Gerry Myton and Mike Block explain the latest updates and rulings affecting VAT. Read more on the latest news from HMRC, key takeaways from recent VAT rulings, and a full analysis of recent VAT cases.
Plastic Packaging Tax is now mandatory
The application of Plastic Packaging Tax shall be mandatory from 01 April 2022, for further guidance on this, please refer to our article here:
Mandatory Use Of “Making Tax Digital” For VAT
Submission of VAT Returns using HMRC’s “Making Tax Digital” service will be mandatory for all VAT Returns starting 01 April 2022 or later.
HMRC Online Sales Tax Consultation
HMRC have launched a public consultation, seeking feedback on the viability of introducing an “Online Sales Tax”, with this due to close on 20 May 2022.
Questions that the Government are looking to address include: how to define an online sale, given range of possible transactions, delivery, and collection options; what transactions should be covered; the manner in which the tax would be levied; how returned purchases would be handled and how to prevent avoidance by non-UK sellers.
Revenue & Customs Brief 04/2022 – Recovery Of Incorrectly Charged VAT
This replaces the 2017 brief, and explains how an end-user that has been wrongly over-charged VAT can seek remedy.
The only person eligible to recover overpaid VAT from HMRC is the person who accounted for it to HMRC via their VAT Return. I.E: it is only possible for a trader to recover VAT mistakenly overpaid from HMRC where it accounted for an overpayment of Output VAT on its sales, to HMRC.
If a customer overpays VAT to its Supplier, this is considered by HMRC to be a commercial matter between those two parties, to be settled without HMRC’s involvement.
Previously, under case law (HMRC v Investment Trust Companies [2017] UKSC 29) it was noted that under EU law, if it were impossible or excessively difficult for a customer to obtain reimbursement for over-charged VAT from a supplier, then that customer may be eligible to bring a claim against HMRC (for example, if a supplier was insolvent). On this basis, it was possible to bring such a claim against HMRC either in a very limited set of specified circumstances, or else in Court.
From 1 January 2021, it is no longer possible to engage in legal action regarding a failure to comply with any of the general principles of EU law. As the right to bring a claim against HMRC for overcharged VAT derives from such law, these rights no longer apply in the exceptional circumstances identified by the UK Supreme Court in UKSC 29, and it is no longer possible to make claims for incorrectly over-charged VAT against HMRC.
Claims brought in court before 1 January 2021, remain unaffected.
Uncertain Tax Treatments By Large Businesses
On 25 February 2022, HMRC released its latest manual relating to “Uncertain Tax Treatments by Large Businesses”, impacting Corporation Tax, Income Tax and VAT. These measures apply with effect from 01 April 2022, and require traders to notify HMRC of any “uncertain tax treatments” if their business is within the scope of the scheme, and the relevant conditions are met.
These rules apply to companies and partnerships (wherever established ) that meet the threshold criteria of either:
Groups should combine the UK turnover and Balance Sheet totals of any other 51% subsidiaries for the purposes of determining whether it falls within scope of this scheme.
An “uncertain amount” exists if either of the two notification criteria are met, these being either:
In the event such an “uncertain amount” would confer a potential tax advantage of £5 million or more, HMRC must be notified.
If the value of the potential tax advantage is uncertain, a choice exists whether to either formally notify HMRC, or else to request exemption from doing so. HMRC have stated that they keen to engage early to resolve exemption from notification.
Notification must be made on or before the filing deadline of a related ‘relevant return’ that is due after 1 April 2022.
There are both exemptions to these requirements, and strict liability penalties for non-compliance (including failing to notify, late notification, and submitting an incomplete or inaccurate notification).
If your business enjoys a UK turnover in excess of £200 million, or a UK balance sheet total in excess of £2 billion, then you should consider whether you have any uncertain tax treatments that may require notification.
HMRC Brief 05/2022 – Updates Re: VAT Grouping Treatment
Per HMRC’s latest brief regarding VAT Grouping, if a business is awaiting confirmation of HMRC’s acceptance of its an application to form, join, leave or disband a VAT group, it should treat the application as provisionally accepted on either the date of online submission, or else the date of HMRC receipt if posted, and proceed to account for VAT on this basis.
HMRC have stated that any automated Assessment, Payment Demand or Default Surcharge notices received while the grouping is being processed can be disregarded; as such notices will be cancelled once the VAT group application is finalised.
This supersedes previous guidance, which recommended that the grouping be presumed as ineffective until HMRC’s approval were received; and is no doubt likely to be welcomed by applicants given HMRC’s current backlog of Grouping requests.
Lennartz – HMRC Business Brief 6 (2022)
This Brief sets out HMRC’s changes to the way in which Output VAT charges under the “Lennartz Mechanism” are to apply.
The Lennartz Mechanism allows businesses to recover VAT incurred in respect of assets put to both business and private use, provided an Output VAT charge is applied and accounted for in respect of the private use element.
Before 22 January 2010, the application of this Mechanism was broader, and could be used to allow VAT recovery in respect of assets used for business and non-business purposes (such as in respect of charitable use). From this date, however, if an asset had already benefitted from this historic treatment, Output VAT had to be accounted for on non-business use element.
The rise in VAT rates from 17.5% to 20% in 2011 has been detrimental in this regard, as it has led to the non-business use VAT charge being excessively high, and in some cases the amount of Output VAT paid under the Lennartz mechanism has now exceeded the sums of VAT initially recovered.
Under the newly announced changes, businesses do not need to account for an Output VAT charge in respect of non-business use of an asset, provided the Output VAT paid before the end of the asset’s Useful Economic Life is equal to the amount of Input VAT originally claimed. I.E: no further Output VAT charges are due once the “Fiscal Balance Point” is reached.
If your business has any such assets that are subject to these pre-22 January 2010 rules, you may wish to review your VAT position to determine whether an overpayment has arisen.
Takeaways from recent VAT rulings:
For a more in-depth analysis of each specific case see below:
ECJ Ruling: UK Imports Of Chinese Clothing At Significant Undervalue, UK Owes Import Duty Due
On 08 March 2022, the European Court Of Justice issued its decision in respect of an action brought by the EU Commission against the UK, finding that the UK had been negligent in conducting customs checks, which had allowed shell-company importers to fraudulently under-declare a significant value of textiles, footwear and clothing brought into EU free circulation, between 2011 and 2017.
The EU’s anti-fraud office “OLAF” had previously requested that EU Member States monitor imports of these types of goods with particular care, as being at particularly high risk of being under-declared for value. It also developed a tool to identify consignments of such goods being cleared at undervalue, which it recommended for use, but which was not adopted for use by HMRC.
Following reviews in 2011 and 2014, OLAF claimed that the UK’s import checks were inadequate; did not follow OLAF’s recommendations, had led to the increasing movement of fraudulent import operations to the UK, and the entry of goods to the Common Market at significant undervalue, with the attendant loss of Customs Duty and VAT.
As a result, this action was initiated by the European Commission against the UK, for failing to uphold its obligations under EU legislation on controls and supervision, in relation to the recovery of Customs Duty and VAT.
While the European Commission’s claim in this case was for 2.7 billion Euros of un-remitted Duty, based on statistical data, the ECJ has found that the precision of this sum was insufficient, and that a re-calculated quantum would need to be presented for the ECJ’s consideration, by the Commission.
ECJ Case: C-605/20 (Suzlon Wind Energy Portugal)
Suzlon Wind Energy Portugal (“SWEP”) purchased wind turbines from its Indian sister company Suzlon Energy Limited (“SEL”), which were subsequently found to be defective, and requiring repair in Portugal under warranty.
These repairs were conducted under a separate agreement between SWEP & SEL, with SWEP to either carry out the repairs itself, or to enlist local sub-contractors in doing so. SWEP recovered the VAT incurred in carrying out the repairs, and charged its costs on to SEL via debit note without applying Portuguese VAT.
SWEP believed that it was correct to not account for VAT on the charges passed through to SEL, as it understood there was no taxable consideration being received: the work was being performed as a warranty matter, with no mark-up; and the debit notes being issued for purely notional book-keeping purposes.
The Portuguese Tax Authorities, however, considered this transaction to be a separate service for consideration, as evidenced by the separate agreement between SEL and SWEP for the latter to provide a repair service (as opposed to SWEP simply making a warranty claim for repair or return); the existence of the debit notes, which gave the transaction a value (even if this was at nil mark-up) and the fact that SWEP had recovered VAT on the cost of repairs, since if it were warranty work, these costs would have been directly borne by SEL.
The position of the Portuguese Tax Authorities was therefore upheld by the ECJ.
Takeaway: if arranging for works to be carried out on goods, be clear as to which party has the right to recover or charge VAT, and take care to understand which party has responsibility for accounting for any related VAT liability that may arise.
UK FTT – TC 08396/V – Junjie Liu & Zhi Lie – Clothing Export to China
Junjie Liu & Zhi Lie (“the Traders”) purchased clothes from UK retailers and arranged for these to be exported to a reseller located in China, applying the Zero Rate of UK VAT to their invoices, as exports.
In the course of a VAT audit by HMRC, it was determined that the evidence retained by the Traders was insufficient to demonstrate that the goods had left the UK and allow application of Zero-Rate of VAT, leading to HMRC issuing an Assessment for unpaid VAT of £379,280.00.
HMRC argued that the commercial evidence retained by the Traders, as issued by their freight company, was insufficient, since it did not set out the precise details of the goods being shipped, nor did it show the correct value for these goods (with each consignment being deliberately declared as valued at £100.00, as an anti-theft measure by the Traders).
These shipments did, however, contain a “packing slip” which provided a detailed listing of the contents and their value; in addition to setting out the overseas customer’s name; the freight tracking number, and the Traders’ banking details; with the value of these slips agreeing to the Traders’ bank statements.
Reading from the “Arkeley” Upper Tribunal decision, the Judge noted that there is no need for the specific information required to allow Zero-Rating of exports to appear in any single particular document; or all be in the official or commercial documentation; and that the supporting documentation should be considered as a whole.
On this basis, it was held that these Packing Lists superseded the Freight Company forms as the source of “Accurate Value” for the purposes of documenting the supply, since these clearly set out the value of the goods, and could be crossed referenced to both the customer orders and receipts in the Traders’ bank account. Neither party argued that the value appearing on the Freight Company forms was entered with the intent that it should be treated as the value of the supply for commercial or VAT purposes.
Equally, it was held that while the Freight Company forms did provide a general description of the goods, as required by the legislation, the vagueness of these was overcome by the additional detail provided by the Packing Lists.
Accordingly, it was found that the Packing Slip, plus the Freight Company’s Chinese delivery confirmation provided sufficient evidence to permit Zero Rating of the supplies made, and HMRC’s assessments were thus cancelled.
Takeaway: it is possible to apply the VAT Zero-Rating to exports on the basis of a wide range of commercial documentation, even if the necessary information is spread across a range of disparate forms.
[2022] EWCA Civ 249 – First Alternative Medical Staffing Ltd & Delta Nursing Agency
These Agencies provided temporary nursing staff to hospitals and care homes, acting as principals in each case. Instead of making use of the “Nursing Agencies Concession” to Exempt their supplies from UK VAT, they relied on an HMRC letter dating from January 2004, stating that Delta was acting as an agent rather than a principal, and thus was only required to account for VAT on its commission charges.
HMRC subsequently rejected this and issued an assessment for unpaid VAT totalling £2,086,571.00, in respect of the “non-commission” sums received.
The Agencies thus sought a Judicial Review of HMRC’s decision, on the grounds they should have “reasonable expectation” to rely on the guidance provided by the 2004 letter.
The High Court held that while the letter could provide this in 2004, updates to HMRC public guidance by 2013 meant that it could no longer do so, particularly with the introduction of the “Nursing Concession” in HMRC Brief 12/10 of March 2020, which would have allowed the application of VAT Exemption by concession, provided the qualifying measures were complied with.
The Agencies’ request to retrospectively apply the concession was also denied by the Court, as it was not possible to do so: an election to use the Nursing Concession had to be applied at the time the invoices were first issued (as it is at this time the supply is deemed to be made, and the nature of this supply is determined, with there being no statutory mechanism to allow this to change), and there is no clear language in the concession itself that would provide grounds to give it retrospective effect.
On the above basis, HMRC’s Assessments were upheld by the Court of Appeal on 04 March 2022.
These Assessments could have been avoided if the Agencies had simply applied the concession once it had been released, rather than continuing to rely on the 2004 Letter.
Takeaway: If you are relying on an HMRC ruling or non-statutory clearance, ensure you keep up-to-date and alert for any changes to the law that may affect you, your VAT position and VAT accounting obligations.
Failure to do so may mean you are unable to apply any subsequent concessions or changes retrospectively should your existing ruling become obsolete.
STARZ TRADERS LIMITED [2022] UKFTT 89 (TC) Released 09 March 2022
Starz Traders Limited (Starz) arranged the inward UK processing of goods imported from Pakistani Manufacturers, and the onward shipment of these to final customers located in the UK / EU.
Contractually, this service was provided to the Shipping Agent of the Pakistani Manufacturers; who paid Starz for this. To avoid Pakistani foreign exchange controls, the final customers also remitted payment to Starz’s bank account, at the request of the Pakistani Manufacturers. These receipts were then available for offset against the sums due to Starz, in respect of the UK service provided.
Due to a misunderstanding of the nature of the trade, HMRC were unable to reconcile the sales invoice to the bank statements. In four periods, Starz declared sales of £262,346.00, but its bank records showed receipts of £422,308.00, which HMRC took to reflect Standard Rate taxable sales, leading to their imposition of Assessments for additional VAT of £40,437.84 on the difference.
Starz confirmed that this difference arose on receipts Outside The Scope of VAT, including a Director’s loan deposit, intercompany loans and an intercompany current account balance; and was able to support this with documents and schedules underpinning the loan agreements entered into.
Accordingly, Starz’s appeal was upheld on basis of the supporting documentation, which validated the Company’s position, with HMRC’s assessments being cancelled.
Takeaway: HMRC sometimes misunderstands more complex trading models or payment arrangements, and it is therefore important to ensure that non-taxable receipts can be supported with documentation explaining what these relate to in the event these need to be justified.
To discuss your specific circumstances, get in touch with Gerry Myton.
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