Tag Archives: vat-errors

VAT Self-billing and latest from the courts

By   6 January 2017
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Self-billing: where the customer issues the invoice (and how this can go wrong).

A recent case Court of Appeal case: GB Housley here has highlighted the inherent dangers of using the self-billing system.  Self-billing is a very useful mechanism for a lot of businesses, especially in respect of activities like royalties and scrap purchases where the supplier may not know (or know immediately) the value of the supply.  Before we look at the case, it may be useful to recap the rules for self-billing.

Self-billing is an arrangement between a supplier and a customer. Both customer and supplier must be VAT registered. The customer prepares the supplier’s invoice and forwards a copy to the supplier with the payment.  There is no requirement to notify HMRC or get approval for using the arrangement.

If you are the customer

You issue the documentation and you are able to reclaim as input tax the VAT shown on the self-billing invoice.

In order to set up self-billing arrangements with your supplier you are required to:

  • enter into an agreement with each supplier
  • review agreements with suppliers at regular intervals
  • keep records of each of the suppliers who let you self-bill them
  • make sure invoices contain the required information and are correctly issued

If a supplier stops being registered for VAT then you can continue to self-bill them, but you can’t issue them with VAT invoices. Your self-billing arrangement with that supplier is no longer covered by the VAT regulations.

Self-billing agreements

You can only operate a self-billing arrangement if your supplier agrees to put one in place. If you don’t have an agreement with your supplier your self-billed invoices won’t be valid, and you won’t be able to reclaim the input tax shown on them.

Both parties need to sign a formal self-billing agreement. This is a legally binding document. The agreement must contain:

  • your supplier’s agreement that you, as the self-biller, can issue invoices on your supplier’s behalf
  • your supplier’s confirmation that they won’t issue VAT invoices for goods or services covered by the agreement
  • an expiry date – usually for 12 months’ time but it could be the date that any business contract you have with your supplier ends
  • your supplier’s agreement that they’ll let you know if they stop being registered for VAT
  • details of any third party you intend to outsource the self-billing process to

Reviewing self-billing agreements

Self-billing agreements usually last for 12 months. At the end of this you will need to review the agreement to make sure you can prove to HMRC that your supplier agrees to accept the self-billing invoices you issue on their behalf. It’s very important that you don’t self-bill a supplier when you don’t have their written agreement to do so.

Record keeping

If you are a self-biller you’ll need to keep certain records. These are:

  • copies of the agreements you make with your suppliers
  • the names, addresses and VAT registration numbers of the suppliers who have agreed that you can self-bill them

If you don’t keep the required records, then the self-billed invoices you issue won’t be proper VAT invoices.

All self-billed invoices must include the statement “The VAT shown is your output tax due to HMRC”.

It is important that a business does not add VAT to self-billed invoices that it issues to suppliers who are not VAT-registered.

A business will only be able to reclaim  input tax shown on self-billed invoices if it meets all the record keeping requirements.

If you are a VAT registered supplier

If one of your customers wants to set up a self-billing arrangement with you, they’ll ask you to agree to this in writing. If you agree, they will give you a self-billing agreement to sign.

For VAT purposes you will be required to do all of the following:

  • sign and keep a copy of the self-billing agreement
  • agree not to issue any sales invoices to your customer for any transaction during the period of the agreement
  • agree to accept the self-billing invoices that your customer issues
  • tell your customer at once if you change your VAT registration number, deregister from VAT, or transfer your business as a going concern

The VAT figure on the self-billed invoice your customer sends you is your output tax.   You are accountable to HMRC for output tax on the supplies you make to your customer, so you should check that your customer is applying the correct rate of VAT on the invoices they send you. If there has been a VAT rate change, you will need to check that the correct rate has been used.

The Case

The issues were whether the lack of formalised self-billing agreements disqualified the use of self-billing, and if that was the case, whether alternative evidence should have been accepted to support a claim for input tax. The CoA discharged HMRC’s assessment which was issued to GB Housley – a scrap metal merchant.

The assessment was based on input tax claims made on the basis of the self-billed documents.  It was ruled that although the self-billing was used in error, HMRC should have considered alternative evidence and used its discretion on whether to allow the claims on transactions which took place. For this reason, as it is unclear whether HMRC would have assessed if they had considered other information, the assessment should be removed.

A timely warning to ensure that all of the conditions of self-billing arrangements are met, and that this is clearly demonstrable.  Ongoing monitoring is crucial for businesses operating self-billing as an overlooked change can affect the VAT treatment.

In this case, it looks like the applicant was rather fortunate, but this outcome cannot be relied on if self-billing is applied incorrectly.

We are able to advise on such agreements, arrangements and accounting.

VAT: Latest from the courts – Pole Tax?

By   20 December 2016
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(Pardon the dreadful pun).

The Court of Appeal case of Wilton Park Ltd and Secrets Ltd

Background

The appellant operated an “exotic dancing” club which featured table and lap dancing.  It received commission from self-employed dancers which was treated as exempt from VAT.  This was on the basis that the commissions were charged on redemption of vouchers (known as Secrets Money) such that it represented the services of dealing with security for money.  Customers were able to purchase Secrets Money with the addition of a 20% commission. The vouchers were used to pay individual dancers who subsequently needed to exchange the vouchers for cash.  The taxpayer charged a 20% fee for such a conversion.

The issue

The issue was whether face-value vouchers issued by appellant companies constituted “…any security for money” within the VAT Act 1994, Schedule 9, Group 5, item 1.   HMRC argued that the redemption of the vouchers was part of a taxable supply of performance facilitation services by the taxpayer and thus standard rated.

Decision

Not surprisingly, the CoA dismissed the appeal, agreeing with both the FTT and UT in holding that the provision of the club’s facilities formed part of the consideration for the commission an consequently was not an exempt supply.

Commentary

This appears a rather desperate appeal, and there still remains the possibility that the taxpayer could take the matter to the Supreme Court.  It illustrates that simply putting in a mechanism which adds a degree of complexity does not affect the overriding VAT analysis.  What was provided and what was paid for here seems reasonably apparent and it is quite a leap to consider the structure was simply exchanging vouchers for cash.  It also occurs that this would be a very straightforward way for other businesses to avoid paying VAT if the appellant had been successful.

For more on this subject (should that be your thing…….) a read of the Spearmint Rhino case not only explores the structure/relationship between dancers and club owners but is also rather good entertainment and provides an amusing yet illustrative overview of the agent/principal issue (and is not salacious in the least…..).

Oops! – Top Ten VAT howlers

By   16 December 2016
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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 – Cash businesses: Investigations

By   25 October 2016
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HMRC’s methods of establishing underdeclarations

HMRC have always taken interest in cash businesses as they see them as a revenue risk.  We have heard, anecdotally, that there is an ongoing campaign to target cash businesses which HMRC suspect are under-declaring takings. Such businesses are usually retail and commonly restaurants and take aways (which I shall use as an example in this article).  A retail business is obliged to keep certain records.  For sales, this is a record of daily gross takings (DGT) and this is the area I will focus on as it is where “suppression” of income generally occurs.  In a very crude example, the owner, or a member of staff does not ring up a sale and the payment is pocketed.  There are more sophisticated ways in which suppression occurs, but this is the most common.

Even in this day and age where most payments are made by credit or debit cards, there is still significant scope for declarations to be inaccurate.

The methods

There are a number of ways in which HMRC can determine the accuracy of VAT declarations.  These may be from the usual bank and accounts reconciliations, mark up exercises, to, say, counting take-away containers to build up a picture of the turnover.  The following are also ways in which HMRC test the credibility of declarations:

  • Compliance checks

These usually take place in the evenings when a restaurant is open for business (or soon after it closes). Officers gain entrance, question staff, examine records for that and previous days, and remove certain records. From this information they can build up a picture of trading.  These visits are usually unannounced.

  • Invigilation exercise

HMRC observe how the business operates and check that all sales of food and drinks are rung into the till. This is usually with the agreement of the business.

  • Test meals

HMRC staff will purchase a test meal and at a later time check to see if it has been recorded correctly.  It may be that this method will be repeated at a suspect restaurant by different HMRC staff, perhaps in the same evening.  If any of the sales are not recorded correctly, it may be insufficient in itself to create an assessment, but it will confirm suspicions of suppression and lead to further action.

  • Observation

While posing as customers, HMRC will also count the number of covers, the amount of take aways, the number of staff, how orders are taken and paid for, and how payments are made.

  • Surveillance

Members of HMRC staff park outside a restaurant (usually in an unmarked van) and watch the activities of the restaurant.  They count the number of people dining and the numbers of people exiting with take aways. This observation may also record the number of deliveries and other relevant information that they are able to obtain from what they can see.  This exercise may be carried out over a number of days/nights or even weeks.

  • Purchases

In more complex suppression, the value of purchases may also be suppressed in order to present a more credible picture to an inspector.  This may be more common if the purchases are zero rated food (on which the business would not claim input tax). HMRC may attempt to build up a picture of sales by the volume of actual purchases made.  They often check the restaurant’s suppliers’ records to get a full picture of trade.

Information obtained by one of the above methods may, on its own, be insufficient to raise an assessment, but combined with information obtained in different ways will more often than not result in one (should the exercises demonstrate an under-declaration of course).

Taxpayer’s rights

Attendance

HMRC do not have the right to attend a taxpayer’s premises at any time.  The law says that inspections may be carried out “at any reasonable time”. This means that that if a business owner is busy, or the time is outside normal office hours, or there is not access to all of the relevant information, or the request is unreasonable for any other reason, the business owner (or his adviser) may request that an inspector leaves and makes an appointment at a future reasonable time.  This is sometimes easier to do in theory than in practice, but a taxpayer’s rights are set out in The Finance Act 2009, Schedule 36, part II.

A business has no right to refuse a “regular” inspection but these are arranged for an agreed time in any case.

Records

The VAT Act 1994, Schedule 11 states that the requirement to produce records is limited to being provided at such time as HMRC “may reasonably require”. So, again, if HMRC are making demands that a business feels are unreasonable, it is within its rights to refuse to allow access and to make a mutually agreed and acceptable appointment to allow access to premises and records.  This may lead to a discussion, but HMRC do not have unfettered rights to access premises or records.

Best judgement

Regardless of how HMRC have gathered information, any assessment must be made to the best of their judgement and must be “an honest and genuine attempt to make a reasoned assessment of the VAT payable”.   If the business is able to demonstrate that this was not the case, the assessment must be removed.  Broadly, this will entail demonstrating that things that ought to have been considered were ignored, or that things that have been included should not have been.  Generally, the most common ways to challenge an assessment based on the above exercises are; that the period considered was not representative, or not long enough to be representative, or that the tests carried out were insufficient to demonstrate a consistent pattern of trading. There are usually specific facts in each case that may be used to challenge the validity and quantum of an assessment.

Action

Of course, it is hoped that no business which makes accurate declarations is troubled by such investigations.  However, if a business feels that HMRC is being unreasonable with its demands it should seek professional advice before agreeing to permit HMRC access.

Matters change however, if HMRC have a Search Warrant or a Writ of Assistance in which case HMRC are able to compel a business to allow entry or inspection.

As always, we advise that any assessment is, at the very least, reviewed by a business’ adviser.

Latest from the courts: Excise Duty – against which party may an assessment be raised?

By   19 October 2016
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A little “light” relief from VAT.  Indirect taxes extend to Customs and Excise Duties (as well as IPT and various other “lower profile” taxes) and we are able to assist with all of these.

In an interesting Excise Duty case; B & M Retail Limited (B & M) the Upper Tribunal were asked whether an assessment for Customs Duty due on wine and beer could be issued to an entity “down the chain” to an entity which was holding goods at a given time.

Background

HMRC detained the relevant the goods under The Customs & Excise Management Act 1979 (“CEMA”) Section 139 on the grounds that, in their judgment, on the balance of probabilities, Excise Duty had not been paid on the goods. Under B & M’s terms and conditions of business its suppliers were required to warrant that the sale of alcohol to B & M was on a “Excise Duty paid” basis.

The First Tier Tribunal (FTT) decided that despite an HMRC investigation resulting in the fact that they were not satisfied that duty had been paid on the goods, B & M was not responsible for the duty (and subsequent penalties) as the goods had passed through other various entities before they reached the appellant.  The decision was based on the fact that the duty point must have arisen before the goods reached B & M and consequently, the duty was payable by someone further up the supply chain and not simply by the entity which was holding the Excise Duty goods at the Excise Duty point.

Decision

However, the Upper Tribunal disagreed with the FTT and overturned the verdict.  The Upper Tribunal stated that “… the recognition by HMRC that one or more other Excise Duty points must, in principle, have been triggered before B & M received the relevant goods did not preclude HMRC from assessing B & M for excise duty …”.  The Upper Tribunal did, however, remit the case to the First Tier Tribunal to review the evidence to ensure that the assessment is in time and that, as a matter of fact, the Excise Duty due on the beer and wine remains unpaid.

Conclusion

It would appear that this decision currently gives HMRC the right to raise an assessment for duty and penalties anywhere along the supply chain when an entity is holding the goods, even though a “previous” entity may have been responsible for the payment. This is not * * polite cough * * small beer as the amount in question was £5,875,143 of duty and a penalty of £1,175,028.  This is helpful to HMRC as, in this instant case, it would appear that entities further up the supply chain were either not registered, or became deregistered, making it more difficult for HMRC to recover the Duty due.

It is important for every importer to be clear about the Excise Duty position and to carry out detailed due diligence on the relevant shipment.  It is now not possible to escape an assessment by demonstrating that a third party is responsible for the payment of the duty.

Latest from the courts: missing goods subject to VAT

By   13 October 2016
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In the CJEU case of Maya Marinova the issue was whether goods which could not be located in the Bulgarian appellant’s warehouse were subject to VAT on the grounds they had been disposed of.

Background

The appellant purchased certain goods, and subsequently, at an inspection, was unable to either;

  • produce the goods , or;
  • demonstrate how they were disposed of.

The Bulgarian authorities had confirmed that the goods had been purchased from a supplier, but the purchases did not appear in the business’ purchase records. They assessed for VAT on the missing goods assuming that they had been purchased and sold off record and the output tax had not been accounted for. They employed a mark-up exercise based on similar goods sold in the appellant’s shop.

The case proceeded directly to the court without an AG’s opinion.  The matter was; whether the decision to assess offended the principle of fiscal neutrality if it were supported by national legislation (which it was here).  It was decided that in these circumstances, such action was not precluded and the assessment was basically sound.  It was stated that “… tax authorities may presume that the taxable person subsequently sold those goods to third parties and determine the taxable amount of the sale of those goods according to the factual information at hand …”.  As usual, the case was passed back to the referring court to consider whether the Bulgarian domestic legislation goes further than is necessary to ensure the correct collection of tax and to prevent evasion.

Commentary

Although the issues in this case arose from specific facts, this is not an uncommon scenario for a business.  It was hardly a surprising outcome.  In a similar position in the UK, HMRC is also very likely to form the view that if the goods are no longer on hand, then they must have been disposed of, unless evidence to the contrary is provided by a taxpayer.

Of course, there may be a genuine reason why the goods are no longer in stock, but no output tax has been declared on them.  These reasons are considered in guidance published by HMRC here and the rules mainly consider goods which have been lost, stolen, damaged or destroyed.

There are specific ways of dealing with VAT in these situations, and in fact, whether output tax is due at all.  Failure to comply with this guidance may result in an assessment being issued.   The general point is VAT is only due after a tax point has been created.  A crude example is that if goods are shoplifted from a store, there is no output tax due.  However, if the goods were sold and recorded via a till, and the money which went into the till was stolen, output tax is still due on the supply of those goods (as found in the case of G Benton [1975] VATTR 138).

As always with VAT, it is crucial to keep accurate and up to date records to evidence supplies (as well as recording the movement of stock and any discrepancies in these circumstances).  Although an inspector will need to demonstrate “best judgement” in issuing an assessment in respect of missing goods, it is obviously prudent to be able to demonstrate why the anticipated output tax has not been declared and therefore be prepared for such enquiries.

In this instant case, it was not discovered why the goods were not located in the warehouse.  It could be that there was a miscommunication between parts of the business, a simple underdeclaration of sales, staff theft, or any other hazards of business.  Even for non-tax reasons it is vital that a business’ systems are sufficiently robust to identify such occurrences and procedures are put into place to deal with them.

If you or your clients have received an assessment of this sort, it is usually worthwhile obtaining a review of the position.

VAT – Intended penalty for participating in fraud

By   3 October 2016
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Consultation

A consultation was proposed in the 2016 Budget on the introduction of a new penalty for businesses that participate in VAT fraud. Now HMRC has announced that views are sought on; whether there is a case for a new penalty, its structure and to whom it should apply.  The intended changes will require amendment to Schedule 24 of the Finance Act 2007.  The main target of these proposed new measures is MTIC (Missing Trader Intra-Community) fraud.

Full details of the consultation paper here

Penalty principles

It may be worth reviewing HMRC’s view on the principles of applying a penalty, which they state are;

  • The penalty regime should be designed from the customer perspective, primarily to encourage compliance and prevent non-compliance. Penalties are not to be applied with the objective of raising revenues.
  • Penalties should be proportionate to the offence and may take into account past behaviour.
  • Penalties must be applied fairly, ensuring that compliant customers are (and are seen to be) in a better position than the non-compliant.
  • Penalties must provide a credible threat. If there is a penalty, we must have the operational capability and capacity to raise it accurately, and if we raise it, we must be able to collect it in a cost-efficient manner.
  • Customers should see a consistent and standardised approach. Variations will be those necessary to take into account customer behaviours and particular taxes.

Consultation Process

It may be an appropriate time to look at what the consultation process is and how it works.  This may helpfully be summarised (by HMRC) as:

There are 5 stages to tax policy development:

  • Stage 1 Setting out objectives and identifying options.
  • Stage 2 Determining the best option and developing a framework for implementation including detailed policy design.
  • Stage 3 Drafting legislation to effect the proposed change.
  • Stage 4 Implementing and monitoring the change.
  • Stage 5 Reviewing and evaluating the change.

The closing date for comments on this consultation is 11 November 2016.

Comment

Putting to one side the minor irritation of taxpayers being called customers (a bête noire of mine I’m afraid) it is difficult to argue with the above principles and any attempt to prevent or deter VAT fraud is to be welcomed, as long as it does not impact on innocent parties and HMRC apply any such penalty in an even-handed manner. As a taxpayer in a personal and business capacity, I welcome any measures that may result in my tax bill being increased to cover revenue lost to fraud!

Action

Of course, please respond to HMRC should you feel that you should make your views known.  The consultation is open to businesses, individuals, legal firms, accountants, and other interested parties.

We occasionally come across situations where innocent parties have been inadvertently been caught up in fraudulent supply chains. Please contact us for advice on planning that may be put in place to avoid this position and how we can assist if HMRC are making enquiries. As always in VAT, it always pays to be proactive to ensure that processes and structures in place are robust and are demonstrably so.

Bad Debt Relief (BDR) – Avoiding the VAT burden

By   20 September 2016
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VAT Basics

Anything which can relieve the burden of VAT is to be welcomed. BDR is a useful tool if a business is aware of it and understand when it may be claimed.

It is at the very least frustrating when a client does not pay, and in some cases this situation can lead to the end of a business. At least the VAT charged to the client should not become a cost to a supplier.  The BDR mechanism 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).

There is specific relief however:

Conditions for claiming BDR

The supplier must have supplied goods or services for a consideration in money, and must have accounted for and paid VAT on the supply. All or part of the consideration must have been written off as a bad debt by making the appropriate entry in the business’ records (this does not have to be a “formal” procedure). At least six months (but not more than three years and six months) must have elapsed since the later of the date of supply or the due date for payment.

Records required

Various records and evidence must be kept (for four years from the date of claim), in particular to identify:

• The time and nature of the supply, the purchaser, and the consideration
• The amount of VAT chargeable on the supply
• The accounting period when this VAT was accounted for and paid to HMRC
• Any payment received for the supply
• Entries in the refund for bad debts account
• The accounting period in which the claim is made.

Procedure for claiming BDR

The claim is made by including the amount of the refund in Box 4 of the VAT Return for the period in which the debt becomes over six months old.

Repayment of refund

Repayment of VAT refunded is required where payment is subsequently received or where the above conditions have not been complied with.

Refund of input tax to debtor

Businesses are required to monitor the time they take to pay their suppliers, and repay input tax claimed if they have not paid the supplier within six months. Subsequent payment of all or part of the debt will allow a corresponding reclaim of input tax. This is an easy assessment for HMRC to make at inspections, so businesses should make reviewing this matter this a regular exercise.

Finally, there is tax point planning available to defer a tax point until payment is received for providers of continuous supplies of services. Please see here

VAT Latest from the courts – HMRC’s bad ‘phone service

By   18 August 2016
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As we know, late payment of VAT results in a Default Surcharge. Details of DS here

However, if a taxpayer has a reasonable excuse the DS will not be due. In the interesting recent case of McNamara Joinery Ltd here

The appeal was on the grounds that HMRC itself caused the default. The business was successful in the appeal on the grounds that its agent could not contact HMRC to arrange a time to pay agreement because of HMRC’s poor telephone service. Anyone who has attempted to contact HMRC by telephone will appreciate that this isn’t a one-off case!

Background

The appellant had a previous history of submitting returns on time, but making late payments late such that the period in question would give rise to a DS if the return or payment was late. Appreciating that the business would not have sufficient funds to meet the VAT payment due, it instructed its agent to contact HMRC on its behalf in an attempt to arrange a “time to pay” (TTP) agreement. The agent attempted to do this two days before the payment was due. However, there were significant problems with the telephone service and the agent was unable to get through as the line kept “going dead” (It appears from later comments made by HMRC that this was due to the volume of calls made at the end of the VAT period). A TTP agreement was subsequently reached, but only after the due date which HMRC argued was too late to avoid the DS.

Decision

On the subject of reasonable excuse, the FT Tribunal observed that “A reasonable excuse is normally an unexpected event, something unforeseeable, something out of the appellant’s control. Insufficiency of funds is not regarded as a reasonable excuse although the reason for the insufficiency might be. It is unfortunately part of the hazards of trade that debtors fail to keep promises to pay. These submissions cannot be regarded as establishing for the appellant a reasonable excuse for the late payment.”
It continued “However, faced with the problem of not having received promised payments, the appellant through its agent did all that it could do in the circumstances…., its agent tried repeatedly to contact HMRC by telephone but was unsuccessful until 12 February 2016 when a time to pay agreement was made and subsequently the arrangements made were adhered to. In the Tribunal’s view this repeated failure to contact HMRC was unexpected and unforeseeable”. Therefore the taxpayer had a reasonable excuse and the DS was removed.

The Judge did not accept HMRC’s submission that the appellant should have been aware that there was a likelihood that there would be a large volume of calls being made to HMRC on the days immediately prior to the due date and that as a result the appellant could reasonably have expected delays in being able to make contact. HMRC do not publish times when their lines are likely to be busy. Rather than expecting delays it is reasonable for a taxpayer to expect telephone calls to HMRC to be answered without delay. In the Tribunal’s view HMRC were in a better position than the appellant to know when there is a likelihood of a large volume of calls and they should have arrangements in place to deal with the higher volume of calls promptly.

So HMRC lost this case because they failed to answer the phone.

Lessons to be learned

  1. One cannot rely on HMRC answering their own phones, even though they are fully aware that there will be an increased demand at certain times. They do not have arrangements in place to deal with the known demand. They do not have a reasonable excuse for not dealing with taxpayers!
  2. When attempting to contact HMRC it is a very good idea to keep an accurate log.
  3. If it is likely that a business is experiencing cashflow issues, contact HMRC as soon as possible and do not leave it to the last moment.
  4. It is possible to arrange a TTP agreement with HMRC.
  5. A business should take advice from their advisers as soon as possible to avoid DSs. This may avoid both a TTP position and/or a DS.

VAT – The “business” of shooting; a tale

By   15 July 2016
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Sometimes one is involved in a dispute which goes to the core of the tax.  This is a case which highlights basic VAT principles, HMRC’s approach to an issue and the lengths to which a taxpayer has to go to defend his position.

Are you sitting comfortably?

A day out in the countryside; striding across beautiful landscape, amongst friends, enjoying each other’s’ company and a bit of sport – can this really be the subject of such intense debate with HMRC? Well, unfortunately this seems to be the case when it comes to the operation of a day’s shooting. In the eyes of the taxman, whether or not a profit or a surplus is achieved, shooting, conducted in the course of furtherance of a business is subject to VAT.

This is not usually an issue which shooting syndicates find themselves having to address; they are not concerned with the ins and outs of what constitutes a business for the purposes of the VAT legislation. However, HMRC was pursuing this issue in earnest and they have a team devoted solely to attacking shoots.

Who is HMRC targeting?

HMRC seem to be focusing on syndicate run shoots which are not registered for VAT but who HMRC believe are operating on business principles. If an organisation is operating as a business then it may be liable to register for VAT if certain income thresholds are exceeded. The shoot will then have to charge output VAT on the supplies it makes.  In my case there would have been a significant assessment plus penalties and interest which could double the past VAT bill.

How is HMRC attacking the issue?

HMRC is looking closely at the specific activities of syndicate shoots in order to build an argument demonstrating that the organisation of the shoot is run on “sound business principles”.  The reason that there is room for debate on this matter is that what constitutes a business is not explicitly defined anywhere in the VAT legislation either in UK or EC law. Rather, the issue has been defined in case law.

The defining case was Lord Fisher, which co-incidentally also concerned a shoot. This case is relied upon throughout the VAT world to give guidance on what constitutes a business – and not just in respect of shoots but for all types of activity.

Anyway, back to this syndicate…

I was involved in a battle lasting four years which concerned a local shoot run for over five decades by a group of friends and which was provided only for the benefit of the syndicate members. The shoot was not open to the common commercial market place or members of the public and the shoot did not advertise. HMRC spent a great deal of time trying to understand the finer details of the running of this shoot and concluded that it was a business

We advised The Shoot to appeal to the VAT Tribunal against HMRC’s decision to levy VAT on its activities.

They key to the syndicate’s defence was to demonstrate that no true business would operate commercially in the way that The Shoot does.  If it did, it would be completely unprofitable and would soon be out of business. To demonstrate this effectively, every aspect of the shoot was examined in detail and compared and contrasted with the way a commercial shoot operates. This involved everything from the lunch arrangements, CVs of the gamekeepers and how beautiful the land is, right through to whether chicks or poults are purchased and whether local deer were sold to the highest bidder. However, the most important factor was the demonstration that the syndicate does not have a profit built in to the cost structure and the amounts that the syndicate members contribute. The syndicate is run on a cost sharing basis and is not “an activity likely to be carried out by a private undertaking on a market, organised within a professional framework and generally performed in the interest of generating a profit.”

It all sounds so simple to those familiar with the industry but unfortunately from a VAT ‘business’ perspective it has been a long, stressful and costly argument for the appellant to make.  A few days before the case was to be heard at the Tribunal, HMRC withdrew their assessment and conceded the case.

HMRC had seen the many witness statements filed by the members of the syndicate waxing lyrical about how this was an age-old hobby run by a few friends and in no way could it be considered a commercial business. They had seen the expert witness report written by a specialist in the field. The distinctions made between commercial and syndicate shooting were made very clear. They had also seen the powerful argument which concluded that the shoot “cannot seriously be suggested to amount to a ‘business’ for the purpose of the VAT code”.

What this means?

Of course this victory over HMRC was a fantastic result for the members of the The Shoot, but from a practical point of view quite frustrating in that the case was not heard; denying other entities the benefit of the predicted victory.  Alas, it was one case that HMRC could not afford to lose.

It is therefore likely that HMRC will continue to target other shoots where they think they can ‘win’ or at least not be challenged.

Have you been affected? – What should you do next?

If this makes for frighteningly familiar reading and you or your local syndicate shoot are, or have been, under HMRC investigation then it is vital that you should take professional advice.  As we orchestrated the defence for The Shoot we are the leading advisers in such matters.

 For completeness, the six tests derived from the Lord Fisher case (and others) are: 
  1. Is the activity a serious undertaking earnestly pursued?
  2. Is the activity an occupation or function, which is actively pursued with reasonable or recognisable continuity?
  3. Does the activity have a certain measure of substance in terms of the quarterly or annual value of taxable supplies made?
  4. Is the activity conducted in a regular manner and on sound and recognised business principles?
  5. Is the activity predominantly concerned with the making of taxable supplies for a consideration?
  6. Are the taxable supplies that are being made of a kind which, subject to differences of detail, are commonly made by those who seek to profit from them?
 The recent case of Lajvér Meliorációs Nonprofit Kft. and Lajvér Csapadékvízrendezési Nonprofit Kft is also helpful in looking at what a business is details here