Check, check and check again
HMRC are looking to impress on VAT registered businesses that they should undertake due diligence checks on the businesses they do business with; especially new suppliers/customers.
It is good business practice to ensure that who you’re dealing with is who they say they are. The difficultly is in establishing the level of checks that need to be done to be seen as “fair and reasonable” (an often used phrase in VAT with no legal definition).
That said, the basics would be to confirm that the VAT number they give you is valid (there is a specific online checker for UK VAT numbers ) and that the business has at least an online presence, and if local, a visit to establish they exist is a good idea. In one case the “fake” business came up with increasingly bizarre reasons why the real business could not visit their place of business.
Also bear in mind the old, but still valid, adage, “If it’s too good to be true . . “
There are cases where HMRC have used the lack of diligence by a business buying goods and services as a reason to restrict VAT recovery.
At a recent VAT visit the HMRC officer seemed almost embarrassed to ask the question of due diligence (especially when the individuals involved had known each other for decades before they started doing business with each other), but it does show where HMRC’s current focus is.
Making taxable supplies
Anyone who has tried to register a business for VAT in the last 18 months in anticipation of future taxable supplies will understand the frustrations when HMRC decides that there is insufficient evidence of this intention.
In this case the business was registered for VAT but their troubles began when HMRC undertook a visit to verify a repayment VAT return. The business supplied services in the construction sector, securing projects and using subcontractors to carry out the works. HMRC said that the business had issued pro forma invoices, was not named on planning applications, and had not made it clear what they were charging for.
HMRC said it was not credible that the business undertook several stages of work without being paid; and that there was no evidence of reasonable steps being taken to pursue payment until after HMRC had issued their decision to refuse the VAT claim.
Added to this was a lack of information with regard to certain subcontractors (HMRC’s focus on due diligence) and the business had failed to register for the Construction Industry Scheme (CIS).
The taxpayer said it had provided clear evidence of taxable supplies, tenders in respect of work carried out signed as contracts, it was also clear from the invoices and bank statements that the claimed VAT had been incurred.
The Tribunal noted that it was not that HMRC disagreed that the VAT supplies had been incurred, it was whether it related to supplies, actual or intended.
The Tribunal ruled that there was clear evidence of payments to a number of construction suppliers, with contracts under which the taxpayer was engaged. Importantly the suppliers had no connection to the taxpayer, nor had HMRC contended that the taxpayer’s clients were connected to them.
The Tribunal also pointed out that HMRC had failed to consider that the invoices were for stage payments rather than the final sums agreed.
Tribunal made the point that poor management of the business did not equate to a lack of taxable supplies; and that failing to undertake “rigorous” due diligence is not evidence of the same.
The appeal was allowed.
This is a constant source of dispute as to whether a supplier is an agent or a principal, as the VAT due for the former is often far less (as based on the commission or monies retained) than the latter. The time it takes for such cases to progress through the Tribunal system means that the taxpayer’s business model is now probably redundant in these days of Artificial Intelligence.
The taxpayer ran a website where customers require an essay, course work, etc. to be written to specific instructions (even what grade to get – often what’s needed rather than too high which may raise suspicions).
The work is “ordered” online through the taxpayer’s website(s), however the customer and writer (human?) are not identified to each other. This was the main reason that the First-Tier appeal failed in 2018. The Tribunal ruled that contracting parties could not create a contractual relationship where complete anonymity existed.
In addition, payments were made by customer to taxpayer, and by taxpayer to writer based on separate agreements keeping the two separate, with no mention of each party to the other. The taxpayer lost.
An appeal went to the Upper Tier, which saw the creation of a contract with, and a liability for, the taxpayer when signing up a customer. Again, the taxpayer lost.
Then the taxpayer sent HMRC revised contracts, on the basis that these did properly reflect the agency relationship. A view which HMRC did not accept, and the taxpayer appealed on the basis that the “new” contracts gave them agency status for VAT periods subsequent to those of the first appeals.
Back to the First Tier, but another loss. The fact that the new contracts gave the writers the copyright of their work was not held to be sufficient to create an agency relationship for the taxpayer, as the main obligations for the delivery of the product still rested with the taxpayer.
The case here is rather complex and niche so we will spare you the details, but what is interesting is that the taxpayer was looking to use an HMRC concession for allowing alternative evidence to a tax invoice for input tax recovery. As a concession, this cannot be heard at a Tribunal and so this was a Judicial Review. What is interesting here is that HMRC appeared to initially deny that the concession even existed referring to it as the “so called” concession. HMRC lost.
This is not an EU Court decision (yet) and even if it was there is no obligation for HMRC to adopt the ruling, but if the Court does so rule and HMRC do so adopt, we will keep you informed.
An Advocate General’s opinion (which the European Court often, but not always, follows) has said that a VAT registered business is not necessarily liable to account for VAT on fraudulent invoices created by an employee.
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