Tag Archives: vat-penalty

VAT: Avoiding a Default Surcharge. Reasonable Excuse – Update

By Marcus Ward 14 March 2022

I have looked at the Default Surcharge regime in detail here but as statistics show more business to be in default (which is probably accurately attributable, inter alia, to the pandemic) I consider how a penalty may be mitigated, by the provision of a “Reasonable Excuse”. HMRC has updated its internal guidance on Reasonable Excuse this month.

Specifically: HMRC state that “…where a person has not been able to meet an obligation on time due to the impact of COVID-19, HMRC will usually accept that they will have a reasonable excuse.”

What is a Default Surcharge?

The Default Surcharge is a civil penalty issued by HMRC to encourage businesses to submit their VAT returns and pay the tax due on time.

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.

More on late returns here and on late payments here.

New rules forthcoming

It is noted that there is a new regime for penalties, details here although these changes have been delayed until 1 January 2023

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. The onus is on a business to satisfy HMRC that it has a Reasonable Excuse.

Definition

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. There is a great deal of case law on this particular issue. Please contact us should there be doubt about a Reasonable Excuse.

What may count as a Reasonable Excuse?

HMRC give the following examples:

“your partner or another close relative died shortly before the tax return or payment deadline
you had an unexpected stay in hospital that prevented you from dealing with your tax affairs
you had a serious or life-threatening illness
your computer or software failed just before or while you were preparing your online return
service issues with HMRC online services
a fire, flood or theft prevented you from completing your tax return
postal delays that you could not have predicted
delays related to a disability (including mental health) you have”

This list is not exhaustive.

What is NOT a reasonable excuse

Statute identifies two specific situations that are not a reasonable excuse:

lack of funds to pay any VAT due, or
reliance on any other person to perform a task, where there has been a delay or inaccuracy on that person’s part.

There can be exceptions to these two exclusions. For example, an insufficiency of funds may be a reasonable excuse where the insufficiency is a result of events outside the person’s control.

HMRC also states that these situations would not normally be accepted, on their own, as a reasonable excuse:

pressure of work
lack of information
lack of a reminder from HMRC

Facts

HMRC will establish what facts the business believes gave rise to a Reasonable Excuse. The facts may include:

the taxpayer’s beliefs
the taxpayer’s own experiences and relevant attributes
the situation of the taxpayer at any relevant time
acts carried out by the taxpayer or someone else
acts that the taxpayer or someone else should have carried out but did not.

Case Law

Although not a VAT issue, in the Upper Tribunal (UT) case of Christine Perrin [2018] UKUT 156 [TC], the judge provided guidance on how the Tribunal should approach a Reasonable Excuse defence. There are four steps:

establish what facts the taxpayer asserts give rise to a reasonable excuse
decide which of those facts are proven
if those proven facts amount to an objectively reasonable excuse for the default
having decided when any reasonable excuse ceased, decide whether the taxpayer remedied the failure without unreasonable delay after that time

Appeal

If HMRC refuse to accept an advance of a Reasonable Excuse and the Default Surcharge is maintained, there are two potential remedies:

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

ask HMRC to review your case (A Statutory Review)
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 (SLNE) was sent. The letter should give the reasons why a business disagrees with the decision.

We are able to assist with all disputes with HMRC and have an enviable record of succeeding in having Default Surcharges removed.

VAT Inspections …and how to survive them

By Marcus Ward 5 January 2022

VAT Inspections

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

Background

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

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

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

More details on certain inspections/investigations here

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

The inspection – how to prepare

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

The inspection – during the visit

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

The inspection – at the end of the visit

The inspector should:

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

You should:

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

After the inspection

HMRC will write to you confirming:

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

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

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

VAT Registration

By Marcus Ward 4 January 2022

VAT Basics

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

Taxable Turnover

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

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

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

Catches

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

goods a business hired or loaned to customers

business goods used for personal reasons

goods which were bartered, part-exchanged or given as gifts

services a business receives from suppliers in other countries which are subject to a reverse charge

building work over £100,000 a business did for itself

zero-rated items (these are still taxable although no VAT is charged)

Timing

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

Future test

A business must mandatorily register for VAT if it expects its VAT taxable turnover to be more than £85,000 in the next 30-day period. This may be because of a new contract or a other known factors.

Registration exception

If a business has a one-off increase in income it can apply for a registration ‘exception’. If its taxable turnover goes over the threshold temporarily it can write to HMRC with evidence showing why the taxable turnover will not exceed the deregistration threshold (currently £83,000 in the next 12 months). HMRC will consider an exception and write confirming if a business will receive one. If not, HMRC will compulsory register the business for VAT.

Transfer of a going concern (TOGC)

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

Businesses outside the UK

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

Late registration

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

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

How to register

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

Between application and receiving a VAT number

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

Purchases made before registration

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

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

Once registered

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

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

VAT groups

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

Oops! – Top Ten VAT howlers

By Marcus Ward 2 November 2021

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:

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.
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.
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.
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.
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.
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.
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.
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.
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.
Forgetting the impact of the Capital Goods Scheme (CGS). 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: Fraudster ordered to pay £37 million

By Marcus Ward 5 August 2021

Latest from the courts

A high level fraudster who skipped his trial and fled to Dubai has been ordered to pay more than £37 million. Failure to do so will result in ten years in prison. He played a major role in this missing trader fraud (MTIC) which involves the theft of Value Added Tax from HMRC. He was part of a conspiracy to use a network of companies and a huge number of transactions to cover up the theft of VAT.

Adam Umerji, 43, was convicted in his absence of offences of conspiracy to cheat the government’s revenue and conspiracy to transfer criminal property, in a prosecution conducted by the CPS Specialist Fraud Division after a complex criminal investigation by HMRC.

Background

Missing trader fraud (also called missing trader intra-community fraud or MTIC fraud) involves the theft of VAT from a government by fraudsters who exploit VAT rules, most commonly the EU rules which provide that the movement of goods between Member States is VAT free. There are different variations of the fraud but they generally involve a trader charging VAT on the sale of goods and absconding with the VAT (instead of paying the VAT to the government’s taxation authority). The term “missing trader” is used because the fraudster has gone missing with the VAT.

A common form of missing trader fraud is carousel fraud. In carousel fraud, VAT and goods are passed around between companies and jurisdictions.

Businesses still owe £Billions after VAT deferral

By Marcus Ward 27 July 2021

Over 25% of VAT registered businesses that were permitted to delay VAT payments as a result of the pandemic still owe HMRC the tax deferred.

The now closed payment scheme permitted VAT registered persons to defer VAT payments due between March and June 2020 and around 600,000 businesses took advantage of the relief. The deadline was 30 June 2021, and it has been stated that over a quarter of business have failed to contact HMRC about their debts and have not made the necessary payments.

The total outstanding, according to The Treasury, is £2.7 billion which represents circa 9% of the VAT take. Of the tax deferred under the scheme, £17.8 billion has been paid and around £13 billion is being paid via monthly instalments.

HMRC have announced its approach to collection VAT debt after Covid19.

It has also become clear is that businesses and consumers have fallen into default during and after the pandemic. It is anticipated that the ability to settle of debts on time will decrease and it is apparent that many debts will never be settled. Consequently, it appears timely to look at the available relief. An article on VAT Bad Debt Relief here.

We would urge, that even if a business cannot make a payment, that it still submits VAT returns on time. It is tempting to accept a centrally issued assessment if it is for a lesser amount than the actual VAT due for the period. However, such action can, and often does, lead to penalties and increased interest from HMRC.

VAT registration delays – latest

By Marcus Ward 8 March 2021

Anecdotally, we understand that some businesses applying for registration are experiencing significant delays. Further, attempts to contact HMRC by email is often difficult, and telephones are regularly not answered (although we understand that some people have enjoyed more success with the webchat). Also, the Non-Established Taxable Persons (NETP) office has moved, right at the time when more EU businesses need to register in the GB due to Brexit. This has created an even longer backlog.

Confirmation

The Business Delivery Team at HMRC has confirmed that it is attempting to deal with a very high number of applications, which are being delayed for various reasons (not least by the sheer volume one expects). The department has also stated that the following actions and checks will assist with faster processing times and urges applicants to check that all information requested set out here is included with the application to avoid any further delays. The most salient being to use the online method rather than the hard copy. However, this is not always possible if additional documentation needs to be sent.

How to avoid common errors identified by HMRC

ensure that the addresses provided on the VAT 1 form matches the business’s principal place of business (PPOB)
check that the notification of a trade classification matches the supplies the business makes
the VAT treatment of activities must be correctly identified
the correct person must sign the application – eg; for a corporate body it must be a director, company secretary or authorised signatory or an authorised agent
ensure the correct registration date (effective date of registration – EDR) is given. And that the EDR is accurate considering the circumstances that have been outlined for requesting registration elsewhere in the application
the bank account details provided must be in the name of the taxable person

And I will add; do not forget form VAT5L when registering a business which is involved in land and property transactions.

The Business Delivery Team also stated that “We are also considering how we can improve the registration process by resolving more cases in real time by telephone and engaging with customers in a different way to gather any further required information. We’ll tell you more about this shortly.”

While any improvement in communication is to be welcomed, it remains to be seen what practical measures will be implemented to speed up registration processing and how soon these will be put in place.

VAT – Apportionment issues: Complex and costly

By Marcus Ward 16 February 2021

The dictionary definition of the verb to apportion is “to distribute or allocate proportionally; divide and assign according to some rule of proportional distribution”.

So why is apportionment important in the world of VAT and where would a business encounter the need to apportion? I thought that it might be useful to take an overall look at the subject as it is one of, if not the most, contentious areas of VAT. If affects both output tax declarations and input tax claims, so I have looked at these two areas separately. If an apportionment is inaccurate it will either result in paying too much tax, or risking penalties and additional attention from HMRC; both of which are to be avoided!

The overriding point in all these examples is that any apportionment must be “fair and reasonable”.

Supplies

The following are examples of where a business needs to apportion the value of sales:

Retail sales

Retailers find it difficult to account for VAT in the normal way so they use what is known as a retail scheme. There are various schemes but they all provide a formula for calculating VAT on sales at the standard, reduced and zero rate. This is needed for shops that sell goods at different rates, eg; food, clothing and books alongside standard rated supplies. As an example, in Apportionment Scheme 1 a business works out the value of its purchases for retail sale at different rates of VAT and applies those proportions to its sales.

Construction

A good example here is if a developer employs a contractor to construct a new building which contains retail units on the ground floor with flats above. The construction of the commercial part is standard rated, but the building of the residential element is zero rated. The contractor has to apportion his supply between the two VAT rates. This apportionment could be made with reference to floorspace, costs, value or any other method which provides a fair and reasonable result. The value of supplies relating to property is often high, so it is important that the apportionment is accurate and not open to challenge from HMRC. I recommend that agreement on the method used is agreed with HMRC prior to the supply in order to avoid any subsequent issues.

Property letting

Let us assume that in the construction example above, when the construction is complete, the developer lets the whole building to a third party. He chooses to opt to tax the property in order to recover the attributable input tax. The option has no effect on the residential element which will represent an exempt supply. Consequently, an apportionment must be made between the letting income in respect of the shops and flats.

Subscriptions

There has been a great deal of case law on whether subscriptions to certain organisations by which the subscriber obtains various benefits represent a single supply at a certain VAT rate, or separate supplies at different rates. A common example is zero rated printed matter with other exempt or standard rated supplies.

Take away

Most are familiar with the furore over the “pasty tax” and even with the U-turn, the provision of food/catering is often the subject of disputes over apportionment. Broadly; the sale of cold food for take away is zero rated and hot food and eat in (catering) is standard rated. There have been myriad cases on what’s hot and what’s not, what constitutes a premises (for eat in), and how food is “held out” for sale. The recent Subway dispute highlights the subtleties in this area. I have successfully claimed significant amounts of overpaid output tax based on this kind of apportionment and it is always worth reviewing a business’s position. New products are arriving all the time and circumstances of a business can change. A word of warning here; HMRC regularly mount covert observation exercises to record the proportion of customers eating in to those taking away. They also carry out “test eats” so it is crucial that any method used to apportion sales is accurate and supportable.

Opticians

Opticians have a difficult time of it with VAT. Examinations and advice services are exempt healthcare, but the sale of goods; spectacles and contact lenses, is standard rated. Almost always a customer/patient pays a single amount which covers the services as well as the goods. Apportionment in these cases is very difficult and has been the subject of disagreement and tribunal cases for many years; some of which I have been involved in. Not only is the sales value apportionment complex, but many opticians are partly exempt which causes additional difficulties. I recommend that all opticians review their VAT position.

Input tax recovery

Business/Non-Business (BNB)

If an entity is involved in both business and non-business activities, eg; a charity which provides free advice and also has a shop which sells donated goods. It is unable to recover all of the VAT it incurs. VAT attributable to non-business activities is not input tax and cannot be reclaimed. Therefore it is necessary to calculate the quantum of VAT attributable to BNB activities, that VAT which cannot be attributed is called overhead VAT and must be apportioned between BNB activities. There are many varied ways of doing this as the VAT legislation does not specify any particular method. Therefore it is important to consider all of the available alternatives. Examples of these are; income, expenditure, time, floorspace, transaction count etc.

Partial exemption

Similarly to BNB if a business makes exempt supplies, eg; certain property letting, insurance and financial products, it cannot recover input tax attributable to those exempt supplies (unless the value is de minimis). Overhead input tax needs to be apportioned between taxable and exempt supplies. The standard method of doing this is to apply the ratio of taxable versus exempt supply values to the overhead tax. However, there are many “special methods” available, but these have to be agreed with HMRC. Partial exemption is often complex and always results in an actual VAT cost to a business, so it is always worthwhile to review the position regularly. Exemption is not a relief to a business.

Attribution

In both BNB and partial exemption situations before considering overheads all VAT must, as far as possible, be attributed to either taxable or exempt and non-business activities. This in itself is a form of apportionment and it is often not clear how the supply received has been used by a business, that is; of which activity is it a cost component?

Business entertainment

At certain events staff may attend along with other guests who are not employed. The recovery of input tax in respect of staff entertainment is recoverable but (generally) entertaining non staff members is blocked. Therefore an apportionment of the VAT incurred on such entertainment is required.

Business and private use of an asset

If a company owns, say, a yacht or a helicopter and uses it for a director’s own private use, but it is chartered to third parties when not being used (business use) an apportionment must be made between the two activities. The most usual way of doing this is on a time basis. Apportionment will also be required in the example of a business owning a holiday home used for both business and private purposes. Input tax relating to private (non-business) use is always blocked.

Motoring expenses

It is common for a staff member to use a car for both business and private purposes. Input tax is only recoverable in respect of the business use so an apportionment is required. This may be done by keeping detailed mileage records, or more simply by applying the Road Fuel Scale Charge which is a set figure per month which represents a disallowance for private use.

The above examples are not exhaustive but I hope they give a flavour to the subject.

If your business apportions, or should apportion, values for either income or expenditure I strongly recommend a review on the method. There is often no “right answer” for an apportionment and I often find that HMRC impose unnecessarily harsh demands on a taxpayer. Additionally, many business are unaware of alternatives or are resistant to challenging HMRC even when they have a good case.

VAT – How to apply for a non-statutory clearance

By Marcus Ward 16 December 2020

One would think that it would be a relatively straightforward matter to write to HMRC to obtain a ruling (non-stat clearance) on a matter. Surely a taxpayer ought to be able to set out the issue, describe the transaction, provide a tax analysis and ask HMRC whether they consider the proposed VAT treatment appropriate. Well, of course, it is not as simple as that (this is VAT after all).

So, what are the issues and what hurdles must be cleared before HMRC engage with a written query?

Checklist

First, there is a checklist which a business must consider and include in a non-stat clearance. Inter alia, this list includes:

Information about the transaction(s)
The reasons why the business is undertaking the transaction
The relevant facts about the transaction, set out chronologically as transaction steps,
The answer sought – set out your view of the tax consequences of the transaction
Any details that are contingent, eg; on future events or the consent of others
Information about commercial background
Explain the significance of the tax result in achieving the desired outcome
Explain why you chose this form of transaction over another that could achieve the same commercial result, where you have considered alternative forms
Information about legal points
Outline the specific legislation at issue
Why you believe the application of the legislation is open to possible different interpretations, summary of those different interpretations, and why the tax consequences are uncertain, including reference to our published guidance or to case law
Any legal advice you have already received, and you are content to disclose
Details of how you intend to use the clearance, such as for public documents
Information about the disclosure of a tax avoidance scheme that covers all or part of the transaction

Failure to address any items on the checklist usually means no determination will be forthcoming.

An applicant must also set out what HMRC guidance (including internal guidance) legislation, case law and other information has been considered. We find it helpful to reproduce the full checklist (as HMRC advise) and provide a comprehensive response to each point in order to avoid a straightforward refusal to respond.

Genuine uncertainty

One of the main reasons HMRC refuses to provide a non-stat clearance is that it considers that there is no genuine uncertainty; in other words, “go and look at the guidance”. This is very unhelpful after time and effort, and fees cost has gone into the application. The fact that an application is required to set out what guidance etc has been considered, and why it is ambiguous in the relevant circumstances does not seem to carry very much weight. I find it is unhelpful to say, “if it wasn’t uncertain, we wouldn’t be writing to you”! We recommend that a full explanation of the genuine uncertainty is provided to forestall such a HMRC refusal to reply.

Chances

Experience insists that it is difficult to obtain a non-stat clearance which is of any value. Quite often, HMRC will reply saying that their letter is not a non-stat clearance, but then go on to address (at least) some of the issues. This sometimes provides a degree of comfort. An approach that I sometimes adopt is to say, “we believe this to be the correct VAT treatment, and one we will apply to the transaction unless you advise otherwise with reasons”. This sometimes creates a reaction.

HMRC guidance

Details of obtaining a non-stat clearance here.

Address

I find that applications are looked at quicker if they are emailed: nonstatutoryclearanceteam.hmrc@hmrc.gsi.gov.uk. However, there is a 2mb size limit which is often unhelpful. If emailing, an applicant should state that you confirm that you understand and accept the risks involved in using email (otherwise this can cause delays).

Postal address

HM Revenue & Customs, Non-Statutory Clearance Team, S0563. 5th Floor, Saxon House, 1 Causeway Lane, Leicester , LE1 4AA

What HMRC will not rule on

Incomplete information
When there is no genuine uncertainty
When they consider it planning advice, or approval of a planning arrangements
HMRC believes that the intention is to avoid tax
There is a statutory clearance applicable to the transaction
Whether activities constitute a business
Whether a transaction represents a Transfer Of a Going Concern (TOGC).

Reliance

Even if a business does obtain a determination, is it possible to rely on it? The answer is no (well, not always). I consider this here.

Summary

It is understandable that a business wants certainty on a transaction, and it ought to be able to rely on HMRC for confirmation of its own analysis, but obtaining such an opinion is fraught with difficulties, frustrations and (genuine) uncertainty. It seems that HMRC will go to lengths to avoid giving a decision, but they are not reticent in penalising a taxpayer once a business has made a decision, applied it, and HMRC subsequently disagree with the VAT analysis.

A wholly unacceptable situation.