Constable VAT Focus 6 February 2020


VAT Civil Penalties

HMRC has updated its guidance on civil penalties to remove references to TALA (Tax Administration Litigation and Advice).

HMRC Monthly Exchange Rates

HMRC has released its foreign currency monthly exchange rates for February 2020.

Updates on VAT Appeals

HMRC has updated its list of cases which it has either lost or has decided whether to appeal. The hearing dates for Done Brothers (Cash Betting) Ltd and The Rank Group Plc have been updated; both hearings will take place in July 2020.

How to Report Your EU Sales for VAT

Information about call-off stock has been added to the guidance on reporting supplies of goods and services to VAT-registered customers in another EU country using an EC Sales List.


The UK left the EU on 31 January 2020. There is now a transition period until the end of 2020 while the UK and EU negotiate longer term arrangements. The current rules on trade, travel, and business for the UK and EU will continue to apply during the transition period. New rules will take effect on 1 January 2021. We will be keeping abreast of matters as they unfold and we will be adding updates to our website and newsletters as guidance is issued by HMRC.

Impact of Brexit on some partial exemption special methods

Leaving the European Union has implications for partial exemption special methods (PESMs) that incorporate provisions relating to VAT recovery in relation to non-EU transactions, since the pre –Brexit legislation would have allowed recovery of VAT on UK transactions that became ‘non-EU’ when the UK left the European Union. To mitigate this problem a new regulation 102(2A) has been inserted into the VAT Regulations 1995.

The new regulation enables the current VAT recovery position – exempt from VAT and with no recovery available – for UK to UK supplies of financial services to be maintained within all PESMs.   This removes the need for PESMs to be redrafted by the business and reapproved by HMRC with the associated administrative burden this would have created.  No action by business is necessary as a result of these regulations as they retain the status quo.

The new regulation can be found here SI 2019/513.



1. VAT Assessments: Out of Time and Unreasonable

This appeal concerned best judgment assessments raised by HMRC against Wei Xian and Qian Hong Peng who operated a restaurant called Zhu Guang Restaurant (The Restaurant). Following some suspicion that the restaurant was understating VAT on its sales, HMRC launched an investigation in 2014 and concluded that sales were being suppressed. As the restaurant had insufficient business records, it made the assessments based on “best judgment”. The restaurant argued that the assessments were out of time and, in any light, were not made to best judgment.

Mrs Jackson, an HMRC Officer, attended three undercover visits to the restaurant to make observations. Whilst she could not see the till on these visits, she informed the Tribunal that she could hear the till and watch the unwinding of till roll. She paid for one of the meals with marked £20 notes in an effort to prove that cash sales were not being recorded. However, when an unannounced visit to the restaurant took place at cashing up time, those £20 notes were in the till. Despite this, in August 2016, Mrs Jackson raised assessments against the restaurant totalling £158,953.00 which dated back to the 09/12 period. It was submitted that, based on the undercover observations made by Mrs Jackson, the restaurant had been suppressing around £3,500 in cash sales per week.

The appellants submitted that HMRC’s assessments were out of time; as the assessment letter was issued on 1 August 2016, any assessment in respect of an accounting period ended prior to 09/14 is automatically outside of the two-year period allowed without proving that the taxpayer has acted deliberately. Whilst Mrs Jackson tried to argue that failure by the owners to keep back-up till receipts on an evening where the till battery had died evidenced a deliberate intent, the Tribunal noted that HMRC had failed to prove such a deliberate intent and dismissed the assessments for the periods to 09/12 as invalid. It also found that the assessments for the periods before 09/14 must also be invalid.

The restaurant owners also argued the remainder of the assessments were not made to best judgment; HMRC’s observations recorded only 1/3 of the recorded card sales in the till and could not be relied upon as accurate, that Mrs Jackson’s observations of a changing card:cash sales ratio was proof of nothing and that the alleged amounts in question were “absurd”. The Tribunal agreed with the appellants and gave a disparaging summary of HMRC’s conduct before reducing the remaining assessments to less than £6000; a reduction of over £150,000 from the original assessment.

Constable Comment: The Tribunal expressed a degree of exasperation with HMRC in this instance. The observations which had been made by Mrs Jackson were evidenced to be inaccurate as was her quoting of the appellants in her reports with statements which they would never have made. She disregarded the evidence before her and raised assessments based on her suspicion, not on best judgment. The Tribunal took a negative view of her conduct and it is recommended to read the judgment in full.

2. Supply of Staff or Medical Care

This case concerned a decision by HMRC to retrospectively compulsorily register Archus Trading (Archus) for VAT as its supplies were above the VAT registration threshold and were standard rated supplies of staff. Archus believed that it made supplies of VAT exempt medical services so disputed this decision.

The disputed supplies were made by Archus to the Ayrshire and Arran Health Board (AAHB). Under a contract between Archus and AAHB, Archus undertook to supply medical services at HMP Kilmarnock. The contract stated that the obligation to provide healthcare is AAHB’s and that it would fulfil this obligation through the appellant and employment of NHS staff. It also clarified that Archus is “…engaged in providing staff to the NHS so that the NHS can meet their obligations…”. HMRC argued that the contract highlights the position clearly; that Archus is making supplies of staff to AAHB in order for it to fulfil its obligations to HMP Kilmarnock.

Archus argued that if the contract were for the provision of staff, it would have specified that control of the staff would pass to AAHB and, owing to this, that Archus would not have taken out professional indemnity insurance. It also asserted that the contract was clear and consistent in relating to the provision of medical services and not a provision of staff; AAHB had no control over Archus staff members. This is a position which was supported by AAHB which added that it is Archus which orders drugs from the NHS and that it also arranged locum cover when its staff are unavailable. It also carries out extra medical work, which falls outside the scope of the contract, without any request from AAHB.

Analysing the position, the Tribunal considered the judgment in City Fresh Services Ltd, in which is was observed that “There will be a supply of staff if there has been a change of control from the supplier to the recipient over the activities of the individuals concerned.” It was also noted that AAHB is free to discharge its statutory obligations by providing medical services or by appointing a subcontractor to provide medical care.

The Tribunal held in favour of Archus, noting that the staff were always under the control of Archus (so were not supplied to AAHB) and that the supplies were VAT exempt supplies of medical care.

Constable Comment: The difference between making a supply of services and a supply of staff that provide those services can be a difficult distinction to make for the purposes of VAT. These cases are often complex and others have been significantly more challenging and less successful. It is important to seek professional advice when drafting contracts for the provision of services to ensure the correct VAT treatment is applied, although it is equally important that the business is carried out inaccordance with these contracts.

3. Penalty for Careless Inaccuracies: What is Careless?

This case is an appeal by Udlaw Limited (Udlaw) against a penalty assessment raised by HMRC for submitting inaccurate VAT returns as a result of failing to take reasonable care. Whilst Udlaw accepted that the returns in question were inaccurate, it claims that it did take reasonable care and should not be liable to a penalty for failure to take care.

Udlaw made supplies of holiday lettings of mobile homes. It was run by Mr Giggs and his family. His daughter, Mrs Gleeson, was responsible for the bookkeeping of the business but relied on accountants for the compilation of annual accounts, amongst other things. One role the accountants were tasked with was reconciling the money received from holiday lets reported in the VAT account and the annual accounts.

The business began to make losses and Mr Gigg’s health deteriorated as his prostate cancer progressed so the park was sold and a final VAT return was submitted showing a repayment of over £13,000. HMRC sought to verify this claim and visited the business. During this visit, an HMRC officer identified several issues including discrepancies between the annual accounts and VAT returns.

During the relevant period, Mr Gigg’s health declined, his wife died and one of his sons had a stroke. Owing to these circumstances, more responsibility was given to the accountants. Unfortunately for Udlaw, the accountants were going through a string of mergers with other firms and Udlaw’s case was not handed over correctly. This led to an under-declaration of VAT.

HMRC argued that the errors were careless and sought to impose a 15% penalty. Mrs Gleeson argued that Udlaw had taken reasonable care and that the penalty for “careless inaccuracies” should not apply. The Tribunal analysed what is meant by reasonable care within the context of VAT penalties and stated that “What is reasonable care in any particular case will depend on all the circumstances.” It considered that a taxpayer which chooses to rely on an accountant for its tax return is not careless where it satisfies itself that the accountant is not making any obvious errors. In the circumstances in which Mr Gigg found himself, the Tribunal observed that he acted reasonably in entrusting his accountants.

The Tribunal commented that the level of negligence demonstrated by the accountants was “pretty extraordinary”. Concluding that Mr Gigg had acted reasonably, the Tribunal allowed the appeal and the penalties were cancelled.

Constable Comment: Cases which revolve around penalties and whether a taxpayer has acted reasonably are always interesting. As observed in this instance, whether or not a taxpayer has acted reasonably is very much dependent on the circumstances. Whilst HMRC guidance claims that relying on an accountant is not an acceptable way to act “reasonably”, the Tribunal is clearly willing to consider this in the frame of the wider circumstances.

4. Failure to Register: Best Judgment Assessment

This case concerned Sital Khimji who ran a corner shop from November 2011 until February 2016. She failed to register for VAT in this period and when she sold the lease of the shop and left the area, she destroyed her business records claiming she was unaware of an obligation to retain them.

In December 2016, HMRC launched an investigation into the business. Unable to produce business records, Ms Khimji instructed an accountant to use her bank statements to prepare accounts for HMRC. In addition to these accounts, HMRC interviewed the new owners of the business and enquired as to the typical turnover of the shop. It was informed that in a good week turnover could be £3000 and in a bad week, £1000.

Ms Khimji was assessed for £27,325.53, a figure at which HMRC arrived without using the bank statements and accounts provided. HMRC also disregarded the interview with the current shop owners and claimed that turnover for the shop was £230,000 in a year.

Whilst Ms Khimji understood that she had breached the VAT registration threshold and made no challenge to this, she argued that HMRC were not acting reasonably and had not arrived at the assessment figures using best judgment. She submitted that the disregard for the bank statements and the information gained from the new owners was “illogical and unjustified”. She argued that the information from the new owners and her bank statements demonstrated that the turnover of the shop would not have been more than £100,000.

The Tribunal agreed with Ms Khimji and considered that she had proved that HMRC had failed to consider any of the information available to it. The assessment was re-calculated and the liability was reduced from HMRC’s £27,325.53 to £4255.68; a substantial difference of £23,069.85.

Constable Comment: It was unclear in this case why the HMRC officer disregarded the bank statements and accounts provided by Ms Khimji as well as the information gained from interviewing the current owner of the shops. If you are dealing with HMRC and feel that they are acting unreasonably, Constable VAT will be happy to assist in reviewing the position.

5. Evidence for Zero-Rating Exports of Goods

This appeal concerned a dispute about the availability of zero-rating for supplies of goods which were, purportedly, exported from the UK to China by A&S Import and Export Trading Limited (A&S). The issue was whether A&S had sufficient evidence to zero-rate its supplies.

A&S purchases branded goods in the UK to sell to middle-class Chinese consumers who are concerned about the prevalence of counterfeit goods in the Chinese marketplace. Originally the business focussed on baby milk formula but since 2012 it has grown significantly and now sells cosmetic products, phones and designer clothes and accessories. Therefore, many of the exports were of a high value. A director from A&S explained to the Tribunal that the Chinese authorities require purchases of goods from overseas to be below a certain value, as a result of which A&S would often incorrectly describe and undervalue the goods on export shipping documents.

A&S submitted a VAT return for period 01/17 claiming a repayment of £48,474.43 which was selected for checking by HMRC. A&S was unable to satisfy HMRC, or the Tribunal, that there was a link between any of the items which it had purchased, such as iPhones and handbags, and an associated export document.

VAT Notice 703, Paragraph 6.5, explains the conditions for zero-rating and clarifies that the proof of export must clearly identify the goods and an accurate value of the export. A&S argued that, despite its inability to link specific purchases and sales to export movements, the evidence which it had presented demonstrated that the relevant exports had taken place.

The Tribunal considered that, “whilst it is not a requirement that all the necessary evidence of export needs to be contained in a single document, the evidence of export must read as a whole clearly and correctly identify all the matters specified in paragraph 6.5”. It was held that A&S did not have sufficient evidence to zero-rate its supplies and upheld HMRC’s assessment.

Constable Comment: This case illustrates that making false declarations on customs documents can not only cause you problems in the country of destination if the package is searched and seized, but also in the country of origin. Given the recent introduction of changes to VAT law (Quick Fixes), it is a prudent time to analyse your businesses export procedure as the conditions for zero-rating have been restricted. Our coverage of the “quick fixes” can be read here

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.