Constable VAT Focus 9 September 2022

HMRC NEWS

Fulfilment House Due Diligence Scheme registered businesses list
Businesses can use the above guidance to check if the business storing your goods in the UK is registered with the Fulfilment House Due Diligence Scheme if you’re a trader based outside the EU. The list has been updated with 19 additions and 5 removals.

HMRC email updates, videos and webinars for VAT
The above link provides information about VAT including accounting schemes, VAT returns and keeping records. The ‘How to apply the VAT reverse charge for construction services’ section has been updated because the way VAT is accounted for in the construction industry has now changed.

VAT refund scheme for museums and galleries reopening

This VAT refund scheme has been running since 2001and it was last open for new applicants in 2018/2019, it is estimated to have refunded up to around £1 billion to museums and galleries to date. The VAT refund scheme is set to reopen for new applicants from autumn 2022 and ministers encourage more museums and galleries to join the scheme to support free entry for the public.

Any museum and gallery open to the public free of charge for 30 hours a week can apply. It will help organisations boost their finances and open up their collections more regularly.

The full criteria for a museum and gallery to apply are:

  • Being open to the general public for at least 30 hours per week, without exception
  • Offering free entry without prior appointment
  • Holding collections in a purpose-built building
  • Displaying details of free entry and opening hours on the museum website

CASE REVIEW

FTT

1. Input VAT recovery: Lease rental invoices

This case concerned a VAT assessment in the sum of £26,250 raised by HMRC. The appellant, Star Services Oxford Ltd (SSO) operates a bed and breakfast business from a premises which is leased from Oxford City Council (OCC). However, prior to SSO being incorporated, Mr Latifi (owner of SSO) took out the lease with OCC in his personal capacity. Mr Latifi sublet parts of the building to Lola Zeng and Stitch, and the rest of the building was used for the bed and breakfast business by SSO.

The VAT assessment relates to input VAT claims made by SSO regarding VAT incurred on the lease for the building from OCC. HMRC identified an issue in that the lease from OCC is made to Mr Latifi as an individual rather than by SSO as the company, which is the VAT registered entity. HMRC noted that SSO has been reclaiming input VAT on invoices which are addressed to Mr Latifi.

HMRC raised the VAT assessment on the grounds that SSO does not hold valid VAT invoices which entitles it to deduct input VAT. OCC leases the premises to Mr Latifi who then sublets to SSO, Zola Zeng and Stitch, and therefore, the VAT charged was incurred by Mr Latifi not SSO.

The appellant argued that the lease was acquired in Mr Latifi’s name because SSO did not exist at the time the lease was entered into. The name on the lease was changed after HMRC notified this error. It was submitted that this was an innocent omission to transfer the lease from Mr Latifi’s name to SSO, and the delay was caused by forgetfulness. The appellant claims that HMRC is exploiting an administrative mistake and if Mr Latifi knew the consequences the lease would have been changed earlier.

The Tribunal considered whether the requirements for claiming input VAT has been met. It confirmed as a starting point that in order to reclaim input VAT the appellant must hold a valid VAT invoice to evidence that the supply is being received by the appellant. This means that the invoice needs to be addressed to the right legal entity and the supply needs to be made to that entity. VAT cannot be recovered on invoices in the name of the third parties.

The Tribunal concluded that the legal relationship was between OCC and Mr Latifi due to the lease agreement being in the name of Mr Latifi. As a result, SSO is not entitled to reclaim any input VAT incurred and the appeal was dismissed.

Constable Comment: This case shows the importance of taking care regarding administrative tasks when incorporating a business. In this case, HMRC raised a significant VAT assessment as a result of what appears to be a genuine administrative oversight of changing the name on the lease from Mr Latifi in his personal capacity, to SSO, the new incorporated business. Incorporating a business can have various VAT implications and we would recommend seeking professional advice.  Constable VAT will be happy to assist with any incorporation related queries. The case also acts as a reminder that it is important that taxpayers hold all the evidence required to support an entitlement to reclaim VAT incurred.

2. Tribunal: Start proceedings or ‘entertained’?

This case concerned the SNM Pipelines (SNMP) appealing a decision of HMRC to deny input VAT claimed by SNMP and issuing VAT assessments to recover input VAT so claimed. In 2017 HMRC took the view that SNMP was not entitled to repayments of input VAT because it knew or should have known that the input VAT had been incurred in transactions which were connected with the fraudulent evasion of VAT. The VAT assessment was in the sum of £312,377.

SNMP appealed this decision, but the FTT returned the notice of appeal because the VAT in dispute had not been paid and SNMP had not made a hardship application. In the UK, an appeal shall not be entertained unless the amount which HMRC have determined to be payable as VAT has been paid or the Tribunal decides that the requirement to pay the amount would cause the appellant to suffer financial hardship.

SNMP has made another attempt to resubmit the notice of appeal, but the FTT then returned the notice of appeal again for the same reason but, unfortunately, to an incorrect email address. Therefore, 3 years elapsed with no action from neither party.  Later, in 2020, SNMP made a hardship application to HMRC and resubmitted the notice of appeal to the FTT; however, HMRC filed a notice of objection to SNMP’s late appeal.

SNMP argued that the appeal was made in time. It was submitted that the appeal was still made or notified even if the disputed tax had not been paid, and a hardship application had not been made. HMRC argued that:

  • The delay of more than four years was serious and significant
  • SNMP did not have any good reason for such long delay
  • In all the circumstances, which includes prejudice to HMRC and the need to enforce compliance with the rules, the application should be refused

The Tribunal referred to various case law and made a distinction between a case being entertained and being validly made. Whilst payment needs to be made, or application for hardship is required for a case to be ‘entertained’ (The Tribunal begins to entertain a case when it lists it for a hearing), it is not required for a claim to be validly made. It was confirmed that starting proceedings is not the same as entertaining or proceeding with an appeal.

In summary, the Tribunal has ruled that SNMP’s 2017 appeal was made in time regardless the fact that disputed tax was not paid and no application for hardship was made at the time, it was still a valid notification of the appeal.

Constable Comment: This case highlighted the difference between starting proceedings and entertaining or proceeding with a case. The Tribunal confirmed that payment or application for hardship is not a requirement for making a valid notice of appeal; however, to entertain the case (process towards a hearing) it would be necessary. Therefore, the notice of appeal was valid, and also as HMRC has accepted SNMP’s application for hardship, the case can proceed towards a hearing. This case also reinforces the importance of ensuring all statutory, and other, deadlines are met. In the absence of confirmation of receipt of correspondence from HMRC or the Tribunal in a timely manner, we would recommend that taxpayers follow up to ensure that documents and paperwork have been received. If your business has any questions regarding the application of time limits in relation to HMRC’s or the Tribunals policies and any ‘out of time’ issues please do not hesitate to contact Constable VAT.   


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.