In this month’s VAT Update we consider the next phase of the of HM Revenue & Customs’ (HMRC’s) Making Tax Digital (MTD) programme. We also highlight further issues with postponed import VAT accounting and changes to HMRC’s procedures with a new route to escalation for mid-size businesses. Finally, we comment on the latest Upper Tribunal case in which the concept of business was explored.
Making Tax Digital extension
All VAT registered persons in the UK will need to comply with MTD from 1 April 2022. Currently MTD obligations for VAT compliance purposes only need to be met by VAT registered persons whose taxable turnover exceeds £85,000. The extension of MTD for VAT will, according to HMRC, require a further 1.1 million VAT registered persons (including those established overseas) to comply and file their VAT returns through functionally compatible software and hold digital VAT records.
Comment: We are encouraging clients who are not yet filing VAT returns through MTD, to get set up for it now in advance of the extension. The extension will apply to VAT accounting periods beginning 1 April 2022 but getting set up now is advisable. If your accounting software is not MTD compatible and is not capable of linking to HMRC’s system for VAT filing purposes, or if you maintain VAT records purely in a spreadsheet for example, a separate software tool (known as bridging software) will be required. There are numerous inexpensive bridging software solutions available.
Once set up and registered for MTD, VAT records need to be held digitally, which generally means any manual steps within the VAT reporting process need to be eliminated, with some exceptions.
For further details of how to get set up for MTD for VAT purposes, and for guidance on keeping digital VAT accounting records, please do get in touch with your Saffery partner for assistance.
Import VAT accounting issues
Postponed import VAT accounting (PIVA) enables importers to pay the import VAT incurred when they ship goods into the UK, through their VAT returns, creating a cash flow benefit.
For those traders authorised to use simplified import declarations, HMRC is aware of issues where payable import VAT is not appearing on the correct monthly postponed import VAT statement. This is causing confusion for affected taxpayers and HMRC has suggested they adopt the following workaround whilst the matter is being investigated:
- Pay (and reclaim where applicable) the import VAT amounts shown on the import VAT statements when completing the VAT return; or
- Identify import VAT amounts that are not included on the correct monthly statement and reallocate them to the correct one.
Importers not authorised by HMRC to use simplified import declarations are not affected, however there have been teething problems with postponed import VAT accounting and the monthly import VAT statements showing the correct figures.
Comment: PIVA has been a welcome introduction this year. It is now possible to account for import VAT through the VAT return process rather than being required to pay import VAT in cash and then reclaim it. System issues have, however, resulted in cases where import VAT has not appeared on the correct monthly statements, and some statements have had to be reissued. HMRC’s updated guidance outlines the process for checking previous VAT returns for inaccuracies. Read the HMRC guidance here.
Taxpayers should perform the necessary checks to reconcile the import VAT amounts appearing on their statements against their actual imports, to demonstrate reasonable care is being taken.
Please contact Nick Hart, VAT Director, for further assistance with PIVA and other import related matters.
HMRC processing times
HMRC is experiencing significant processing delays in a number of its departments, including the option to tax and VAT group registration units.
Taxpayers submitting option to tax elections and VAT group registration applications or applications to amend a VAT group (adding or removing members) should expect and plan for significant delays in HMRC responding to those submissions. In the case of the Option to Tax Unit, we are aware of officers quoting 100 working days as the expected response time.
We have also been advised that 64-8 agent authorisation forms are taking over a month for HMRC to process and scan into the system.
Comment: Processing delays can cause uncertainty and confusion, leaving taxpayers with difficult issues to try and resolve. In some limited circumstances there is an opportunity to ask for a specific matter to be escalated and promoted up the waiting list. However, in most cases there is simply no alternative to waiting for HMRC’s response.
One potential route for escalation is HMRC’s Customer Engagement and Support Team. Access to this service is restricted to mid-size businesses whose UK based turnover is over £10 million or which have at least 20 employees.
Mid-sized businesses can access additional support from this dedicated team through a government gateway account. The process for accessing this begins here.
If you are experiencing significant commercial issues or financial hardship is arising from delays, please do get in touch with your client team at Saffery to discuss your options.
Is there a business for VAT purposes?
One of the fundamentals of VAT has been considered by the Upper Tribunal in the recent case Babylon Farm Limited (UT/2019/0173). VAT can only be treated as input tax if the associated costs are incurred in respect of a business (economic) activity.
In Babylon Farm, the Upper Tribunal concluded, in agreement with the earlier First Tier Tribunal (FTT) decision and HMRC, that the company was not undertaking an economic activity, and therefore the VAT incurred, principally on the construction of a new barn, was not recoverable.
Babylon Farm maintained that it was carrying on the business of haymaking (with the hay being sold to a Director/Shareholder for use in their livery business) and business consultancy. The Upper Tribunal found no evidence of the company undertaking either activity.
Whilst the FTT had applied the ‘business tests’ from the High Court decision in Lord Fisher  STC 238 the Upper Tribunal indicated that these tests should not be the starting point when considering if an activity is a business and any such deliberation should begin with Wakefield College v HMRC  EWCA Civ 952, and Article 9 of the EU VAT Directive.
Comment: The business tests from Lord Fisher are well known, are widely applied, and form the basis for HMRC’s guidance on what constitutes a business activity. However, as Babylon Farm Ltd has highlighted, they should not necessarily be the starting point when considering whether something is an economic activity or not. In Wakefield College the Court of Appeal concluded there was a supply of goods or services in return for consideration, which was sufficient for an economic activity to be present. In Babylon Farm Ltd such supplies were lacking and reference to the business tests was not necessary for the Upper Tribunal to reach its conclusion.
The point regarding what is an economic activity is the focus of much litigation. Even after 31 December 2020, when the EU VAT Directive is not prime VAT law for the UK any longer, Article 9 and the definition of what constitutes a taxable person is still be the first port of call for the UK courts when considering whether an economic activity is being undertaken. Relevant UK and EU jurisprudence (as retained law at least for the time being) would also be referred to where necessary. As advisers, we would take a similar approach, acknowledging that HMRC may prefer to base their position around the Lord Fisher business tests and their current published guidance.
If you have queries about what is and what is not an economic activity or business, for VAT purposes, please contact Sean McGinness, VAT Partner.