News & Articles


Monthly VAT update: February 2023


As well as the articles here, I’ve written some more in-depth pieces concerning VAT, Duty and Plastic Packaging Tax which can be found here .

Default surcharge SOS

An interior design business was established in late 2019 and registered for VAT in early 2020. Several VAT returns were not submitted and/or paid on time resulting in significant default surcharge bills for the taxpayer.

At Tribunal the taxpayer argued that due to the nature of the business and the fact that it was a new business with little or no reserves to draw on it was impacted by COVID far more than other businesses were. Work had to be done in people’s homes and the varying rules meant that it was not possible to plan in advance. The IT system used also appeared to accelerate the tax point for sales. HMRC said that after the initial shock, life during the pandemic could be planned for, the taxpayer could have used cash accounting or requested time to pay but did neither.

However, the Tribunal agreed with the taxpayer and allowed the appeal. Whilst HMRC does have internal guidance for what constitutes reasonable excuse during the pandemic it seems that this taxpayer was fortunate to get the decision they did. As a first-tier decision this does not create a precedent so HMRC’s unlike to appeal and will no doubt to continue to take their customary hard-line stance.

These default surcharge cases will start to decrease in number as the surcharge is replaced with the new penalty and interest regime in early 2023 (depending on your VAT stagger).

Interesting: bad debt relief

HBOS and Lloyds have won a case that entitles them to an additional £10m in interest payments from HMRC. The issue was in relation to bad debt relief (BDR) and the fact that for a period UK law was not compliant with EU law.

The banks said that this meant that they did not make BDR claims because they were following UK rules which said that claims in their circumstances were not permitted. The banks claimed that the interest was due from the dates that the claims could have been made if the UK had correctly interpreted EU law rather than the date that the error in law was identified. This equated to an additional £10m in interest.

VAT treatment of food: the naked truth

VAT treatment of various foodstuffs is seen by many as a rich source (not sauce) of tales that show how illogical VAT is. This case even saw the marvellous phrase “hurdle of perversity” being applied. In this case the food retailer Morrisons went to Tribunal to seek a ruling on VAT treatment of “Nakd” and “Organix” bars.

The First Tier tribunal said that the bars were deemed to be confectionery and as such were standard rated (which is how Morrisons had been treating their sale).

Morrisons then took this to the Upper Tier on the grounds that the First Tier had erred in law. The Upper Tier agreed with Morrisons and had the case remitted back to the First Tier. Some reports talk of Morrisons “winning £1m VAT appeal”; but the battle is not over. Not only will the First Tier need to agree that the original decision was incorrect, but the issue of how much output tax is repayable (and potentially, under unjust enrichment rules, whether it’s repayable at all.) has also been remitted to the First Tier.

Option to Tax changes

Late last year HMRC held a “blink and you’ll miss it” consultation regarding their proposals for the Option to Tax unit. The two proposals were that they would no longer issue documentation to indicate that a notification had been submitted by post and that they would not look into or respond to any requests for confirmation of an option being notified if it seemed likely that the notification took place within 6 years. Then in the middle of January they announced that these proposals would become policy from 1 February this year.

So, the only notification you will get is if you make a submission by email and there is the automatically generated reply. However, what if a legal representative of a potential buyer asserted that this response could be for emailing anything to the OTT email address?

What happens if the forms are incorrect? If it is something that is obvious to HMRC (e.g., a request for backdated the effective date more than 30 days) they may respond, but if the address is incorrect or the map sent was for the wrong plot of land?

Equally, how does HMRC react when someone asks for confirmation of an option made, by post, within six years but after 1 February 2023, so there is no correspondence to confirm receipt?

So many questions but so few answers.

Hanging on the telephone

It has been reported that taxpayers have an average waiting time of 27 minutes when trying to speak to someone from HMRC about their tax returns. As someone who constantly has to contact HMRC about VAT I only wish that this was true.

VAT and discounting for prompt payment

TalkTalk, the telecoms provider, offered customers a 15% discount for prompt payments. TalkTalk accounted for VAT on the discounted amount even when the criteria was not met and no discount was given. There had been a rule that allowed this VAT treatment, but this was repealed early on in TalkTalk’s discount offering.

Apart from this any customer who wanted to benefit from this discount had to go through a separate process where they were ‘redirected’ to a website to make a separate payment, the offer was not mentioned in the standard terms and conditions on their website. Less than 3% of customers got a discount.

TalkTalk’s case was dismissed and HMRC’s assessment of more than £10m confirmed.


A charity had an assessment raised against them for £92,644 in early 2019. The rules regarding appeals is that they must be made within 30 days of the appealable decision (a term that itself has been the subject of many Tribunals). The Charity instructed an advisor to assist. This advisor agreed an extension to appeal to 3 May 2019. However, the notice of appeal was only filed on 17 September 2021, two years, four months and 14 days late. The advisor said that there had been an initial postal submission that was not received by the Tribunal office. The Tribunal chair said that the advisor’s evidence “lacked credibility”.

Timing Part Two

HMRC had a fairly disastrous Tribunal where they tried to defend an assessment made for the taxpayer failing to demonstrate that the goods sold as exports (and so zero-rated) had left the UK. The Tribunal deconstructed HMRC’s arguments on two points:

The first was that the evidence that the taxpayer had provided fell into that allowed as per the Public Notice and the Upper Tier Tribunal case of Arkeley which stated:

“the required evidence [under paragraph 6.5] may be provided from a number of sources. The evidence may be official (that category is not relevant to this case), or it may be commercial or supporting”.

The second was that HMRC had erroneously interpreted paragraph 3.5 of the Public Notice 703 “Exports”, parts of which (including paragraph 3.5) have the force of law. Paragraph 3.5 specifies that the time limit for exporting the goods and for obtaining the relevant evidence is in each case three months from the time of the supply.

HMRC took the view (up until lunch of the Tribunal) that the three month deadline was in providing the evidence to HMRC, not the exporter being in possession of it within three months of the supply (which they had met).

The Tribunal was rather damning in its views of the assessing officer, the review officer (who had written “nonsense” and the representative from HMRC’s Solicitor’s office. Bad times indeed.

If you would like to discuss any of these VAT updates in more detail please contact Ian Marrow .

This article is from the latest issue of our VAT newsletter. To receive future copies of any of our newsletters directly to your inbox, please register your interest via our preference centre .

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