storage area is considered as being separate, it was ruled that, on the facts, it was an annex rather than an extension, so it also qualified for zero rating on this basis.

Commentary

The date a building is “completed” is often an issue which creates significant disputes with HMRC, not only for charities, but for “regular” housebuilders. I have also encountered the distinction between an annex and an extension representing a very real topic, especially with academy schools. Even small changes in circumstances can create differing VAT outcomes. My advice is to seek assistance form a VAT consultant at the earliest stage possible. It may be that with a slight amendment to plans, zero rating may be obtained in order to avoid an extra 20% on building costs which charities, more often than not, are unable to reclaim.

Links to what we can offer to schools here, and charities here

Additionally, our offering to the construction industry here

VAT: Output tax on credits? A Tax point case

By   18 September 2017
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Latest from the courts

In the Scottish Court of Session case of Findmypast Limited the issue was whether the sale of credits represented a taxable supply, the tax point of which was when payment was received.

Background

Findmypast carries on a business of providing access to genealogical and ancestry websites which it owns or for which it holds a licence. If a customer wishes to view or download most of the records on the website, they will be required to make a payment. This may be done by taking out a subscription for a fixed period, which confers unlimited use of the records during that period. Alternatively, the customer may use a system known as Pay As You Go. This involves the payment of a lump sum in return for which the customer receives a number of “credits”. The credits may be used to view records on the website, and each time a record is viewed some of the credits are used up. The credits are only valid for a fixed period, but unused credits may be revived if the customer purchases further credits within two years; otherwise they are irrevocably lost.

Technical

Findmypast accounted for output tax on the price of the credits at the time when they were sold.  As a consequence, VAT was paid, not only on credits which were used, but also on credits that were not redeemed (The tax point therefore similar to the current rules on the sale of single use face value vouchers. Rules here).

The taxpayer claimed repayment of the VAT accounted for on the sale of unredeemed vouchers during a period which ran up to May 2012 when the legislation was changed.

The question was whether output tax should have been accounted for at the time when the vouchers were sold or at the time the vouchers were redeemed. If the tax point was the date of redemption, then the claim would be valid. The court identified the following issues:

  • What is the nature of the supply made by the taxpayer to customers?
    • Was it was the supply of genealogical records selected by the customer and viewed or downloaded by them?
    • Or was the supply a package of rights and services, which conferred a right to search the records and download and print items from the taxpayer’s websites?

If the former is accurate, the supply only takes place if and when a particular record is viewed or downloaded.  If the latter, the supply includes a general right to search which is exercisable as soon as the credits are purchased, with the result that the supply takes place at that point.

A subtle distinction, but one which has an obviously big VAT impact.

Decision

The Court decided that where credits were not redeemed, the taxpayer is entitled to be repaid the output tax previously declared as no tax point was created. In the Court’s view, Findmypast was making the relevant documents available in return for payments received. HMRC’s contention that there was a complex, multiple supply of the facility to find and access genealogical documents such that payment created a tax point was dismissed. The court further found that the relevant payments did not qualify as prepayments (deposits) because it was not known at the time of purchase whether the credits would be redeemed (many were not) or indeed at what time they would be redeemed if they were.  It was also decided that the credits were not Face Value Vouchers per VAT Act 1994, Schedule 10A, paragraph 1(1) as they are rather mere credits that permit the customer to view and download particular documents on the taxpayer’s website, through the operation of the taxpayer’s accounting system.  And that they are not purchased for their own sake but as a means to view or download documents.

Commentary

Readers of my past articles will have identified that multiple/single supplies and tax points create have been hot topics recently, and this is the latest chapter in the story.

This case highlights that any payments received by a business must be analysed closely and the actual nature of them determined according to the legislation and case law. Not all payments received create a tax point and

Some will not represent consideration such that output tax is due. Careful consideration of the tax point rules is necessary.  Not only can the correct application of the rules aid cashflow, but in certain circumstances (such as set out in this case) it is possible to avoid paying VAT on receipts at all.

The Default Surcharge for late VAT payments

By   5 September 2017
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A Default Surcharge is a civil penalty issued by HMRC to “encourage” businesses to submit their VAT returns and pay the tax due on time.

VAT registered businesses are required by law to submit their return and make the relevant payment of the VAT by the due date.

A default occurs if HMRC has not received your return and all the VAT due by the due date. The relevant date is the date that cleared funds reach HMRC’s bank account. If the due date is not a working day, payment must be received on the last preceding working day.

Payments on Account (POA)

If a business is required to make POA it must pay them and the balance due with the VAT Return by electronic transfer direct to HMRC’s bank account. The due dates for POA are the last working day of the second and third month of every quarterly accounting period. The due date for the balancing payment is the date shown on the business’ VAT Return. It is important to ensure that payments are cleared to HMRC’s bank by these dates or there will be a default.

Consequence of default

A business will receive a warning after the first default ‐ the Surcharge Liability Notice (SLN). Do not ignore this notice. If you fail to pay the VAT due on the due date within the next five quarters, the surcharge will be 2% of the outstanding tax. The surcharge increases to 5% for the next default, and then by 5% increments to a maximum of 15%.  Each default, whether it is late submission of the return or late payment, extends the surcharge liability period, but only late payment incurs a surcharge.

If you can’t pay the VAT you owe by the due date or are having difficulties, contact the Business Payment Support Service immediately.

Special arrangements for small businesses

There are special arrangements if a business’ taxable turnover is £150,000 or less to help if there are short term difficulties paying VAT on time. HMRC send a letter offering help and support rather than a Surcharge Liability Notice the first time there is a default. This aims to assist with any short-term difficulties before a business formally enters the Default Surcharge system. If the business defaults again within the following 12 months a Surcharge Liability Notice will be issued.

Minimum surcharges

There is a minimum of £30 for surcharges calculated at the 10% or 15% rates. There will not be a surcharge at the 2% and 5% rates if it is calculated it to be less than £400. However, a Surcharge Liability Notice Extension extending the surcharge period will be issued and the rate of surcharge if you default again within the surcharge period will be increased.

Circumstances when HMRC will not levy a surcharge

There’s no liability to surcharge if a business:

  • submits a nil or repayment return late
  • pays the VAT due on time but submit your return late

HMRC will not issue a surcharge in these circumstances because there is no late payment involved. If a business had defaulted previously HMRC will issue a Surcharge Liability Notice Extension extending the surcharge period because the return is late, but they will not increase the rate of surcharge.

Time limit

A business’ liability to surcharge will expire if a business submits all of its returns and payments for tax periods ending on or before the end of the surcharge liability period on time.

Reasonable excuse

If a business has a reasonable excuse for failing to pay on time, and it remedies this failure without unreasonable delay after the excuse ends, it will not be liable to a surcharge.

There’s no statutory definition of reasonable excuse and it will depend on the particular circumstances of a case. A reasonable excuse is something that prevented the business meeting a tax obligation on time which it took reasonable care to meet. The decision on whether a reasonable excuse exists depends upon the particular circumstances in which the failure occurred. There is a great deal of case law on this particular issue. Please contact us should there be doubt about a reasonable excuse.

Disagreement over a surcharge

If you disagree with a decision that you are liable to surcharge or how the amount of surcharge has been calculated, it is possible to:

  • ask HMRC to review your case
  • have your case heard by the Tax Tribunal

If you ask for a review of a case, a business will be required to write to HMRC within 30 days of the date the Surcharge Liability Notice Extension was sent. The letter should give the reasons why you disagree with the decision.

Examples when a review may be appropriate are if a business considers that:

  • it has a reasonable excuse for the default
  • HMRC applied the wrong rate of surcharge
  • HMRC used the wrong amount of VAT when calculating the surcharge
  • there are exceptional circumstances which mean the default should be removed

A business will still be able to appeal to the Tribunal if it disagrees with the outcome of the HMRC review.

We are very experienced in dealing with disputes over Default Surcharges, so if you feel that one has been applied unfairly, or wish to explore your rights, please let us know.