Deeks VAT News

Keeping you up to date on VAT changes

Issue 7                                                                                                               20 August 2019

Welcome to the latest edition of Deeks VAT News.

In this week’s issue we look at the following areas:

• Campers Scotland Ltd [2019]–Default surcharge
• Darren Luke [2019] – DIY Builders Claim
• Koolmove Limited [2019] – Pre-incorporation legal expenses
• Making Tax Digital 

Campers Scotland Ltd [2019] –Default surcharge

The appellant was issued with a number of default surcharges amounting to £13,863.43. The appellant’s VAT return submissions and payments had been late on a number of occasions.  In addition, the appellant’s previous VAT compliance history was unsatisfactory.

The appellant submitted an error correction for under recovered import VAT. HMRC undertook a verification of the error correction, which took some time due to the complexity of the claim. The appellant argued that it had a reasonable excuse for its late payments of VAT because it took HMRC a significant time to agree and repay the claim.

It was held that this was not a reasonable excuse, because the claim was submitted after some of the defaults and also it was the error was the appellants own fault.

Darren Luke [2019] – DIY Builders Claim

This is an appeal by Mr Luke against a decision by HMRC dated 23 May 2018 to reject £7,807.85 of a claim submitted by him on 28 July 2017 for a refund of VAT totaling £64,659.25. The claim was made under the DIY builders and converters scheme.

The appeal concerned two matters:

1. Whether the accommodation above a detached garage met the conditions to be ‘designed as a dwelling’ and so was eligible for a claim under the DIY scheme. HMRC argued that it did not meet the conditions and refused the associated claim for a refund of £7,238.65.
2. Whether three mirrored bathroom cabinets qualified as ‘building materials’ ordinarily incorporated into the building. Again, HMRC argued that they did not qualify as ‘building materials’ and refused the associated claim for a refund of £569.20.

The taxpayer was granted planning permission for construction of a new dwelling and detached garage. The first floor of the garage included a sitting/dining area with kitchen units, two bedrooms, and bathroom. Planning permission had a condition that the accommodation on the first floor of the garage should be brought into ancillary use solely for purposes incidental to the enjoyment of dwelling house. HMRC argued that the planning permission condition prohibits separate use and disposal of the building.

It was held that there was only one dwelling and that the condition in the planning was only included to allow the taxpayer to occupy the property above the garage, while the house was built. Therefore, the claim was allowed.

It was held that the bathroom cabinets screwed to the wall with lights attached to mains were not fittings and did not qualify for a VAT refund under the DIY Scheme. Therefore, this part of the claim was not allowed.

Koolmove Limited [2019] – Pre-incorporation legal expenses

This case involved whether VAT on legal expenses incurred before incorporation was recoverable under the Value Added Tax Regulations 1995 Reg 111. The legal expenses were incurred by the Mr McKee when he was defending an intellectual property dispute with his former employer.

HMRC argued that the VAT was not a business expense of the company as the company had not yet been incorporated.

The appeal was allowed on the basis that Mr McKee always intended to set up a company to operate his business and without the intellectual property, there would be no business. Also, the company undertook to reimburse Mr McKee the legal fees incurred and are shown as a director’s loan in the company’s accounts.

Making Tax Digital – The current position

For anyone involved in Making Tax Digital (MTD) last week was an important week as MTD went live on 1 April 2019 for most VAT registered businesses and this was the week to submit their first quarterly return. However, as most of you will be aware this was not straightforward.

Signing up for MTD involved a number of steps, which have caused problems. Given the sheer number of businesses who had to submit and the low numbers who had registered well in advance, it was not surprising that the system was overwhelmed and last week HMRC closed MTD registrations for the current VAT return period. They advised that those who had not signed up in time would need to submit the VAT return using the old method. Fortunately, no penalties will be charged for submitting the old way, but businesses should use this quiet period as an opportunity to ensure they are signed up well in advance of the next submission period.

What have been the most common issues when submitting the first MTD VAT return?

We understand that, most businesses (who were able to sign up before the site was closed) were able to access the HMRC API and successfully submit their first VAT return. However, there have been some common trends which have resulted in a number of businesses being unable to submit in an MTD compliant manner. These are as follows:

·      HMRC’s guidance says it will transfer your Direct Debit to the new system and it is not necessary to set up a new one. However, we are aware of a number of cases where this did not happen, or HMRC canceled existing arrangements – so it is well worth checking with your bank.

·      The BTA has proven to be a source of many questions. Originally HMRC said that they would not migrate existing Government Gateway accounts, but this now seems to be standard practice, which has caused confusion. We recommend that you check if a BTA already exists before setting up a new one – duplication of BTAs has caused issues for some organisations. Where multiple accounts were previously held under the old Government Gateway, these may need to be linked to the new BTA or created afresh.

·      There are two different levels of authorisation for BTAs, admin and standard – only admins can change the status of users so make sure you know who that is. Checking that the correct individuals are authorised with appropriate user rights is essential to ensuring a smooth VAT return submission.

·      Once the BTA and users are set up and the business has signed up to MTD, it is, (in theory) not possible to submit VAT returns using the old VAT return submission method, although we have heard of at least one that has managed to do so – always ensure that you have your submission acknowledgments from HMRC.

HMRC has been clear that a light-touch approach will be applied and that default surcharge notices should not be issued in relation to MTD VAT return submission issues. If you experience these problems and have received a notice, you should discuss with HMRC.

The deferred group

A number of more complex businesses were deferred from API submission until 1 October 2019. We advise that if you have not already done so, set up your BTA as soon as possible and identify your software to submit.

The way forward

There are three components of MTD, however, in the heat of submitting VAT returns, it is easy to forget that this is only one. Digital records and the Digital Tax Journey make up the other two. HMRC have introduced a soft-landing period, to allow businesses a 12-month period to ensure they will be compliant with the digital link requirements. Although, this does give some breathing space for businesses also facing other challenges including Brexit. We understand that many of the large and complex organisations are struggling with the complexities posed by the new rules and many are concerned that the 12-month soft landing period will not provide adequate time for them to meet the rules. We, therefore, recommend that businesses should review their digital link requirements and understand the actions required to comply sooner rather than later.