In this month’s VAT Update we highlight recent Brexit and construction sector-related VAT changes; we write about challenging processing times at HM Revenue & Customs (HMRC); we flag possible changes in the VAT treatment of dilapidation payments and highlight a recent case relevant to the charity sector and grant funded education.
We recently published updates to highlight the key VAT and customs issues now the UK has left the EU VAT system and single market. The articles, which cover cross-border movements of goods and supplies of services, can be found at the following links:
Comment: Brexit is still a significant issue for UK businesses, particularly with respect to supply chains involving goods. They continue to try to find the most efficient and effective route to their markets, whilst remaining competitive in the face of increased compliance and costs.
We have been assisting clients with a host of issues and we have been able to utilise our international network (Nexia International) in order to consider and address those issues in a number of EU jurisdictions.
HMRC processing times
HMRC is currently experiencing severe delay in certain departments, including VAT registrations, VAT group applications and changes, voluntary disclosures, EORI number applications and duty deferment applications.
VAT registration applications are particularly affected and, if an application is flagged in HMRC’s system as requiring further checks of some sort, those applications may take several months to be fully processed. One recent discussion with a member of the VAT registration unit, suggested HMRC were still processing applications received in the last week of October 2020. HMRC is working through the backlog on a strict date received basis and is not offering any flexibility to this, even when a follow-up is flagged as urgent.
Comment: The delays in HMRC’s processing times in certain departments is a cause for concern, as businesses have been relying on obtaining VAT and EORI numbers and registering new VAT groups to address Brexit-related changes. Such delays are creating operational issues. Businesses must be be mindful of the likely delay in HMRC dealing with a particular matter and should plan accordingly.
Whilst, in many cases, we are unable to escalate matters with HMRC, we can assist with practical advice in terms of the approach to take whilst a VAT or EORI number is still pending.
Please get in touch with your usual Saffery Champness contact if you are experiencing operational or commercial issues as a result of delays with HMRC responding to a certain matter.
VAT liabilities deferred under the UK government’s VAT deferral scheme (the Covid-19 measure introduced last year) must be paid in full by 31 March 2021 unless taxpayers opt in to pay the deferred liability by instalments. Ever since the Chancellor announced the additional measure of allowing the deferred VAT liability to be paid in instalments, we have been waiting for HMRC to announce further details. These are only now being provided.
To take advantage of the instalments opportunity, taxpayers must opt in. This must be done by the taxpayer themselves rather than their agent or another third party on their behalf. Saffery Champness is therefore not able to opt in on behalf of its clients. Under the scheme, the deferred liability must be paid in full by 31 March 2022 through equal monthly instalments (the maximum being 11).
Opting in must take place before 31 March 2021, and acceptance by HMRC is dependent on taxpayers:
- Still having deferred VAT to pay.
- Being up to date with their VAT returns.
- Opting in before the end of March 2021.
- Paying the first instalment when opting in.
The instalment scheme cannot be used to pay any other VAT liabilities apart from the deferred liability. Specific time to pay arrangements can be discussed with HMRC in respect to any other VAT debts. There are very limited opportunities for a VAT error which occurred in a VAT period which was deferred, to be included in the amount to be paid in instalments.
The opting in process is completed through a government gateway account, so taxpayers would need to set an account up if they do not already have one. The system is not yet ready for the opting in process to begin and a further announcement is expected soon.
Comment: The new payment scheme is a welcome measure and will provide much needed support to taxpayers who may otherwise have struggled to settle their deferred VAT liability from last year by 31 March 2021. However, it is interesting that HMRC is not allowing the opt in process to be completed by agents on behalf of their clients. Some taxpayers may not be able to complete the necessary steps themselves and additional support will still be required.
The scheme also allows for a flexible number of instalment payments to be made, but this would need to be specified at the outset, with the whole liability needing to be paid off by 31 March 2022.
Please contact your usual Saffery Champness contact to discuss further the opportunity provided by the new payment scheme.
Changes in the construction sector
The domestic reverse charge (DRC) will apply in the construction sector from 1 March 2021, following two previous postponements.
Businesses operating in construction supply chains need to familiarise themselves with the DRC to ensure they are ready for 1 March.
An update on contract termination charges
In our September VAT Update we highlighted new guidance from HMRC regarding the VAT treatment of termination payments. Following a series of concerns raised at the approach HMRC was taking, the guidance was withdrawn to be reviewed by the HMRC.
HMRC has now announced that the changes in the VAT treatment of termination payments will apply from a future date and will not have retrospective effect. A new Brief will be published by HMRC shortly to confirm its views on termination payments and what businesses must do to apply the correct treatment.
The new guidance will also outline what should be done if, in the meantime, businesses have changed their approach to termination payments following HMRC’s original guidance from last September. Until the new Brief is published, HMRC has indicated that taxpayers can either continue to treat such payments as further consideration for the contracted supply or revert back to treating them as outside the scope of VAT, if that is how they treated them before the guidance was published last year.
Comment: There is ongoing representation from various industry bodies, which believe that HMRC’s suggested VAT treatment of termination charges, in certain circumstances, would be incorrect. This is particularly the case for dilapidations under lease arrangements. We await the publication of HMRC’s new Brief, which we hope will provide some clarity.
The recent announcement that any changes in the VAT treatment of termination payments will not need to be applied retrospectively is a welcome clarification from HMRC.
Colchester Institute case
Just before Christmas, the Upper Tribunal concluded in Colchester Institute Corporation v HMRC (UT/2019/0006) that the educational services it supplied were business activities. Such activities were therefore exempt from VAT and no VAT was due on them.
The Upper Tribunal ruled in favour of HMRC in respect of input tax recovery. Given the appellant was making exempt supplies and whilst certain periods were outside of the four-year cap, HMRC was still entitled to offset over-claimed input tax when repaying £1.5 million in overpaid output tax which had been claimed by Colchester Institute under the Lennartz mechanism.
Lennartz was a mechanism used as a way of accounting for output tax on the non-business use of an asset and Colchester Institute had used it to pay VAT, over time, to HMRC in respect to a property which it had constructed in 2008 and which it had claimed VAT of over £2million. It later changed its position, believing its supply of grant funded education was a business activity. It then believed the VAT it had accounted for under Lennartz had been paid to HMRC in error and it submitted a claim to HMRC. When HMRC rejected the claim, the Institute appealed. The First Tier Tribunal (FTT) concluded that the provision of educational services purely funded by government grants is not a business activity. However, the Upper Tribunal disagreed with the FTT in this case when the Institute appealed its decision. Read more here.
Comment: The case highlights the importance of determining whether a specific activity is a business or economic activity, not only to ensure the correct VAT treatment is applied if it is a business activity, but from a VAT recovery perspective as well. VAT is not recoverable if the associated costs are incurred in respect to a non-business activity or, in this case, an exempt activity. Further, purely grant-funded activities will not automatically be treated as non-business activities. In the Colchester Institute decision, the Upper Tribunal decided that, under the circumstances, it was undertaking a business activity and the grants it was receiving were consideration for a supply of education services. The sting in the tail for the appellant was the decision of the Upper Tribunal to allow HMRC to revisit the original input tax recovery by the Institute, even though such VAT was claimed in periods outside of the four-year cap.
The Upper Tribunal decision is binding and therefore it is recommended educational institutions review their own positions in light of the Colchester Institute case, particularly with respect to activities which they have previously treated as non-business.
Please contact Alison Hone, VAT Partner, to discuss further the implications of this case.