VAT Update – February 2022

24 Feb 2022

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In this month’s VAT Update we consider HM Revenue & Customs’ (HMRC’s) latest Brief on termination payments; we remind exporters of the need to keep appropriate export evidence; we highlight the need to comply thoroughly with the conditions to apply bad debt relief VAT adjustments; and finally we consider the new plastic packaging tax and when it will apply.

HMRC has published Revenue & Customs Brief 2(2022) which sets out its revised position on the VAT treatment of various termination payments, including dilapidations paid by a tenant to a landlord at the end of a property lease. This guidance replaces its previous announcement in September 2020 that all such payments would become subject to VAT following judgments of the European Court of Justice (CJEU).

HMRC broadly confirmed that it will see most payments made at the termination of a contract as being consideration for a supply for VAT purposes. This means a termination payment will be subject to VAT at the same rate as the supply made under the original contract. These changes will take effect from 1 April 2022.

However, this new treatment will not apply to dilapidations in most cases. Dilapidations payments will therefore continue to be outside the scope of VAT, although HMRC reserves the right to review the treatment if it considers there is any evidence of ‘value shifting’ between taxable rent and dilapidations payments to avoid a VAT charge. The guidance also confirms that payments by a tenant for the surrender of a lease will continue to be treated as consideration for the supply of a right over land by the tenant. As is currently the case, these payments will be subject to VAT if the tenant has opted to tax their interest in the property.

Any businesses that treated dilapidations payments as taxable since September 2020 will need to correct this, especially where the VAT charged by a landlord was not recoverable by the tenant. Former tenants will need to request the refund of VAT overcharged by the landlord and the landlord will need to correct their VAT declarations. For tenants who paid VAT to landlords no longer in business, it is likely to be difficult to obtain any repayment of the VAT costs suffered.

Comment: HMRC’s latest Brief has been widely anticipated and promised for some time now and it is helpful that it has finally been issued. Businesses have some clarity over contract termination payments and considering them to be subject to VAT as the default position is now the appropriate position to take. We welcome HMRC’s confirmation that they will continue to view dilapidation payments as being outside the scope but with a degree of caution given that they reserve the right to challenge where that treatment has been applied in cases where they believe the payment due to landlords has been overstated. Caution should still be exercised and advice taken when considering the VAT treatment of termination payments and dilapidations.

You can read the full Revenue & Customs Brief 2/22 here.

The First Tier Tribunal (FTT) recently considered the importance of export evidence when applying the zero rate of VAT to export sales, in the case of Junjie Liu and Zhe Li (TC 08396/V). The case concerned the conditions that must be met before zero-rating can be applied to the supply of goods for export, paying particular attention to the level of documentary evidence that needs to be retained.

In this particular case, HMRC originally concluded that the evidence held by the appellant was unsatisfactory and assessed for the VAT due on the goods at the standard rate The requirements for export evidence are detailed in Public Notice 703, some sections of which have the force of law and therefore must be strictly applied. The FTT considered these requirements against the evidence the appellant had provided and concluded that it did meet the requirements. The appeal was therefore upheld.

Comment: Whilst the taxpayer was successful in appealing HMRC’s assessment in this case, it does highlight the need to ensure the appropriate export evidence is retained and that it meets the relevant requirements. Taxpayers can often get caught out, particularly when export documents are handled and stored by third party shipping and customs agents and there is not perhaps a direct line of sight or control of those documents on the part of the supplier who has applied the zero-rate to its export supplies.

UK businesses currently exporting or intending to export goods outside the UK are recommended to review their record keeping procedures to ensure sufficient evidence is held to support the zero-rating of exported goods.

Please contact Nick Hart, VAT Director, if you are exporting or intend to export goods outside the UK and would like advice on documenting export evidence.

Junjie Liu and Zhe Li v HM Revenue & Customs

The Upper Tier Tribunal (UTT) case of Regency Factors Plc v HM Revenue & Customs [2022] EWCA Civ 103 has highlighted the importance of ensuring that required VAT accounting records are kept when applying Bad Debt Relief (BDR).

BDR provides a business the opportunity to adjust its VAT account when sales invoices (on which it has accounted for VAT) remain unpaid. There are various conditions that must be met, and one condition that is often overlooked is that the claimant has to keep a single BDR account within its VAT records, where the write off for VAT purposes must be recorded. This BDR account must contain specific information that HMRC outlines in its relevant guidance. In the absence of a separate BDR account, HMRC would deny the relief on the basis one of the conditions for applying it would not have been met.

In the case highlighted, Regency Factors Plc failed to fulfil the BDR conditions. The record of its bad debts was not kept in a separate bad debt relief VAT account and the appellant was not able to adequately show the supplies and invoices it had applied BDR to. The business maintained a record system that did not enable it to apply receipts to a particular invoice. Therefore, it was impossible to establish whether the substantive conditions for BDR had been met and the appeal was dismissed.

Comment: This case highlights the importance of keeping appropriate records, particularly when applying a particular VAT position that requires specific information to be held as a condition. BDR is a valuable relief available to businesses whose customers are late payers, but to apply it correctly having a detailed BDR account where the debt is written off to is a critical factor.

If aged debtors is a particular issue for you, please get in touch with your usual Saffery Champness contact and we can advise on how to maximise the opportunity BDR offers.

Regency Factors Plc v HM Revenue & Customs

Plastic packaging tax (PPT) is a new environmental tax that will take effect from 1 April 2022. The core purpose of PPT is to encourage the use of recycled materials in plastic packaging. A broad range of sectors with an estimate of 20,000 businesses is expected to be affected by the new tax.

PPT will apply to importers and UK manufacturers of plastic packaging containing less than 30% recycled plastic and will be charged at a rate of £200 per tonne. Any businesses that manufacture plastic packaging in the UK or import plastic packaging into the UK will be liable to register for PPT if they exceed the threshold of 10 tonnes within the last 12 months (except in the first 12-month period where they only need to look back to 1 April 2022) or the next 30 days. An important point to note is that a registration will be required if the 10-tonne threshold is exceeded, even if the 30% recycled content threshold is met, such that no PPT is payable.

With just under two months before PPT comes into force, it is vital that businesses carry out checks and/or seek advice to determine whether PPT is applicable to their current packaging products. The scope of PPT means that joint and several liability could apply across the supply chain if the tax is not correctly accounted for. If businesses ultimately conclude that their current packaging products could fall within this new tax, they may wish to take steps to switch to products with greater than 30% recycled plastic content.

From 1 April 2022, businesses will need to work out the weight of the plastic packaging they manufacture or import into the UK. Businesses should keep a record of the workings and any supporting evidence, and will need to determine whether a PPT registration is required. If the 10-tonne threshold is exceeded, HMRC must be notified within 30 days and tax must be accounted for from the day the business becomes liable to register. Where PPT applies, businesses will be required to keep accounts and records of details of their plastic packaging and to file quarterly returns and pay the tax due every quarter. Penalties will be levied for failing to comply with the new tax, including failure to register with HMRC, failure to file returns and failure to pay the tax.

Comment: PPT will clearly have a significant impact on those manufacturing or importing plastic packaging. With less than two months to go before PPT comes into force, we encourage businesses to consider the impact of PPT and to take any necessary actions at the earliest opportunity to avoid penalties. It should be noted that the registration process has not yet been finalised.

We understand it is HMRC’s intention to work closely with industry to help businesses understand and comply with the new requirements. HMRC has recently written to the Chartered Institute of Taxation (CIOT) providing updates on the new tax and has provided two decision trees to assist businesses in understanding the tax and what plastic packaging products are in scope (see links below). HMRC has also suggested that it will only resort to using enforcement powers where needed. We would therefore expect a light touch where businesses have made reasonable efforts to comply with the new tax.

For advice on how PPT affects your business and for guidance on complying with the new rules, please contact Wendy Andrews (VAT Director) or Nick Hart (VAT Director).

HMRC has shared two useful decision trees for businesses via its LinkedIn account here:

https://lnkd.in/edE8dytp

https://lnkd.in/eQ_bv9Wq

webinar-vat-brexit-2022

VAT Webinar | Brexit-related VAT Issues

On 1 March, we held a VAT webinar focusing on Brexit-related VAT issues.

Our expert team recapped the key changes and also looked at the specific challenges for UK businesses.

You can watch the full recording of the webinar here.

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