Elbrook (Cash and Carry) Ltd – Payment of VAT Assessment Would Cause Hardship

Arguments are inevitable between taxpayers and HMRC over interpretations of key phrases in the legislation. These often revolve around penalties, appeals and what constitutes ‘reasonable’. In a recent case, the Revenue lost on the grounds that the taxpayer would have suffered ‘hardship’ if required to pay a VAT assessment before appealing it (as according to VATA 1994, s.84 one of the conditions for appealing is that the tax must be paid).

The taxpayer had won the case at the First-Tier Tribunal, and the Upper Tribunal noted that it could only overturn the finding in that case if they had made an error in law.

The Upper Tribunal noted that the test had to consider not just the ability to pay, but “the capacity to pay without financial hardship”. It was felt the possibility of obtaining new finance should be ignored in the circumstances (which seems to go against standard HMRC practice in cases regarding difficulty paying). It was only if other sources were likely to become available they should be considered. The judge agreed with the First-Tier Tribunal that approaching their bankers would not have been suitable as it could have caused further financial difficulties through the bank becoming concerned.

Overall, the judge agreed with the conclusions of the First-Tier Tribunal, even though the decision could perhaps have been worded better. The case highlights that it can be worth challenging HMRC interpretation. They are Civil Servants, not the judiciary, so there are independent arbiters of the rules!

Please contact us if you have any concerns about HMRC practices. We have extensive experience in such matters. Often HMRC are right, but not always. They will only be kept to high standards by rigorous, independent review. This is in the best interests of everyone, including HMRC.

Corporation Tax and VAT Loans

Whilst as tax advisors we tend to focus on [what we think are] interesting technical tax issues and considering how much should be payable having calculated that answer. Another possible difficulty with tax is the practical one of cash flows and actually paying it!

You may or may not be aware that it may be possible to obtain a loan to spread the cost of Corporation Tax or VAT bills to free up working capital. For example, with a Corporation Tax loan you could spread the cost over a 12 month period rather than paying all in one go.

We are not able to advise directly on such funding, but if you are interested in such opportunities for your clients, please contact Jonathan Smith at JGS Finance (http://www.jgsfinance.co.uk/) on 07778 523 499 and he will be happy to assist.  Please use reference EVL when you make contact with Jonathan.

Jonathan Smith (Head of JGS Finance) is a Chartered Accountant who I know and have trusted over many years of working with him.

Paul Eaves

The Importance of Advanced Planning – VAT Registration

A recent case at the First-Tier Tribunal, DJ Butler v HMRC, highlighted again the benefits of taking professional advice in good time. The taxpayer operated as a sole-trader working as a decorator, project manager and carpenter.

In the absence of the project management turnover the taxpayer would have been below the VAT registration threshold. After HMRC identified that his turnover was above the limit, the taxpayer argued that the project management was run as a partnership with his wife; however he had always declared it on his individual self-assessment tax returns as sole trader turnover.

The Tribunal considered that the project management work should rightfully be considered an extension of his sole trader activities and that no partnership existed. It did not help that no profits were reported on his wife’s tax returns, and nor were there separate partnership bank accounts or sales invoices raised in its name. The taxpayer’s appeal was therefore dismissed.

It would appear that if the taxpayer had taken steps in advance to create a separate legal entity for the project management, whether a partnership or a company, and followed the correct reporting and legal steps, the planning may have been effective. As it was, it was difficult to argue that self-assessed sole-trader income was in fact from a partnership.

Taking professional advice in advance would have helped this taxpayer, is there anything we can help you with?

VAT Penalty Reduced – J & W Brown

A recent case concerned penalties that arose on a taxpayer due to a technicality. The taxpayer had run a business as a VAT registered sole trader. He brought his son in as a business partner, which was therefore technically a transfer to a partnership and a transfer of a going concern (TOGC) for VAT purposes.

The taxpayer did not realise this and did not notify HMRC until around 2 years later. However, he continued to submit his sole trader VAT returns and pay the tax due through this period. Two of the returns in the period were submitted late.

HMRC therefore sought penalties for late registration by the new partnership of more than 12 months and charged an 18% penalty. They did, however mitigate this by 70% as the VAT returns and tax were submitted through the sole trader registration and there was therefore no loss of tax.

The First-tier Tribunal felt that as the error was a technicality and that there had been no loss or administrative inconvenience to HMRC, the penalty should be reduced by 90% instead and lowered the 18% penalty to 12.5%. They also noted that the taxpayer had made a voluntary disclosure and that HMRC’s protracted case management had been inappropriate, causing “significant inconvenience and expense’” to the taxpayer

Overall the penalty was reduced from £582 to £100 and so the taxpayer’s appeal was allowed in part.

This case shows the continued firm approach that HMRC appear to be taking with penalties for minor mistakes. However, the Tribunals continue to provide a safety net to taxpayers and the comments of the Tribunal showed the importance of taking the first steps and making voluntary disclosure before HMRC find the error. If you would like assistance with making a disclosure or have any concerns about past transactions, please get in touch with us as we would be delighted to assist.

Brexit and European Tax Law

Here are some interesting questions. Well, I think them interesting anyway!

1. If we ‘do Brexit’, will we persist with VAT?

2. If so, how will it be administered, bearing in mind the current cross-border arrangements?

3. Will the European Court remain supreme, in terms of judicial opinion and interpretation?

4. On direct taxes, will we revert to double tax treaties, rather than the various European Directives?

5. If so, from what date?

6. If we do leave the EU, will the Courts go back to the ‘literal’ approach to interpreting tax legislation, a la Justice Rowlatt, or will it continue to dabble in the ‘purposive’ approach?

7. In the context of the above how would anyone define ‘The Purpose of Parliament’, in terms of (say) the formulae in the Emloyee Security/Benefit rules?

Je ne sais pas?

Opinions, s’il vous plait.

VAT Exemption for Tournament Fees – A Bridge Too Far

The first-tier tribunal has ruled that Bridge is not a sport and as a result tournament entry fees are not exempt from VAT.

The English Bridge Union (EBU) were appealing HMRC’s decision not to repay VAT on £631,000 on tournament fees raised between 30 June 2008 and 31 December 2011.

Background

Under current UK legislation entry fees may qualify for exemption where:

  • they are for entry to a competition in sport or physical education and the total amount of the entry fees charged is returned to the entrants of that competition as prizes; or
  • they are for entry to a competition promoted by an eligible body, which is established for the purposes of sport or physical recreation.

HMRC’s VAT notice Notice 701/45 provides a list of all the sports and physical activities that it believes qualifies for the exemption.

Taxpayers Arguments

The EBU argued that Bridge was a sport for a number of reasons:

– it is recognised as a sport by the Olympic Committee

– The natural meaning of “sport” is not limited to activities which principally involve skill or exertion

– Bridge is on a par with darts, croquet, billiards, flying and gliding (accepted as sports by HMRC) in that physical activity plays second fiddle to mental skill

They also argued that bridge unions in France, Holland and Belgian (amongst others) were not required to pay VAT on their entry fees.

HMRC’s Arguments

– Sport is something that involves physical activity or fitness and the European article defining the VAT exemption was intended to promote physical and mental health

– Bridge does not involve a significant element of physical activity or fitness

Tribunal’s Ruling

The tribunal concluded that the normal English meaning of “sport” involves a significant element of physical activity and stated that “sport normally connotes a game with an athletic element rather than simply a game”.

Bridge does not contain an athletic element and therefore does not meet the conditions necessary for the VAT exemption.

Implications

Some commentators have likened the case to the great biscuit/cake debate around Jaffa Cakes; however this ruling seems much clearer cut and is unlikely to garner much media attention.

The ruling should not have any wider implications other than to reinforce the definition of what constitutes a sport for VAT purposes as initially established in the Royal Pigeon Racing Association Case (VDT 14006).

HMRC repayments are to be withheld where avoidance is suspected – HMRC Brief and Rouse v CRC

The recent HMRC repayments brief 28/13 outlines a new policy on withholding repayment claims, particularly in suspected avoidance cases.  In cases where it is HMRC’s opinion that an avoidance scheme was used, it is their intention to withhold repayments.  It is not clear on what legal basis this is to be achieved, especially bearing in mind the outcome of Cotter.

The Cotter decision was enforced in the recent case of Rouse v CRC, in which HMRC sought to enforce the payment of tax debts with immediate effect pending the resolution of enquiries into their claims for loss relief. In the Rouse case a repayment over an undisputed VAT repayment was also withheld from the taxpayer, and set against a disputed income tax liability, while waiting for the resolution of the enquiry with regards to his income tax.

Rouse v CRC

Background and facts: 

Rouse had been a VAT-registered, self-employed contractor of plant and machinery since about 1993. He was also a director of a civil engineering company. For the years 2007/08 and 2008/09 he paid tax and National Insurance amounting to £1,049,061 and £998,892 respectively. In 2008/09 Mr Rouse incurred a loss of £1.5 million. He applied to ‘carry back’ the loss and have it offset against the tax due for 2007/08 under ITA 2007, s.132 as part of his 2007/08 tax return.

Mr Rouse had also submitted a VAT return in 2011 which stated that he was owed a repayment of over £600,000.

The Case:

HMRC rejected the claim for loss relief as they argued that the losses were made through avoidance schemes and opened an enquiry under TMA 1970 s.9A into the 2007/08 and 2008/09 tax returns, and refused to give credit for the loss in the meantime.

However, they also withheld the VAT repayment that they accepted was due to Mr Rouse to set against the income tax debt they claimed was due. The central issue in the case was whether HMRC were entitled to set-off a VAT repayment against the disputed income tax.

The Decision:

Upon Rouse’s appeal, the Upper Tribunal were bound by the Court of Appeal decision in CRC v Cotter from 2012 whereby once HMRC had begun an enquiry into a return under TMA 1970, s.9A they could not also enquire under Sch 1A para 5.

Under TMA 1970, s.9A and Cotter there should be no debt on Mr Rouse’s account against which the VAT credit due to him might be set off.  The taxpayer’s application for judicial review was therefore granted.

Conclusion

HMRC repayments may become increasingly hard to obtain based on their stated intentions. Fortunately, the cases of Rouse and Cotter prove that the courts and tribunals do continue to provide a mechanism to challenge HMRC decisions that exercise powers disproportionately.  However, it is worrying that HMRC persist with such tactics, which they claim prevent the taxpayer from the right to appeal which should rightly be due.

When Does VAT become Unpaid? – Taste Of Thai Ltd (TC2721)

The recent tribunal case of Taste of Thai Ltd (TC2721) dealt with a penalty for late VAT registration; specifically when the VAT became due for the purposes of calculating the penalty rate.

Background

The restaurant deregistered for VAT in 2008 as its turnover fell below the threshold.

On 17 November 2011 the business notified HMRC that it should have been re-registered for VAT from 1 March 2011.

HMRC checked the figures and found that it should have actually been re-registered for VAT from November 2010 (it had failed the historic test at 30 September 2010).

As a result a penalty for late registration was issued, with HMRC acknowledging that the failure to notify was not deliberate and the disclosure unprompted.

HMRC said that the disclosure was made more than 12 months after the tax became due. Therefore the penalty range was 10% to 30%.

HMRC levied a penalty of £966; equivalent to 10% of the tax due, so full mitigation for the quality of the disclosure was given.

The Case

The taxpayer appealed the penalty on the basis that the disclosure was made within 12 months of the tax being due.

The legislation states that a lower minimum rate of 0% will apply if HMRC ‘becomes aware of the failure less than 12 months after the time when tax first becomes unpaid by reason of the failure’.

Therefore the tribunal had to establish when the tax became unpaid.

It was agreed by both parties that the taxpayer should have re-registered for VAT from 1 November 2010.

However, HMRC felt that the tax become unpaid at this point, i.e. from when they should have charged VAT on their goods and services. Therefore as the disclosure was made on 17 November 2011 more than 12 months had passed.

Conversely the taxpayer argued that the VAT did not become unpaid until it was required to be paid over to HMRC, i.e. a month after the quarter end.

The earliest possible quarter end would have been 30 November 2010, with the tax being due on 31 December 2010.  Therefore the taxpayer argued that the disclosure was made within 12 months.

The Decision

The tribunal said ‘it would have been a very simple matter, if parliament had intended Date 1[the date tax becomes unpaid] to be…. the effective date of compulsory registration, for it to say so’.

The logic behind the wording was so that a taxpayer who is initially a repayment trader is not deprived of the opportunity of a 0% non-notification penalty until, broadly 12 months after he becomes a “repayment” trader.

‘There is a link between the 12 month period starting to run and the start of the potential loss to the public purse’.

Therefore they found ‘no reason not to take these words [of the legislation] at face value’

As a result they agreed with the taxpayer and concluded that the ‘time when the tax first becomes unpaid’ is the due date for payment of the VAT.

The earliest possible date for payment was 31 December 2010 and the disclosure was made on 17 November 2011; therefore the disclosure was made within 12 months.

The tribunal found ‘no reason to interfere with HMRC’s view that the quality of the disclosure merited 10% mitigation within the available range’.

The taxpayer’s appeal was allowed and the penalty reduced to 0% – i.e. no penalty would be due.

Rather interestingly as an aside the tribunal said that if the disclosure had been made later (i.e. January 2012), they would have required evidence of HMRC policy on the first VAT accounting period which would have been allocated.

Littlewoods Case – Compound Interest due on VAT Refunds?

HMRC paid Littlewoods £205m in relation to a VAT claim by them, stretching back over a period of up to 30 years.

Interest under the normal simple basis was calculated at £268m, as being due to Littlewoods.

However the owners of Littlewoods were not satisfied that this was sufficient recourse for them not having the money for so long and challenged in the Courts that interest should be calculated on a compound basis.  If successful they stand to gain additional interest of around £1bn.

As the case rumbles on, its outcome could have a significant effect on everyday taxpayers.  If HMRC lose will underpayments of tax also be charged with compound interest?  Also, are the rates of interest payable fair, in terms of the rate payable on refunds being lower than that on tax due.

Can We Expect Any More Budget U-turns?

English: George Osborne MP, pictured speaking ...

English: George Osborne MP,  (Photo credit: Wikipedia)

The government has made a number of high profile U-turns in recent weeks.

The chancellor has decided to modify plans to impose VAT charges on takeaway food and static holiday caravans, as well as deciding not to introduce a limit on the amount of tax relief that can be claimed on charitable donations.

All three changes appear to have come about directly as a result of considerable public pressure, with the ‘pasty tax’ in particular capturing the public’s imagination. However these U-turns are expected to cost the treasury in the region of £120m in lost revenue.

Pasty Tax

The pasty tax, as it has now become known, was proposed in order to bring clarity to the VAT position on the supply of baked goods.

However, the proposed changes in the budget appeared to cause more confusion and place a greater administrative burden on taxpayers. The amendments should reduce the burden on those affected, but the recent furore has merely highlighted the discrepancies and complications involved in the current VAT system.

Static Caravans

The VAT amendment will mean a rate of 5%, rather than the full rate of 20% being applied to static holiday caravans to ‘reflect their position between permanent residences that are not liable for VAT and other caravans that are liable for the standard rate’.

Cap on Charitable Donations Relief

The above amendments on VAT can be seen to have clear tax and administrative reasons for the U-turns. However the removal of the cap limiting income tax relief on donations to charities to £50,000 appears, on the basis of donation figures, to be as a result of the public outcry rather than based on substantiated facts.

In order to exceed the previously proposed cap an individual would have to make donations exceeding £100,000 in one tax year (assuming they were a 50% rate taxpayer).  That is a substantial donation and it is unlikely that the vast majority of individuals could afford such giving in one tax year.

This was confirmed by BBC Radio 4 who conducted a study of the largest charities and found that only around 1% of their income came from donations over £50,000, suggesting that the cap would have had nowhere near the impact on charities’ funding as heralded by the media and various charity lobby groups.  It would be interesting to see how many donations charities receive in excess of £100,000, as this was the effective ceiling for donations that was initially proposed.

Whatever your views on the U-turns, it will be interesting to see how the chancellor proposes to fill the £120m ‘gap’.