New To VAT
As Sedley LJ observed:
“…beyond the everyday world lies the world of VAT, a kind of fiscal theme park in which factual and legal realities are suspended or inverted”.
The more you discover about VAT the more you come to realise that situations are seldom as straightforward as they appear. You will increasingly learn to think of VAT as a risk management issue, not an exact science. However, there is a lot of reading material to help you start your journey.
Sources of guidance
If you are operating in the UK you should make use of a huge amount of free guidance that has been prepared by HMRC. This is available on HMRC’s website.
A key difficulty you will find is knowing what you need to read. Therefore, we strongly advice you consider Notice 999 first. This contains a list of HMRC’s VAT publications. You are likely to find listed in Notice 999 a publication that covers your area of interest.
You will also almost certainly benefit from reading Notice 700 (The VAT guide).
Key points that you should bear in mind from the outset:
VAT is subject to harmonised rules within the EU and the law in other EU countries should be broadly the same as it is in the UK. However, HMRC’s guidance reflects the UK view of the law and other EU territories are in no way bound by HMRC’s opinion. Also, on some issues EU law allows each country a degree of discretion on whether (or how) to apply a particular rule.
If you conclude that you have a VAT liability in another EU territory then that must be addressed locally. There is usually a “nil” threshold for VAT registrations of non-established businesses. If your business is established in France and makes £1 of taxable business sales in the UK then it is likely that you will need to register for VAT in the UK, and vice versa. The system takes no account of the fact that the compliance costs involved in this will dwarf the sums of VAT that may be involved. It is not acceptable to simply ignore a VAT liability (wherever it arises) and often businesses are forced to take a view that the cost of compliance makes a particular transaction uneconomic. Of course if the transaction has already occurred before the liability has been recognised it will be too late to make that judgement!
Mechanisms that allow the transfer of information between EU member states are increasingly effective. A judgement 10 years ago that a business in one country would not be spotted doing the occasional transaction elsewhere and ignoring an obligation to charge VAT would have been unacceptable in law but might have reflected the reality of the situation. However, this is an increasing dangerous judgement to make.
If you cannot find the answer you seek in a publication then you can call HMRC on 0300 200 3700. If you are already VAT registered you will need to provide your VAT registration number and answer a security question to receive guidance.
Important points to note when calling HMRC’s helpline are:
- Consider carefully the information HMRC will need to give an accurate question. If you ask “I am selling X, must I charge VAT?” you may be told “yes”. Had you thought to mention that you were exporting those goods the answer might have been “No”
- Always make note of the call, the information you provided, answer received and the call reference number you are given. If you are not offered a call reference number remember to ask for one. It is surprising how often a dispute arises when a taxpayer follows incorrect advice or misunderstands advice. The call reference number will usually allow a recording of that call to be retrieved at a later date.
HMRC discourages written enquiries by taxpayers who have not taken the time to first read published guidance. Indeed, ordinarily a written enquiry will generate a response that points you in the direction of published guidance, rather than answering your question. Written enquires may be made in writing or by email and HMRC’s website provides the relevant contact details.
Holding HMRC to account
The mechanics of the VAT system means that it is the law that determines whether VAT is due not HMRC. Essentially this means that it is extremely common for HMRC to provide incorrect advice and then disclaim any liability. In short, if you are told by HMRC not to charge VAT and several years later it transpires that that advice was incorrect you will still receive a bill for the VAT in question unless you can prove beyond doubt that:
- You sought advice from HMRC on the matter
- The advice you obtained was clear and devoid of qualification
- The advice you obtained was based on a full disclosure of all relevant facts
- You made clear to HMRC what that advice would be used for and that you intended to rely upon it.
Essentially your only protection against incorrect HMRC guidance lies in establishing that you had a legitimate expectation that you could rely on HMRC’s advice.
Client’s often fail to understand how difficult it is to persuade HMRC to accept liability. Be under no illusions, it is incredibly difficult. If HMRC declines to accept responsibility your options are limited. The only legal avenue is to seek a Judicial Review in the High Court, a very expensive process, and you would need to show that HMRC’s actions amounted to an abuse of power.
You must assume that HMRC will usually try to disclaim liability and that you are dealing with a government department with huge resources and which is well aware that if they say “no” there is little that most people can do about it.
Client A wrote to HMRC for a clearance and received back a letter explaining which VAT leaflet he should read. He wrote again, explaining exactly what his business was and how it was accounting for VAT. HMRC wrote back indicating that it would not give a clearance because clearances are only available where the tax payer has demonstrated that a material uncertainty about his tax treatment exists. To quote from HMRC’s letter:
“As you have shown a full understanding of our published guidance and have clearly shown a clear rationale for your proposed method of accounting for VAT in this instance, HMRC is unable to offer further assistance”.
Three years, and a bill for £450,000, later-HMRC’s position? “We did not give you a clearance so you can’t hold us responsible!” Of course sometimes HMRC has no choice but to accept liability. In another recent Constable VAT case, HMRC wrote off £270,000 because of incorrect advice. In that example the client phoned HMRC five times with a question, the first resulted in an answer and the other four (by a disbelieving taxpayer) to make absolutely sure of the first answer. When a dispute arose we were able to obtain transcripts of all 5 calls and HMRC had no choice but to accept responsibility. However, the outcome would have been very different had the client had not made a note of the call reference numbers given in relation to each call.
Many clients ask when we think they will be inspected but even as ex-officers of HMRC, we are unable to give a definite answer to this.
Reasons for a VAT audit include situations where:
- the taxpayer has submitted a VAT return reporting figures which appear “out of the ordinary” (especially if the VAT return is a repayment claim when their VAT returns are usually payment returns) or has failed to submit a return at all;
- an internal HMRC reference has been issued to confirm VAT has been accounted for (e.g. a VAT audit carried out by HMRC at a business recovering input tax on a transaction can result in a reference to ask another HMRC officer to verify that output tax has been accounted for by the seller on that transaction);
- HMRC have instigated a specific visiting programme for a sector or geographic area.
- errors were discovered on a previous inspection meaning HMRC have categorised the business as ‘high risk’.
HMRC’s stated purpose of a VAT audit is to ensure that the correct VAT is being declared. HMRC should tell you who is coming to visit; where and when the visit will take place; which people in your organisation they will want to talk to; any specific issues they wish to discuss and what VAT periods the officer will be looking at.
Once HMRC have contacted you to arrange a VAT visit this is the point, under the current penalty regime, where the notification of any previously made errors to HMRC will be viewed as “prompted’. The mitigation of penalty rates for prompted disclosures is more restricted than for unprompted disclosures.
The officer will probably want to discuss the activities of the organisation, specifically whether there have been any significant changes since the last VAT Audit. The officer will then ask how the records are completed and used to calculate and complete the VAT returns and will usually then ask for detailed records (e.g. sales and purchase invoices) for specific VAT return periods.
At the end of the visit the officer should discuss any issues that have arisen and follow these up in writing. If no issues arise this is not confirmation that everything is being done correctly. HMRC make it clear that a VAT audit is not a complete review of VAT records for a given period.