A Recipe for a Car Crash

HOUSE OF LORDS

taxadvice

The House of Lords Finance Bill Sub-Committee recently took oral evidence on economic preparation for Making Tax Digital which is planned to become compulsory (under threat of penalties) for many VAT registered business in April 2019.

Concerns were raised on a number of points including the costs (both in monetary and management time), the lack of general preparedness and the difficulty in so many businesses seeking to implement new computer systems in the 5 months or so to April 2019.

Lord Hollick said, “To rush this in with very derisory estimates of the costs and indeed the turbulence that it is going to cause seems to be a recipe for a bit of a car crash”.

Evidence was given that fully developing the relevant software was impossible because “Some key facts are missing.  We do not know what the penalty amounts would be for either late filing or failing to pay tax.  We do not know exactly which taxes will be affected and when.  We do not know fully how appeals will be handled”.

Some of the exchanges seem just plain bizarre, or maybe there is another English language which I do not know about?

House of Lords : “Will the information come to the HMRC cloud in real time, so it will be privy to it as it arrives?  Or how?”

CEO Software House : “I do not know about real time.  That has not been defined yet”.

Is Dr Who involved?

Or consider the following (truly priceless) description of HMRC strategy in this area.

At the Office of Tax Simplification we have done some strategic thinking as to how the technology may improve the user experience in tax administration in the longer term.  We have observed that in some countries real time information is now a key part of the tax administration strategy; transitional level data is provided in real time to the tax administration, which enables real time calculation of profit”.

Is it just me that thinks the fact that this is a quote from a Director at the Government Office of Tax Simplification is somewhat ironic?

The only remarkable simplification in this sentence is that it seems to suggest a cash ledger [“transitional level data”] is sufficient to calculate business profits.  What about stock, bad debts, capital versus revenue, income recognition etc., etc.?  How are they all to be dealt with by the harassed business men, trying to work out which button to press on his mobile phone app, whilst also trying to do his job, negotiating a price and trying to actually get paid?  (Assuming the business man on the other side of the transaction can work out which button to press for payment that is).

Of course, the “profit” point is not directly relevant for the first phase MTD dealing with VAT, but therein lies the nub.  The stated benefit by HMRC of all this cost and disruption is that there will be fewer transposition errors or errors in addition.  Even if this unproven assertion turns out to be true, the anticipated benefits are projected to be relatively minor.

If an Authoritarian State (say North Korea) introduced a system whereby to be in business you had to buy a Government licensed computer program to record all your transactions, which was shared in real time with the State, with fines on the business owner for errors, would our elected Members of Parliament not make disparaging remarks and point out how much more competitive the market was (say in South Korea) because the business owners there could choose which software suited them best or even adopt it to suit their business, or their innovations.

Message to MP’s, Government, HMRC and Office of Tax Simplification, introduce MTD if you wish but make it voluntary.  SIMPLES!

You may be scared no-one would volunteer to join?

If so, what does that say about the quality of the whole idea!?

Making Tax Digital (MTD) for VAT – Are you Ready?

VAT Tax Advice

Recent surveys suggest that only 50% of affected businesses are aware of the new rules being brought in from April 2019 in relation to VAT. Even those who are aware of the changes are not prepared, with 20% of those who are aware of them currently have no plan at all.

If you have followed this blog, you will be aware that we have been critical of the proposals under MTD (see here) however HMRC and the government have continued to press ahead with them and it appears very likely that the rules for VAT will be coming in in April 2019, and will be compulsory!

From that date, all businesses who are required to be VAT registered (i.e. they are above the VAT registration threshold) with be required to comply with the MTD for VAT rules. From April 2019, such businesses will be required to keep business records digitally from the start of their accounting period and will need to file in an MTD approved manner.

A spreadsheet can be used to keep records, however MTD-compatible software will be needed to send HMRC the VAT returns and so bridging software might be required in order to transfer the data between systems. HMRC have announced a ‘soft landing’ for digital links, giving businesses until April 2020 to make sure there are digital links between software products, but preparation now makes sense, because it is a radical departure in terms of there being a Government prescribed method for record keeping.

If you are concerned about the new rules and would like help understanding them, please get in touch with David Stebbings. It is better to be prepared now rather than waiting until April!

Taxpayer awarded costs over HMRC’s unreasonable conduct

A recent VAT case heard by the First-Tier Tribunal (Gekko & Company Ltd v HMRC (TC06029)) highlighted worrying aspects of HMRC’s handling of the case and even awarded costs against HMRC. The Tribunal clearly felt strongly about the case, with the decision stretching over 29 pages for a case involving an assessment to VAT of £69 and three assessments of penalties of £780, £8.85 and £10.35 respectively.

The decision begins by stating that it , “is a great deal longer than we would ordinarily write in a case involving such small amounts: this is because there are a number of disturbing features about the way the case has been conducted by the respondents (HMRC).”

The case involved a property developer company who HMRC claimed had made errors on their VAT returns, with the biggest one being an omission of £5,200 of output tax (which the Tribunal later found to actually be £4,880).

The penalty notices were found to be invalid because the original assessments had been withdrawn and new ones had not in fact been issued. The tribunal found that, even if they had been valid, the penalty of £780 should have been reduced to nil as the behaviour was careless but the disclosure was unprompted and that the other two penalties should be cancelled as there was no inaccuracy.

In deciding to award costs to the taxpayers, the Tribunal were particularly critical of HMRC. We enclose a passage from this below regarding HMRC’s change of opinion from an unprompted to prompted disclosure:

“We consider, having thought about this long and hard, that there are two possible explanations for this volte face. One is that there was incompetence on a grand scale. The other is that there was a deliberate decision to keep the dispute alive, when on the basis of the reviewing officer’s remarks it would have been discontinued, by seeking to revisit the “prompted” issue. The facts that have caused us not to dismiss this possibility include the minimal information about the change with no explanation and the hopelessly muddled response with its spurious justification that Miss Pearce sent when the appellant spotted the change. Of course we have had no evidence from those involved and do not intend in this decision to make any findings about the matter. But it is something we have to take into account in deciding whether HMRC’s conduct in this case was unreasonable.”

The Tribunal cancelled the VAT and penalties and awarded costs to the taxpayer.

Overall, this case seems to echo our recent experiences with HMRC and shows a worrying trend in decreasing quality of HMRC case handling and emphasis on winning at all costs, regardless of the merits of individual cases.

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.