Julie Park

Following a period of consultation, HMRC are introducing a new penalty system for late submission of returns and payment of VAT. This system will replace the current default surcharge regime. The new penalties will apply to VAT returns starting on or after 1 January 2023. The new system is intended to simplify the current system and to encourage compliance with deadlines. The aim is only to penalise repeat offenders. It will also apply to Income tax and Self Assessment.

The new system is in three parts – (1) late submission, (2) late payment of VAT and late payment interest (“LPI”) :

Late submission of return

• There will be a points system for late submission of returns. Each late return will incur points and when the points threshold is breached, a fixed penalty of £200 will be charged. The points threshold depends on the return periods i.e. monthly (5 points), quarterly (4 points) and annually (2 points)
• Points will be reset to zero after certain conditions are met
• Further fixed penalties will apply to each late submission where a business continues to miss deadlines after the first penalty is issued. This will be the case even where the first penalty has been paid

Late payment of VAT

• Payments made within 0-15 days of the return due date will not incur a penalty
• Payments made after 15 days will incur a first penalty of 2% of the outstanding VAT
• If the VAT remains unpaid after 30 days, a further penalty will be incurred. This will be 2% of the outstanding VAT at day 15 plus 2% of the outstanding VAT at day 30 (so 4% in most cases)
• If the tax remains outstanding at day 31, a second or additional penalty will apply. This accrues at a daily rate of 4% until the outstanding VAT is paid in full.
• A time to pay arrangement agreed with HMRC can stop the penalties accruing further.

It has been announced that HMRC will apply a “light touch” approach to the first penalty in the first year where businesses are seen to be trying to comply. During the first year, they will allow businesses 30 days to pay before applying the first penalty. If there has been no contact after 30 days, a penalty will be charged. Penalties will not be charged or may be reduced where a business has a reasonable excuse for non payment or where special circumstances apply.

Late payment interest

LPI will apply to outstanding VAT (including payments on account, assessments) regardless of whether a penalty is charged. LPI will apply from the date the VAT was due until the date it is paid to HMRC. The rate of interest will be 2.5% above the Bank of England base rate. LPI will continue to apply even where a time to pay arrangement has been agreed for the outstanding VAT.

Julie has recently had an article published in relation to AEO and Brexit. To read the article published in The Tax Journal click here.

We have seen a marked increase recently in the number of businesses seriously considering applying to become AEOs – Authorised Economic Operators. The impetus for this arises from Brexit and the need to manage supply chain risk by planning for a potential ‘hard Brexit’. In the early days following the referendum there was a focus on trying to establish what the increased cost of customs duty might be within the supply chain, both as a result of current preferential tariff rates potentially falling away, and an increase in the incidence of customs duties applying as a result of all UK/overseas transactions becoming imports or exports.

More recently however, focus has shifted to concerns about delays to supply chain deliveries as a result of border queues, caused by increased volume and also teething issues and potential systems issues in the UK and overseas. Businesses are therefore looking for ways in which they can ensure they are not at the back of the queue at the border. When AEO was first introduced back in 2008, speed of clearance and being in the ‘green lane’ was hailed as a major benefit. The reality was somewhat different however, with so few businesses applying for AEO that there was no queue. For the first time however Brexit brings this benefit to life.

Many businesses are grappling with the question of whether they should apply for the full authorisation which includes ‘Safety and Security’, or the more straightforward ‘customs’ AEO which is focused only on blue chip customs and systems processes. As there are 2 tiers to AEO authorisation, the question arises as to whether, in the event of a long queue of AEOs at the border post Brexit, which move to the front. The answer is surely those with full AEO, but for some businesses this could delay the process of getting ready to make an AEO application as it often presents the greatest degree of complexity and generates the most remediation work prior to an application being filed (although this might not be the case for all industries depending on how key security and other regulations are for their industry).

In theory HMRC require 120 days to audit an AEO application but in our experience many businesses see this clock stopping once an application has been made so that further detail can be provided and remediation work can be carried out. In addition HMRC’s workload in this area will ramp up, leading to further delays.

We would recommend that any business relying on just in time deliveries gives serious consideration to applying for AEO to ensure there is no impact of not benefitting from an accreditation that is currently widely recognised globally under various suppy chain security Mutual Recognition treaties. Our approach to helping businesses determine how ready they are to make an AEO application involves spending 2 days on site with you working through key areas to capture the profile of the business and apply traffic light coding, showing areas requiring most work in red. Please contact Julie Park on 0781 400 4236 or julie.park@thevatconsultancy.com if you’d like more detail

The case of U-Drive (UDL) v HM Revenue & Customs was recently heard at the Upper Tier Tax Tribunal. The case was an appeal by UDL against a decision of the First Tier Tax Tribunal in relation to the recovery of VAT on costs incurred in tripartite arrangements.

UDL is a car and van self-drive hire business.

The FTT had decided, in agreement with HMRC, that where UDL incurred VAT on the cost of repairing damage caused by its vehicles to third party property this VAT was not recoverable. This decision was made notwithstanding the point that UDL had a contract with the repairer and incurred the costs in the course of its business of operating its van and car hire fleet.

The UTT carefully examined the case and the principles involved including Redrow and Airtours. The UTT was also interested in understanding what the case law means by the term “economic reality” when considering whether substance over contractual form should apply.

This is an interesting case in terms of the ongoing jurisprudence where there are 3 or more parties involved in commercial scenarios and to what extent the benefit of the arrangements can confer a right to VAT recovery as a result of one or more of the recipients being the party(ies) receiving the supply.

In terms of direct industry application, the decision which we expect early next year will be of interest to all businesses who have a large fleet of vehicles who manage costs of the damage caused directly rather than relying on the insurance process.

We have been directly involved with this case since the initial dispute with HMRC and instructed Counsel at both the FTT and UTT. If you would like to discuss the application of the case in more detail, please contact Sean McGinness on 01962735350 or sean.mcginness@thevatconsultancy.com

The Supreme Court handed down its judgement in the Airtours case last week. This case is the latest in an ever increasing line of case law relating to tripartite VAT recovery.

HMRC were successful in denying Airtours recovery of VAT on the costs incurred on the basis that Airtours was not receiving services under the contract, nor did it contract with PwC to have services provided to a third party. Further, the Court held that the economic reality was reflected in the contract and therefore Airtours could not be seen as receiving a supply on those grounds.

What’s the case about?

Airtours was in financial difficulty and in 2002 it decided to appoint PwC to produce a report for various lending institutions. This report was to be used by the lending institutions to assist with their decision making on whether to extend Airtours’ credit facilities. Airtours was party to the agreement and a beneficiary of the outcome as it would benefit by being able to continue to trade if the lending institutions agreed to support the business. Airtours contracted to pay PwC the costs of producing the report, but it was only entitled to a copy of the report in redacted form. The engagement contemplated that the report was being prepared for the lending institutions.

Airtours recovered the VAT on the invoices it received from PwC. HMRC disagreed with this VAT recovery as its opinion was that Airtours had not received a supply of services from PwC. Only the lending institutions had received a supply.

Following defeat in the Court of Appeal which found for HMRC (2 judges to 1) Airtours appealed to the Supreme Court. The Supreme Court was equally split on the outcome with three judges finding for HMRC and two against.

So does this apply in all tripartite scenarios?

Whilst this means that HMRC were successful in this case and that Airtours will not receive the VAT paid as input tax, the situation where three parties are involved in a supply remains unclear. The Supreme Court has followed the line of thought from various cases that a small difference in fact can alter the outcome of a case. Whilst there is a lack of certainty from this decision it does still give businesses that have assessments from HMRC, or ongoing disputes with HMRC, an opportunity to consider whether, following the Supreme Court’s decision, their fact pattern is distinguishable from Airtours.

We would recommend the following points are considered:

1. In addition to paying for the services (assuming the paying party is trying to recover the VAT), is the contractual position clear that the supplier is under a contractual obligation to the business reclaiming the VAT to provide services to that party? The decision in Airtours indicates that the services do not need to be provided directly to the business recovering the VAT – no doubt this point needs to be carefully considered and hopefully HMRC will express a view on what they think this part of the decision means; and
2. Does the contract reflect the economic reality of what is happening? If not, then the wider economic and commercial reality should be considered to identify whether services have been received.

Is this just relevant to professional costs?

Clearly, the area of legal and other professional costs remains the highest profile tripartite scenario. However, this remains a complex area of VAT law and the ongoing appeals, due to be heard by the Upper Tier Tax Tribunal later this year, in the cases of Associated Newspapers (input tax on vouchers purchased for a business promotion scheme), and U-Drive (input tax on costs of repairing 3rd party vehicles and property damaged by a van and car hire business) indicate that tripartite scenarios can arise in a range of businesses.

Please contact Sean McGinness on 01962 735 350 should you wish to discuss the above in more detail.

This VAT case represents a 17 year old dispute with HMRC which was originally concerned with the VAT liability of Halle’s ticket income – the question of whether the philanthropic VAT exemption applied.  The issue before the Tribunal related to one final point on the VAT status of Halle’s membership scheme.  Halle is a charitable organisation, set up with the aim of “promoting the study, practice and knowledge of the art of music” through its orchestral concerts and education programmes .  In return for an annual subscription, Halle members could receive a number of benefits including corporate rights, priority bookings on concert tickets and publications.

The First Tier Tribunal was asked to consider whether Halle’s supplies of the membership scheme were within the scope of VAT and, if so, whether they fell within the exemption for philanthropic activities.

The FTT concluded that the Halle was making a supply of services (being a package of benefits in return for the membership fee).  The question was whether the services are within the scope of the philanthropic exemption.  VAT exemption applies when a not-for-profit organisation makes supplies to members of services that are in keeping with the aims of the organisation and which are not charged for beyond the membership subscription.  Qualifying organisations include those with objects in the public domain that are of a philanthropic nature.

There is no statutory definition of “philanthropic”.  In HMRC’s view, Halle’s activities were cultural rather than philanthropic as they primarily benefitted those who enjoy classical music rather than being for the “good of all mankind”.  However, the Tribunal noted that the great philanthropists of the 19^th century did not limit their activities to basic provisions such as housing and sanitation but also focussed on the arts and literature and that music should be no different.  The fact that the Halle’s concerts were free or heavily subsidised meant that they wouldn’t be offered by commercial operators, further supporting the philanthropic focus.

This case is relevant to any charity/not-for-profit organisation that provides services to members in return for a subscription.  The case demonstrates that the scope of the term “philanthropy” is wider than HMRC have previously accepted.  It will be of particular relevance to those organisations that host events for members without further charge e.g. conferences/concerts etc. both in the UK and overseas.  However the exemption is unlikely to apply where a separate and additional charge is made for entrance to an event, even if by a not-for-profit body.

HMRC has clarified its policy on zero-rating and reduced-rating for projects carried out under permitted development rights.

Business Brief 9/2016 clarifies the evidence required to support zero-rating (the sale of the converted property) and reduced-rated (conversion services) where a conversion from non-residential to residential use takes places without full statutory planning consent under the permitted development rules.

This brief is relevant to:

• Developers selling converted dwellings wishing to apply the zero rate;
• Construction industry contractors who may apply the reduced rate to the services they provided related to the conversion; and
• DIY housebuilders looking to reclaim the VAT incurred on a conversion carried out for their own purposes.

The first grant of a major interest (i.e. the freehold sale or granting of a lease over 21 years) in a dwelling following its conversion from non-residential use can be zero rated, provided certain conditions are met.  One of those conditions is that statutory planning consent must have been granted and the conversion must have been carried out in accordance with that consent.  However, as part of the process to streamline planning applications, some conversions do not require a full planning application and can be carried out under permitted development rights.

Evidence required

HMRC have clarified that they still require evidence that the conversion is lawful and would require one of the following:

• Written notification from the Local Planning Authority (LPA) advising of the grant of prior approval; or
• Written notification from the LPA advising that prior approval is not required; or
• Evidence of deemed consent (i.e. evidence that you have written to the LPA and your confirmation that you have not received a response from them within 56 days).

So the zero-rate and the reduced rate apply whether or not planning permission is granted?

No. Taxpayers will also need to provide evidence that the development is a permitted development.  If a conversion is carried out and there was a requirement for planning permission then the developer and contractor cannot rely on the permitted development rules.  This would mean that the most likely outcome would be VAT at 20% on the contractor costs which would likely be irrecoverable in the hands of the developer. VAT liability of any conversion that is not carried out in accordance with the applicable planning route would be exempt on sale.  The works to the premises in the course of the conversion would be subject to VAT at 20%.  It is therefore still important that developers and contractors ensure they are applying the rules correct to avoid a VAT cost.

The evidence that a developer or contractor should hold, includes all of the following (if available):

• Plans of the development;
• Evidence of the prior use of the property (e.g. evidenced by its classification for business rates purposes etc.); or
• Confirmation of which part of the planning legislation is relied upon for the development and a lawful development certificate where one is already held.

Whilst the use of permitted development rights is intended to streamline the planning process, HMRC’s clarification demonstrates that some interaction with the LPA will still be required in order to provide the necessary evidence of the planning status of the property in order to gain the benefit of the zero-rate and the reduced rate of VAT.

Should you have any queries on the above, or any other property related VAT matters please contact Sean McGinness or Steve McIntyre on +44(0)1962 735 350.

The European Commission has today published its Action Plan on VAT. We will be reflecting on the comments made and providing our insight on this in the next few days. In summary the key features of the proposals are:

• Fundamental changes to the way cross-border retailers deal with their VAT compliance. Draft law is to be published by the end of 2016 to introduce a system where the retailer is registered in one member state and accounts for VAT at the rate in force in the other 27 member states on sales to customers in those countries. This is effectively an extension of the one-stop shop (MOSS) that applies to suppliers of electronic services and telecommunications;

• Removal of the low value consignment relief for non-EU suppliers of goods;

• Simplification for SMEs in respect of VAT compliance across the EU;

• A new set of VAT rules to be published to replace the existing rules (they were drafted in 1993 as transitional rules). The objective is to move all VAT determination to be based on a place of supply of destination;

• A set of measures to reduce the VAT gap (the difference between what the EU and member states believe is the amount of VAT that should be paid and what has actually been paid); and

• More freedom for member states to choose VAT rates.

Should you have any queries on the measures announced please contact Sean McGinness or Julie Park on +44(0)1962735350.