Constable VAT Focus 25 November 2021

Constable News

We have recently released our special Autumn Budget 2021 VAT Focus, covering all the VAT related announcements and updates. Click here to read in full and see also further documents issued by HMRC in the HMRC News below.


Check how to pay duties and VAT on imports
HMRC has updated this notice to show how to use the flexible accounting system when your goods move across the UK border if you want to pay by bank transfer, guaranteed cheque or bank draft and are using the Customs Handling of Import and Export Freight system.

Help and support for Making Tax Digital
HMRC has now added a recording of a webinar about Making Tax Digital.

Complete your VAT Return to account for import VAT
This guidance has been recently updated to include more information about how to adjust for errors for import VAT.

Tell HMRC about changes to your VAT IOSS registration in the EU
HMRC have published new guidance, you can use this to tell HMRC you’ve deregistered from using the VAT Import One Stop Shop (IOSS) in an EU country or have changed your business details.


Since the end of the transitional period on 31 December 2020 European Court judgments are not binding on the UK in most cases. However, it is expected that UK courts will still take these judgements into consideration when reaching their own conclusions and there may be occasions where they have a more binding effect. If you are concerned about the impact of any matters raised in the following cases, please contact us.


1. Reduction of taxable amount

This case concerned ELVOSPOL and the Czech Republic tax authorities. ELVOSPOL has made supplies to a company which was later declared, by the Czech court, insolvent. The courts determined the manner in which it was to be wound up. ELVOSPOL had adjusted its taxable amount on the basis of national law, arguing that the insolvent company had not paid the invoice for the supply made. The national court; however, took the view that the appellants interpretation of national law was incorrect because the unpaid claim had arisen during the 6 months period preceding the declaration of insolvency.

However, Article 90 of the VAT directive states that in the case of cancellation, refusal or total or partial non-payment, or where the price is reduced after the supply takes place, the taxable amount shall be reduced accordingly under conditions which shall be determined by the Member States. Therefore, the question referred to the CJEU is whether national legislation is contrary to the purpose of Article 90 if it prevents taxpayers from making a correction to the amount of output tax, if that claim arose less than 6 months before a court decision declaring the other company insolvent.

The CJEU stated that Member States may derogate from the VAT directive only to enable them to counteract the uncertainty associated with the recovery of sums owed. It also stated that a Member State must allow the taxable amount for VAT purposes to be reduced where the taxable person is able to demonstrate that his, or her, claim against the debtor is definitely irrecoverable.

It was considered whether the fact that a company has been declared insolvent is sufficient for a taxpayer to demonstrate that the claim will definitely not be recoverable, and, therefore, it should be able to adjust the output tax even if 6 months have not elapsed, in accordance with Article 90 of the VAT directive.

The CJEU concluded that Article 90 of the VAT Directive must be interpreted as precluding a national provision which makes adjustment of the amount of VAT, subject to the condition that the partially or totally unpaid claim must not have arisen during the six-month period preceding the declaration of insolvency of the debtor company where it is not ruled out under that condition that such a claim may ultimately be definitively irrecoverable.

Constable Comment: The UK’s national law also has a rule that 6 months must have elapsed before a bad debt claim can be made. This is the general rule and would usually apply in most circumstances; however, if you feel that a claim is appropriate within 6 months we recommend seeking professional advice to avoid any potential assessments or penalties from HMRC.

First Tier Tribunal

2. Flat Rate Scheme operation

This appeal concerns the operation of the VAT flat rate scheme (FRS). Under FRS, a taxpayer declares output VAT calculated by applying a percentage, based on the trading sector of the business, to the VAT inclusive turnover of the business and input tax is not usually deductible.

Swiss Dawn Consultants Limited (SDCL) was registered for VAT with effect from 5 August 2014 and it was also authorised by HMRC to operate the FRS from that date. The trading sector was “management consultancy” and the appropriate percentage was 14%. This was reduced to 13% as it operated the FRS in its first year of VAT registration.

HMRC issued a VAT “best judgment” assessment for £8,474. The assessment was upheld following an internal HMRC review. SDCL have applied the appropriate percentage to its net turnover, rather than VAT inclusive gross turnover. Therefore, SDCL had under calculated the output tax due. In addition, it has reclaimed input VAT in two VAT accounting periods.

The tribunal concluded that, other than a reduction of the assessment by £39 to take account of the withdrawal of the input tax claim by SDCL, it confirmed the assessment of the amended sum of £8,435 and allowed the appeal in part.

Constable Comment: Whilst this case did not involve complex VAT liability issues, it highlights the importance of operating all VAT accounting schemes correctly to avoid assessments and penalties. If you or your business does, or intends, to operate a VAT scheme we suggest advice is taken. We would also recommend periodic reviews of the mechanics of the operation of the scheme to ensure that there are no VAT accounting errors. There is currently a four-year cap in place that allows HMRC and taxpayers to revisit VAT returns rendered and a review within this timeframe may be beneficial to business accounting for VAT using a margin scheme.   

3. Comply with tax obligations

There has been a recent case which helps to define what knowledge a non-tax specialist is required to have if running a business. The case involved Mr Osman, the sole director of Salford Santos Kebab Limited (SSKL), which operated a takeaway food shop selling burgers, pizza, kebabs, and similar foods.

HMRC raised VAT assessments and after agreeing a reduction, HMRC issued a personal liability notice (PLN) of £29,473 to Mr Osman. This was on the basis that his actions had been entirely responsible for the deliberate inaccuracy which led to the VAT assessment. The inaccuracy was treating standard rated food items as zero rated, therefore not accounting for output tax due. The business submitted VAT returns showing an average of 84% of sales being zero-rated. This is not credible for this type of business. As a fast-food takeaway shop, HMRC would expect very limited zero-rated sales.

Mr Osman argued that he knew nothing about VAT requirements, did not understand the difference between standard rated and zero-rated sales. He had done nothing other than appoint an accountant and provide them with some figures as requested.

The Tribunal concluded that it did not consider Mr Osman acted dishonestly regarding the VAT treatment of sales, but he taken no steps to establish whether information provided by his accountant was accurate. The Tribunal stated that a person running a business is obliged to establish what is required of them to comply with their tax obligation and, therefore, upheld that the PLN was correctly issued.

Constable Comment: This case was straightforward regarding the VAT issue that supplies of catering services of hot take-away food should not be zero-rated; however, it highlights the importance that a person running a business is expected to have a basic understanding of their VAT compliance responsibilities. In this case Mr Osman had engaged the professional services of an accountant and, unfortunately VAT accounting errors had arisen. The Tribunal found that it was the taxpayers responsibility to have a knowledge and understanding of the VAT liability of its businesses supplies.

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.