A MATTER OF RECORDS

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A regular VAT bulletin for all ICPA members

A MATTER OF RECORDSMistakes in your record keeping could have serious consequences

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HALLELUJAH FOR PVA!Why Postponed Import VAT Accounting is a rare and beautiful thing

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NEW PENALTY REGIMENew rules come into effect next April. So what will change?

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Issue 41 October 2021

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WelcomeWelcome to the latest issue of VAT Update – another

issue packed, we hope, with interesting news and features designed to help you broaden your knowledge

and so do your job better.When VAT was first introduced in Britain – on

April Fool’s Day, 1973 – the then Chancellor of the Exchequer, Anthony Barber, famously said: “VAT is a simple tax.” Few accountants working today would agree! Our job is to make VAT as easily digestible as possible, but we would advise all our readers to seek

expert guidance where necessary. Many of the contributors to this e-magazine are experts

in the field and would be only too happy to help.

Best wishes, the ICPA team

Disclaimer The information contained in this publication is for general guidance only. You should neither act, nor refrain from acting, on the basis of any such information. Professional advice should be taken based on particular circumstances, as the application of laws and regulations will vary. Please be aware that laws and regulations are also subject to frequent change. While every effort has been made to ensure that the information contained in this publication is correct, neither the author nor his firm shall be liable in damages

(including, without limitation, damages for loss of business or loss of profits) arising in contract, tort or otherwise from any information contained in it, or from any action or decision taken as a result of using any such information.

ContentsCommon mistakes made in record keeping .......... 4

How to claim Bad Debt Relief ............................... 6

Postponed Import VAT Accounting explained ....... 8

Implications of Babylon Farm rulings ................... 10

When can VAT be recovered on cars? ................ 12

Tax gap hits £35 billion ....................................... 13

New penalty regime for next tax year .................. 14

PPI commissions are subject to VAT ................... 15

VAT matters: a digest .......................................... 16

VAT Update is produced for the ICPA by Armstrong Media (07970 426789).

VAT Update is published quarterly, in January, April, July and October. For details contact the ICPA,

Imperial House, 1a Standen Avenue, Hornchurch, Essex RM12 6AA.

Tel: 0800 074 2896/Fax: 01708 453 123. Email: [email protected]. Web: www.icpa.org.uk

MTD’s being imposed on

everyoneHMRC have published a policy paper outlining the final

phase of Making Tax Digital (MTD) for VAT returns which means that from April 2022 MTD's being imposed on

everyone .So far, the only VAT registrations that have had to comply

with MTD are those trading above the £85k compulsory registration threshold. This final phase of MTD means that the remaining approximately 1.1m VAT-registered businesses who are trading below the VAT threshold will also need to change their VAT accounting and become MTD compliant.

Seemingly, about a quarter of VAT registered businesses trading below the VAT threshold have already voluntarily chosen to join MTD, which HMRC see as demonstrating that a modern, digital approach to managing tax can work for businesses of every size.

So what this all means is that smaller businesses need to do something in order to comply with MTD.

It might be that an easy answer is to adopt an accounting package with an integrated VAT filer. Those currently using Excel for their accounting can continue to do so, but will need to adopt new methodology to ensure VAT data is handled digitally from start to finish.

These changes extend MTD requirements to smaller VAT businesses from their first VAT period starting on or after 01 April 2022. They build on what HMRC describe as “the successful introduction in April 2019 of MTD for those VAT businesses with taxable turnover above the VAT threshold”.

The policy paper refers to a “growing body of evidence, from research and insights from taxpayers within MTD for VAT, which demonstrates that MTD is securing a range of benefits for those that use it in practice. These benefits include reducing or eliminating paper-based or manual processes through use of software and an integrated approach to business administration and tax, allowing for greater accuracy in tax returns. This reduces the time businesses spend on administration, providing businesses more time to maximise business opportunities, productivity and profitability. MTD’s intention is that, for the majority of businesses, tax will be made easier to get right and harder to get wrong.”

April will be here before we know it so best to start thinking about this now and be ready for the new rules.

•Melanie Lord, Director, AVS VAT

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A matter of records…Les Howard describes a tax dispute and appeal that highlights a number of key

areas where mistakes are often made

From time to time a Tax Tribunal decision seems to bring together a large number of key principles and procedures. The Timothy Lock decision breaks no new ground and

creates no important precedent but might well be considered a useful case study for accountants who wish to specialise in VAT.

BACKGROUNDTimothy Lock ran Woodborough Hall in partnership with his wife. It is not clear whether the business is a sole trader or a partnership. That matters!

The appeal was in relation to around £85,000 of disallowed input tax. This had varied repeatedly during HMRC’s intervention. At times it must have been difficult for the taxpayer to know how much was assessed.

During a HMRC officer’s visit, in June 2015, it was revealed that the taxpayer’s computer’s hard drive had burnt out; there was no Sage backup and no ‘cloud’ backup. That unfortunate (and hopefully unusual) series of disasters meant there were no primary records. In particular there was no purchase ledger and no purchase invoices. This meant the taxpayer had a huge task to reconstruct several years of records (I will resist any suggestion that we should immediately stop Making Tax Digital and return to pen and paper!).

Of course, it is time consuming to reconstruct records. After four months, HMRC began to lose patience and issued a Sch 36 Information Notice. Non-compliance with a Sch 36 Notice leads to a penalty and more stress.

The FTT decision records that the first VAT assessment was for around £257,000. There was correspondence between the parties, invoices and other evidence for input tax provided, assessments amended, over the following 18 months. The fifth VAT assessment was for around £189,000.

ALTERNATIVE DISPUTE RESOLUTIONThe taxpayer applied for Alternative Dispute Resolution (ADR), which took place in January 2018. This is a useful option in such a messy situation. It avoids the more confrontational approach of the Tribunal and is better suited to finding resolution. Following the ADR, there was a further substantial reduction in the assessment to around £115,000 with the receipt of alternative evidence for input tax.

And there is reference to the amended assessment being ‘based on averages.’ This was due to Mr Lock making many purchases from supermarkets, with no VAT analysis on the invoices (till receipts). Of course, input tax can be claimed on less detailed VAT invoices where the invoice value is less than £250. Over that value, a modified or a proper VAT invoice is required. Paras 55-59 of the decision explain the methodology. It is a valid point to make here that, in the absence of complete records that HMRC can undertake a best judgment estimation. Similarly, in the absence of complete records a taxpayer can suggest that such an estimate be made.

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QUANTUMMixed in the overall picture were a series of default surcharges, where Returns were submitted or paid late. Further, there were a series of ‘central’ assessments issued in the absence of Returns (para 66). And s73(8) allows HMRC to issue ‘inflated’ assessments where the taxpayer has failed to submit Returns. I have no doubt that was part of the picture.

My observation at this point is that non-compliance in one respect usually indicates non-compliance elsewhere. A failure to maintain adequate records was accompanied by persistent late and non submission of VAT Returns.

Advisers do well to remind taxpayer clients that VAT penalties and surcharges tend to grow exponentially. Mr Lock had persistently failed to submit Returns either on time or at all in 2016-2019. This period went beyond the VAT Return periods which were subject to appeal but will not impress the Tribunal! Was the taxpayer not told of the possibility of submitting estimated Returns?

Mentioned, almost in passing, in this case, is that HMRC had issued a winding up petition in August 2016 for £274,931.83. If you let VAT get out of hand, it will!

DOCUMENTATIONAt some stage, Mr Lock provided a substantial volume of hard copy documents for HMRC review. This is commented on in the HMRC Officer’s evidence in paras 62-64.

Making Tax Digital is intended, in part, to prevent such a rigmarole, but it won’t! There will always be a number of taxpayers whose records are not up to scratch. There is a standard receipt form that HMRC issue to the taxpayer where they wish to uplift records for examination (I remember the carbon paper version!).

The decision highlights a dispute about the number of boxes of documents which were uplifted. Were there 13 or 16? Had the receipt been properly completed, this dispute would not have arisen. Oddly, the Officer admitted to not having checked every document, but making sample checks. Given that the assessment was largely based on whether the taxpayer had sufficient evidence for input tax claims, this admission should have been challenged by the taxpayer.

CORRESPONDENCE AND TIMELINEThe decision also refers to correspondence that had gone astray and meetings that were not attended. Usually, both sides are culpable! Ideally a taxpayer (or adviser) will keep an accurate and up-to-date record of all communication with HMRC. HMRC’s own record is frequently incomplete. I recently came across an instance where the taxpayer was able to complete HMRC’s own incomplete record! Of course, where a taxpayer has failed to retain complete accounting records, he is unlikely to have maintained a comprehensive record of correspondence.

Part of the taxpayer’s evidence was that he thought that the settlement of the winding up petition meant that all dispute with HMRC was finalised. The FTT said that this was not true and that HMRC was not bound by any such agreement. Again, careful comparison of the winding up petition against the various assessments and surcharges would have resolved this issue.

APPEAL GROUNDSMoving on to the grounds of the appeal, summarised by the FTT in para 136. I have no doubt that this is the Tribunal’s attempt to summarise a meandering narrative provided by the taxpayer in

his Trib 1 form:

•The charges arose principally as a result of the removal by their officer of all input tax, despite providing the primary records to HMRC.

•While this is the primary issue there are also several other arbitrary calculations and estimates despite provision of supporting documentation such as till receipts and bank statements.

•The supporting documentation is held in 14 filing boxes of information which are available to reference if required.

•The Appellant’s input tax is calculated as values from purchase invoices and cash receipts for goods purchased.

•The HMRC calculations do not take into account the full value of the input tax.

PRECISION IS ESSENTIAL.We are all used to reading vague and waffly HMRC correspondence and guidance. But that is no excuse for doing the same! If there is a dispute between the taxpayer and HMRC, what exactly is that dispute? Is it output tax or input tax? Is it a matter of principle or quantum? You may not be able to quote the legislation (although that is helpful), but it is important to be able to state precisely the issue(s). Whether you are writing to HMRC of drafting an appeal to the Tax Tribunal, be precise.

INCOMPLETE RECORDSTurning to HMRC’s and the Tribunal’s approach to the problem of incomplete records, the ‘best judgment’ test was set down originally in the Van Boeckel case ([1981] STC 290):

•The Commissioners are required to exercise their powers in such a way that they make a value judgment on the material that is before them. Clearly they must perform that function honestly and bona fide.

•There must be some material before the Commissioners on which they can base their judgment.

•The Commissioners should not be required to do the work of the taxpayer in order to form a conclusion as to the amount of tax which, to the best of their judgment, is due; and

•The Commissioners will fairly consider all material placed before them and, on that material, come to a decision which is one which is reasonable and not arbitrary as to the amount of tax due.

The taxpayer has to appreciate that ‘best judgment’ applies in this context because he has not complied with his legal obligations to retain records under VAT Act 1994, Sch 11, in particular in regard to evidence for input tax deduction. The issue of the Sch 36 Information Notice is further indication of HMRC’s concern.

On appeal, the Tribunal will start at the point that the taxpayer had failed to comply with legislation. The taxpayer may be said to be at a disadvantage, but that is largely of his own making.

CONCLUSIONTaxpayers rarely understand the way legislation and procedures applicable to VAT. To misquote Arsene Wenger, VAT is an art, not a science. Taxpayers will need help to understand properly and navigate effectively the VAT maze that lies ahead of them.

•Les Howard is a partner in vatadvice.org, a specialist VAT practice based in Cambridgeshire. Contact him at [email protected]

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How to claim Bad

Debt ReliefCatherine Gearing explains how a recent

tribunal case highlights what not to do when making a claim for Bad Debt Relief

The recent VAT tribunal case of Regency Factors plc provides a salutary lesson on how to claim Bad Debt Relief (BDR) and, perhaps more importantly, how to avoid problems with

the claim.The Upper Tier Tribunal decision (2021 BVC 502) demonstrates

how important it is to keep accurate, complete records and to fulfill the obligations contained within the BDR rules. Regency Factors had appealed against a VAT assessment for £164,932 but found itself having its claim for BDR denied. The appeal was lost due a complicated accounting system that HMRC considered did not comply with regulations. Unfortunately for Regency both the First Tier (FTT) and the Upper Tier (UTT) tribunals agreed with HMRC.

THE CASE Regency Factors were buying debts from their clients and taking over the collection of those debts. Once the debts were assigned by its clients, Regency could pay an advance which was a percentage of the debt to be collected less their fee.

They kept a running balance of funds available to the clients and fees due, which was represented by the issue of monthly invoices plus VAT. Regency claimed for BDR on fee invoices where it was unable to recover the associated debts – which actually seems fair enough. However, and unfortunately for Regency, it is not that straightforward!

Regency’s accounting system was complicated and HMRC found it difficult to quantify the taxable amount that was unpaid. HMRC disallowed the BDR that Regency had claimed on its VAT Return on the grounds that it had already received consideration for the supplies and therefore no relief fell due.

Regency appealed the assessment, but the FTT agreed with HMRC that there were no bad debts as the point at which the advance to the client was made was the time at which the consideration was received. This was contrary to Regency’s Chief Executive’s assumption that the charges were not paid until collections exceeded the sums of advance payments. The FTT went on to state that the running account balance made it impossible to apportion credits to a particular invoice.

Regency appealed the FTT decision to the UTT and argued that the advance was not always drawn down and that in these cases the invoices had remained unpaid. Accordingly, Regency should be able to claim BDR for these invoices.

The UTT agreed with Regency that the FTT’s decision did not apply to all of the bad debts but concluded that Regency had

not maintained a single account of bad debts and therefore the record keeping did not meet the conditions required by regulation. It followed that HMRC were correct to deny the BDR claim, and Regency lost the case.

HOW THE BDR RULES WORKThe BDR rules are set out in the VAT regulations including the specific record keeping requirements that must be met before any BDR claim can be made. So how to claim Bad Debt relief? The rules against which Regency’s appeal was tested are summarised below.

Normally, a VAT-registered organisation can claim BDR against VAT paid to HMRC on unpaid sales invoices. There are certain conditions for claiming BDR and it is important to know what they are. In order to make a BDR claim you must have:1. Already accounted for VAT on the supplies and paid it to

HMRC. 2. Written off the debt in your accounts.

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3. The value of the supply must not be more than the customary selling price.

4. The debt must not have been paid, sold or factored.5. The debt must have remained unpaid for six months.

In support of a BDR claim the regulations stipulate what records need to be kept which are: 1. A copy of the VAT invoices for the supplies on which BDR is

being claimed.2. A separate Bad Debt Account showing:

a. The amount you have written off as a bad debt.b. The amount of VAT you wish to claim as bad debt relief.c. The VAT period in which you have claimed a refund.d. The total amount of VAT charged on each supply.e. The VAT period in which you originally accounted for VAT on

the supply.f. Any payment received for each supply.g. The name of your customer.h. The date and number of the invoice to which the bad debt

relates (if you did not issue an invoice you must include sufficient information to allow the time and type of the supply to be readily identified).

ISSUES HIGHLIGHTED IN THE CASEThis case highlights the importance of identifying the taxable amount and maintaining a Bad Debt account. The decision addresses the basic principle of the VAT system described in the precedent case of Elida Gibbs Ltd (Case C-317/94). [1997] BVC 80) being that the taxable amount serves as the basis for the VAT to be collected and this cannot exceed the consideration actually paid.

It also addresses the time when a taxable amount is paid and the circumstances in which the taxable amount can be reduced after a supply has taken place.

•Catherine Gearing, Tax Technician, AVS VAT. Call 01438 716176 or email [email protected] to arrange a free 30 minute chat about anything you’re not sure about

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Hallelujah for PVA!Kelly Eland explains why Postponed Import VAT Accounting is a rare and

beautiful thing

Overshadowed by Brexit and the mayhem that came with it, Postponed Import VAT Accounting (PVA) was introduced in the UK with effect from 1 January 2021. It is a beautiful

rose among the thorns of the past 18 months, but sadly seems to have passed many smaller to medium sized businesses by. So what is it, how does it work and how can you take advantage of it?

In a nutshell, PVA means that an importer does not need to actually pay anything over to HMRC (unless duty is due), so this is great news for cash flow.

WHAT IS IMPORT VAT?Taking a small step back, it’s probably useful to think about what import VAT is. This is VAT due on the movement of goods cross border; a tax upon goods coming into the UK. It follows the rate of VAT of the underlying goods that are bought in.

While a tax upon entry, import VAT (unlike customs duty) should be recoverable so long as the importer (typically the business bringing the goods into the UK) is registered for VAT and is able to recover VAT in the normal course of events. Import VAT paid is claimed by these businesses in the same way as ‘input VAT’ (VAT on purchases) through the VAT return covering the date of import.

WHEN DO I NEED TO PAY IMPORT VAT?Prior to the introduction of PVA, there were two main ways in which businesses could settle their import VAT bill upon bringing goods into the UK.

The first, and least preferable, is to pay import VAT as soon as goods enter the UK. This can delay goods coming through Customs and creates the worst possible cash flow position. For example, if goods are imported into the UK on 2 January 2021 and the business submits calendar quarter returns, its import VAT claim will be delayed until the March return is submitted. This means that import VAT paid on 2 January would not be recovered until May.

The second, and until this year, most efficient method, was to set up a duty deferment account with HMRC or use an import agent’s duty deferment account.

Using either variation of this option, businesses or their agent would set up a duty deferment account, effectively a line of credit, with HMRC supported by a bank guarantee. The import VAT due

would be taken by direct debit on the 15th of the month following the import. Using the example above (but with a duty deferment account), the goods would enter the UK on the 2 January, import VAT would be paid to HMRC by direct debit on 15 February. The importer would then use HMRC’s monthly import VAT statement (the C79) as evidence for a reclaim of import VAT on March return so that the repayment would not be achieved until May 2021.

HALLELUJAH FOR PVA!As of 1 January 2021, importers can choose to ‘postpone’ their import VAT accounting until their VAT return is due.

Put simply, the importer notifies their import agent/freight forwarder/courier that they wish to use PVA. A box on the import documentation is ticked and HMRC is notified that the business will account for their import VAT through the VAT return. Accordingly, HMRC issues the business with monthly PVA statements which the business then downloads and accounts for both the import VAT due and the associated reclaim via the same VAT return.

Using PVA for the same example as above, the business imports the goods on 2 January 2021 but opts to use PVA. When the March VAT return is due to be compiled, the business accesses HMRC’s online system and downloads the PVA statements for January, February and March 2021. The total value of import VAT is then entered into boxes 1 and 4 of the VAT return. In this way, the import VAT is simultaneously paid and recovered. Nice and easy. Cash flow issues disappear. Hallelujah for PVA!

WHAT DO I NEED TO DO TO BENEFIT FROM PVA?The great news is that there is no authorisation or registration required for businesses to use PVA. All that is required is that the business notifies their import agent in writing that they wish to avail themselves of PVA. It would also be advisable to request acknowledgement of the request. The switch should be immediate and the cash flow benefits will fall into place straight away too. Customs duty will still need to be paid on the basis of option 1 or 2 above, but hey, you can’t win them all!

•Kelly Eland, Senior Specialist, AVS VAT. Call 01438 716176 or email [email protected] to arrange a free 30-minute chat about anything you’re not sure about

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When is a business not a business? When it no longer qualifies for VAT registration, writes Sarah Halsted

It is well understood in the business world that an entity must have an economic activity to be VAT registered and eligible to recover VAT on related costs. While this basic concept has been in place ever since VAT was

introduced, the UK courts and HMRC have been refreshing their view of it lately in light of some more in-depth European case law that has emerged in recent years.

This has been highlighted in an appeal brought by Babylon Farm Ltd, whose directors, Mr and Mrs McLaughlin, also operated a farm as a partnership. Babylon Farm Ltd was set up to undertake certain farming activities alongside their main farming business, and had been VAT registered separately since 1991. Mr McLaughlin also owned several other non-farming businesses which he operated through separate limited companies.

By the time HMRC looked at the company’s affairs in 2018, Babylon Farm Ltd had only one remaining activity, that of cutting and baling hay, which it sold to Mr McLaughlin for use in his own livery business. Income from this amounted to just £440 per year. HMRC’s attention was drawn to the company by a claim for input VAT of £19,000 which Babylon Farm Ltd had made on the construction of a new barn to house its haymaking equipment.

HMRC decided that the company no longer had a business activity for VAT purposes and disallowed this VAT recovery. The Upper Tribunal has now supported this decision. While Babylon Farm Ltd’s haymaking activity still continued, was producing regular, albeit seasonal income, the tribunal found that this activity was not conducted on sound and recognised business principles. The company had no staff, did not hold insurance to cover the activity and there was no evidence that it actually had title to the hay it sold, which was harvested from land owned by Mr and Mrs McLaughlin.

There had been no efforts to obtain other customers, and the company’s profitability was entirely dependent on Mr McLaughlin’s

judgment as to where costs and revenue should be allocated between his various activities. The tribunal also noted that the company had fallen out of the habit of invoicing for and collecting its income from the livery business for a few years, until this was identified as necessary to support claims for input VAT. There was also a significant mis-match between the cost of the new barn versus the income it would generate.

While the Babylon Farm case may be appealed further, the Upper Tribunal decision shows that a small amount of regular taxable income may not be enough to support a business’s continued registration and VAT recovery. The impact of this is by no means restricted to farming. Most sectors have operators who have left subsidiary entities to ‘tick over’ while their owners concentrate on other interests. If they also recover input tax from HMRC, this could be at risk.

The relevant factors that determine whether there is a legitimate business activity will vary widely according to individual circumstances. Also, the Upper Tribunal’s decision does not pinpoint a moment in time when Babylon Farm ceased to be in business for VAT purposes, only that this had already happened by 2014, the beginning of the period covered by its VAT inspection.

Owners of VAT registered businesses who have scaled back their activities or left one of their entities in an almost dormant state should take steps to review the risk to their VAT recovery in the light of the Babylon Farm case and other recent case law.

Of course, VAT is only one tax where it is complex yet very important to determine whether the taxpayer is trading as a business. What constitutes a business for one tax may not for another, with varying consequences. Business owners operating more than one entity should ensure their activities still qualify as a ‘business’ for VAT purposes.

•Sarah is RSM’s VAT Technical Associate Director

Making hay…

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VAT fraudster jailed after eight years on the run

A VAT fraudster who fled the country eight years ago to escape justice has been jailed for four years.

Mohammad Tanwir Khan, of Heaton Moor, Stockport, ran a company called Spearpoint Limited and absconded to Pakistan after he was convicted of an £817,000 VAT fraud in 2013.

An investigation by HMRC revealed he used more than 350 false invoices linked to fictitious exports to pocket VAT repayments he was not entitled to. The 66-year-old fled the country after he was found guilty and was sentenced in his absence to three-and-a-half years in August 2013. He was also ordered to repay £696,749 or face another three years in prison.

Khan returned to the UK and was arrested by HMRC officers on 13 August 2021.

On 18 August 2021, he appeared at Manchester’s Nightingale

Crown Court via video link where his sentence was confirmed. He was also sentenced to another six months in prison for absconding.

Eden Noblett, Assistant Director, Fraud Investigation Service, HMRC, said: “Khan stole more than £800,000 of taxpayers’ money and thought he could escape punishment– but now he must serve his sentence.

“Tax crime robs our vital public services of much-needed funds. Our actions do not stop at conviction and we will always seek to recover the proceeds of crime.”

Confiscation proceedings to recover the stolen VAT remain ongoing. If Khan fails to pay the confiscation order, he faces another three years behind bars and still owe the money, and any interest accrued.

Motoring mattersWhen can VAT be recovered on cars and expenses?

Many businesses provide cars and fuel for their employees’ use. Sometimes the car may

be required for business trips by the employee. In some cases, the car is provided as part of the employee’s salary package.

In most cases even where an employee needs the car to perform his work the employee will also be entitled to make use of the car for private purposes. Since many business cars are not solely used for business, VAT recovery of the purchase and leasing of cars is restricted under the VAT rules.

PURCHASE OF CARS There is a 100% block on recovering VAT on the purchase of a car by a VAT registered business. This applies to the majority of cars purchased by businesses. HMRC take the view that as long as a car is available for private use VAT is blocked in full.

This block of input VAT recovery also applies to electric vehicles. While there are tax reliefs for electric vehicles VAT is still blocked.

HMRC do allow businesses who use cars “exclusively for business use” to recover VAT. A car is used exclusively for business purposes if it is used only for business and it is not available for private use. In practice, this means VAT can be recovered only when the car is kept at the business premises, it is not allocated to an individual and not kept at an employee’s home. HMRC are extremely strict about VAT recovery and will typically challenge VAT recovery.

WHEN CAN VAT RECOVERED? VAT is also recoverable if a car is purchased by a motor dealer, a car intended to be used primarily as a taxi, driving instruction car,

or self-drive hire. If a business purchases a car for one of these purposes and recovers the VAT and subsequently the business changes the use of the car, then a self-supply charge may apply which could result in the business having to pay back the VAT.

CAR-DERIVED VANS AND COMBINATION VANS In contrast to the above, a business can recover VAT on a commercial vehicle such as a van. There are certain cars which are altered to provide the functionality of a van. HMRC have produced a list of car-derived

vans and vans with rear seats (combi vans) and duel cab pick-ups, showing whether they’re classed as a commercial vehicle or a car for VAT purposes. As vehicle specifications often change the list may not always be up to date, so businesses should check with HMRC before reclaiming the VAT.

In practice many dealers are able to advise if the vehicle is one which can be treated as a commercial vehicle and therefore eligible for VAT recover.

If a van is put to private use, HMRC may require the business to account for output VAT to represent the private usage element.

SECONDHAND CARSIt follows that if a business is unable to recover VAT when purchasing a car, it does not need to account for VAT when it sells the car. Such a sale is treated as an exempt supply from a VAT perspective.

It is worth remembering that most purchases of secondhand cars are not subject to VAT. When a business purchases a secondhand car there will be no VAT on the invoice and therefore no VAT may be recovered.

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VAT rate to rise for hospitality sectorTemporary measures lowering of the

VAT rate to 5% for firms working in hospitality ended on 30 September,

being replaced by a 12.5% VAT rate on 1 October 2021.

The temporary reduction was brought in as a result of the impact of the pandemic on the sector.

The 12.5% VAT rate will apply until the 31 March 2022, at which point the rate will return to the standard rate of 20%. The reduced VAT rate applied to supplies of:

•Catering and non-alcoholic beverages for consumption on premises.

• Hot takeaway food and hot takeaway non-alcoholic drinks.

• Hotel and holiday accommodation including charge fees for caravan & tent pitches.

• Admission to certain attractions.Organisations that qualify as a ‘cultural

body’ in a VAT context should note that their admission charges are VAT exempt in liability

and will not qualify for the reduced rate.All supplies made from 1 October 2021 will need to have VAT at

the 12.5% rate calculated on them, and this must be fed into the VAT return declaration for that period.

The tax gap hits £35bn in 2019/20HMRC has announced that the tax gap for 2019/20 reached

£53bn, or 5.3%. This is the gap between the expected tax that should be paid to HMRC and what is actually paid.

Total tax liabilities for the year were £674 billion.The ‘VAT gap’ was estimated to be £12.3 billion in the tax year

2019 to 2020. This equates to 8.4% of net VAT total theoretical liability.

It has increased from 7% in tax year 2018 to 2019 to 8.4% in 2019 to 2020. Growth in VAT receipts (1.8%) was slower than the growth in the net VAT total theoretical liability (3.3%).

The tax gap provides tool for understanding the relative size and nature of non-compliance. This understanding can be applied in many different ways:

•it provides a foundation for HMRC’s strategy – considering the tax gap helps the government to understand how non-compliance occurs and how it can be addressed.

•the analysis provides insight into which strategies are most effective at reducing the tax gap.

•it provides important information which helps HMRC understand its long-term performance.

•provides information to the public on tax compliance, creating greater transparency in the tax system.

WHY IS THERE A TAX GAP?The tax gap arises for a number of reasons. Some taxpayers make simple errors in calculating the tax that they owe, despite their best efforts, while others don’t take enough care when they submit their returns. Legal interpretation, evasion, avoidance and criminal attacks on the tax system also result in a tax gap.

Around £3.7 billion of the gap is estimated to be due to error and £3 billion due to the hidden economy.

Some £15.1 billion of the gap is attributed to small businesses and £6.1 billion is attributed to large ones, with £5 billion attributed to medium-sized firms.

Taxpayers paid more than £633.4 billion in tax during 2019/20, an increase of more than £100 billion since 2015/16, when the total revenue paid was £532.5 billion.

CAUSE OF THE TAX GAPHMRC estimate that the causes of the tax gap are:

•Failure to take reasonable care £6.7bn – 19%

•Legal interpretation £5.8bn – 16%

•Evasion £5.5bn – 15%

•Criminal attacks £5.2bn – 15%

•Non-payment £4bn – 11%

•Error £3.7bn – 10%

•Hidden economy £3bn – 8%

•Avoidance £1.5bn – 4%

WHO IS RESPONSIBLE?HMRC estimates that responsibility for the tax gap breaks down as:

•Small businesses £15.1bn – 43%

•Large businesses £6.1bn – 17%

•Criminals £5.2bn – 15%

•Mid-sized businesses £5bn – 14%

•Individuals £2.6bn – 7%

•Wealthy £1.5bn – 4%The impact on the tax gap from the coronavirus lockdowns and

economic downturn is likely to be first seen in the 2020/21 figures, which will be released next year.

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New VAT penalty regime to start in April 2022

HMRC is reforming the existing regime with a £200 points-based late submission penalty. Here’s an extract from ACCA summing up the salient points

The reforms will come into effect as follows:

• VAT taxpayers for accounting periods beginning on or after 1 April 2022.

•Income Tax Self Assessment (ITSA) Return for taxpayers with business or property income over £10,000 per year (who are required to submit digital quarterly updates through Making Tax Digital for ITSA) for accounting periods beginning on or after 6 April 2023, and to all other ITSA taxpayers for accounting periods beginning on or after 6 April 2024.

This measure introduces a new points-based penalty regime for regular tax return submission obligations, which replaces existing penalties for VAT and ITSA.

Legislation will be introduced in Finance Bill 2021 to create two new schedules.

The first schedule will provide for the new points-based late submission penalty regime for VAT and ITSA. This legislation will set the financial penalty at £200.

The second schedule will replace the deliberate withholding penalty for ITSA (currently set out in paragraphs 6(3)(a) and (4)(a) of Schedule 55 to Finance Act (FA) 2009) so it works effectively with the new points-based regime.

LATE SUBMISSION PENALTIESWhen a taxpayer misses a submission deadline they will incur a point. Points accrue separately for VAT and for ITSA.

A taxpayer becomes liable to a fixed financial penalty of £200 only after they have reached the points threshold.

The level of points threshold depends on the taxpayer’s submission frequency: Annually = 2 points / Quarterly = 4 points / Monthly = 5 points.

Individual penalty points accrued will automatically expire after 24 months provided the taxpayer remains below the points threshold. After the points threshold has been reached all points will expire after the taxpayer has met their return obligations for a set period of time based on their submission frequency: Annually = 24 months / Quarterly = 12 months / Monthly = 6 months.

If the taxpayer continues to miss submission deadlines after they have reached the points threshold and have been issued with a penalty, they will become liable for a further fixed rate penalty for each additional missed obligation. This is the case even if they have paid the fixed rate penalty.

In common with other tax penalties, a taxpayer will not be liable to a point or penalty if they had a reasonable excuse for not

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making the relevant submission on time and will have a right to appeal against both points and penalties.

LATE PAYMENTThe new late payment penalty will consist of two separate charges. The first charge will become payable 30 days after the payment due date and will be based on a set percentage of the balance outstanding. The amount of that charge will depend on payments made or Time to Pay (TTP) arrangements that are agreed during those first 30 days.

There is no penalty at all if the taxpayer pays the tax late but within 15 days of the due date.

The first penalty is set at 2% of the outstanding amount if they pay between 16 and 30 days after the due date. It is set at 4% of the outstanding amount if there is tax left unpaid 30 days after the due date.

A second late payment penalty is charged at a rate of 4% per annum, calculated on a daily basis on the total unpaid tax incurred from day 31.

To avoid a penalty or penalties, the taxpayer will need to either pay or approach HMRC to agree a Time to Pay Arrangement, as shown in the table below.

FIRST CHARGE0–15: Payments made or taxpayers proposes a TTP that is eventually agreed= No penalty is payable16–30: Payments made or taxpayers proposes a TTP that is eventually agreed= Penalty will be calculated at half the full percentage rate (2%)Day 30: No payment made, no TTP agreed= Penalty will be calculated at the full percentage rate (4%)

SECOND CHARGEA second charge will also become payable from day 31 and will accrue on a daily basis, based on amounts outstanding. As with

the first charge, the taxpayer can agree a TTP with HMRC.The penalty will stop accruing from the date the TTP is

agreed.

NOTICE OF PENALTYBoth the first charge and second charge will be notified to the taxpayer and any amounts shown as payable on the notice will be required to be paid, or appealed, within 30 days of the date of that notice.

In common with other tax penalties, a taxpayer will not incur a late payment penalty if they had a reasonable excuse for not making the payment on time and will have a right to appeal against late payment penalties.

INTERESTLegislation will align the interest rules for VAT to ensure they follow similar rules to those for ITSA. Provisions similar to the current FA 2009 s101, s102, Schedules 53 and 54 will be enacted to apply to VAT accounting periods starting after April 2022.

The measure will ensure that in VAT, where a payment is made after the due date, late payment interest will be payable from the date that payment became due until the date it is received by HMRC.

Late payment interest will also apply to VAT returns, VAT amendments and assessments and VAT payments on account.

Additionally, repayment interest will be payable in VAT either from the last day the payment was due to be received or the day it was received, whichever is later, until the date the repayment to the taxpayer is authorised or offset. Where a VAT repayment return has been received HMRC will not pay interest:

•for periods of reasonable enquiry where a full response has been received.

•for periods where HMRC needs to correct errors or omissions in the return.

•where security has been requested and not provided.

••Thanks to ACCA for this article

Upper Tribunal: PPI claims company commissions were subject to VAT

In Claims Advisory Group Limited v HMRC [2021] UKUT 0199, the Upper Tribunal (UT) confirmed that claiming Payment Protection Insurance (PPI) compensation on behalf of individuals

was not a VAT exempt supply of insurance services.

•Claims Advisory Group Limited (CAG) made claims on behalf of individuals who had been mis-sold PPI. • Where claims were successful, the relevant financial

institution would repay the PPI premiums previously paid, plus interest.

• CAG received a fee for its claim services which was based on a percentage of the compensation paid.

•CAG argued that its fees were exempt from VAT. • Insurance and reinsurance transactions and related services

performed by insurance brokers and insurance agents are exempt from VAT under Group 2 of Schedule 9 to the VATA 1994.

In 2019, the FTT found that the supplies made by CAG were standard rated. The essence of an insurance contract is indemnity against a risk. That was not present in this case.

•CAG was assisting its customers with the making of claims for compensation, not the termination of insurance relationships or providing insurance transactions or services related to insurance contracts.

•For similar reasons, the FTT rejected the alternative argument that the company was an insurance agent.

CAG appealed to the UT on the basis that the FTT erred in law. The UT dismissed all grounds of appeal, agreeing with the findings of the FTT.

•CAG’s supplies to its customers did not fall within the VAT exemption as they were not insurance transactions or services performed by an insurance agent that were related to insurance transactions.

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VAT mattersHere is our round-up of some of the latest cases, rulings and developments in the

world of VAT

n LAURE NCE SUPPLY CO: DUTY CLASSIFICATION OF LEATHER HANDBAGS

The rate of customs duty on leather handbags that have ‘an outer surface of textile materials’ is 6% lower than if they are covered in plastic sheeting, so it is important to classify them correctly.

HMRC examined two samples obtained from Laurence Supply Co (Leather Goods) Ltd (‘LSC’), and concluded that one fell into each category.

When LSC failed to respond fully to follow-up questions, HMRC concluded that all of the handbags (except for the single model that HMRC had classified at the lower rate) were covered in plastic, and issued a post-clearance demand notice. LSC appealed to the FTT, and applied (in effect) for summary judgment on the basis that its imports should clearly have been classified at the lower rate.

That application, in the FTT’s judgment, was “entirely misconceived”. As with VAT appeals, the taxpayer faces the burden of proving its case in an appeal against an assessment or demand issued by HMRC. Even if the classification of some of LSC’s imports at the lower duty rate is not contentious, LSC will now have to justify that treatment in tribunal, which is likely to be a more challenging process than addressing it in correspondence with HMRC.

n VAT PAYMENT DEFERRAL – PENALTIESHMRC have updated their guidance on VAT deferred due to coronavirus to confirm the penalty regime that applies if the VAT deferred on payments due between March and June 2020 was not paid in full or a payment arrangement was not made by 30 June 2021.

An arrangement to pay could include either joining the VAT Deferral New Payment Scheme (to make instalment payments) or entering into an agreement to pay with HMRC. The penalty will be charged at 5% of the deferred VAT unpaid when the assessment is made, and the penalty must be paid within 30 days of the date of the assessment.

n PLASTIC PACKAGING TAX: GUIDANCE UPDATED

The Plastic Packaging Tax (PPT) is due to come into effect from 1 April 2022 and is likely to affect a wide range of businesses in supply chains involving the manufacture or importation of plastic packaging materials.

On 20 July 2021, when draft clauses for the Finance Bill were published, HMRC also updated the guidance on how businesses can

start preparing for the introduction of PPT to include details of packaging components that are not subject to PPT.

HMRC have indicated that further guidance will be issued before the introduction of the tax. Nevertheless, based on the information already available, businesses can use the lead time to the implementation of the tax to determine their PPT registration and reporting requirements (including access to the information necessary to comply with the rules) and to consider the implications of the tax and associated costs for their supply chains.

n OPTION TO TAX LAND AND BUILDINGS – CHANGES TO NOTIFICATION

HMRC have confirmed that the temporary extension to the time limit for notifying HMRC of an option to tax land and buildings to 90 days has now ended. For decisions to opt to tax made from 1 August 2021, taxpayers are again required to notify HMRC within 30 days of the decision to opt to tax. HMRC have also confirmed that the ability to notify HMRC of an option to tax by way of electronic signature, another Covid-19-

related measure, has been made permanent. The relevant form can be submitted with an electronic signature, provided there is evidence that the signature is from a person authorised to make the option on behalf of the business, and if an agent is notifying an option to tax on behalf of a business, the agent has the necessary authority to use the electronic signature. Notice 742A: Opting to tax land and buildings has been updated accordingly.

n DATE OF JOINING VAT GROUP CANNOT BE AMENDED

Dollar Financial UK Ltd (Dollar), a payday lender, applied to include Dollar Financial Group Inc (DFGI), its US parent, in its UK VAT group. DFGI had seconded staff to Dollar in 2011-12, but only applied to join the VAT group from June 2013.

In 2016, Dollar asked for DFGI’s VAT group membership to be backdated (on the basis that DFGI had a UK establishment from 2011, and would have joined Dollar’s VAT group at that time).

If VAT grouping could be amended in this way, then Dollar should not have accounted for VAT of £2.2m on charges from DFGI under the reverse charge. The First-tier Tribunal noted that VATA 1994 refers to four specific types of VAT grouping application, including an application for another person (i.e. a company outside the VAT group) to be included in the VAT group. However, there is no statutory provision that states that an existing member can change the date on which it joined a VAT group.

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The FTT has therefore ruled that the request submitted by Dollar in 2016 was not a valid VAT grouping application. The FTT also rejected Dollar’s attempt to present its case as relating to VAT registration or overpaid VAT, as HMRC had not made any decision on these issues. In the absence of an appealable decision, the FTT struck out Dollar’s appeal. There was therefore no need for the FTT to consider whether the presence of the US secondees meant that DGFI has a UK establishment, an issue that will come before the Upper Tribunal in October 2021 in HSBC.

n COS VAT SUBJECT TO NORMAL ASSESSMENT PROCEDURES

NHS Trusts are allowed to reclaim VAT on costs relating to their non-business activities under the contracted out services (COS) scheme. Although this is a purely domestic provision that is not derived from the EU Principal

VAT Directive, the UK has chosen to administer it through the normal VAT return process: NHS Trusts have to be VAT-registered to use the scheme, and include COS VAT as input tax in their VAT returns.

In Milton Keynes Hospitals NHS Foundation Trust, the Court of Appeal has ruled that HMRC’s powers of assessment also apply to COS VAT. The Trust had reclaimed VAT on IT services under COS, but HMRC considered that the services did not qualify and assessed the Trust.

In the court’s judgment, repayments made under the COS scheme did not lose their character as amounts of VAT, and the Trust accounted for COS VAT by reference to “prescribed accounting periods”. HMRC were therefore entitled to issue an assessment in the normal way, and the Trust will need to pursue alternative arguments that the assessment was out of time, or that the VAT was correctly claimed, at a substantive tribunal hearing.

n ONWARD SUPPLY RELIEF NOT AVAILABLE FOR IMPORT AGENT

In 2012, Scanwell Logistics was approached by Calleva, a Czech freight company, to act as import agent for some Czech companies

that were importing goods from China into the EU via the UK. Scanwell received documents from Calleva concerning imports

(bills of lading, invoices, packing lists, etc.), which it used to make customs declarations. The First-tier Tribunal has ruled that it was not entitled to apply onward supply relief (during pre-Brexit periods), and should have paid import VAT of £5.7m.

Scanwell argued that, although it never owned the goods, it was deemed to have supplied them as agent and should therefore be entitled to apply OSR. However, the FTT has ruled that this relief was not available to import agents. By completing the customs declarations, Scanwell was potentially liable for import VAT. However, it was not supplying the goods on behalf of the Chinese sellers (i.e. it was not a disclosed agent selling the goods). The rules on undisclosed agency also applied to agents who were helping to effect a transfer of title from principal to customer.

Scanwell had no such authority, and did not act in its own name in relation to the goods (except in making the customs declarations). As its role was limited, it was not entitled to apply OSR (it should have adopted the external community transit procedure instead). Its appeal was dismissed.

n RENEWABLE HEAT INCENTIVE SCHEMES – FTT

Colin Newell purchased a dozen biomass boilers (fuelled by wood chips) at a time when the Renewable Heat Incentive (RHI) scheme in Northern Ireland was operating on a particularly generous basis.

He used heat from the boilers to dry animal bedding, logs and animal feed. In the first few years, he received almost as much income in support payments under the RHI scheme as he generated in turnover from customers (although the scheme was subsequently pared back).

HMRC assessed Mr Newell on the basis that the support payments represented a non-business activity, which should have led to an input tax restriction, but the FTT has allowed his appeal. In its judgment, the existence of income that was outside the scope of VAT did not always indicate an activity that was outside the scope of VAT.

The FTT ruled that there was a direct and immediate link between Mr Newell’s purchases and his taxable supplies, and the conditions attached to the support payments (e.g. ensuring the boilers were accredited) did not disturb this link. Mr Newell’s appeal was allowed.