Tag Archives: making tax digital

Making Tax Digital Update

13th February 2019

New Information Regarding Enrollment 

VAT registered businesses with a taxable turnover above the VAT registration threshold of £85,000 must Making Tax Digital (MTD) compliant software to submit their VAT returns from 1 April 2019. It is important to ensure that your business enrols into Making Tax Digital at the correct time in order to avoid any potential issues. The CIOT have prepared an illustration to help businesses make sure that they enrol during the appropriate window which is available to view here.

It is important to note that HMRC guidelines state that:

“If you pay your VAT by Direct Debit you will not be able to sign up in the 15 working days leading up to your submission date and the 5 working days immediately after it.”

Whilst the illustration is not a substitute for professional advice it offers useful guidance.

 

Stagger Group 1

Sign up to Making Tax Digital for VAT pilot in order to submit the January to March 2019 VAT return by the 4th May 2019 and by the 4th August for the April to June VAT return.

Stagger Group 2

Sign up to Making Tax Digital for VAT pilot in order to submit the November to January 2019 VAT return by the 4th March 2019 and by 4th June for the February to April VAT return.

Stagger Group 3

Sign up to Making Tax Digital for VAT pilot in order to submit the December to February 2019 VAT return by the 4th April 2019 and by 4th July for the March to May VAT return.

Monthly VAT Returns

Sign up to Making Tax Digital for VAT pilot in order to submit the January 2019 VAT return by the 4th March 2019 and by the 4th April 2019 for the February VAT return.

 

Before enrolling for Making Tax Digital it is essential that your business is ready as, once enrolled, it will lose the ability to submit VAT returns through the current channels. Failure to submit VAT returns will continue to attract penalties as it does now.

If you feel that you are not ready for Making Tax Digital for VAT, you should already have been registered for VAT or need any assistance with your VAT affairs prior to enrolment do not hesitate to contact Constable VAT for assistance or clarification.

CVC VAT Focus 18 October 2018

18th October 2018

HMRC NEWS

HMRC are having difficulty dealing with DIY Housebuilder VAT refund claims and that some claims are being approved and paid up to four months later than the usual 30 days. If you are a housebuilder or are considering submitting a VAT refund claim, in order to mitigate any cash flow issues which may arise as a result of this, please call Constable VAT to see if there is anything we can do to help your particular case.

VAT MOSS exchange rates for 2018

Find currency exchange rates for VAT Mini One Stop Shop (VAT MOSS) businesses registered in the UK to complete declarations.

Charity funded equipment for medical and veterinary uses (VAT Notice 701/6)

HMRC has updated its guidance regarding zero-rated supplies of medical and research goods and services that have been funded by charities.

Making Tax Digital Update

Making Tax Digital for VAT will now not be mandatory until 1 October 2019 for businesses falling into one of the following categories considered by HMRC to be ‘more complex’ businesses. Additionally HMRC has issued more guidance on making Tax Digital for VAT.  The businesses regarded as complex and a list of the new guidance can be found on our website.

 

CONSTABLE NEWS

Brexit Blog

We have a new article about the potential impact of Brexit on VAT recovery for businesses in the financial services and insurance sectors. In this piece we ask the question “If you had to make a guess on whether your business will be allowed to reclaim more VAT or less VAT if the UK leaves the EU without a withdrawal agreement what would you say?” Consideration is given to The VAT Specified Supplies Order 1999. If you are impacted by this legislation then this will be of particular interest to you.

Opinion of Advocate General

The Advocate General (AG) has handed down his opinion in the Morgan Stanley CJEU case, which considers VAT recovery rules for costs incurred by overseas branches. Our coverage of this opinion can be found on our website.

This opinion adds another dimension to Brexit planning, which can involve creating new EU businesses with multiple establishments as well as longstanding multi-establishment arrangements. Whilst the CJEU decision need not follow the opinion of the AG, in most cases it does.

If you operate using overseas branches then you should consider your input VAT recovery position now. Constable VAT will be happy to assist in this exercise.

 

CASE REVIEW

CJEU

1. Refusal of right to deduct input VAT by the tax authorities

This referral concerned whether EU law on VAT precludes tax authorities from refusing the right to deduct input VAT on the grounds that the company in question failed to submit VAT returns for the period in which the right to deduct VAT arose.

The company, Gamesa, was declared an “inactive taxpayer” by the Romanian tax authorities as it did not submit VAT returns for a six month period in 2011. In 2015 Gamesa was subject to a VAT inspection and was issued with an assessment for the output VAT which should have been declared on the missing VAT returns. The assessment did not allow the deduction of the relevant input tax. Gamesa alleged that this practice infringed the principle of proportionality and the principle of neutrality of VAT.

Giving regard to these principles and the relevant EU legislation on the matter, the Court reduced the issue to one question: is it permissible for the tax authorities to refuse, on account of a failure to submit tax returns, a taxable person the right to deduct input VAT? This was answered succinctly, “As the Court has repeatedly pointed out the right of deduction […] is an integral part of the VAT scheme and in principle may not be limited.”

The Court held in favour of Gamesa and stated that the relevant EU law precludes tax authorities from using this practice.

Constable Comment: This case illustrates the fundamental nature of the right to deduct input VAT in the EU VAT system. It confirms that even if a business has made VAT accounting errors or failed to disclose certain sales, a VAT assessment can be mitigated by demonstrating, accurately, the amount of input tax incurred in the period being assessed which relates to taxable supplies. If you have received a VAT assessment and are concerned about the amounts involved or the entitlement to deduct input VAT has not been taken into account, do not hesitate to contact Constable VAT.

 

First Tier Tribunal

2. HMRC Best Judgment

This case was an appeal by Derbyshire Motors Ltd (DM) against a best judgment VAT assessment issued by HMRC and a civil penalty for dishonesty. The appellant had declared taxable motor repair services as MOTs which are outside the scope of VAT. DM admitted that this had taken place after initially denying the wrongdoing, albeit not convincingly.

DM was struggling to stay afloat when the “credit crunch” began to take serious hold of the UK economy in 2008/09. Owing to a lack of capital reserves no more money could be pumped into DM to keep it going. Mr Derbyshire, the director and owner, made the decision to treat some repair works as MOT tests to improve the cash position of the business. When HMRC discovered this in 2014 DM no longer had VAT records for the relevant period. HMRC therefore relied on figures from later years to calculate the assessment for underpaid VAT. DM submitted that HMRC had not used best judgment as the assessment was based on material relating to other years.

Analysing previous case law and relevant tests for the application of best judgment were considered and the assessment was upheld. The penalty was also upheld in full.

Constable Comment:  This demonstrates well that simply not having records and not being compliant for years does not mean that tax evasion is untraceable. If taxpayers discover any irregularities or suppressed sales it is always best to be honest and notify HMRC. If you co-operate fully and make an un-prompted disclosure then penalties can be mitigated. Attempting to hide from and mislead HMRC is likely to result in the highest possible penalty being applied. Please contact Constable VAT if you are worried about notifying a disclosure to HMRC, we will be happy to be of assistance.

 

3. Calculating VAT when prompt payment discount is offered

Virgin Media Limited (VML) made supplies of telecommunications to its domestic customers. 95% of these customers paid a monthly subscription fee, the remaining 5% paid one lump sum for a 12 month subscription which amounted to less than 12 monthly instalments. Output VAT was calculated for all customers using the lower price based on the suggestion that if a “prompt payment discount” is offered then output VAT should be calculated using the discounted amount even if the customer did not take advantage of this discount.

HMRC disagreed with this assertion and stated that output VAT may only be accounted for on the discounted amount where this sum is paid within a specified time period and is taken to satisfy the full amount.

The FTT considered that VML’s supplies could, in theory, benefit from this prompt payment discount pricing. However it was considered that VML, in reality, makes two different supplies at different amounts albeit of the same services.  It was not disputed that where the prompt payment discount is taken by customers that this is the value which should be used for calculation of output VAT. However, since the change in the rules around prompt payment discounts in 2015 it is no longer permissible to account for VAT based on the reduced price unless taken within the time period specified.

Constable Comment: It used to be the case that offering a prompt payment discount allowed businesses to account for output VAT on the reduced price even if this were not taken by the customer. This has since changed and now the discount must be taken in order to account for VAT on the lower amount. If your business offers prompt payment discounts you should consider how to reflect these when accounting for VAT.

 

CVC VAT Focus 13 September 2018

13th September 2018

HMRC NEWS

HMRC and online marketplaces agreement to promote VAT compliance

The list of signatories has been updated with a new addition.

Claim a VAT refund as an organisation not registered for VAT

Use this online service (VAT126) to claim back VAT if you are exempt from it as a local authority, academy, public body or eligible charity.

Software suppliers supporting Making Tax Digital

The list of software suppliers supporting Making Tax Digital has been updated.

Cash accounting scheme (VAT Notice 731)

Information on how to account for VAT if you leave the scheme voluntarily or because your turnover exceeds the threshold has been updated.

CVC MAKING TAX DIGITAL UPDATE

 

Paragraph 2.1 of HMRC Notice 700/22 (Making Tax Digital for VAT) states, “With effect from 1 April 2019, if your taxable turnover is above the VAT registration threshold you must follow the rules set out in this notice. If your taxable turnover subsequently falls below the threshold you will need to continue to follow the Making Tax Digital rules, unless you deregister from VAT or meet other exemption criteria (see paragraph 2.2 of this notice).

Only businesses with taxable turnover that has never exceeded the VAT registration threshold (currently £85,000) will be exempt from Making Tax Digital.”

This paragraph appears to suggest that if a business has ever exceeded the VAT registration threshold (including prior to 1 April 2019) the business will be impacted by the new MTD rules. However, the Chartered Institute of Taxation (CIOT) has reported this month that HMRC has confirmed that MTD will only apply where the business’ turnover has exceeded the VAT registration threshold at any time after 1 April 2019. The CIOT are anticipating that HMRC will update the Notice to make this clearer.

Similarly, businesses registered for VAT under the ‘intending trader’ rules will only be subject to the MTD rules when their taxable supplies breach the VAT registration threshold, irrespective of the value of input tax claimed in the interim period.

 

CASE REVIEW

First Tier Tribunal

1. Colchester Institute (Lead Case) – Whether funded education is a business or non-business activity

This appeal by Colchester Institute Corporation (CIC) is against a decision of HMRC to reject an application for repayment of overpaid VAT. CIC receives government funding to provide education and vocational training.

Before the rules on this issue were changed in 2010, CIC wrote to HMRC requesting to use the Lennartz mechanism for input VAT recovery in relation to some construction work. Under this arrangement input VAT was reclaimed in respect of both the taxable business and outside the scope non-business activities. Private or non-business use of the building then gave rise to deemed supplies, chargeable to VAT as such use occurred. HMRC agreed to CIC’s proposal and until 2014 CIC paid over output VAT on non-business use of the building as it arose.

In 2014 CIC submitted a claim for repayment of output VAT on the grounds that the provision of education and vocational training should be regarded as a business activity, regardless of how it is funded, and no output VAT should have been due. Whilst this view would also point to CIC’s original refund claim of VAT on the construction costs being incorrect, the time limits that apply meant that HMRC’s ability to seek a refund of the input VAT was constrained. [HMRC did have an alternative arrangement to deal with this point but this was not considered by the Tribunal.] Effectively, CIC sought a windfall benefit because the output VAT refund it sought was sufficiently recent to allow a recovery from HMRC, whereas the input VAT over claim occurred too long ago for HMRC to seek a rebate.

Giving lengthy consideration to the relevant EU law and UK legislation and, in particular, the potential dissonance between the terms “economic activity” and “business activity, the Tribunal found in favour of HMRC, asserting that the provision of education and vocational training, to the extent that it is funded by the funding agencies, is not an “economic activity.” Therefore, the Lennartz mechanism as it then stood gave CIC a right to deduct VAT and an ongoing liability for the output VAT which CIC sought to reclaim. As a result the appeal was dismissed.

CVC Comment: This case was designated as a lead case and a number of other institutions had their cases stood behind it. It addressed a historical issue but on the underlying points concerning “business” and “economic activities” it highlighted once again how nebulous the legal position can be. It is increasingly difficult to see a clear logic and, as one case follows the other, it seems to us that often there is a great deal of subjectivity and often the position is being construed to deliver a “sensible” outcome rather than the application of clear law to facts. For example, HMRC guidance states quite clearly that an activity cannot simultaneously be both a business and non-business activity which, in some respects, is what HMRC argues with its proportional non-business approach. It is also interesting that more was not made in the case of the acceptability of the UK law leading to ongoing output VAT declarations, bearing in mind that this was a sticking plaster applied when the previous UK law was recognised to be defective following a decision of the CJEU.

 

2. Golden Cube – Whether output tax was understated

In this instance, the appellant trades as a franchisee of Subway. In 2016 it received a VAT assessment when HMRC took the view that certain supplies of food had been incorrectly treated as zero-rated cold take-away food. The Appellant appealed the assessment, stating that the zero-rated supplies were correctly classified.

Three HMRC invigilations took place at the franchise. These revealed a higher percentage of standard rated-sales than Golden Cube declared. The appellant sought to appeal against these invigilations as they took place during weekdays, so did not account for evening and weekend trade. It was also argued that the inspections were carried out at a cold time of year so more people would have been purchasing hot food and eating their food in the premises, leading to a higher degree of standard rated sales. It was also asserted that the till system used at the Franchise was automatic and linked to Subway itself, leaving no room for human error in terms of VAT calculation.

Hearing witness statements from employees and examining the till system used by the Appellant, the Tribunal concluded that there were no systematic issues with staff training and that the till had not been tampered with to display more zero-rated sales than it should. On this basis, it was held that the assessment issued to the Appellant was excessive. Deciding that the Appellant had accounted correctly for all sales and associated VAT, the appeal against the assessment was allowed.

CVC Comment: This case goes to show that the Tribunal will take more into consideration than just the content of an HMRC invigilation. It also highlights the benefits of an electronic till system which automatically records the VAT liability for each transaction individually as it can be used as effective evidence when defending or appealing against HMRC. HMRC is often inclined to collect detailed information for a limited period and extrapolate large under declarations. In our experience, HMRC is more likely to use this as a tool to seek more VAT than is actually due from businesses that have some level of suppression. However, hard evidence of sales is the best defence, bearing in mind that at the stage that HMRC carries out physical observations on sales, it is likely to already have reached the conclusion that the tax is being underpaid and will see everything through this prism. If you have any issues similar to the ones at hand, do not hesitate to make contact with Constable VAT.

 

3. Rowhildon Limited – Belated notification of an option to tax

This appeal is against a decision by HMRC to refuse a belated notification of an option to tax land and property.

The Chief Finance Officer for the appellant provided a witness statement in which she stated that the property was purchased after agreement by the board of the company and she had been asked to deal with the paperwork.

Having completed the form (VAT 1614A) on 1 July 2016 the notification was given to the company’s management accountant who missed the post that day and so posted it the next working day, 4 July. HMRC claim to have never received this notification and requested proof of postage for the form. The appellant conceded that the notification had not been sent recorded delivery. However, it submitted to HMRC the minutes of the board meeting in which there was a decision to opt to tax as well as computer records to evidence that the decision to opt to tax had been made and to show that the form had been completed on 1 July 2016 and their own retained copy of the form. HMRC were unsatisfied with this and refused to accept the notification.

At Tribunal, the appellant demonstrated that the form could not have been back-dated as HMRC’s website does not allow a past date to be inserted when completing the form. The fact that the retained copy showed 1 July 2016 as the date proved that the decision to opt had been made on that date.

The Tribunal found in favour of the appellant, holding that HMRC’s refusal to accept all of the evidence presented to it without proof of postage was remiss. It is concluded that HMRC had no good reason to not accept the notification and that its decision was not made reasonably.

CVC Comment: HMRC should seek to achieve a fair, just and reasonable result in all dealings with businesses and should act in good faith. There may be circumstances in which the law does not give any latitude to HMRC but this was not such a case. This case seems to us to have been unnecessary. As far as we can judge, there is absolutely no suggestion that refusing the taxpayer application was necessary to guard against an unfair tax loss. HMRC seemed to have no reason to question the veracity of the taxpayer’s explanations. Even more importantly, the taxpayer proved that HMRC’s own systems not only supported its assertion but proved them unambiguously. It is difficult to understand why, in supposedly straitened times, HMRC would waste taxpayers’ money and force the appellant to incur costs itself on a case of this kind. We would like to say this is unusual but unfortunately it is not.