In this month’s VAT Update we spotlight what you should do when you receive a central assessment from HM Revenue & Customs (HMRC). We also remind taxpayers about the need to complete annual adjustment, and where applicable, standard method override calculations for partial exemption purposes.
We highlight HMRC’s newly introduced mechanism allowing taxpayers to set up time-to-pay arrangements online, and we focus on two recent VAT cases regarding a DIY housebuilder claim, and also whether an error was deliberate or careless, respectively. Finally, we comment on a landlord/tenant (non-VAT) case in which VAT was a central theme.
What should a VAT registered business be doing when they receive a central assessment?
HMRC have the power to issue assessments to VAT registered businesses where those businesses have failed to submit a periodic VAT return. The central assessment (or prime assessments are they are termed by HMRC) is an estimate of the VAT liability due to HMRC on the outstanding VAT return. The estimates are raised based on one of two mechanisms: prior period liabilities or taxable turnover.
The latter approach is typically adopted when historical data is not available, but it does tend to result in large and perhaps disproportionate amounts being assessed. This is because the amount is calculated based on taxable turnover which is used in comparison with the average liability and average taxable turnover of the other traders within the same trade group. We also have experience of prime assessments being based on the taxable turnover figure provided to HMRC as part of the VAT registration application, when a business is registered for VAT. Whilst a prime assessment using these methods is raised based on ‘best judgement’ in line with legislation, it does lead to issues.
For example, a UK film production company provides its services solely to overseas businesses. The income from overseas is outside the scope of VAT because of the place of supply rules, and the company has a right to input tax recovery. The company should never find itself charging VAT or having to pay VAT to HMRC on this basis. The company failed to submit its first VAT return and HMRC issued a central assessment which stated that the company has a VAT liability of £50,000 for the period.
HMRC will chase payment of central assessments, so they are not to be ignored. Ultimately if the assessment remains unpaid, and the VAT return for the period in question is not submitted, HMRC will likely refer the debt to third party collection agents. HMRC will also not repay VAT refunds due to the taxpayer with respect to VAT returns submitted after the outstanding period, until the compliance position is brought up-to-date by the taxpayer.
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When businesses receive central assessment letters from HMRC, we would recommend advice is sought with respect to the assessment and the VAT accounting period which has not been filed. It is critical that the outstanding VAT return is submitted as a priority. The submission of the outstanding VAT return will override the central assessment on the business’ VAT account, and the assessment should be removed. However, HMRC may still query the submitted VAT return in the event they feel the reported position should be verified prior to the submitted VAT return being accepted and the central assessment removed.
Where a business is normally in a repayment position but pays a central assessment prior to submitting their outstanding VAT return, a cashflow issue may arise as HMRC could delay repaying the money owed for the central assessment liability which wasn’t payable, as well as the repayment of VAT from the submitted return.
In the event the taxpayer is unable to file the outstanding VAT return in short order having received the central assessment, we would advise making contact with HMRC to discuss the prevailing circumstances as to why the return cannot be submitted and to discuss payment of the assessment. Having an open dialogue with HMRC is important to prevent a debt being referred to a third party.
VAT returns often remain unfiled, with central assessments being raised, when a business has ceased to trade but has not deregistered for VAT when it should have done. It is therefore important that where a business does cease to trade, and does not expect to resume in the near future, that it deregisters from VAT, so it no longer has to remember to file nil VAT returns. We would always recommend taking advice before deregistering from VAT, as under some circumstances VAT is due to be paid to HMRC with respect to retained stock or assets, on cancellation of the VAT number.
If you are facing difficulties in filing your VAT returns on time or you have received a central assessment from HMRC and do not know what the next steps are, please get in touch with Nick Hart.
In keeping with their gradual shift towards a more digital-based approach, HMRC have recently introduced the option for VAT registered businesses to set up VAT payment plans online. Businesses should be able to setup a VAT payment plan through their online business tax account, in the following situations:
- They have filed their latest VAT return.
- They HMRC owe VAT of £20,000 or less.
- They are submitting the payment plan request within 28 days of the payment deadline.
- They do not have any other payment plans or debts with HMRC.
- The payment plan debt is scheduled to be paid off within the next six months.
It should be noted that the option to submit an online VAT payment plan is not possible for businesses that operate the cash accounting scheme or make VAT payments on account. Businesses that are unable to submit online VAT payment plans will need to contact HMRC to request a payment plan.
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This introduction is helpful when considering the new VAT penalties for the late submission and/or payment of VAT returns that was introduced for VAT periods commencing on, or after 1 January 2023. There is currently a soft-landing period (ends after 31 December 2023) in respect of the late payment of VAT, providing, within 30 days of a business’ payment due date, the liability is either paid in full, or a VAT payment plan is arranged.
The option to set up VAT payment plans online will be helpful for some VAT registered businesses, unable to settle an outstanding VAT liability in one payment. It will be interesting to see whether in time HMRC extend the conditions so that businesses with larger VAT debts are also able to establish VAT payment plans online.
This move is also another example of HMRC taking pressure off its phonelines as taxpayers with VAT debts below the £20,000 limit no longer have to call in to HMRC to arrange a payment plan. Other steps taken by HMRC to free-up resources to deal with other matters, by taking personnel off the phones are less positive for taxpayers and the closure of the VAT registration helpline in particular has not been well received in some quarters.
Please get in touch with Callum Richards if paying VAT liabilities on time is becoming an issue and time-to-pay arrangements would be a welcome opportunity.
For those businesses that are partially exempt, VAT recovery during the VAT tax year is provisional, and at the end of the year the business must undertake an annual calculation to see if any adjustment to VAT recovery is due.
The process involves calculating the difference between the amount of input tax recoverable under the annual calculation, the amount actually recovered during the year, and making an adjustment to true the position up. Most partially exempt businesses have a VAT tax year-end of 31 March, 30 April or 31 May, depending on their VAT accounting periods, and whilst the annual calculation can be done in these VAT quarters, they must be done in the quarter following, meaning many businesses will be considering their annual partial exemption position over the next couple of months.
The partial exemption annual adjustment is not a means for correcting errors, and the adjustment itself is not an indication an error has been made. HMRC do not need to be notified about the adjustment, although failure to include an annual adjustment in the final return of the partial exemption year or the following return, will result in an error having been made which may require a disclosure to HMRC.
Annual calculations are also required to be undertaken as part of agreed special partial exemptions with HMRC.
For taxpayers using the standard method of partial exemption, the override may also need to be considered. The override is a mechanism which may result in further VAT recovery adjustments in instances when the standard method does not produce a “fair and reasonable” deduction of input tax; where the amount of input tax deducted in the tax year “substantially” differs from the amount that would be recovered based on the use or intended use of the purchases received in making taxable supplies. The override has effect if the total annual amount of residual input tax (VAT costs which are not wholly attributable to taxable or exempt supplies) exceeds £50,000 or £25,000 for group undertakings where the company is not in a VAT group.
The override requires a taxpayer to assess its use of the VAT bearing costs incurred to demonstrate whether the standard method has produced a result which fairly reflects the use of those costs. In the event a substantial difference is noted between the turnover based standard method and the use-based override, an adjustment to VAT recovery is required.
For this purpose, a “substantial” difference is one which is:
- More than £50,000.
- Over £25,000 and more than 50% of the total residual input tax incurred.
Comments
The annual partial exemption must be part of a partially exempt business’ VAT compliance process, and it crystallises its VAT recovery position for the VAT tax year. Under partial exemption simplification rules, some businesses may only be required to perform the annual calculation rather than the provisional calculations in each VAT accounting period. For some, the annual calculation will provide the VAT recovery rate to be adopted throughout the following year, until the annual calculation for that year is performed 12 months later. It is therefore important that businesses do not overlook the annual calculation.
The override only becomes applicable in specific circumstances, but it is important that it is not overlooked and HMRC would expect taxpayers to give the matter the appropriate level of consideration. In the event override adjustments are required year-on-year, the business should perhaps consider agreeing a special method with HMRC although there is no legal obligation to do so.
Please contact John Butterfield VAT Director, for further advice and guidance on the annual calculation or the standard method override.
The Upper Tribunal (UT) case of CPR Commercials Limited [2023] UKUT 61(TCC) has highlighted the importance difference between deliberate errors and careless errors within the context of VAT penalties.
The appellant sold used commercial vehicles to customers including VAT registered businesses in Ireland. It charged the zero-rate of VAT on those supplies to Ireland on the basis the vehicles had been removed from the UK.
The underlying issue which ultimately resulted in HMRC levying penalties based on deliberate errors having been made, was the lack of evidence held by the appellant to demonstrate the vehicles had indeed been removed from the UK when sold. Higher rates of penalties apply in cases where deliberate errors have been made. HMRC had assessed the appellant for VAT due on supplies where acceptable removal evidence was not provided. Later on, HMRC checked again whether the conditions for zero-rating the supply had been met for supplies made following the original assessment, and again HMRC was not satisfied they had been. It raised further assessments and at that point considered the error to be deliberate given the appellant had in HMRC’s view not appeared to have addressed the need to retain removal evidence in order to apply the zero rate of VAT to its sales to Ireland.
The UT found in favour of the appellant and directed HMRC to charge penalties based on careless errors made rather than deliberate ones.
Comments
The difference between a deliberate error and a careless error for the purposes of the VAT penalty regime is an interesting one and the test to determine this has its origin in other case decisions.
The test whether a deliberate error has occurred is a subjective one and it is whether the taxpayer knowingly provided HMRC with a document that contains an error with the intention that HMRC should rely on it as being correct. The key point in this case was whether blind-eye knowledge amounts to errors being made deliberately and the UT concluded it does not.
Taxpayers are encouraged to adequately address issues identified by HMRC during control checks or assurance events, not only to ensure the correct amount of VAT is being brought to account but also to manage against the risk of higher penalties in the future, through robust controls and processes.
We have previously highlighted the importance of retaining removal/export evidence to be eligible to apply the zero rate of VAT to supplies of goods shipped from the UK. Our February 2023 VAT Update provides further details https://www.saffery.com/insights/publications/vat-update-february-2023/#collapse-1-0
If you are currently facing the prospect of HMRC charging penalties for VAT errors noted, or you would like a review of current processes and controls for the retention of export evidence, please get in touch with Nick Hart, VAT Director to discuss further.
Steven James Mort v HMRC [2023] UKFTT 387 TC01382
In this case, Mr Mort constructed a new dwelling in Bury and made a VAT claim under the DIY housebuilders scheme. HMRC contended that a number of the suppliers had incorrectly standard rated supplies to Mr Mort when they should have applied the zero-rated. As a result, the suppliers incorrectly charged VAT and VAT incorrectly charged cannot be recovered.
HMRC’s argument was that having received such erroneous payments from the supplier, the logical step would be for Mr Mort to write to the supplier and seek a refund from them and not HMRC.
The tribunal was quite critical of HMRC taking a position that, not only did they have no responsibility to make repayment to the supplier (it being entirely the responsibility of the supplier to make a reclaim, for VAT incorrectly charged), but that it is appropriate to expend resources on tribunal proceedings to prevent onward payment to the DIY housebuilder.
The proceedings in relation to this issue would be entirely obviated by HMRC simply facilitating the repayment of incorrectly charged VAT to the supplier.
In particular, HMRC disputed a number of items which had been included in the claim. The tribunal found in their favour on some but agreed with the appellant on others. The tribunal agreed the surfacing of the footpath and driveway entrance, and the supply and installation of roof beams, was zero-rated, whereas it was concluded the supply and fitting of custom gates and an insulated garage door with an associated electric mechanism, were both supplies of goods and allowed them to be included in the claim.
Comments
The tribunal’s approach in this base is questionable. The zero rating within Group 5, of Schedule 8 applies to services but item 4 does extend the zero rating to building materials where they are supplied by a supplier providing services that qualify for zero rating as being in the course of constructing a building designed as a dwelling. The tribunal gave weight to the relative value of the goods compared to the cost of installing the goods and looked at the predominant supply. However, the law allows for the supply to be zero-rated even where it is a supply of goods, on the basis it is supplied with a zero-rated construction service.
We understand that HMRC are not going to appeal this decision even though they may believe that the tribunal’s conclusions were incorrect. Being a first-tier decision, this case doesn’t set a precedent. Whilst the onus is on the supplier to determine the correct rate of VAT to apply, it is advisable that the customer takes advice as to whether that treatment is correct, and this is best addressed before works commence where possible. Suppliers can get the VAT treatment wrong, particularly on construction projects, and given the customer is exposed to the risk of disallowed claims on the basis VAT has been incorrectly charged by the supplier, it is recommended the customer does its own due diligence to protect its position.
If you are considering a residential new build project, please get in touch with John Butterfield VAT Director, to discuss the VAT implications.
HMRC has released Revenue & Customs Brief 6/2023 which concerns VAT and digital publications. The release of the brief has been prompted by HMRC success in News Corp UK and Ireland Ltd [2023] UKSC 7 in which the Supreme Court concluded the scope of the zero rate for printed matter before 1 May 2020, could not be extended to include electronic versions of publications such as newspapers and periodicals.
In May 2020 the law changed and the scope of the zero rate was extended to include digital publications.
Following the News Corp litigation, businesses had submitted claims for overpaid VAT with respect to supplies of digital publications which pre-dated the change in legislation. These claims were stood behind News Corp, and in light of the Supreme Court decision, HMRC is writing to those businesses to make them aware and to establish whether they intend to lodge their own appeal against the rejection of their claims.
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Businesses whose claims for overpaid VAT with respect to supplies of digital publications before 1 May 2020, should review their position and decide whether or not to appeal the rejection of their claims, following the Supreme Court decision in News Corp.
If you had submitted such a claim and have received recent correspondence from HMRC on this matter, please do get in touch with Nick Hart VAT Director, to discuss next steps.
Fairleigh and others v St George South London Limited and others (LON/ooAY/LSC/2019/0038 and LON/ooBJ/LSC/2019/0330)
This case involved significant VAT issues but was not directly related to VAT legislation. It was heard by the Property Chamber of the First Tier Tribunal.
Our Head of VAT, Sean McGinness, was called as an expert witness and provided evidence regarding the application of the VAT legislation and HMRC’s practice in relation to the issues under discussion.
The case was bought by tenants at two large London developments of leasehold apartments. They did not consider that their landlords had been reasonable in including the VAT they incurred on the staff element of the service charge provided by their third-party managing agent to their annual service charge, following a change in HMRC guidance in 2018.
The Landlord and Tenant Act 1985 s 27A provides that landlords can only include costs which are “reasonably incurred” in their charges to tenants and the applicants considered that following HMRC Business Brief 2018 their landlords had not been reasonable in passing on VAT on staff costs which had not previously been charged. It had previously been thought that charges of this kind were covered by an extra statutory concession (ESC) and therefore not subject to VAT.
The applicants considered that it would be possible for the respondents to employ the staff providing onsite services, such as concierge and cleaning, directly without significant additional cost or disruption. Their view was that it was not reasonable for the landlords to continue with the same business model resulting in an increase in cost due to VAT now being due. The applicants suggested two models for the direct employment of the staff – employment of all site staff by the head landlord, or joint employment of the staff between all the head lessees and other lessees.
Much of the hearing consisted of detailed discussion of the commercial implications of direct employment, in particular, whether this would in fact create additional costs and a lack of efficiency which could lead to increased costs for the tenants. The employment law aspects of joint employment were also explored in detail.
From a VAT perspective there were representations regarding the approach of HMRC to restructuring the staff provision which would have been put in place to reduce VAT liabilities, including the need for certainty which would require a non-statutory clearance to be obtained from HMRC, and what the potential challenge to any arrangements from HMRC on the grounds of VAT avoidance could be.
The tribunal considered that the applicants were required under the Landlord and Tenant Act to make a prima facie case for the alternative actions which should have been taken by the landlords to remove the VAT charge on the staff costs. This had not been achieved as the applicants had only put forward high level theoretical models which the respondents had demonstrated would be unlikely to work in practice.
The tribunal therefore concluded that the applicants had not been successful in showing that VAT on the staff charges was not reasonably incurred by the landlords.
Comments
Whilst not a VAT case, the dispute centred on VAT treatment of service charges and it is an important reminder that VAT, and other taxes, can be a commercial issue that leads to litigation. From the landlords’ perspective, the decision indicates that finding a way to the lowest tax cost is not necessarily the prime motivator and the commercial implications, as well as the tax risks, are important considerations when considering whether landlords have acted reasonably.
For any further information on these cases, please contact Sean McGinness.
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