Constable VAT Focus 6 August 2021


Option to tax: End of temporary 90 days to notify extension
HMRC has previously extended the notification period for an option to tax to 90 days, which was effective between 15 February 2020 and 31 July 2021. This extension has now ended, an option to tax must be notified to HMRC within 30 days of the decision to opt to tax being made.

Also, due to Coronavirus HMRC allowed businesses or agents to notify an option to tax with electronic signatures, this change is now permanent. Conditions for this can be found in Paragraph 7.7 of VAT Notice 742A.

If you or your business needs assistance with an option to tax or should you have any queries regarding it, please do not hesitate to contact Constable VAT, we will be happy to assist and advise on the wider implications of opting to tax land or buildings.

Appoint a tax representative if you’re distance selling into Northern Ireland
If you are distance selling into Northern Ireland you may have to appoint a UK tax representative. This has to be done using form VAT1TR. HMRC have now released the latest version of the VAT1TR Notes to help you complete the form.

Agent Update: issue 86
The VAT deferral new payment scheme is now closed. If your business is unable to pay an outstanding VAT debt HMRC suggests going to GOV.UK and searching “if you cannot pay your tax bill on time “.

If assistance is needed in making a time to pay arrangement with HMRC please contact Constable VAT.


Court of Appeal

1. VAT exemption: Supplies of loan administration

This case concerned Target, a company supplying services to Shawbrook Bank Limited (Shawbrook). These services are loan administration services including the operation of individual loan accounts and processing payments received from borrowers. Target created a “loan account” on receipt of loan origination data from Shawbrook. Target recorded the account information on file including the initial loan advance and identified the balance of the loan, the next repayment date, and the amounts, including interest, to be applied to the next payment. Then it interacted with borrowers, in the name of Shawbrook, including taking steps to facilitate timely repayment. Target was responsible for managing these loan accounts but was not involved in the making of any loans.

Target submitted a non-statutory clearance application (NSC) to HMRC in which it stated that its services are composite supplies of payment processing, and therefore exempt from VAT.  HMRC took the view that the supplies made by Target to Shawbrook were composite supplies of the management of the loan accounts and taxable at the standard rate.

Target’s appeal to the First Tier and Upper Tier Tribunals were dismissed. Following the FTT and UT’s decisions, Target was granted permission to appeal to the Court of Appeal, on three grounds:

  • The Upper Tribunal erred in law by unduly narrowing the scope of the exemption for “transactions concerning payments, transfers”
  • The Upper Tribunal erred in failing to consider full scope of the exemption for “transactions concerning debts”
  • The Upper Tribunal erred in law by unduly narrowing the scope of “current accounts” so as to exclude the loan accounts operated by Target from exemption.

Firstly, the Court of Appeal addressed the issue regarding the payments and transfers. Target argued that the services supplied are transactions concerning payments and transfers, and are therefore VAT exempt. In response to the first point the Court of Appeal stated that following previous CJEU cases, to qualify for this aspect of exemption there must be “execution of an order of transfer” of a sum of money by the taxpayer and the services supplied must have the “effect of transferring funds” and “entail changes in ownership”. The Court of Appeal found that as Target does not debit or credit an account directly or intervene by way of accounting entries on customers’ accounts, and its role is limited to giving instructions or orders that are executed by a different party, the services supplied by Target are not transactions concerning payments or transfer.

On the third point Target have made the argument that there is no EU law definition for “current account “but it is “running accounts” and the loan accounts created meet this definition. The Tribunal rejected Target’s submission that a current account is just simply a running account on the basis that the essential characteristic of a current account, and the functionality that distinguishes a current account from a loan account, is the customer’s ability, not only to pay in and draw out funds, but also the ability of the customer to pay third parties by drawing on funds or credit available in the account.

In dismissing the appeal, the Court of Appeal stated that given the conclusion regarding the issues discussed above it was unnecessary to deal with the exclusion of debt collection from the exemption, taking the view that resolution of another difficult question was not necessary given its findings on the other points.

Constable Comment:  This case demonstrates the complexity involved regarding VAT exemption applying to financial services, and the importance of seeking advice to ensure the correct VAT treatment regarding supplies of financial services. At Constable VAT we are happy to assist with any financial services related queries. This is a sector in which we have a number of clients and experience in liaising with HMRC.

First Tier Tribunal

2. Default Surcharge: Reasonable excuse

This case is an appeal against VAT surcharge penalties. The appellant, One Motion Logistics LTD (OML), has been VAT registered since 25 February 2014 and it entered the surcharge regime in the 08/16 VAT accounting period for making a late payment. On 22 November 2017 the appellant has received a letter from HMRC directing it to make payments on account for VAT as the appellant’s VAT liability in qualifying period exceeded £2.3m. This letter contained guidance and information around making payments on account, including advising the appellant it was no longer entitled to the seven-day extension for filing its VAT return and paying any VAT owing to HMRC. OML has filed its VAT return and paid VAT owing to HMRC late for both the 02/18 and 05/18 VAT accounting periods. There was no dispute as to when the VAT return and payment was made, nor as to the fact that they were made late. The question for the Tribunal was whether the appellant has a reasonable excuse for the defaults.

OML argued two points it believed gave it a reasonable excuse for its defaults. Firstly, the reminder and surcharge liability notice letter for the 02/18 VAT accounting period was not received by the appellant. It stated that HMRC has been sending correspondence to a wrong postcode. Letters and forms were sent to a postal code ending 7HG instead of 7HJ, which does not exist. As a result of not receiving this correspondence OML argued it was wrong to assume the seven-day extension is available, but this was a genuine mistake. Furthermore, the decision reports that there had been an inadequate handover within the appellant’s accountancy firm, which meant that the new engagement manager was also not aware that the seven-day extension is no longer available.

In addition, OML stated that the penalty was disproportionate and that this case could be distinguished from Trinity Mirror (Upper Tribunal case binding on the First Tier Tribunal) because that, or any similar cases, made no reference to what relation the penalty bore to profitability or the corporate tax liability. The appellant stated the penalty was 6-7% of its profit and 88% of its corporation tax liability, which it found disproportionate, given that the infringements were relatively minor and were honest mistakes.

HMRC argued that the incorrect postcode did not mean the correspondence had not been properly served. It has never been returned undelivered to HMRC, and other its correspondence addressed to the same postcode in the same time period has been received. Furthermore, HMRC stated that a letter received on 22 November 2017 clearly outlined that the seven-day extension no longer applied. Whilst overlooking this detail is accepted as a genuine error, it is not a reasonable excuse for the failure. With regards to the penalty being disproportionate HMRC argued that this case is not wholly exceptional. OML had failed to meet its tax obligation and had been issued with penalties in accordance with the legislation.

The Tribunal stated that following a binding decision from the case “Perrin” it held that to be a reasonable excuse, the excuse must not only be genuine, but also objectively reasonable when the circumstances and attributes of the actual taxpayer are considered.  The Tribunal commented that it was clear that the appellant and its accountant believed the seven-day extension was available, but the fact that they did not appear to pay much attention to the letter it confirmed to have received from HMRC on 22 November 2017 cannot provide OML with a reasonable excuse. To conclude the debate around the reasonable excuse, the Tribunal stated that a taxpayer acting reasonably would not be reliant on a reminder from HMRC to comply with its obligations, therefore it is concluded the appellant did not have a reasonable excuse.

With regards to proportionality of the penalty, the Tribunal stated that the fact that the penalty could be considered large in comparison to the appellant’s profit and corporation tax liability does not make this an exceptional case. Therefore, the Trinity Mirror case must be taken into consideration, in which it is made clear that the default surcharge regime is not made disproportionate by the penalty being based on the relevant VAT and for that reason the appeal is dismissed.

Constable Comment:  This case identifies the importance of administrative compliance and the difficulty of successfully promoting an argument for a reasonable excuse in relation to a default under the default surcharge regime. If an individual or business enters the surcharge regime it is important to ensure that any VAT accounting obligations are met to avoid potential penalties. If you or your business have any queries or require assistance regarding the default surcharge regime, or any other HMRC compliance issues, please do not hesitate to contact Constable VAT and we will be able to assist.

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.