Tag Archives: vat-errors

VAT: How to characterise a supply – The tests

By   27 June 2023
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In the age-old matter of whether a supply is separate/composite/compound for VAT purposes which and what is the nature of that supply, the Court of Appeal case of Gray & Farrar International LLP has provided very helpful guidance. A background to facts of the initial hearing here (although this decision was overturned by both the UT and the CoA).

I have previously considered these types of supply here, here, here, here, and here. Although not specifically concerning composite/separate supplies, the case sets out a hierarchy of tests to be applied in characterising a single supply for VAT purposes which now sets the standard. These test are:

  1. The Mesto predominance test should be the primary test to be applied in characterising a supply for VAT purposes.
  2. The principal/ancillary test is an available, though not the primary, test. It is only capable of being applied in cases where it is possible to identify a principal element to which all the other elements are minor or ancillary. In cases where it can apply, it is likely to yield the same result as the predominance test.
  3. The “overarching” test is not clearly established in the ECJ jurisprudence, but as a consideration the point should at least be taken into account in deciding averments of predominance in relation to individual elements, and may well be a useful test in its own right.

Comments

The Mesto Test

CJEU Mesto Zamberk Financini (Case C-18/12)

The primary test to be applied when characterising a single supply for VAT purposes is to determine the predominant element from the point of view of the typical consumer with regard to the qualitative and not merely the quantitative importance of the constituent elements.

Principal/ancillary

If a distinct supply represents 50% or more of the overall cost, it can not be considered ancillary to the principal supply. In such cases an apportionment will usually be required.

Overarching

A generic description of the supply which is distinct from the individual elements. In many cases the tax treatment of that overarching single supply according to that description will be self-evident.

CPP

One must also have regard to the Card Protection Plan Ltd case. This has become a landmark case in determining the VAT treatment for single and multiple supplies. In this case the ECJ ruled that standard rated handling charges were not distinct from the supply of exempt insurance. It was noted that ‘a supply that comprises a single service from an economic point of view should not be artificially split’. Notably many subsequent court decisions have since followed this outcome thereby suggesting a general lean towards viewing cases as single supplies where there are reasonable grounds to do so.

VAT: How long do I have to keep records?

By   26 June 2023
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Time limits for keeping records

Record keeping is a rather dry subject, but it is important not to destroy records which HMRC may later insist on seeing! I have looked at what VAT records a business is required to keep here, but how long must they be kept for?

This is seemingly a straightforward question, but as is usual with VAT there are some ifs and buts.

The basic starting point

The usual answer is that VAT records must be kept for six years. However, there are circumstances where that limit is extended and also times when it may be reduced. Although the basic limit is six years, unless fraud is suspected, HMRC can only go back four years to issue assessments, penalties and interest.

Variations to the six year rule

One Stop Shop (OSS)

If a business is required to use the OSS then its records must be retained for ten years (and they should be able to be sent to HMRC electronically if asked).

Capital Goods Scheme (CGS)

If a business has assets covered by the CGS, eg; certain property, computers, aircraft and ships then adjustments will be required up to a ten year period. Consequently, records will have to be retained for at least ten years in order to demonstrate that the scheme has been applied correctly.

Land and buildings 

In the case of land and buildings you might need to keep documents for 20 years. We advise that records are kept this long in any event as land and buildings tend to be high value and complex from a VAT perspective, However, it is necessary in connection with the option to tax as it is possible to revoke an option after 20 years.

Transfer Of a Going Concern (TOGC)

This is more of a ‘who” rather than a what or a how long. When a business is sold as a going concern, in most circumstances the seller of the business will retain the business records. When this happens, the seller must make available to the buyer any information the buyer needs to comply with his VAT obligations. However, in cases where the buyer takes on the seller’s VAT registration number, the seller must transfer all of the VAT the records to the buyer unless there is an agreement with HMRC for the seller to retain the records. If necessary, HMRC may disclose to the buyer information it holds on the transferred business. HMRC do this to allow the buyer to meet his legal obligations. But HMRC will always consult the seller first, to ensure that it does not disclose confidential information.

How can a business cut the time limits for record keeping?

It is possible to write to HMRC and request a concession to the usual time limits. HMRC generally treat such a request sympathetically, but will not grant a concession automatically. If a concession is granted there is still a minimum allowance period of preservation which is in line with a business’ commercial practice.

Computer produced records

Where records are stored in an electronic form, a business must be able to ensure the records’ integrity, eg; that the data has not changed, and the legibility throughout the required storage period. If the integrity and legibility of the stored electronic records depends on a specific technology, then the original technology or an equivalent that provides backwards compatibility for the whole of the required storage period must also be retained. 

How to keep records

HMRC state that  VAT records may be kept on paper, electronically or as part of a software program (eg; bookkeeping software). All records must be accurate, complete and readable.

Penalties

If a business’ records are inadequate it may have to pay a record-keeping penalty. If at an inspection HMRC find that records have deliberately been destroyed your they will apply a penalty of £3,000 (this may be reduced to £1,500 if only some of the records are destroyed). In addition, there will be questions about why they have been destroyed!

VAT – What is reasonable care?

By   7 June 2023
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What is reasonable care, and why is it important?

HMRC state that “Everyone has a responsibility to take reasonable care over their tax affairs. This means doing everything you can to make sure the tax returns and other documents you send to HMRC are accurate.”

If a taxpayer does not take reasonable care HMRC will charge penalties for inaccuracies.

Penalties for inaccuracies

HMRC will charge a penalty if a business submits a return or other document with an inaccuracy that was either as a result of not taking reasonable care, or deliberate, and it results in one of the following:

  • an understatement of a person’s liability to VAT
  • a false or inflated claim to repayment of VAT

The penalty amount will depend on the reasons for the inaccuracy and the amount of tax due (or repayable) as a result of correcting the inaccuracy.

How HMRC determine what reasonable care is

HMRC will take a taxpayer’s individual circumstances into account when considering whether they have taken reasonable care. Therefore, there is a difference between what is expected from a small sole trader and a multi-national company with an in-house tax team.

The law defines ‘careless’ as a failure to take reasonable care. The Courts are agreed that reasonable care can best be defined as the behaviour which is that of a prudent and reasonable person in the position of the person in question.

There is no issue of whether or not a business knew about the inaccuracy when the return was submitted. If it did, that would be deliberate and a different penalty regime would apply, see here  It is a question of HMRC examining what the business did, or failed to do, and asking whether a prudent and reasonable person would have done that or failed to do that in those circumstances.

Repeated inaccuracies

HMRC consider that repeated inaccuracies may form part of a pattern of behaviour which suggests a lack of care by a business in developing adequate systems for the recording of transactions or preparing VAT returns.

How to make sure you take reasonable care

HMRC expects a business to keep VAT records that allow you to submit accurate VAT returns and other documents to them. Details of record keeping here

They also expect a business to ask HMRC or a tax adviser if it isn’t sure about anything. If a business took reasonable care to get things right but its return was still inaccurate, HMRC should not charge you a penalty. However, If a business did take reasonable care, it will need to demonstrate to HMRC how it did this when they talk to you about penalties.

Reasonable care if you use tax avoidance arrangements*

If a business has used tax avoidance arrangements that HMRC later defeat, they will presume that the business has not taken reasonable care for any inaccuracy in its VAT return or other documents that relate to the use of those arrangements. If the business used a tax adviser with the appropriate expertise, HMRC would normally consider this as having taken reasonable care (unless it’s classed as disqualified advice)

Where a return is sent to HMRC containing an inaccuracy arising from the use of avoidance arrangements the behaviour will always be presumed to be careless unless:

  • The inaccuracy was deliberate on the person’s part, or
  • The person satisfies HMRC or a Tribunal that they took reasonable care to avoid the inaccuracy

* Meaning of avoidance arrangements

Arrangements include any agreement, understanding, scheme, transaction or series of transactions (whether or not legally enforceable). So, whilst an arrangement could contain any combination of these things, a single agreement could also amount to an arrangement.  Arrangements are `avoidance arrangements’ if, having regard to all the circumstances, it would be reasonable to conclude that the obtaining of a tax advantage was the main purpose, or one of the main purposes of the arrangements.

NB: We at Marcus Ward Consultancy do not promote or advise on tax avoidance arrangements and we will not work with any business which seeks such advice.

Using a tax adviser

If a business uses a tax adviser, it remains that business’ responsibility to make sure it gives the adviser accurate and complete information. If it does not, and it sends HMRC a return that is inaccurate, it could be charged penalties and interest.

Evidence

Before any question of reasonable excuse comes into play, it is important to remember that the initial burden lies on HMRC to establish that events have occurred as a result of which a penalty is, prima facie, due. A mere assertion of the occurrence of the relevant events in a statement of case is not sufficient. Evidence is required and unless sufficient evidence is provided to prove the relevant facts on a balance of probabilities, the penalty must be cancelled without any question of reasonable excuse becoming relevant.

None of us are perfect

Finally, it is worth repeating a comment found in HMRC’s internal guidance “People do make mistakes. We do not expect perfection. We are simply seeking to establish whether the person has taken the care and attention that could be expected from a reasonable person taking reasonable care in similar circumstances…” 

VAT: Charity exemption for show admittance – The Yorkshire Agricultural Society case

By   9 May 2023
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Latest from the courts

In the Yorkshire Agricultural Society First Tier Tribunal (FTT) case the issue was whether payments for entry into the annual The Great Yorkshire Show qualified as exempt via The VAT Act 1994, Schedule 9, Group 12, item 1 –

“The supply of goods and services by a charity in connection with an event—

      1. that is organised for charitable purposes by a charity or jointly by more than one charity,
      2. whose primary purpose is the raising of money, and
      3. that is promoted as being primarily for the raising of money.”

HMRC raised an assessment on the grounds that the supply of admittance fell outwith the exemption so it was standard rated. It appears that this view was formed solely on the basis that the events were not advertised as fundraisers.

The exemption covers events whose primary purpose is the raising of money and which are promoted primarily for that purpose. HMRC contended that the events were not advertised as fundraisers and therefore the exemption did not apply. Not surprisingly, the appellant contended that all of the tests at Group 12 were fully met.

The FTT found difficulty in understanding HMRC’s argument. It was apparent from the relevant: tickets, posters and souvenir programmes all featured the words “The Great Yorkshire Show raises funds for the Yorkshire Agricultural Society to help support farming and the countryside”.

Decision

The FTT spent little time finding for the taxpayer and allowing the appeal. The assessment was withdrawn. There was a separate issue of the assessment being out of time, which was academic given the initial decision. However, The Tribunal was critical of HMRC’s approach to the time limit test (details in the linked decision). HMRC’s argument was that apparently, the taxpayer had brought the assessment on itself by not providing the information which HMRC wanted. The Judge commented: “That is not the same as HMRC being in possession of information which justified it in issuing the Assessment. It is an inversion of the statutory test”.

HMRC’s performance (or lack of it)

Apart from the clear outcome of this case, it also demonstrated how HMRC can get it so wrong. The FTT stated that it was striking that there was very little by way of substantive challenge by HMRC to the appellant’s evidence, nor any detailed exploration of it in cross-examination. The FTT, which is a fact-finding jurisdiction, asked a series of its own questions to establish some facts about the Society’s activities and the Show in better detail. No-one from HMRC filed a witness statement or gave evidence, even though HMRC, in its application to amend its Statement of Case, had said that the decision-maker would be giving evidence. The decision-maker did not give evidence. HMRC were wrong on the assessment and the time limit statutory test and did not cover itself in glory at the hearing.

Commentary

More evidence that if any business receives an assessment, it is always a good idea to get it reviewed. Time and time again we see HMRC make basic errors and misunderstand the VAT position. We have an excellent record on challenging HMRC decisions. Charities have a hard time of it with VAT, and while it is accurate to say that some of the legislation and interpretation is often complex for NFPs, HMRC do not help by taking such ridiculous cases.

A VAT Did you know?

By   27 April 2023
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Eels, salmon and trout are VAT free when sold dead or alive, but bream, perch, pike and tench are standard rated.

VAT: Credit notes – what are they and how are they treated?

By   18 April 2023
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VAT Basics

There can be confusion about credit notes and how they are used and accounted for, so I thought it worthwhile to pull together, in one place, an overview of the subject.

What are credit notes for?

A VAT credit note is a document issued by a supplier to a customer. It amends or corrects a previously issued invoice. Invoices are documents which evidence a taxable supply. The credit note is documentary evidence of a change to that supply, or of a decrease in the consideration for that supply. A reduction in consideration may be as a result of; cancellation, discount, refund, prompt payment, bulk order or other commercial reasons.

Why are VAT credit notes important?

The information given on a credit note is the basis for establishing the adjusted VAT figure on the supply of taxable goods or services. It also enables the customer to adjust the figures for the total VAT charged to them on their purchases.

If a business issues a credit note showing a lesser amount of VAT than is correct, it is liable for the deficiency.

Legislation

The UK Law that covers credit notes is found in VAT Regulations 1995, Regulations 15, 24 and 38 of. Regulation 24A defines the term “increase (or decrease) in consideration”.

Conditions of a valid credit note

Requirements for a credit note to be considered valid:

  • be issued to the customer
  • correct a genuine mistake or overcharge
  • reflect an agreed reduction in the value of a supply
  • give value to the customer
  • not be issued for a bad debt
  • be issued in good faith

HMRC also require for credit notes to:

  • be issued within 14 days of the decrease in consideration
  • contain all the details specified in Notice 700, Paragraph 18.2.2.

Accounting

HMRC has issued guidance on how to correct VAT errors and make adjustments or claims – VAT Notice 700/45.

When you issue a credit note you must adjust:

  • the records of the taxable supplies you have made
  • your output tax

The accounts or supporting documents must make clear the nature of the adjustment and the reason for it.

Where the adjustment is not in respect of an error in the amount of VAT declared on a VAT return, you should make any VAT adjustment arising from the issue or receipt of a credit or debit note in the VAT account in the accounting period in which the decrease in price occurs.

This will be the accounting period where the refunded amount is paid to the customer.

If you have charged an incorrect amount of VAT and have already declared it on a VAT return you can only correct an error in your declaration by adopting the appropriate method of error correction procedures.

Specific cases

Credits and contingent discounts

When a business allows a credit or contingent discount to a customer who can reclaim all the tax on the relevant supply, it does not have to adjust the original VAT charge – provided both it and its customer agree not to do so. Otherwise, both parties should both adjust the original VAT charge. A business should issue a credit note to its customer and keep a copy.

Prompt payment discounts

If the discount is taken up within the specified time you may adjust the consideration and amount of VAT accounted for by issuing a credit note. If you choose not to use a credit note, the original invoice must have the following information:

  • the discount terms (which must include, but need not be limited to, the time by which the discounted price must be paid)
  • a statement that the customer can only recover as input tax the VAT paid to the supplier

VAT rate change

Where a VAT invoice showed VAT at the old higher rate, then a credit note should be issued for the element of overcharged VAT. However, there is no way to charge VAT at the lower rate if:

  • VAT invoices for supplies were issued before the lower rate took effect, and
  • the supplies were actually made (delivered or performed) before then.

In such circumstances, VAT cannot be saved by issuing a credit note for the old VAT invoice and then issuing a new invoice charging VAT at the lower rate.

The deadline for issuing a credit note following a rate change is 45 days. Any credit notes issued after this 45-day deadline are invalid, so the old higher rate would apply to the affected supplies.

Case law – further reading

There is a significant amount of case law on credit notes as this is an area that often creates disputes. Some of the most salient cases are:

  • British United Shoe Machinery Company Ltd (1977 VATTR p187)
  • Silvermere Golf and Equestrian Centre Ltd (1981 VATTR p 106)
  • Robin Seamon Brindley Macro (MAN/83/100)
  • Highsize Ltd (LON 90/945)
  • Kwik Fit (GB) Ltd (1992 VATTR p427)
  • British Telecommunications plc (LON/95/3145)
  • The Robinson Group of Companies Ltd (MAN/97/348)
  • General Motors Acceptance Corporation UK Ltd (GMAC)(LON/01/242)

NB: A business can only reduce the output VAT on its return if it has made an actual refund. This could be by making a payment to the customer or offsetting the credit against other invoices.

Finally

Failing to issue a credit note is a mistake that needs to be corrected under the error correction procedures.

VAT: Late payment interest rates increased

By   4 April 2023
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HMRC has announced that interest rates for late payments will be revised following the Bank of England interest rate rise to 4.25%.

HMRC interest rates are linked to the Bank of England base rate.

As a consequence of the change in the base rate, HMRC interest rates for late payment and repayment will increase.

These changes will come into effect on:

  • 3 April 2023 for quarterly instalment payments
  • 13 April 2023 for non-quarterly instalments payments

Please also refer to Rates and allowances: HMRC interest rates for late and early payments.

A VAT Did you know?

By   28 March 2023
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Embryos of animal species which are used for human food may be zero-rated but “anything below” the embryo stage is standard-rated.

VAT: Evidence for retrospective claims – new guidance

By   14 March 2023
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HMRC has updated its Manual VRM9300 on historic VAT claims.
These types of claims are often called “Fleming” claims and refer to those made before the introduction of the four (once three) year time cap. Such claims extend beyond the period that businesses were required to keep business records and so these were less likely to have remained available.

Standard of Proof where records are unavailable

Where detailed records are unavailable it does not mean there is a lower standard of proof for a claim. The civil standard of proof (on a balance of probabilities) remains.

However, taxpayers’ estimates, assumptions and extrapolations must be sufficiently robust to support a claim. HMRC and the Tribunals must have regard to the evidence that is available, and each claim must be considered on its individual merits.
HMRC state that it “…is not obliged to accept a figure simply because some input tax is due or because it is the claimant’s ‘best guess’ based on the material available”. The claimant must first establish that its method of valuing the claim is reasonable and provide an identifiable repayable amount.
The guidance considers the judgement in the NHS Lothian [2022] UKSC 28 case and its impact on claims where full evidence is unavailable.
Alternative evidence
It is also worth noting that HMRC have the discretion to accept alternative evidence.

VAT: Updated guidance on deliberate behaviour

By   21 February 2023
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HMRC has published updated guidance on deliberate behaviour. It clarifies the definition of these actions in respect of extended time limits.

What is deliberate behaviour?

A deliberate inaccuracy in a document occurs when a person (or another person acting on behalf of that person) knowingly gives HMRC an inaccurate document.

“A person who submits a document containing a deliberate inaccuracy might assert that they did not intend to cause a loss of tax. For the purpose of assessing this loss of tax, the person or any persons acting on their behalf will be treated as deliberately causing the loss of tax if they consciously intended to mislead HMRC”.

Examples

  • knowingly failing to record all sales
  • describing transactions inaccurately or in a way likely to mislead
  • lodging a VAT return that includes a figure of net VAT due that is too low because the person does not have the cash at that time to pay the full amount, and later telling HMRC the true figure when he has the funds to pay
  • similarly declaring less tax due for aggregates levy, climate change levy, landfill tax or excise duty because the person does not have the funds at that time to pay the full amount

(This list is not exhaustive and HMRC provide more examples in the guidance).

Why is it important?

Mainly, there are different time limits within which HMRC can take action.

A 20 year time limit applies where tax has been underdeclared, or over-repaid, as a result of a deliberately inaccurate return or other document. The normal cap is four years.

Other action

Although HMRC can make assessments to recover any tax lost, it also have a criminal investigation policy and will refer the most serious cases for consideration of criminal proceedings where appropriate.

If you or your clients are subject to an investigation, please seek professional advice immediately. There is a dark side to VAT.