Hospitality, holiday accommodation and attractions
The temporary reduced rate which applied to hospitality, holiday accommodation and attractions, introduced as a result of COVID-19, ended on 31 March 2022. From 1 April 2022 the normal VAT rules apply for these supplies and VAT should be charged at the standard rate.
The end of reduced rating will affect areas such as entrance to attractions, pitches for holiday caravans and associated facilities, catering and takeaway food, hotels and holiday accommodation. The relevant guidance has been updated to reflect the end of the temporary application of reduced rating.
Making Tax Digital
The HMRC guidance about Making Tax Digital (MTD) has been updated to reflect that VAT registered businesses with taxable turnover below the registration threshold will now also need to follow the MTD rules from 1 April 2022 for VAT. Additionally, as further support to those not already MTD compliant, HMRC has released a new guidance which sets out when you should sign up and start using MTD for VAT. This new guidance can be found here.
Completing a One Stop Shop VAT Return
The above guidance sets out how to fill in a One Stop Shop (OSS) VAT return if you are registered for the Union scheme and make distance sales from Northern Ireland to the EU. HMRC has now updated the guidance with new information about what should not be included on the OSS VAT return.
Prepare for the second-hand motor vehicle export refund scheme
HMRC has now published guidance about the new scheme to claim a VAT refund if you are a motor dealer who buys second hand motor vehicles in Great Britain and moves them to Northern Ireland or the EU for resale.
1. VAT Zero rating: cake or confectionery
This case concerned Glanbia Milk Limited, appealing against HMRC making an assessment of VAT as a result of concluding that certain supplies of food goods by a company in the appellants VAT group had been incorrectly zero rated rather than standard rated.
The goods were varieties of food products described as flapjacks containing oats, syrups and protein. The goods were all confectionery detailed within Excepted Items, Item 2, Group 1, Schedule 8 VATA 1994, however the dispute was whether the products were ‘cakes’ or confectionery, if cakes, they were correctly zero rated or they were confectionary in which case they were to be standard rated.
Within the appellants VAT group, there were multiple companies and the supply chain involved Glanbia Performance Nutrition (UK) Limited (GNUK) and Glanbia Nutritionals (Ireland) Limited (GNIL). GNUK manufactured the products and sold it to GNIL, which then sold some to third parties and supplied some of them back to GNUK. GNUK then sold the products acquired back to third party customers.
The appellant’s grounds of appeal were that:
- The products were correctly zero rated as cakes within the meaning of excepted items Item 2, Group 1, Schedule 8, VATA 1994
- Alternatively, if the products did fall to be standard rated, the VAT assessments should be reduced by the amount of input tax that would inevitably arise from that classification.
The Tribunal first examined the product to determine whether it has sufficient characteristics of a cake to fall within that definition for zero rating. The Tribunal considered various factors, previously set out in relevant case law, to confirm its view including:
Ingredients and manufacturing technique: It was established that an ordinary person would consider a cake to be something which is baked, made from a thin batter containing flour and eggs. The appellants product differed from this perception in that they contained no or only very small amount of flour, oil, eggs. In addition, an ordinary person would consider it highly unusual for a cake to contain protein let alone in large quantities and the product does not undergo any baking as part of the production.
Texture and appearance: The Tribunal was satisfied that an ordinary person would view the product as a bar, fruit bar or an energy bar.
Function and typical consumption: A cake would ordinarily be consumed sitting down, for example as a dessert to a meal or at an afternoon tea, it can be consumed as a snack on the go but that is not the typical method of consumption. It was stated that the appellant’s products would be wholly out of place as a dessert, at an afternoon tea or a casual social function.
Marketing: All the products were targeted at consumers in the sports nutrition category and the brands were affiliated to sports nutrition. The products were not placed in the cake sections of supermarkets along with other cake products. Also, the word ‘cake’ does not appear on the wrapping of the product, but the word ‘protein’ was featured prominently on the wrapping of the product.
As a result of the above, the Tribunal concluded that the products were not cakes but confectionery and therefore standard rated. With regards to input VAT recovery, the Tribunal confirmed that the appellant cannot recover input tax deemed to have been paid by GNUK in the absence of a fully compliant VAT invoice issued by GNIL showing the correct amount of VAT paid in relation to those supplies. There were no such invoices present, therefore the appeal was dismissed.
Constable Comment: This case demonstrates the importance of examining all relevant factors to be taken into consideration when determining the VAT liability of a food product. Often these are quite subjective. HMRC has previously challenged many ‘confectionery’ products wrongly classified as zero rated cakes, as they should have been standard rated food products. This could lead to significant VAT assessments raised and potential penalties. We recommend that if your business is unclear on the correct VAT liability of certain food products, it is important to seek professional advice. Constable VAT has a wide range of relevant experience in dealing with zero rated food products and would be happy to assist with any queries.
2. Partial Exemption: Standard Method Override
This case concerned the method for the recovery of residual input tax by the appellant, Hippodrome Casino Limited (HCL). HCL makes taxable supplies of hospitality and entertainment including a 326 seat theatre, restaurants and bars. However, the majority of HCL’s income was from VAT exempt gaming and betting activities from the casino.
HCL incurred large amounts of residual input tax on expenses that cannot be directly attributed either to taxable or exempt activities such as rent, utilities, security and other costs. HCL argued that the actual economic use of its overhead expenditure in making taxable and exempt supplies, based on a floor space apportionment, differs substantially from a standard method attribution based on the turnover, as a result of that an override calculation is necessary (the floor space approach was rational and fairer). Revenue generated from the area in a restaurant compared to the revenue generated by gaming areas was not proportionate. Floorspace better represented use of input VAT on costs.
According to legislation, a difference is ‘substantial’ if it exceeds £50,000 or is greater than £25,000 and 50% of the amount of residual input tax. HCL presented the Tribunal with a partial exemption method calculation primarily based on the floor area of the building premises and set out the figures calculated based on the standard method override (SMO) use based calculation and the standard method (SM). The average difference per annum was £548,000 clearly exceeding the £50,000.
The Tribunal have reviewed the business activities and agreed with HCL, the standard method does not provide a fair and reasonable apportionment of residual input tax because the VAT exempt gaming activities generated a much higher turnover compared to the area used for that specific activity. For example, an electronic roulette machine could generate up to £400,000 turnover per annum and it would take up less space than a table at HCL’s steakhouse, that table generating £50,000 per annum.
As a result of this and other related discussions, the Tribunal concluded that the floor space method as set out in HCL’s SMO calculation provided was a fairer and reasonable proxy of its economic use of its overhead expenditure than the turnover based standard method, particularly given that the most of those overheads are all property related. HCL’s appeal was allowed.
Constable Comment: This case demonstrates the importance to businesses of reviewing their partial exemption recovery methods. Often the standard turnover-based methodology does not provide a fair and reasonable apportionment of residual input tax and could lead to large amounts of VAT becoming unfairly irrecoverable. A special method may offer a fairer and logical higher VAT recovery. HMRC will often agree such a special method produces a logical, fair and reasonable outcome but facilitating the process with evidence and suitable presentation is of huge benefit. If you or your business wishes to review partial exemption methods Constable VAT would be happy to assist.
3. VAT Penalty: deliberate or careless
This case concerned the appellant, Atlas Garage (Morpeth) Limited (Atlas), appealing against a penalty issued by HMRC, on the grounds that its behaviour was not deliberate and that the percentage reductions for quality of disclosure has not been correctly applied. Atlas did not dispute that there were inaccuracies in the VAT return. Atlas is a car dealership and HMRC carried out a pre-arranged VAT assurance visit at their premises. HMRC raised a VAT assessment which was appealed by Atlas and the following issues are to decided by the Tribunal:
- Whether the behaviour of Atlas met the standard of ‘deliberate behaviour’
- Whether HMRC’s application of reductions to the penalties for telling, helping and giving has been made correctly
- Whether a 10% restriction on the reductions was correctly applied for the length of delay in remedying the inaccuracy
- Whether the potential lost revenue (PLR) for the penalties has been correctly calculated
With regards to the deliberate behaviour, HMRC argued this on the grounds that Atlas made inaccuracies of the same nature in 2014 and was advised how to account for hire purchase sales correctly but had not made any changes to the procedures and was still accounting for hire purchase in the same incorrect method. Atlas argued that, whilst it agrees there are inaccuracies, they are not deliberate. Atlas confirmed that the errors were caused by limitations in the system of particular finance providers, which do not allow them to put the appropriate figures in the relevant boxes, so that the automatically generated information that flows into their VAT returns system is incorrect. The Tribunal concluded that HMRC’s arguments did not meet the burden of demonstrating that Atlas consciously and intentionally submitted incorrect returns therefore the errors are careless not deliberate.
Atlas argued that the correct reduction of penalties was not given. HMRC provided part mitigation for telling and helping. Their argument for part mitigation was documents not provided and was slow to be produced. Atlas provided emails as evidence where the officer was grateful for obtaining the files promptly and that confirmed that full reductions for telling and helping will be given. As a result, the Tribunal have stated full mitigation for telling and helping must be offered.
Where there is a significant delay between date of inaccuracy and date of disclosure, HMRC will restrict the maximum reduction by 10%. The Tribunal confirmed that there is nothing irrational about the policy and does not infringe on the statutory minimum and maximum penalty reductions therefore the application of the 10% restriction was affirmed.
The Tribunal substituted HMRC’s decision concluding the correct penalty was a penalty for a careless inaccuracy with full mitigation for telling, helping and giving, but the penalty mitigation is restricted by 10% as a result of the period between the inaccuracy and the disclosure.
The Tribunal having concluded that the deliberate penalty imposed by HMRC was incorrect set out the approach to apply a careless penalty of 10%. The calculation of potential lost revenue (PLR) and the net quarterly VAT errors amount were discussed in order that HMRC would apply the revised penalty rate the Tribunal had determined as appropriate.
Constable Comment: This case highlights the fact that the burden is on HMRC to prove that a taxable person has acted deliberately regarding inaccuracies and if the taxable person can demonstrate the inaccuracy arose as a result of careless behaviour, the penalty rate will be significantly lower. If your business receives a VAT assessment it is essential that the penalty risk is considered and managed. Careless penalties may range, depending on circumstances, between 0% and 30% of the potential lost revenue. Deliberate but unconcealed penalties may range from 20% to 70%. The penalty may be a significant value. Where we are asked to assist with regard to VAT errors, the penalty risk is an area which we seek to proactively manage seeking the best outcome possible.
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.