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CONSTABLE VAT FOCUS 24 OCTOBER 2024
* News
* VAT Focus
23rd October 2024
HMRC NEWS
VAT on private school fees
Following the release of the Technical Note on 29 July 2024, it has been
confirmed that from 1 January 2025, school and boarding fees for private schools
will be taxable at the standard rate of VAT (20%). Further to the technical
note, HMRC has now released new guidance as follows:
* Check if you must register for VAT if receive private school fees
* Charging and reclaiming VAT on goods and services related to private school
fees
The newly published guidance provides information on who must register for VAT
and when, considering the date of payments received and the VAT registration
threshold. The guidance also covers voluntary VAT registration with some
commentary on how to register, including group VAT registrations. HMRC also
provides some useful commentary around charging VAT on supplies of education in
particular scenarios such as welfare, grants, bursary payments, local authority
placements etc. In addition, the guidance briefly covers input VAT recovery
following VAT registration.
Help with VAT compliance controls – Guidelines for Compliance GfC8
These guidelines are for UK VAT registered businesses who use invoice
accounting, meaning they generally account for VAT when invoices are issued and
received. The guidelines set out HMRC’s recommended approach and are designed to
help you understand HMRC’s expectations as you plan, carry out, and review the
accounting and compliance processes that ensure VAT is accurately declared by
your business. The guidelines and control points:
* help you make informed decisions and consider if you have sufficient controls
within your systems and processes
* should be applied to reflect the complexity and scale of your own business
* are not intended to be exhaustive or expected to apply equally to all
businesses
* help you identify risks and enable you to develop a robust strategy to reduce
those risks
Qualitative research on VAT registration
HMRC commissioned Ipsos, an independent research agency, to conduct qualitative
research to explore perceptions and experiences of VAT registration. The
research also examined linked barriers or pressures on businesses in respect of
growth. Similar research was also carried out for VAT deregistration which can
be found here. The research around registration and de-registration contains
awareness, knowledge and perception and experiences in dealing with HMRC.
The Value Added Tax (Caravans) Order 2024
This newly published guidance is likely to be of interest to manufacturers,
retailers and suppliers of residential caravans and people who buy them for
residential use. The conditions for the zero rate of VAT to apply to a
residential caravan include the requirement for the caravan to be manufactured
to standard 3632 issued by the British Standards Institution (BSI). The BSI
reviewed and updated this standard in 2023, and it was therefore necessary to
amend the Value Added Tax Act 1994 (VATA) to ensure that caravans manufactured
to the new standard can qualify for the zero rate. The measure also zero rates
caravans that meet new versions of the same standard which may be issued in
future by the BSI.
Claim a VAT refund as an organisation not registered for VAT
Certain organisations which are not VAT registered can make a claim for a VAT
refund by submitting a VAT126 to HMRC. This usually applies to local authorities
and similar bodies, museums and galleries that offer free admission etc. HMRC
has updated their guidance to confirm that the VAT126 can now be completed
online.
Fulfilment House Due Diligence Scheme registered businesses list
This guidance can be used to check if businesses storing goods in the UK are
registered with the Fulfilment House Due Diligence Scheme and details 6 new
additions and 2 removals.
CASE REVIEW
Upper Tribunal
1. VAT: PROMPT PAYMENT DISCOUNT
In this case, TalkTalk Telecom Limited (TTL) appealed against the FTT’s decision
to uphold HMRC’s assessment in the sum of £10,606,226 for underpaid VAT during a
four month period between 1 January and 30 April 2024. During this period TTL
offered a ‘Speedy Payment Discount’ (SPD) which was a 15% discount on its
services if their monthly bills were paid within 24 hours.
At the time, in accordance with the legislation, if the terms and conditions
(T&Cs) allowed a discount for prompt payment, the consideration was taken as
reduced by that discount whether or not the discount is taken up. TTL accounted
for output VAT on the discounted amounts even though only 3% of their customers
paid within 24 hours. HRMC took the view that the T&Cs did not allow for prompt
payment discount and therefore VAT was due on the full amounts and raised
assessments accordingly. TTL appealed to the FTT, however the decision was
upheld. The summary of the FTT’s decision can be read here.
TTL appealed to the Upper Tribunal (UT) however the decision was once again
upheld. The UT has concluded that the T&Cs did not include a discount for prompt
payment, but rather agreed, on a month by month basis, to accept a lesser sum if
paid within 24 hours. For those customers who did not pay within 24 hours, the
T&Cs did not change at all. Therefore, the supplies to any customer not taking
advantage of the discount, was not supplied on T&Cs which allowed for a prompt
payment discount, as a result output VAT is due on the full amount (except in
the limited cases where the discount was taken up) and the appeal was dismissed.
Constable VAT comment: This case considered previous legislation which were
revised since and is therefore historical interest only, however, it acts as an
important reminder that for VAT purposes HMRC will consider both the contractual
agreements as well as the commercial reality of a supply.
First-Tier Tribunal
2. VAT PENALTIES: REASONABLE EXCUSE
This is the first case concerning the new point-based penalty system and
penalties for late payment of VAT introduced from 1 January 2023. In this case,
the appellant, Sandra Krywald, engaged the services of a bookkeeper to prepare
and submit VAT return figures to HMRC, however, the appellant was reluctant to
sign VAT returns due to doubts of its accuracy. The appellant was in contact
with HMRC and was told that she is required ‘opening and closing balances’ to
submit a VAT return. The appellant discussed this with the bookkeeper who then
resigned ceasing to act for the appellant. Subsequently, the appellant engaged
the services of a VAT specialist who confirmed that HMRC’s advice was incorrect.
VAT returns were then prepared and submitted retrospectively with the aid of a
VAT specialist.
However, HMRC has charged penalties for late payments of VAT and issued penalty
points for late submission of VAT returns. The appellant has appealed to the
Tribunal arguing it had a reasonable excuse on the grounds that she was entitled
to, and did, rely on the bookkeeper to supply her with competent staff which
they failed to do and once she realised that the bookkeepers did not provide
accurate figures, she made every effort to resolve the situation including
contracting HMRC who also provided misleading information.
HMRC argued that it is statutorily provided that reliance on another person to
do anything is not a reasonable excuse, therefore the penalties were correctly
charged.
The Tribunal had no difficulty in deciding that the appellant had a reasonable
excuse concluding that the appellant took reasonable care to avoid the failures
by the firm, and by HMRC, and then remedied the failings without unreasonable
delay once the excuse ceased. The appellant made reasonable efforts to rectify
the failings of various other parties on which she relied on. Once it was
established that HMRC provided incorrect advice, with the assistance of a VAT
specialist the position was promptly rectified without unreasonable delay and
therefore the appellant had a reasonable excuse.
Furthermore, the Tribunal also went on to confirm that even if it was not a
reasonable excuse, the penalty would have been reduced to nil due to ‘special
circumstances’. The combination of failings from the bookkeeper together with
HMRC’s incorrect advice leading to far more work than is required, has led to
the late submissions and payments, and the Tribunal considered this to be
special circumstances. The appeal was allowed.
Constable Comment: This is a helpful case demonstrating how a person can succeed
on the ‘reasonable excuse’ argument. In addition, it is particularly helpful
given that the new penalty system was considered. Although it is not a
reasonable excuse to rely on third parties such as bookkeepers and advisors, it
becomes a reasonable excuse if the taxpayer ‘takes reasonable care to avoid the
failures by the firm, and by HMRC, and then remedied the failings without
unreasonable delay once the excuse ceased’.
In this case, the appellant made significant efforts to attempt to rectify
failings by her bookkeepers, as well as failings on HMRC’s behalf. The VAT
returns were submitted promptly once these failings were remedied, demonstrating
a reasonable excuse. It is of note that HMRC failed to consider a “Special
Reduction” either, HMRC seldom consider this provision in earnest.
It appears that reliance on a competent VAT advisor was essential in this case
to rectify the issues and has helped the appellant to succeed with the
reasonable excuse argument, with the Tribunal concluding ‘Taking this advice is
in our view taking reasonable care to avoid HMRC’s failings.’ Taking
professional VAT advice is often seen as ‘reasonable’ and therefore mitigates
the risks of any penalties from HMRC for ‘careless’ errors.
3. INPUT VAT RECOVERY ON LEGAL FEES
This case concerned Visual Investments International Limited’s (Visual) appeal
against HMRC’s refusal to accept input VAT claims. Visual’s main business
activity was investing in start-up businesses and providing consultancy services
to help them reach their full potential. Prior to such supplies, Visual incurred
professional fees on legal proceedings protecting their investments as it has
been denied the value of their shares in two companies together with the
dividend payments. It was confirmed that the business activities of Visual would
restart upon receipt of the money arising from the legal proceedings therefore
the input VAT incurred on legal fees have a direct and immediate link to its
taxable supplies of management consultancy. HMRC did not accept this argument
and denied input VAT accordingly.
The First-Tier Tribunal (FTT) agreed with HMRC concluding that the legal fees
did not have a direct and immediate link to making taxable supplies of
management consultancy. The purpose of the legal services was the realisation of
value of by selling the equity and making a large profit. The invoices provided
the following narrative: “Shareholder dispute relating to the fraudulent removal
of assets from Streaming Investment PLC”.
In addition, the FTT also concluded that Visual was not the sole recipient of
the legal services. There were three recipients of the legal services and
therefore an apportionment would have been required even in the event that the
FTT concludes there was a direct and immediate link between the legal services
and taxable supplies. However, that was not the case and the appeal was
therefore dismissed.
Constable VAT comment: This case was determined in accordance with its own
specific facts and it is unlikely to directly impact other taxpayers, however it
offers a careful analysis of the ‘direct and immediate link’ principle which is
a key aspect of input VAT recovery. If you or your business incurred input VAT
and there is ambiguity whether it is recoverable, we would recommend seeking
professional advice to ensure input VAT is not over-claimed as in certain cases
this may lead to assessments, careless penalties and interest amounts due to
HMRC.
4. VAT DIY CLAIM ELIGIBILITY
This case concerned a refund claimed under the DIY Housebuilders Scheme. The DIY
Scheme allows private individual housebuilders to reclaim input VAT incurred on
the goods and services purchased on the construction or conversion of dwellings.
In this case, the appellant, Brian Lawton, converted a barn into a dwelling,
however, this was done in two phases with separate planning permission, one
being for ‘conversion of a barn to a dwelling’ and the other ‘extension to
existing barn conversion’. Due to uncertainty caused by the COVID pandemic, the
appellant sought a completion certificate in relation to the first phase of
constructions and submitted a DIY claim to HMRC. This was an eligible claim
which was not disputed.
Subsequently, the remainder of the conversion was complete, and the appellant
submitted a second DIY claim to HMRC in the sum of £2,582.38. HMRC refused this
claim on the basis that only one single VAT DIY claim is allowed in relation to
one conversion. The appellant argued that due to the financial and economic
impacts of the Covid pandemic, the restrictions which followed and its impact on
the building industry, and the limited availability and increased costs of
labour and materials, he decided it would be sensible to obtain a completion
certificate for the part of the project that was completed, even though the
entire project was not complete and habitable at this stage. However, given that
a completion certificate was issued, in accordance with HMRC guidance, a DIY
claim had to be submitted within 30 days, hence the appellant submitted two DIY
claims, in phases.
Whilst the Tribunal was sympathetic towards the appellant, it concluded that the
second DIY claim related to the extension of an existing dwelling as opposed to
the conversion, which is ineligible for a refund under the DIY scheme. The
appeal was dismissed.
Constable Comment: This case is concluded on the specific facts and its unique
circumstance therefore its unlikely to impact other taxpayers directly, however
it certainly acts as an important reminder that submitting a DIY claim involves
various rules and conditions and if these are not met and complied with, HMRC
may refuse any refunds due, therefore, we advise all statutory conditions are
considered carefully well in advance of completion and submitting the claim.
HMRC apply little or no discretion when reviewing claims and expend a great deal
of resource scrutinising such claims.
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Please note that this newsletter is intended to provide a general overview of
the subject. No liability is accepted for the opinions it contains or for any
errors or omissions. Constable VAT cannot accept responsibility for loss
incurred by any person, company or entity as a result of acting, or failing to
act, on any material in this blog post. Specialist VAT advice should always be
sought in relation to your particular circumstance.
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