VAT Update – August 2021

20 Aug 2021

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In this month’s VAT Update we comment on taxpayers’ ability to argue they have a “legitimate expectation” to rely on a decision from HM Revenue & Customs (HMRC) at the tax tribunal; we highlight the opportunity to apply for a partial exemption special method online; we report on how CDS will replace CHIEF and become the sole platform for customs declaration purposes; and finally we offer some suggestions of how to best handle an HMRC enquiry into a repayment VAT return.

Legitimate expectation

The concept of whether a taxpayer can rely on the public law defence of legitimate expectation was recently considered by the Upper Tribunal (UT) in the case of KSM Henryk Zeman Sp Z.o.o [2021] UKUT 0182 (TCC).

In this case, a Polish company applied to register for VAT in the UK and was advised by HMRC that it did not need to register. This “decision” from HMRC was based on responses provided by the appellant on a VAT registration questionnaire that HMRC had issued. The information provided on the questionnaire was incomplete and did not reflect the immediate transactions the Polish company was entering into in the UK and it did in fact have a liability to register for VAT under the law. HMRC later assessed the company for under-declared VAT and applied penalties relating to the failure to register at the correct time.

The First Tier Tribunal (FTT) considered whether the appellant had a legitimate expectation that it was not required to register for VAT based on HMRC’s response to the completed questionnaire. The FTT found the taxpayer did not have legitimate expectation because it should have known the information provided on the questionnaire was effectively incomplete.

The UT considered whether the FTT had jurisdiction to consider the defence of legitimate expectation, given it is a matter of public law. In this case, the UT decided it did and agreed with the FTT’s conclusions and the appeal was dismissed.

Comment: Whether the FTT has the power to consider a legitimate expectation case is a complicated point and it depends on the specific wording of the area of VAT legislation relevant in each instance of an appeal. In the case of KSM, it was specific parts of the appeals and assessment VAT legislation which, in the UT’s view, gave the FTT authority to pass judgement on whether the appellant had legitimate expectation or not. In other similar cases in the past, the relevant part of the VAT Act has not given the FTT such authority, and so this case highlights the need for great care when taking a legitimate expectation defence to the courts. It may not be a matter that can be heard at a tax tribunal and may instead have to be taken to the High Court. High Court proceedings have different time limits to tax appeals and therefore early advice should be sought.

The KSM case also highlights the need to provide HMRC with as much relevant information as possible when registering for VAT and with respect to other matters relating to an adopted VAT position. It is prudent to provide all details to HMRC, particularly when standard questionnaires do not, perhaps, accurately reflect the applicant’s circumstances. Taxpayers should be aware that HMRC will not always accept that a legitimate expectation exists even when it has issued a non-statutory clearance – great care is therefore needed to understand if any correspondence received from HMRC is complete enough to provide certainty of the tax position.

If you would like to discuss the implications of this case further, please contact Sean McGinness VAT Partner.

Read more here.

Partial exemption special method applications

If a taxpayer wants to use a partial exemption input tax recovery method other than the standard method then a special method must be agreed with HMRC. HMRC has amended its process for the submission of online and email applications. Regardless of which route is used for the application, detailed information must be provided to support the application and discussions with HMRC to agree the method can take several months to conclude.

HMRC summarises what needs to be included in an application as:

  • A proposal document;
  • A worked example of the proposal;
  • The latest annual adjustment calculation;
  • A fair and reasonable declaration; and
  • Any additional documents.

More detailed guidance on how to apply for a partial exemption special method is contained within Appendix 2 of the Public Notice 706.

The online application process begins here.

The email address to be used to submit applications to HMRC is E: [email protected]

Comment: When the partial exemption standard method does not produce a fair and reasonable VAT recovery result, a special method may provide the solution. However, the process of agreeing this with HMRC can sometimes be a protracted affair. The onus is on the taxpayer to demonstrate why the standard method does not provide a fair and reasonable outcome and how the special method achieves this. HMRC’s guidance on applying for a special method is helpful but it is always recommended that advice and assistance is sought. We regularly help our clients achieve successful results with applications for a special method.

If you have any questions or need assistance or advice in your application for a special method, please contact Sean McGinness VAT Partner..

Customs declarations: CDS replacing CHIEF

HMRC has announced that from 31 March 2023, the UK will have a single customs platform for import and export declaration purposes. The full transition from the current CHIEF system to the Customs Declaration Service (CDS) will occur in two stages.

  1. From 30 September 2022, CHIEF will be closed to import declarations and CDS will be used as the system through which imports into the UK are declared.
  2. From 31 March 2023 CHIEF will be closed to export declarations, with CDS replacing it.
    Customs agents, freight forwarders and carriers, as well as businesses that have their own in-house customs declaration teams, will need to prepare for the change.

Read more here.

Comment: Having one system through which imports and exports are declared will provide efficiencies in terms of time and costs. It will also provide clarity as to the appropriate system to use. Currently both CDS and CHIEF are being used, with CDS primarily concerned with Northern Ireland and ‘rest of world’ trade.

It remains to be seen whether customs declarations through CDS will require importers and exporters to provide their agents and forwarders with additional information over and above what is currently required, however benefits should be realised through the more advanced technology on which the CDS is based.

Please contact Nick Hart, VAT Director, for further information.

VAT repayment returns

Repayment VAT returns will often trigger some questions from HMRC prior to refunds being approved and released. It is generally the case that HMRC does query the first VAT return of a newly VAT registered entity when that return reports a VAT refund is due. Enquiries can also arise if a VAT repayment return is submitted by a taxpayer that normally has a VAT liability to pay. It is prudent to be prepared for HMRC making contact to reduce the waiting time for the VAT refund to come through. Any delay in HMRC paying the VAT refund can cause unwanted cash flow problems.

When querying a repayment return, HMRC will typically ask to see the VAT reports that make up the audit trail to the VAT return, as well as a sample of the highest VAT value invoices and bank statements for the period in question. HMRC will also ask more general questions about the nature of the business activities and the specific reason why a VAT return has reported a VAT refund due. If the taxpayer expects to be in a regular VAT repayment position, then it should be confirmed to HMRC at this point. This will enable HMRC to set a particular flag in their system, which means they will not query every VAT return before a VAT refund is paid.

If the VAT refund due has been caused by the purchase of land or property, then HMRC is also likely to request additional documents such as the completion statement and proof of financing.

It is also recommended to ensure HMRC has the correct bank account details on file. HMRC will only pay VAT refunds directly into bank accounts where the account holder’s name is consistent with the name on the VAT register, other than some exceptional circumstances. Without appropriate bank details on file, HMRC will issue a cheque through the post, which further delays the taxpayer being able to utilise the cash.

Comment: HMRC’s compliance checks on repayment VAT returns are not new but we are seeing high volumes of such checks being initiated and VAT registered persons should be prepared to make the discussions proceed as efficiently as possible. Once HMRC has approved a repayment, the refunds do then get released in good time. Unfortunately, there is no mechanism available to let HMRC know in advance that a VAT repayment return will be submitted and the reasons for it, so it is a case of submitting the VAT return and waiting to see if it gets repaid without review, or if HMRC does request supporting information before approving the return.

Please get in touch with your usual Saffery contact if you require assistance with any VAT enquiries from HMRC, or if advice is required ahead of a VAT repayment return being submitted.