11th March 2022VAT Update from HW Fisher

In this month’s VAT Update Gerry Myton and Mike Block bring the latest updates from the world of VAT!

Read on for more updates, information about HMRC’s first-ever seizure of an NFT, and a summary of recent VAT cases.

HMRC NEWS

Revenue and Customs Brief 2(2022): VAT on early termination fees and compensation payments

After an 18-month period of uncertainty, HMRC have finally set out their position on the VAT treatment of early termination fees and similar payments.

Such payments were historically viewed as being outside the scope of VAT, but HMRC revised this treatment in September 2020. After much discussion and suspension of the revised position in January 2021, HMRC have now clarified when charges made by businesses to their customers wishing to withdraw early from agreements for the supply of goods or services are considered further payments for a supply and may be subject to VAT. Examples given include the following:

• If a customer is charged a fee for exiting a mobile phone contract early – subject to VAT.
• Additional car parking fees for overstaying will be subject to VAT if the fee is for the additional use of the parking space. However, where a fine is substantial and punitive and is designed to deter a breach of the terms and conditions of parking, it will be outside the scope of VAT.
• Penalties for the late return of hired equipment, such as a car, is effectively an additional hire fee and will be subject to VAT.
• Hotel cancellation fees are no different from any other commitment to pay in full or in part for the supply, and VAT is, therefore, due on these fees. Similarly, ‘no show charges are also subject to VAT as the amounts paid on account are consideration for the right to benefit from the performance of obligations arising from the contract to provide services, regardless of whether the customer exercises that right.
• Whilst most early terminations payments will be subject to VAT, HMRC have now accepted that dilapidation payments made at the end of a lease will be outside the scope of VAT. HMRC may depart from that view if they find evidence of value shifting from rent to dilapidation payment to avoid accounting for VAT.

Any business that adopted the treatment outlined in the September 2020 guidance and accounted for VAT on transactions which under the revised guidance are outside the scope of VAT may correct this on their next VAT Return.

All businesses must adopt this revised treatment from 1 April 2022 even if they have a ruling from HMRC which states that early termination fees/compensation payments are outside the scope of VAT. To discuss further and the opportunity to recover VAT paid in error, please contact Gerry Myton.

Revenue and Customs Brief 3(2022): Postponed VAT Accounting (PVA) and businesses registered under the Flat Rate Scheme

HMRC have now updated their guidance to address how Flat Rate Scheme traders account for import VAT when utilising PVA. Businesses must adopt the new guidance for the VAT return periods that start on or after 1 June 2022.

Import VAT that is accounted for through PVA should no longer be included within flat rate turnover. The PVA amount should only be included within box 1 of the return following the Flat Rate Scheme calculation.

If any businesses have overpaid HMRC while they have been adopting the incorrect treatment, they should look to recover these amounts using the standard process to correct errors on your VAT Returns. To discuss further, please contact Mike Block.

HMRC seizes NFTs for the first time in £1.4m fraud case

HMRC have made its first-ever seizure of non-fungible tokens (NFTs) as part of a £1.4m VAT fraud investigation, which is understood to involve 250 allegedly fake companies and led to the arrests of three people.

According to HMRC, the suspects used “sophisticated methods” to hide their identities, including false and stolen identities, false addresses, pre-paid unregistered mobile phones and Virtual Private Networks (VPNs)

HMRC is the first UK law enforcement agency to successfully freeze an NFT. Nick Sharp, HMRC’s deputy director of economic crime, said that the recent seizure serves as a warning to those who think they can use crypto assets to hide money from HMRC.

This leads to a debate around the VAT position of NFTs centring on establishing a place of supply and where VAT, if applicable, is declared. If you wish to discuss this topical matter, please contact Gerry Myton.

Closure of HMRC’s VAT helplines on Fridays, 25 February to 25 March

In their wisdom, HMRC decided to repeat the December 2021 exercise of not answering their phones on a Friday: the VAT helplines will be closed on Fridays, 25 February to 25 March 2022, apart from 4 March. Hopefully, this exercise will reduce the excessive delays being experienced by businesses in correspondences being answered and VAT Group Registration numbers being issued!

RECENT VAT CASES

Regency Factors PLC v HMRC [2022] EWCA Civ 103)

The case concerns the application of the VAT bad debts reliefs (BDR) rules as specified in VAT Regulations.

Regency made a claim for BDR. Regency could not allocate the debts to specific invoices due to its internal accounting system, and HMRC disallowed the claim.

Regency appealed to the First-Tier Tribunal, which concluded that bad debt relief was not available as there was no bad debt and Regency had not complied with the legislative requirements to claim the relief.

The Upper Tribunal accepted that while there was a bad debt, no relief was available as the legislative requirements had not been met.

The Court of Appeal (CoA) also found against Regency as it did not keep a single VAT BDR account which is required by Regulation 168 (3).

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. For more information, please contact Mike Block.

Y4 Express Limited v HMRC [2022] UKUT 00040

Y4 Express Ltd arranged for the importation of goods from companies based in China and Hong Kong and collected goods from the airport, stored them, and arranged delivery to customers.

Following a commercial dispute, Royal Mail suspended its online business account in 2013. Y4 then arranged for two associates to open accounts which it could use instead. Y4 reimbursed their Royal Mail costs and paid them an occasional commission.

Y4 prepared invoices to be issued by Mr Man and Colemead Limited and sought to recover input VAT on payments.

HMRC disallowed the input tax claimed as it considered that the individual was not in business, so no VAT was due on the charge made to Y4.

The FTT upheld HMRC’s disallowance of Y4’s input VAT recovery, finding that there was no economic activity carried out and Y4 Express had not received taxable supplies from Mr Man or Colemead Limited relating to delivery services.

Y4 appealed to the Upper Tribunal (UT), which upheld the FTT’s decision that Y4 was not entitled to recover input tax. If you wish to discuss this further, please contact Gerry Myton.

Rufforth Park Ltd v HMRC [2022] UT43 (TC)

Rufforth Park Ltd runs a car boot sale near York and provides toilets, parking for customers, and a café. During a HMRC routine VAT review, it was observed that Rufforth Park Ltd was not charging VAT on all of its supplies.

HMRC decided that Rufforth Park was providing an expertly run event rather than the exempt supply of land.

The FTT took a more realistic approach. It decided that RPL might run its car boot sales very efficiently; however, that was not the same as running them expertly. There was little expertise required, in its judgment, in directing sellers who turned up on the day to a particular pitch.

The FTT concluded that the amenities offered were relatively basic and consistent with RPL making an exempt supply of land, and RFL’s appeal was allowed. If you wish to discuss this further, please contact Gerry Myton.

To discuss any other VAT matter not covered above, please contact Gerry Myton in the first instance.