VAT Update – January 2022

26 Jan 2022

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In our first VAT update for 2022 we provide you with an update of the the latest VAT announcements and developments in the UK.

This issue includes an update on HMRC delays in processing VAT group applications; there’s a reminder of the upcoming mandatory MTD deadline for all VAT registered persons and a delay to the implementation of the new VAT late payment or filing penalty system to; we cover some changes relating to importing goods into the UK from 1 January 2022 onwards and we also highlight the opportunities that a time limit waiver for Returned Goods Relief may provide when bringing goods back to the UK; we highlight a recent VAT case that could help businesses recover VAT on costs associated with a disposal of shares; finally we consider a non-VAT case which has relevance to the VAT treatment of break clause payments.

We previously reported on the delays with HM Revenue & Customs (HMRC) processing VAT group registration applications and applications to amend a VAT group. HMRC is now taking up to nine months to process such applications, which leaves affected businesses in a difficult position with regards to their VAT accounting before HMRC formally accepts an application.

HMRC has recently written to the Chartered Institute of Taxation (CIOT) on this matter to indicate in cases where single companies have applied to join or form VAT groups, VAT returns should continue to be filed and paid by the single company registrations until the formation or addition to the VAT group is confirmed by HMRC. HMRC suggests that retrospective action will then be required to amend the VAT accounting once the VAT group is approved.

Comment: It isn’t clear whether HMRC will issue guidance in the public domain, to confirm the position it has indicated to the CIOT.

We have significant concerns that the position outlined by HMRC is not correct in law and on that basis we are working with our clients to apply a position in the interim period whilst HMRC is processing VAT group applications, which manages risk effectively but is also within the boundaries of VAT group legislation.

It has been suggested in some quarters that HMRC are working to clear the current backlog of unprocessed applications by the end of March 2022 however we are not aware HMRC has committed to that publicly.

We would encourage any businesses that are considering VAT grouping as an appropriate VAT efficiency measure to talk to us before implementing any proposed steps. Those with pending VAT group applications should also get in touch to discuss the approach to VAT accounting whilst HMRC is processing those applications.

Please contact Sean McGinness (Head of VAT) or Alison Hone (VAT Partner) for advice or to discuss this issue further.

VAT registered businesses and persons, including those established or resident overseas, are reminded that it will become mandatory to sign up for MTD for VAT (MTDfV) from 1 April 2022 for all VAT return periods which start on or after this date. It will no longer be possible to file VAT returns through the online business tax account, and all returns will need to be submitted through functionally compatible accounting software, or via a software tool (known as a bridging tool) which provides the digital link between the source data and HMRC’s API platform.

Failure to submit VAT returns on time and in a manner compliant with MTDfV requirements, may result in penalties being issued.

Comment: We are working with clients to ensure those not already filing VAT returns under MTDfV, are registered and ready for the 1 April 2022 deadline. VAT registered persons who do not have functionally compatible software are successfully relying on inexpensive bridging software to comply with the requirements.

For further details of how to get set up for MTDfV, and for guidance on keeping digital VAT accounting records, please do get in touch with your Saffery Champness partner for assistance.

HMRC is to delay the new penalty regime that will apply when VAT returns and VAT payments are submitted or paid late, until 1 January 2023. It was originally going to apply from 1 April 2022. HMRC has cited the need to ensure its IT systems are ready for the new regime, as the reason for the delayed roll-out.

The new system will replace the current default surcharge mechanism and separates late payments from late filings in terms of how penalties are levied.

For late payments, no penalty will be applied if the VAT is paid late but is paid in full within 15 days of the due date or time to pay as proposed and accepted by HMRC. Thereafter, penalties of 2% and 4% of the amount of VAT due will be levied between 16 and 30 days overdue and over 30 days respectively.

Penalties based on a points system will be applied for late filing of VAT returns, with 1 point applying to each submission deadline missed. A £200 penalty is levied when four points have been incurred for quarterly VAT filers (five points for monthly filers). Each subsequent instance of a late submission will result in another £200 penalty. If certain conditions are met over time, the points are reset to zero.

Comment: Until the new regime is introduced from 1 January 2023, the current default surcharge system will continue to apply.

The new regime will be applied to taxes other than VAT as well, as HMRC attempts to create a fairer and more consistent position. The implementation for other taxes is planned for 2024.

Where businesses have previously been in a repayment position or had nil returns and filed VAT returns late there were never any penalties under the existing default surcharge mechanism, however penalties for late VAT filings will be incurred as described, under the new system.

Taxpayers who are having issues paying their VAT liabilities on time are able to discuss their circumstances with HMRC with a view to agreeing a time to pay arrangement, which would help to manage the risk of late payment penalties.

If you would like advice or further information, please contact Sean McGinness (Head of VAT) or Alison Hone (VAT Partner).

There are a number of changes which have been implemented from 1 January 2022 which relate to importing goods into the UK. Such changes mark the end of easements introduced from 1 January 2021, following the UK’s withdrawal from the EU, to assist businesses faced with the complexities of importing, perhaps for the first time.

The changes are:

  • Customs declarations can no longer be delayed;
  • More stringent border controls are now in place;
  • Proof of origin declarations are required at the time of import; and
  • There is an update to the commodity codes under the UK Trade Tariff.

Comment: Whilst certain easements and simplifications have been removed, as expected, it is imperative businesses importing into the UK make the most of available opportunities. Whilst full customs declarations are now required at the time of import, postponed import VAT accounting (PIVA) is still very much available and will remain so. PIVA enables an importer to pay import VAT through its VAT returns rather than at the time of import, thereby providing a cash flow benefit. PIVA is relatively straightforward to apply and we would strongly encourage its use.

As part of the changes, supplier declarations with respect to the origin of the goods will need to be provided at the time of import. In 2021, traders were given more time to provide such declarations following an import where the preferential duty rate of 0% has been applied because goods have UK or EU origin, as permitted by the Trade and Cooperation Agreement (TCA) which the UK entered into with the EU as part of Brexit. Penalties may apply if imports are being declared under a preferential tariff without appropriate supplier declarations confirming the origin of the goods, and it is later identified that the preferential tariff is not available.

If you would like to discuss these changes or if you require assistance with supply chain VAT and customs matters please contact Nick Hart (VAT Director).

More information can be found at www.gov.uk

Returned Goods Relief (RGR) provides an opportunity to pay no import VAT and customs duty when re-importing goods to the UK.

For RGR to apply, the goods must be brought back to the UK within three years of them having been exported. This time limit can be waived in certain circumstances including:

  • Specialised goods or equipment on long-term hire or loan outside the UK;
  • Building equipment or machinery used in one or more capital projects outside the UK; and
  • Exhibition goods on long-term display or loan outside the UK (or stored outside the UK).

The three-year time limit is also waived for personal property owned by a UK resident which is being brought back the UK. Personal property, in this case, includes pleasure craft and private aircraft.

In order to apply RGR when the three-year time limit can be waived, it would be necessary to request confirmation from HMRC that under the circumstances the waiver can be applied. Such requests should be accompanied by details of the circumstances and justification that the three-year time limit can be disregarded.

In addition, the normal three-year time limit does not apply when goods that were located in the EU on 31 December 20210 are re-imported to the UK by 30 June 2022, and there is some relaxation in terms of providing exactly when such goods were removed from the UK.

Comment: RGR is a helpful relief that eliminates the need for customs duty and VAT to be paid when exported goods return to the UK within three years. The opportunity to ask HMRC to waive the time limit in specific circumstances is also welcome, particularly when bringing personal property back to the UK. Owners of yachts not in UK waters at the time the UK left the EU will find the opportunity to apply to use RGR particularly valuable as the costs of customs duty and import VAT which would otherwise apply, would be significant.

You can find further details regarding RGR and the waiver of the three-year time limit at www.gov.uk.

For advice or more information on this issue, please get in touch with Sean McGinness (Head of VAT) or Nick Hart (VAT Director).

The recent First Tier Tribunal (FTT) case of Hotel la Tour Ltd [2022] TC08335, has again highlighted the complexities that can arise when considering whether VAT can be reclaimed on costs incurred when selling shares.

The appellant successfully argued the professional fees associated with of the sale of its shareholding in a subsidiary company, had a direct and immediate link to its intended downstream taxable activities of developing and operating a new hotel.

The key points of the case were that the professional costs incurred did not form part of the consideration payable by the acquirer of the shares, so they did not become cost components of that supply, and that the motivation behind the share sale was to raise funds to pursue its intentions of running a new hotel. The FTT was satisfied that the appellant would seek to recoup the costs it had incurred when selling shares in a subsidiary, through operating the new hotel and not through the price set for the shares it was disposing of.

HMRC’s argued unsuccessfully that the costs had a direct and immediate link to the exempt share sale and the VAT on costs was therefore not recoverable.

Comment: There is a growing body of case law that supports the ‘downstream view’, which was a feature of this particular case. However, caution should be exercised and advice taken when considering applying this approach to recovering VAT on costs that in some way relate to the disposal of existing shares in a subsidiary company.

Such caution aside, the Hotel La Tour case does highlight the opportunity for VAT recovery where the clear motivation for the share disposal is to raise funds to support future taxable business activities and where the costs incurred do not form part of the share price being paid by the party acquiring the shares. It does beg the interesting question of whether there are further opportunities to look ‘downstream’ when considering VAT recovery but the well-established concepts of direct and immediate links, and cost components, still hold great significance. HMRC may not appeal this case but the judgement may prompt a series of disclosures for under-claimed VAT and this may encourage HMRC to publish its views on the position.

Should you have restricted VAT recovery with respect to costs incurred on the disposal of shares, we would be happy to discuss whether the Hotel La Tour offers an opportunity to correct that position. Please contact Sean McGinness (Head of VAT) or Nick Hart (VAT Director) for further information.

Hotel la Tour Ltd v HMRC

In the recent case of Ventgrove v Kuehne & Nagel (CSOH 129) there was a dispute between a landlord and tenant, with the tenant deciding to exercise a break clause. Under the lease the tenant could terminate from “the break date” provided they paid the sum of £112,500 together with “any VAT properly due” thereon. The landlord had opted to tax, so under HMRC’s new policy this was subject to VAT. In September 2020, HMRC issued RCB 12/20 stating that early termination payments would follow the liability of the supply to which they relate (supported by the CJEU cases of MEO (C-295) and Vodaphone Portugal (C-43)), and even where an agreement allowed for a termination any payment for this was no longer outside the scope of VAT and was payment for a taxable supply. This called into question the traditional VAT status of termination payments and payments such as dilapidations as outside the scope of VAT.

Whilst not a VAT case, the outcome turned on the wording “any VAT properly due”.

The tenant was successful in arguing it had correctly terminated the lease. The Court of Session agreed that, at time of the payment on 23 February 2021, HMRC had not changed its policy so the payment was not to be treated as a taxable transaction. Because of this, VAT did not have to be paid in addition to the termination payment to properly effect the termination of the lease.

This was because, following much discussion from interested parties, HMRC suspended RCB 12/20 in January 2021, only applying the updated VAT treatment from a future date. Revised guidance is due to be issued on this matter, but until that is available HMRC is allowing taxpayers to treat payments as further consideration for supply or go back to treating them as outside the scope.

Comment: Interestingly, the Court of Session gave its view that the cases HMRC referenced when it changed its policy in 2020 were not directly on point. They related to compensation for failure to complete a minimum term contract, which the Court saw as different to a contractual entitlement to end a contract after a specified period, for a fee. So does this mean that HMRC should re-assess its position before updating and issuing its new guidance? Or perhaps it will continue to insist that it can rely on these cases, or rely on another argument that where an agreement allows for a termination that the payment is for a supply? We await the updated guidance with anticipation.

Please contact Sean McGinness (Head of VAT) for further information.

Vengrove Ltd Against Kuehne + Nagel Ltd [2021] ScotCS CSOH_129 (22 December 2021) (bailii.org)

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