Constable VAT Focus 15 July 2021


Pay less import duty and VAT when re-importing goods
HMRC has updated information about claiming Returned Goods Relief if you’re re-importing goods into the UK that have previously been exported or transported from the UK.

Register to report and pay VAT on distance sales of goods from Northern Ireland to the EU
HMRC has released guidance specifically covering how to register for the One Stop Shop (OSS) Union scheme to report and pay VAT due on distance sales of goods from Northern Ireland to consumers in the EU.

Revenue and Customs Brief 10 (2021): repayment of VAT to overseas businesses not established in the EU and not VAT registered in the UK
This brief explains the actions HMRC is taking to enable overseas (not established in the EU) businesses to claim VAT refunds where there has been difficulty getting a certificate of status. This brief applies specifically to claims arising in the year 1 July 2019 to 30 June 2020.


With effect from 1 July 2021, the EU introduced substantial changes to the VAT rules around ecommerce. The changes will impact businesses making business to consumer (B2C) supplies of goods. The new ecommerce rules will include 3 major changes:

  • Launch of the One-Stop Shop (OSS) EU VAT return,
  • End of low value import VAT exemption, and introduction of the Import One Stop Shop return (IOSS), and
  • Making online marketplaces deemed suppliers for VAT.

Make sure to read our coverage of the changes here to see if these changes could impact your business.


First Tier Tribunal

1. Assessments not made to best judgment

This case concerned Kong’s Restaurant Limited (Kong’s), a Chinese restaurant which received assessments for VAT from HMRC totalling £61,314 with associated 90% penalties of £54.923, arising from alleged deliberate and concealed under-declarations of sales. As the restaurant did not have records of the alleged transactions, HMRC’s assessments were made using ‘best judgment’. Kong’s appealed against the assessments on the basis that in its view best judgment had not been exercised in calculating the amounts owing.

HMRC conducted two “cashing up” exercises at the restaurant, a process whereby HMRC attends a business and check orders received against receipts issued and income recorded. The sales on these occasions were higher than those which were typically recorded by the business. As a result of this process, HMRC concluded that Kong’s was, on average, suppressing 30% of its sales. It was assisted in reaching this conclusion by Kong’s apparently excessive use of “void” and “cancel” functions within its till software.

In addition to suppressing its sales, HMRC concluded that Kong’s was also suppressing its purchases in order to make the gross profit margin achieved appear more reasonable. HMRC came to this conclusion after making an unannounced visit to observe a delivery from wholesalers to Kong’s. When asked to produce the paperwork relating to the delivery, the owner produced a single invoice addressed to the restaurant, recording a purchase of £601.09.  He also confirmed that he had not received any other invoices with the delivery that had just been received, and had not paid the delivery driver any cash, nor did he intend to do so.

The following day, HMRC attended the premises of the supplier which had made the delivery, TAF. They obtained data from the TAF computer system showing that on the previous day, in addition to the invoice which had previously been shown to them by Mr Kong, TAF had delivered other goods to a value of £202.93 at the same Route and Drop number, but which were subject to a separate cash invoice made out to “Cash444” rather than to a named customer.  A pattern of similar “dual delivering” could be seen which involved three separate dates prior to the Appellant’s cessation of business as well as a great many subsequent dates.

By grossing up the reported takings of £858,408 in respect of the total period from 1 April 2014 to 30 June 2017 to take account of this alleged 30% suppression, HMRC concluded that Kong’s turnover for that period was £1,226,297, an increase of £367,889. Accordingly, HMRC assessed for £61,314 of VAT at 20% allocated across the various VAT accounting periods between those two dates.

Kong’s appealed HMRC’s decision on three grounds:

  • the cash-up exercises were flawed and could not be relied on as a basis for imposing the very large liabilities in issue in the appeals;
  • the goods ordered on the cash sales invoices were for the personal consumption of the staff, their families and friends and were paid for by them, and the evidence relevant to the Appellant on this issue extended to just three invoices;
  • the high level of voids and cancellations on the Appellant’s till were easily explainable because it was such a complicated EPOS till which the poorly paid, inexperienced and badly qualified staff of the Appellant made repeated mistakes on.

However, the Tribunal only considered the cashing up exercises and observed that HMRC only attended the restaurant on two occasions; one of which was Chinese New Year and the other was a “midsummer payday”. It agreed with the appellant that extrapolating from only these two occasions that sales had been consistently suppressed was unreasonable as it is likely that both evenings would have attracted significant amounts of trade which would not be expected on, for example, regular Tuesday evenings.

The Tribunal observed that HMRC assumed the worst and sought subsequently to justify that approach by reference to evidence of three cash purchases from one of a number of known suppliers and numerous voids and cancellations on the Appellant’s till – including cancellations totalling £166.30 on the night of the June 2017 visit. It went on to comment that HMRC did not seem to have investigated these points.

Concluding, the Tribunal upheld Kong’s appeal against HMRC’s assessments. As a result the penalties are also cancelled as there is no “potential lost revenue”.

Constable Comment: This case is a demonstration of how HMRC’s assessment calculations can be flawed. It seems unreasonable to use two days on which turnover could be expected to be significantly higher than normal as a basis for an assessment of underdeclared VAT over several years. If you have received an assessment from HMRC which you think is unreasonable then please contact Constable VAT.

2. Option to tax: late notification

This case concerns William Newman who was involved in a purchase and sale of a property used as a pub. Mr Newman both purchased and sold the property on 22 May 2014. The purchase price was £1.3 million plus VAT of £234,000. Mr Newman provided a VAT invoice to his buyer for the sales price of £1.8 million including £360,000 VAT.

The sale of commercial properties which are older than three years is usually VAT exempt unless the vendor  has opted to tax the property. An option to tax normally leads to supplies of the opted property being subject to VAT at the standard rate. If there was an option to tax in place made by Mr Newman, he would be liable to pay £360,000 VAT on the sale invoice and as a result of that taxable sale would likely be able to reclaim £234,000 VAT on the purchase. The net VAT due to HMRC from Mr Newman as a result of this transaction would be £126,000.

However, Mr Newman did not notify HMRC of the option to tax within the time limit of 30 days and accordingly, HMRC took the view that the option to tax could not apply and as a result the sale was VAT exempt Mr Newman was not entitled to reclaim the £234,000 VAT he paid on the purchase. Additionally the £360,000 charged incorrectly as VAT is due to the Crown. Although Mr Newman did submit an option to tax, it was not within the time limit which allows for it to become effective. Mr Newman appealed this decision.

Section 83 (1) VATA provides a right of appeal against HMRC’s refusal to accept a late notification of option to tax. Mr Newman has provided evidence that his advisors at the time had a lack of understanding and took no action which the Tribunal accepted. The Tribunal stated that they have and accept evidence to show that Mr Newman did make an election before 21 May 2014 but it was not notified to HMRC and therefore was not effective.

The Tribunal accepted Mr Newman’s unfortunate situation regarding his previous adviser’s lack of understanding, alongside his wife being ill, as reasons for the delay in submitting the option to tax. However, the appeal against HMRC’s decision was only made in 2019. Mr Newman was not able to provide sufficient evidence as to why he took no action between 2016 and 2018. Therefore, the Tribunal stated that his advisor’s faults are not sufficient reason for an appeal to be heard so late. Therefore, the appeal against HRMC’s refusal to allow extra time was struck out.

Constable Comment: This case highlights the importance of ensuring that prior to a property transaction the buyer and seller are aware of the VAT implications of the transaction as well as being aware of all requirements for a particular VAT treatment to apply. We always recommend that when larger amounts of VAT are at stake or a transaction is unusual that a business seeks professional advice. At Constable VAT we are happy to assist with any property related queries. Another significant point this cases raises is the need to deal with any appeal against an HMRC decision in a timely manner. There are deadlines for both making appeals and dealing with the various stages of the process and failure to meet these could lead to a appeal that may have been successful, had it been made in time, being struck out

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.