HMRC had conducted a direct tax enquiry and during its course had considered that the individual was operating a business and should have been registered for VAT for several years. The potential VAT at stake was circa.£80,000, plus a potential penalty of 100%. As the period spanned more than six years, there was no requirement for the individual to have retained business records for this period, and other than annual accounts there were no other records available.
Following a period of our own research and investigation, The VAT Consultancy was able to present a business profile to HMRC which considered the nature of the business and its related purchases as well as considering the impact of certain income which related to a hobby. The result WAS A SAVING OF OVER £60,000 in VAT & £75,000 IN PENALTIES!
The moral of the story is that, apart from considering all relevant factors and records, it is often worth considering an alternative perspective or approach. HMRC has a duty of care to collect the right amount of VAT due, and will consider the content of submissions where that content is fair and reasonable.
For more information on how to handle HMRC enquiries and general dealings with HMRC, contact The VAT Consultancy on 01962 735350 or email email@example.com.
HMRC have announced in the wake of their defeat in the case of Bridport and West Dorset Golf Club (see our blog: Tribunal Decision is a swing in the right direction) that they have sought permission to appeal the decision to the Upper Tier Tribunal.
This is not unexpected, in fact it would have been a shock if HMRC admitted defeat!
Any clubs that treat their supplies of green fees to non members as taxable at the standard rate should lodge protective claims going back 4 years as soon as possible. You can contact me us 01962 735350 or email firstname.lastname@example.org if you would like further advice on this.
The case revolves around the definitions applied to the supply of food as a good, as opposed to the supply of food as a catered service. The European Court considered that where the supply involved limited preparation, as for grilling a sausage or burger, to be taken away for consumption, the supply was that of a supply of goods, subject to the reduced rate of VAT in Germany. By comparison, a catered service would consist of a more involved service, such as the provision of tables and chairs, knives and forks etc., creating an environment for enjoyment of the food.
The UK has not adopted a reduced rate for food, and when the zero rate was introduced certain exceptions were drawn into the legislation, which mean that they are excepted from the zero rate and therefore subject to VAT at the standard rate. A supply in the course of catering is one such exception. However, this is further defined within the Notes as any supply for consumption on the premises on which it is supplied, and any supply of hot food for consumption off those premises, i.e. hot takeaway food.
It is this line that HMRC is relying on in to deny the application of the European Court decision in the UK – but this presumes that the UK legislation is compatible with the direct effect of the EU legislation. This is part of the challenge creating the opportunity for UK businesses to protect their position in respect of the last four years. Of course, businesses can wait for the outcome of the legal debate, but this will not happen overnight and may restrict the ability for the business to recover the full extent of overpaid VAT available.
In short, this is HMRC’s polite way of saying ‘Bog-off’, and not for the first time. Some years ago a European decision in another German case determined that takings from certain gaming machines were exempt. The initial reaction from HMRC was that the decision had no effect in the UK, however, many of you will be aware of the recent significant repayment of overpaid VAT to the Rank Group in the UK – just the latest instalment in this long running debate.
To coin a well used gambling phrase, ‘you’ve got to be in it, to win it’. How true!
For more advice on this issue, get in touch with Karen Mulcahy email@example.com or call her on 01962 735350.
HMRC challenged the arrangements Lower Mill Estates had put in place which involved two separate but connected companies making supplies in relation to holiday homes – one supplied standard rated land with planning permission and the other supplied zero rated construction services. If a single supplier had supplied the completed holiday home the entire amount payable by the purchaser would have been subject to VAT at the standard rate. The Upper Tribunal essentially found that there was sound commercial rationale for structuring the contracts in this way. HMRC regularly raise abuse challenges of this nature following their success in the Halifax case.
We are aware of numerous situations in which this is happening but with limited success if the case goes to litigation. More worryingly there appears to be a significant increase in abuse challenges in relation to ‘mixed supplies’, eg where a package of standard rated and zero rated items is sold for a single price. The exhibition industry has been targeted for providing entrance to an event with a zero rated publication.
Whilst the commercial rationale for every business will differ, the Lower Mill Estates decision does seem to reinforce the findings of much older VAT decisions such as Telewest in supporting the view that you cannot force a single supply for VAT purposes from two separate suppliers, provided they are operating on an armslength, commercial basis and have sound business rationale for doing so.
Businesses that supply packages consisting of standard and zero rated/exempt items would be well advised to review the VAT treatment applied to ensure there is no risk of challenge and equally to ensure the business is not unnecessarily over accounting for VAT.
If you would like to know about these issues then get in touch with Julie Park – firstname.lastname@example.org or call her on 01962 735350.
The recent rise in VAT has brought to light the benefits of the flat-rate scheme with many self-employed people and SME’s actually profitting from operating it. We’ve put togther our guide to help you work through the benefits and potential pitfalls of using the flat rate scheme.
What is the Flat Rate Scheme (FRS)?The Flat Rate VAT scheme was introduced in 2002 and is available to all small businesses or sole proprietorships. The FRS differs from standard VAT accounting as you pay a percentage of turnover rather than paying VAT on the difference between sales and purchases. So, while you continue to charge clients the newly introduced 20% VAT rate, you can potentially give a smaller percentage to the taxman. The FRS rate differs from sector to sector but for IT contractors the norm is 14.5%.
What are the advantages of the FRS?The FRS helps to simplify VAT calculations and record keeping. This is particularly helpful to smaller organisations that may not have the time or expertise to conduct their accounting in the traditional way (and, bearing in mind the increasingly severe penalties that can be charged for errors, this can only be a good thing). It shortens the process, removing the need to keep a record of VAT charged for each individual sale or that paid on purchases. However, you do still need to show a VAT amount on each sales invoice.
It might also save you money, for example:
Standard VAT CalculationTotal Billings £50,000
Output VAT 20% £10,000
Total invoiced £60,000
VAT reclaimed through purchases £750
Total payable to HMRC £9,250
Flat Rate Scheme CalculationTotal Billings £50,000
Output VAT 20% £10,000
Total invoiced £60,000
Total payable to HMRC at 14.5% of T/O £8,700
In addition, if you are in your first year of business you can benefit from a 1% reduction to your FRS rate.
Who Stands To Benefit From The Flat Rate VAT Scheme?Largely contractors are likely to benefit from the scheme, though this depends on turnover and expenses as the higher your sales turnover, the more likely it is to be beneficial.
Whilst the rates increased on January 4 2011, reducing the possible profit made, there are still many people who could benefit.
The rates alter depending upon your business, ranging from 4% to 14.5%. For those working in computer and IT consultancy or data processing the rate has increased from 13% to 14.5%.
Visit the the FRS page on HMRC’s website to find out your flat rate.
What are the disadvantages?There are rules and exceptions governing the Flat Rate Scheme. For example if your turnover is more than £150,000 per annum, you will be unable to take part.
If you make use of the scheme, you cannot reclaim VAT on purchases, except in certain circumstances. As a result, the FRS works best for people who have few expenses compared to their fee income. VAT on expenses can only be recovered if they are capital items costing £2,000 or more or if the assets are still within the business on the date of registration.
How do you apply for the FRS?The Flat Rate Scheme can commence at the beginning of any VAT accounting period and it is very easy to change tax programmes. Simply download an application form from the HMRC website and post it to them.
Any other tips?Work done for EU businesses is outside the scope of UK VAT and is therefore excluded from the Flat Rate Scheme calculations
For more advice contact us on 01962 735350 or follow us on twitter: @vatconsultancy.
The classification of food and drink items has become a “hot potato” in the VAT world again this week with news that Innocent Pure-Fruit Smoothies are being classified by HMRC as a luxury beverage and will therefore carry the standard rate of VAT. Not good news with the VAT rate rise in the New Year, further pinches on our purse strings won’t help us pinch those inches off our waistlines!
More recently Lucozade Sport Isotonic and Subway have also received unfavourable rulings in a long line of food firms who don’t feel they are quite the apple of HMRC’s eye.
We’ve had the great pringle debate – when is a crisp not a potato – and of course the famous Jaffa Cake – when is a cake a biscuit……..
So just what are the guidelines from HMRC when it comes to food and drink?
- no VAT is payable on most “essential” basic food and drink
- luxury items such as smoothies and ice cream will carry VAT
- anything classed as a beverage will also carry VAT, so fruit juices and fizzy drinks are subject to VAT, but coffee, tea and milk are zero-rated when bought in a super-market, but vatable when purchased as a prepared hot drink. Bottled water? – it’s a beverage and subject to VAT!
- doughnuts or cakes are zero rated, but the little old chocolate digestive is standard rated!
Feel like you’re wading through treacle? No-one said it was going to be a piece of cake!
We had a question from a client which raised an interesting point this week, one that was actually obvisous but not one we have come across before. It concerns the levels of commission stores operating the retail exports scheme will receive after the change of vat rate.
We are all aware that retailers will need to review prices post 4 January 2011 to reflect that a higher proportion of the ticket price will need to be paid over in VAT. However, there can be benefits. For example, some retailers operate a Retail Export Scheme. This is where the VAT is refunded to a traveller when they leave the country with goods purchased in the UK. Normally the customer is not refunded all of the VAT; the refund is less an administration fee. The fact that the administration charge is usually based on a percentage of the VAT refunded means that a rise in VAT charged will lead to more commission.
One other point; the commission itself is zero rated, which means that the VAT increase will not affect it at all!
Air Passenger Duty has gone up to 55% but no-one has yet mentioned the rise in Insurance Premium Tax (IPT). IPT always follows the rate of VAT, so the standard rate is going from 5% to 6% and the higher rate from 17.5% to 20%.
Not good news for an already struggling travel industry as this means that the cost of travel insurance, which carries the higher rate of 20%, is set to increase by around 2.5%. Taking into consideration the rise in Air Passenger Duty and the increase in IPT, we think as a result, the cost of the average European holiday will rise by some 10%.
The higher rate of IPT also applies to electrical and domestic appliances and insurance sold with cars, while with the lower rate of IPT includes medical insurance, extended warranties and roadside assistance.
Perhaps taking a “staycation” isn’t a bad idea after all!
Getting professional advice before you start your project is highly recommended. The following two recent cases highlight this point:
The first case involved a house builder, who built a property attached to a pontoon. On advice from the HMRC vat helpline he submitted a DIY builder’s scheme claim. Upon receiving his claim HMRC refused it on the basis it was a houseboat and therefore excluded from the DIY scheme and furthermore, stating that advice given on the National Helpline ‘could not be accountable for any advice given’!
The tribunal dismissed the appeal because they concluded the property was a houseboat. Tribunal added that the house builder had every right to be aggrieved that the law discriminates against houseboat builders, but this did not alter that fact that he could not get his refund of over £18,400!
The second recent case considered whether an AGA was a building material for VAT purposes. As the heat provided was incidental the tribunal agreed with HMRC and dismissed his appeal for a refund. Again, advice upfront would have probably saved him the trip to the Tribunal centre. The HMRC DIY forms state AGA’s “must be fitted to a heating module or boiler” in order to qualify.
Losing such an amount to any house builder can seriously affect cash flow and budgets. Of course professional advice upfront could have prevented such budget constraints – not always by changing the situation, but at least both the above cases would have been aware of the sunk VAT costs from the start!
Check your invoices! It is also important to check that you are paying the correct rate of VAT on contractor’s invoices. Many cases this year highlight that if the reduced rate applies to the works in question, HMRC will only refund the 5%. Therefore if you have been charged and paid 17.5%, the 12.5% is something you need to obtain back from the contractor as incorrectly charged VAT. The problem can arise, as in the case of CAM Anderson, that when you return to the contractor for a credit note, the contractor is outside the time limits for VAT to be able to issue one to you!
Know your facts and don’t be afraid to challenge HMRC, as Mr & Mrs Wendels did and won against HMRC in the courts. They built a house on the land next to their cattery business but a question arose over whether it met all the criteria of being a residential dwelling. The claim for VAT was refused by HMRC as they said the property could not be separately disposed of (one particular criteria).
The Wendels appealed the case and successfully argued the conditions for a residential new dwelling for VAT were met, they received their VAT back. The case highlights the specific criteria that must be applied for a property to even be considered ‘residential’ for VAT purposes – even if the average Joe would clearly say it is!
Most aspects of a new build, conversion, or refurbishment can be planned effectively to minimise the VAT due. Professional advice at the outset could prevent nasty surprises at the end of your project. Our experience in dealing with similar projects and our knowledge of the complex and extensive legislation can help prevent any nasty and costly surprises.
Following the ECJ judgement in the joined case of Danfoss and AstraZeneca, HMRC have announced some changes in the tax treatment of business entertainment of overseas customers.
Subject to evidence of the details of the overseas customers and the type of expenditure, they will now allow the VAT paid out on business entertainment to be reclaimed.
In order for the VAT on entertainment costs to be recovered HMRC expect the business to meet two tests: a necessity test and a strict business purpose test. If the tests are not met then any vat recovery is subject to an equal output VAT payment as a private use charge. The tests are designed to ensure that the entertainment is only to enable the smooth running of the business, i.e. food provision at business meetings, and that the element of private benefit is incidental to the provision of the underlying services or goods by the business i.e. paying for transportation to enable attendance at remote sites.
Clearly as a result of these changes it is now possible to claim back vat incurred on the costs of entertaining overseas business customers, subject to the normal four year cap, and the usual evidence will be required to support any Input Tax claim.