Due Diligence

Discussions with HMRC regarding several clients has shown that this is now a major focus for the Department. They are very keen to see that a business has made “fair and reasonable” checks on a business’ suppliers and customers; especially where the supplier is involved in providing employment/payroll and/or labour only services. Where a business does not show that they have made checks HMRC may look to disallow VAT charged by suppliers, if those suppliers are defrauding the Department.

Some of HMRC’s ideas of “common checks” don’t tally with mine (for example they think it reasonable to ask a supplier for copies of their most recently submitted VAT returns) but you must be able to show that checks have been made.

If you are looking to engage a supplier where the supply chain is one that HMRC sees being subject to fraud please ensure that the checks you make (Companies House searches, credit checks, visit to their offices, etc.) are recorded and regularly updated. Just because you’ve already got an existing relationship with a supplier is not a reason not to start those checks now.

Payment related services

The Supreme Court has ruled that the services of a business initiating direct debits via BACS, dealing with repayments and updating balances, was not making exempt supplies. The Court took a narrow definition of the exemption and said that exemption only applies where the service has the effect of transferring the funds. Issuing instructions to trigger a payment is not enough to qualify for exemption.

The Supreme Court is the highest court in the UK, so this is where the buck stops. Whilst the Court made it clear that the exemption was not limited to banks, the narrow interpretation is going to impact on businesses involved in similar payment service provision. However, the ruling requires careful consideration to see if it impacts relevant businesses, as certain supplies within the rather wide remit of “payment services” will still qualify for exemption. If you feel your business is impacted by this please get in touch. Read our article  dealing with this in greater detail.

Paper? Computer says no

From 1 November 2023, HMRC have announced that VAT registration forms will only be available through the online VAT registration service. This isn’t the death of paper VAT 1s as there are inevitable exceptions for those who cannot use the online system and also for overseas partnerships, registration exceptions, etc.

Repatriation of the deceased

The supply of services in the course of the disposal of the remains of the dead are exempt from VAT, so most Funeral Directors have a very low VAT recovery (some of the peripherals are taxable such as announcements, catering, etc.) This case concerned a business that arranged for bringing a dead person back to the UK for burial/cremation. HMRC saw this as an exempt supply, but the taxpayer argued that this was zero-rated transport. The Tribunal ruled that it was both. The rules of which VAT treatment trumps the other (the indirect tax version of rock, paper, scissors) meant that the supply was zero-rated.

Doctors and nurses

The taxpayer employed doctors and nurses. They were then contracted to recruitment agencies and then sub-contracted to the NHS.

The Taxpayer charged VAT to the recruitment agencies as a supply of staff, standard rated, as opposed to a supply of the individual’s services which may be exempt. The key point was that the taxpayer did not pay this VAT to HMRC, creating a VAT assessment for £21m and insolvency for the taxpayer.

The liquidators filed a lawsuit against the company's senior officers, asserting that the supply was taxable. In response, the senior officers argued that the supply was exempt. They contended that the UK precedent, which classified such supplies as standard-rated, did not establish a legally binding precedent due to the differences in interpretation between the UK and the European Union.

The Court of Appeal has ruled that this view is incorrect, the relevant case had been decided correctly and that the defendants’ claim was not sustainable.

Chocolate sandwich?

When describing VAT’s ways, I always emphasise that there is a logic to it and that the legislation (usually) generates the right outcome, except for food. In a case from the company that brought the Jaffa Cake case, we see how logic may not generate the outcome expected.

The product is a biscuit called “Blissfuls”, so the case is not about cake vs biscuit, but does relate to whether the biscuit is chocolate coated or not. McVities argued that the chocolate element was a filling, sandwiched between two biscuit layers (much like a Bourbon). HMRC said that the top layer was insufficient to prevent it being seen as a chocolate covered biscuit. The top layer was a biscuit rendition of the McVitie’s logo with gaps through which the chocolate could be seen. This was enough to convince the Tribunal that they were chocolate covered and therefore standard rated.

This shows that food remains one of the most difficult areas of VAT to navigate. If you are a food producer, wholesaler or retailer and you need advice please get in touch.

Not recognised

A taxpayer had their day in court (OK, Tribunal) to appeal against a 2% default surcharge for the late payment of a 2020 VAT return (the default surcharge regime effectively ended last year, to be replaced by a more complex method where points, as well as late payment, informs how much interest and penalties are applied).

The taxpayer argued that the default could not be applied unless they had not submitted the return or HMRC had issued an assessment. This was an Upper Tribunal case (the taxpayer had lost at First Tier).

The Upper Tribunal listened to the taxpayer’s accountant go through parts of the VAT legislation to show that the fact that the default related to a proportion of the VAT due not being paid on time meant that it was invalid. But the Tribunal simply said that the “description of the scheme of the legislation relating to the default surcharge is not one that we recognize.”

Case dismissed. Again.

Import VAT

One of the main requirements for the recovery of import VAT being reclaimed is that it must be reclaimed by the entity that owns the goods when they are imported. A recent case highlighted this when a taxpayer imported pharmaceutical goods on behalf of the overseas owners. The goods were then subject to processing, testing and/or research.

The paperwork was completed to show the taxpayer as the importer, but HMRC challenged their recovery of the import VAT as they did not own the goods at the point of import.

The Tribunal agreed with HMRC.

Since Great Britain left the single market, all goods arriving are imports (even if temporary) and all goods leaving are exports (again even if temporary), and the required paperwork can be complex, and the issues need to be understood. If you need assistance, please get in touch.

Gambling

The Government has issued a consultation paper on a proposed statutory levy on gambling operators . This follows from their white paper of April this year. The consultation relates to the levy’s design scope and rates and closes on 14 December 2023.

VAT Groups

A UK business applied to have its UK parent become part of a UK VAT group. This it did in 2013. On the basis that the US business had a UK establishment from 2011, they applied for the VAT grouping to be backdated and claimed over £2m for reverse charges made in the 2011-2013 period.

The Upper Tribunal supported the First Tier in rejecting the taxpayer’s appeals on both counts. When it comes to backdating VAT groups HMRC appear to hold all the cards.

Update Issue

Speaking to HMRC regarding a client’s ledger, the balance HMRC had on file was over £50,000 different to the one we had from our agent’s Government Gateway. They explained that there “were issues with updating the agent’s Government Gateway”. The transaction that created the difference (one undertaken by HMRC, not the client) occurred 10 (ten) weeks (yes, weeks) prior to the call, so the information we had access to is somewhat out of date. Be warned.

Get in touch

If you would like to discuss any of these VAT updates in more detail, please contact  Ian Marrow via ian.marrow@rickardluckin.co.uk   

To receive future copies of our VAT newsletter, or any of our other newsletters, directly to your inbox, please register your interest via  our preference centre .