In this month’s VAT Update, we update readers on key news, including:
- From 1 February 2023, HM Revenue & Customs (HMRC) is implementing changes to the notification of options to tax over land and property.
- We illustrate with examples on how the new VAT penalties regime for late returns will work in practice.
- HMRC’s new guidance on repayment interest on VAT credits or overpayments.
- A reminder of the VAT rules relating to selling goods online through an online marketplace or directly to consumers.
- The result of a Court of Appeal decision regarding Mainpay and VAT exemption.
We previously reported on HM Revenue & Customs’ (HMRC’s) consultation on proposed changes to the way in which they deal with the notification of options to tax (OTTs) over land and property. HMRC has now issued Revenue & Customs Brief 1 (2023) to announce implementation of the proposed changes from 1 February 2023.
The first change is that HMRC will stop issuing OTT notification receipt letters. OTTs notified to HMRC before 1 February 2023 will get a standard notification receipt. From 1 February 2023, the only form of acknowledgement issued by HMRC will be an automated email response where an OTT is notified by email. A notification sent by any other means will not get an acknowledgement or receipt, unless HMRC requires more information.
The second change is that taxpayers will no longer be provided with details of OTTs that have been notified to HMRC in the past six years, on the basis that taxpayers have a statutory obligation to retain their records during this period.
Comment: While we welcome any steps taken to improve HMRC processing times, there remain a number of concerns about the new changes, which we raised in our response to the consultation. It is not apparent that HMRC have fully addressed these concerns. The business brief also does not clarify the process for notifying the more complicated elections, such as belated notifications and elections where HMRC’s permission is required.
Please see our FAQ on the process changes for further information.
A new penalty regime for the late filing and/or late payment of a VAT return has come into effect. The new penalty regime affects VAT return periods commencing on, or after 1 January 2023. The new penalty regime replaces the previous default surcharge regime. The previous default surcharge regime will still be in place for return periods that started prior to 1 January 2023.
Late submission of returns
A points-based system has been implemented for the late submission of a VAT return. The late submission of a VAT return can eventually lead to a £200 penalty.
Late payment of VAT
For late payment penalties, the sooner you pay your penalty, the lower that penalty will be. Late payment penalties can be applied to both VAT returns and error corrections.
The first late payment penalty will be received if a payment is 16 days or more overdue. Where a payment is between 16 and 30 days overdue, the penalty is calculated at 2% of the VAT owed at day 15.
A larger first late payment penalty is applicable where a liability is 31 days or more overdue. Where the larger first late payment penalty comes into effect, there is more than one penalty applied. The first rate of penalty is calculated at 2% of the outstanding liability at day 15 and the second rate of penalty is calculated at an additional 2% of the amount outstanding at day 30. For every day that the payment is overdue for more than 31 days, HMRC will also charge an additional late payment penalty, calculated using a penalty rate of 4% per year.
HMRC will also collect interest on all VAT outstanding from the first overdue date. Interest will be calculated using the Bank of England rate plus 2.5% on a daily basis.
Examples of penalties due on the late payment of a 31 March 2023 VAT return
A Limited Company has a quarterly VAT return ending on 31 March 2023. There is a payment of VAT due to HMRC of £15,000. From a practical perspective, the return must be submitted and payment received by Friday 5 May 2023. Due to 7 May falling on a weekend, however, the official submission and payment deadline remains the 7 May and all penalty days and interest will run from 7 May rather than the earlier deadline.
If payment is made in full by 7 May 2023 (the payment deadline) there will be no late payment penalty due. Late payments would have the following impact:
- If payment is made on 12 May 2023 (5 days late) there will be no late payment penalty, but interest will be charged using the Bank of England rate plus 2.5% on a daily basis.
- If payment is made on 23 May 2023 (16 days late) there will be a late payment penalty of 2% (£300) of the outstanding liability at day 15 (£15,000) and interest will be charged using the Bank of England rate plus 2.5% on a daily basis on the outstanding liability starting from day 1 (8 May) that the liability is overdue.
So, the total first late payment penalty is £300, plus interest.
If payment is made on 13 June 2023 (37 days late), the following penalties apply:
- 2% of the outstanding liability (£15,000) at day 15 (£300);
- 2% of the outstanding liability (£15,000) at day 30 (£300);
- A daily late payment penalty calculated using a rate of 4% per year from day 31 (the calculation in this case would be £15,000 x 4% x 6/365 = £9.86 in total); and
- Interest is also be charged using the Bank of England rate plus 2.5% on a daily basis on the outstanding liability.
So, the total late payment penalty is £609.86, plus interest.
HMRC has published new guidance on repayment interest on VAT credits or overpayments, applicable to accounting periods starting on or after 1 January 2023. This replaces the repayment supplement guidance.
HMRC will now pay interest if they are late in settling a legitimate VAT repayment claim.
A business is not eligible for repayment interest if there are any outstanding VAT returns, but repayment interest will be calculated from the date when HMRC receives the last outstanding VAT return.
The repayment interest rate is 1% less than the Bank of England rate, with a minimum rate of 0.5%.
The repayment interest period ends when HMRC repays the VAT to the business or offsets against other VAT liability or other taxes the business owes to HMRC.
HMRC starts to calculate the repayment interest depending on whether the amount to be repaid already has been paid or it is shown as a credit owed to the business on a VAT return or a claim.
If the amount has already been paid, the repayment interest is calculated from the day after the later of when the VAT has been paid or the deadline of the accounting period.
Assuming the following circumstances:
- The company quarterly accounting period ended 31 March.
- The VAT return is due by 7 May.
- The VAT return has been submitted and paid on 15 May.
- On 20 May the company claims a repayment.
- The repayment was paid on 2 June.
Then the company is due repayment interest from 16 May until 2 June (18 days). With the Bank of England rate of 3%, the interest will be calculated for 18 days of 2/365% per day of the outstanding repayment claim due.
If the amount has not been paid to HMRC the repayment interest starts the day after the later of the deadline for the VAT accounting period or when the VAT return or claim has been submitted.
Assuming the following circumstances:
- The company accounting period ended is 30 September.
- The VAT return is due by 7 November.
- The VAT return has been submitted on 1 November.
- HMRC repays the company on 10 November.
Then the company is due repayment interest from 8 November to 10 November (3 days). With the Bank of England rate of 1%, the interest will be calculated for 3 days of 0.5/365% per day of the outstanding repayment claim due.
Exceptions to rules for start dates
If the claim includes VAT that was paid and VAT that has not yet been paid, both rules for start dates can apply.
For businesses making payments on account, repayment interest is worked out differently. If the monthly instalments are more than the business owes for the period, the repayment interest on the overpaid amount starts from the date the VAT return was due.
Comment: Repayment interest replaced repayment supplement, which was rarely paid to the taxpayers as the calculations did not include the period of the HMRC enquiry. Under the new calculations, if HMRC delays a repayment due to an enquiry, the repayment interest will be paid including the period when the claim is being checked by HMRC.
In December, HMRC consolidated its guidance with respect to selling goods online either through on an online marketplace or direct to consumers.
The guidance itself is not new, however HMRC’s new page provides a timely reminder that specific rules apply to transacting online, some of which place online marketplaces on the hook for accounting for VAT due on sales made by vendors through their platforms.
In particular it is worth highlighting that in some circumstances, where goods are sold through an online marketplace, it is the platform operating that marketspace that is held liable to bring VAT to account, including:
- Where a product of a value of £135 or less is imported into the UK and delivered to the consumer’s address; and
- Where the vendor is not established in the UK and imports the goods here, which are then later sold through an online marketplace.
Also, if goods are sold by the supplier directly from their own website, the supplier (including suppliers not established in the UK) remains liable for VAT if:
- It is the importer of record for goods of value more than £135 which are shipped to the UK; and
- Goods of a value of £135 or less are imported into the UK in order to fulfil an online order.
On a related-matter we are expecting the CJEU’s judgement in Fenix International vs HMRC (Case C‑695/20), following the Advocate General’s (AG) opinion released on 15 September 2022. Fenix International concerns whether specific EU legislation is correct to put online marketplaces in the position as an undisclosed agent for VAT purposes and have them account for VAT on a supply of electronically supplied services, as though they had made the supplier rather than the vendor. The argument is that Article 9a of EU Implementing Regulations with respect to electronically supplied services (ESS), seeks its basis in Article 28 of the Principle VAT Directive, and whether or not that is correct.
In responding to this question, the AG opined that Article 9a is compliant with EU Law and is therefore valid law.
Comment: We await the CJEU’s decision in Fenix International with interest. There is a growing trend in VAT to hold online marketplaces liable or jointly liable for VAT due on supplies of goods or services transacted through their platform. Fenix International is specifically concerned with EU legislation relating to ESS. EU VAT reforms currently in the pipeline will also seek to extend the obligations of online marketplaces to other types of service as well. For example, online marketplaces operating in the tourism sector could, in future, be made liable for VAT due on the bookings they administer. The CJEU’s judgement could therefore have far-reaching implications.
The matter of the VAT treatment of supplies affecting online has become a relatively complex one, and UK companies selling online in the UK and outside the EU need to be mindful of both UK, EU and other country specific legislation in order to understand their obligations with respect to VAT reporting. HMRC’s consolidated guidance provides a timely reminder for online sellers to be aware of the relevant VAT rules and in some cases to have a dialogue with the online marketplaces to ensure the correct party is bringing VAT to account.
Please contact Nick Hart if you are selling goods or services online, for advice on this issue.
The Court of Appeal has agreed with the Upper Tier Tribunal (UTT) conclusion that the services of an umbrella company (Mainpay Ltd), whose business was providing medical practitioners, did not qualify for VAT exemption. The basis for this decision is that an umbrella company is not providing medical care and is instead supplying staff. This supply is subject to VAT at the standard rate.
Mainpay had argued that its supplies of medical consultants and specialist general practitioners to an agency, which then supplied those individuals to NHS Trusts and other hospitals, qualified for VAT exemption. The First Tier Tribunal (FTT) and the UTT both disagreed and rejected the argument that Mainpay was carrying out “clinical decision-making” which could be said to be medical care. Mainpay itself was not registered with any medical body, nor did it have any specific medical expertise. The NHS Trusts were considered to be exercising control over the practitioners to the same degree as those which they directly employed, meaning the terms of the medical exemption were not met.
The Court of Appeal has now agreed with the UTT that the contractual arrangements should be viewed in the context of the commercial and economic reality and the contractual terms should not be looked at in isolation and that the term ‘medical care’ had been correctly interpreted by the FTT and the UTT.
Comment: The supply chain for the provision of temporary medical staff is complex and often involves several stakeholders, including the practitioners themselves, staff bureau/agencies, umbrella companies, and medical institutions. Difficulties arise in categorising the supply between one of services (which could potentially be exempt in the case of supplies of GPs and medical consultants), or one of staff. The issue of who in the supply chain ultimately has control over the individual(s) in question, is often the critical one, as noted in Mainpay. The judgment of the Court of Appeal in Mainpay is not unexpected and it highlights the importance of reviewing contracts to determine what the reality of the delivery of the service is when considering whether VAT exemption applies.
For advice on VAT and umbrella companies, please contact Sean McGinness.