Help & Support for VAT
HMRC has added new live webinars for; VAT accounting schemes, VAT Flat Rate Scheme, how to do your VAT Return, new VAT reverse charge for construction services. A new recorded webinar has also been added about the VAT reverse charge.
Find Software Suppliers for VAT and EC Sales List
Information has been added to this list to show whether suppliers provide a Making Tax Digital compliant product.
Domestic Reverse Charge Procedure
HMRC has updated its guidance on what information should be submitted with a Reverse Charge Sales List.
CONSTABLE VAT NEWS
From 1st January 2020, several “quick fixes” were introduced to the VAT system by the EU. One of the quick fixes relates to where, in a chain of transactions supporting one movement of goods, the zero-rate for an intra-EU supply should be applied.
Many businesses seem to be unaware of the new rules regarding intra-EU supplies of goods but it is important to familiarise yourself with them. The new rules will be in effect until the end of the Brexit transition period on 31 December 2020. Our illustrated blog can be read in full here.
1. DIY Housebuilders Scheme – Planning Permission Not for New Build
This case concerned a decision by HMRC to reject David Stewart’s DIY Housebuilder VAT reclaim. Mr Stewart had attained planning permission to convert an old workshop in his garden into a dwelling for his disabled wife which would be suitable for her to manage with her disabilities.
The planning permission granted was for “Alterations and extensions including change of use from workshop to dwelling house”. Mr Stewart engaged an engineer to carry out the work but was advised that the workshop was structurally unsound and should be demolished and rebuilt. The old building was demolished and a new building, which complied with the planning permission, was built on new foundations.
A certificate of completion was issued on 21 August 2018 and a claim for repayment of VAT was received by HMRC on 30 August 2018; the claim was submitted within the three-month time limit after the issue of the certificate of completion. HMRC rejected this claim on the grounds that, for a valid DIY Housebuilder claim to be refunded, the applicant must have constructed a dwelling in line with the planning permission extant at the time of completion. As Mr Stewart did not have planning permission to construct a new dwelling, he did not meet this criterion. Mr Stewart argued that HMRC misunderstood the rules of the scheme and stressed that a completion certificate was received for both sets of work; the work as per the planning permission and the additional demolition and reconstruction work.
The Tribunal accepted that a new dwelling had been constructed and that Mr Stewart had received a completion certificate for the completion of the new property. However, it was also observed that appropriate planning permission was never sought for the construction of a new dwelling. Therefore, the Tribunal agreed with HMRC and dismissed Mr Stewart’s appeal.
Constable Comment: The DIY Housebuilder scheme is often before the Tribunals at the moment, usually in relation to the three-month time limit to submit a claim after the completion of the building. This case related instead to the interpretation of the rules of the scheme. Despite having obtained planning permission, built a new dwelling and received a certificate of completion, Mr Stewart was not entitled to a VAT refund as the planning permission received was not for the construction of a new dwelling.
2. Food or Confectionary?
The case of Corte Diletto UK Limited (CDL) concerned the VAT liability of food products referred to as “vegan healthy balls”. The balls are made of dates, nuts and other natural ingredients and have no added sugar. CDL submitted a non-statutory clearance application seeking confirming that its product should be zero-rated for VAT. HMRC decided that the products should be standard rated. This case is an appeal against that HMRC decision.
“Food” is zero-rated for VAT purposes, whereas “confectionary” is standard rated. The case revolved around whether the products in question should be rightly classified as “confectionary” or not. HMRC’s Public Notice 701/14 highlights HMRC’s perspective on this matter:
“4.6.3 Cereal and fruit bars
Standard-rated items include compressed fruit bars, consisting mainly of fruit and nuts, and also sweet tasting cereal bars, whether or not coated with chocolate, with the exception of bars which qualify as cakes”
HMRC claimed that the items were quite clearly confectionary. CDL argued that the products were to be regarded as a meal replacement or something to be eaten as a dessert. CDL offered no evidence to support this claim and the Tribunal observed that the advertising and marketing materials for the product suggested the opposite – that the product is confectionary. The advertisements described the products as luxurious and indulgent, being displayed with images of champagne. The CEO of CDL had also given an interview to the “Midlands Traveller” website in which she stated that “…our [CDL’s] goal is to be recognised as one of the main players in the confectionary market.”
Considering all factors, the Tribunal concluded that the test to be applied was “what is the view of the ordinary person?” “The ordinary person” is a legal concept which has been applied through the years and has been taken to mean both “the man in the street” and “the man on the Clapham omnibus”. In this context, the Tribunal found that the man in the street would consider the product to be confectionary. Therefore, the Tribunal held in favour of HMRC, ruling that the standard rate of VAT should apply to CDL’s “healthy vegan balls”.
Constable Comment: This case considers an area of the law which can be confusing. The VAT provisions around food include exceptions and overrides; in many cases there is often a strong argument to be made on either side of the fence. Whilst this case was reasonably straightforward, it serves as a reminder that the view of the consumer is important when classifying supplies for VAT. Had the balls not been advertised as luxurious and indulgent “sweet treats”, CDL may have been able to mount a much stronger argument in favour of zero-rating.
3. Penalty: Deliberate or Careless
This case is an appeal by Mr Ansar Ali against a best judgment assessment and associated penalty raised by HMRC against his restaurant, Indian Voojan. HMRC alleged that the restaurant’s takings had been suppressed and assessed for £36,585 underdeclared VAT. HMRC sought to impose a 75% penalty of £27,440 on the basis of deliberate and concealed behaviour.
Indian Voojan appeared to show a low amount of sales when taking into account its location and reputation. Therefore, HMRC undertook two unannounced visits in September and November 2012. Following the unannounced visits, HMRC continued to suspect suppression of sales and decided to conduct covert investigations. Eight HMRC officers secretly attended the restaurant on the same night and paid for meals in cash. The meals purchased were not recorded in the restaurant’s VAT accounting records, indicating suppression. Observations made during the covert visit noted that 95 diners were served whilst HMRC officers were in the restaurant; however, when HMRC checked the restaurant’s VAT accounting records, only 54 meal tickets related to that evening.
As the restaurant was subject to a wider investigation, HMRC’s Financial Intelligence Service (FIS) prevented the results of HMRC’s investigations being put to Mr Ali until a meeting on 10 August 2016. Following the meeting, HMRC raised VAT assessments on 31 October 2016. The Tribunal noted that the assessments were made to HMRC’s best judgment. As the assessments were based on receipts from the merchant acquirer which were obtained in November 2015, the Tribunal held that the assessments were also in time. This had been a matter of dispute.
Mr Ali disputed the classification of the penalty as “deliberate and concealed”, arguing that he had acted in good faith and he had always passed the restaurant’s records over to his accountant to prepare VAT returns. He highlighted that he often delegated the task of “cashing up” to former employees of the business and that there was ample opportunity for cash to be removed from his takings before he submitted the restaurant’s records to his accountants. In order for a taxpayer’s behaviour to be considered deliberate, it must be shown that the taxpayer knew the information which was being submitted to HMRC was incorrect.
The Tribunal observed that “… it is more likely than not that the amount of VAT assessed by HMRC is correct. The Restaurant received more in takings from customers than it declared to HMRC. But that does not mean that the appellant knew that to be the case.” HMRC was not able to show that Mr Ali knew that the returns being submitted to HMRC were incorrect. Therefore, the Tribunal replaced the 75% penalty for deliberate and concealed behaviour with a penalty for careless behaviour (30%) which reduced the penalty amount to £5,487.75.
Constable Comment: This case serves as a demonstration that the threshold for HMRC to impose a “deliberate” penalty is a high one. It must be shown that the taxpayer actually knows that returns being submitted to HMRC are incorrect. The Tribunal commented explicitly on this matter, “It is insufficient to show that simply because the appellant was in overall control of, and had responsibility for the business, that he is deemed to have that actual knowledge.”
The representative sample was accepted as such and was used to calculate a retroactive VAT assessment. The period of assessment covered 1 April 2011 to 30 June 2016, indicating significant suppression. The total unrecorded takings would have been in the region on £220k over a 5 year period. HMRC also undertook a credibility exercise where the ratio of food to drinks on bills was analysed against purchases. This also suggested suppression by the restaurant. However, the Tribunal did not think that HMRC had done enough to support their position that Mr Ali had deliberately suppressed takings. HMRC had not, for example, carried out lifestyle checks to see if the living standards of Mr Ali could be supported by his drawings from the business.
This newsletter is intended as a general guide to current VAT issues and is not intended to be a comprehensive statement of the law. 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 newsletter. Specialist VAT advice should always be sought in relation to your particular circumstance.