Deeks VAT News Issue 28
Keeping you up to date on VAT changes December 2022 – Issue 28 Welcome to the latest edition of Deeks VAT News. In this edition, we cover the following: Claiming UK VAT from overseas With news that HMRC is testing a new electronic submission portal – the Secure Data Exchange Service (SDES) system […]
Keeping you up to date on VAT changes
December 2022 – Issue 28
Welcome to the latest edition of Deeks VAT News.
In this edition, we cover the following:
- Claiming UK VAT from overseas
- New process to support repayment claims
- Treatment of the Energy Bill Relief Scheme
- New penalties and interest for late returns and payments
- Change of registered details – update
- What is unjust enrichment?
- The reimbursement scheme
- A VAT Did you know?
Claiming UK VAT from overseas
With news that HMRC is testing a new electronic submission portal – the Secure Data Exchange Service (SDES) system for overseas businesses to recover VAT incurred in the UK, I thought it timely to look at the process. Especially as the deadline is 31 December 2022 for VAT incurred between 1 July 2021 and 30 June 2022.
The SDES is currently being tested. However, it is available to businesses to make claims, but during the testing period a claimant will need to email HMRC to request access.
Access to SDES request
Claimants wishing to use SDES, are required to email firstname.lastname@example.org and should include:
- ‘SDES’ in the subject field
- confirmation that the business would like to use the SDES
- whether there is a Business Tax Account already set up
HMRC says it will contact the requestor within 15 calendar days to start the registration process and provide registration guidance.
Any queries on the registration process, may be addressed to the Overseas Repayment Unit on 0300 322 9279
If it goes wonky
HMRC states that during testing there may be times when SDES be stopped without notice. If it is stopped, claimants will be told by HMRC updating its online guidance. Further: If the service is stopped, it will not affect the claims that have already been submitted through it.
The alternative to claiming during testing is the good old-fashioned paper claims.
Claims in the UK
A non-UK based business may make a claim for recovery of VAT incurred in the UK. Typically, these are costs such as; employee travel and subsistence, service charges, exhibition costs, tooling, imports of goods, training, purchases of goods in the UK, and clinical trials etc.
Who can claim?
The scheme is available for any businesses that are:
- not VAT registered in the UK
- have no place of business or other residence in the UK
- do not make any supplies in the UK
What cannot be claimed?
The usual rules that apply to UK business claiming input tax also apply to claims from overseas. Consequently, the likes of; business entertainment, car purchase, non-business use and supplies used for exempt activities are usually barred.
There is no maximum claim amount, but for most periods of less than twelve months a minimum of £130 of VAT must be claimed. For annual claims or for periods less than three months ending on 30 June, the VAT must be at least £16.
The business must obtain a Certificate Of Status (CoS) from its local tax or government department to accompany a claim.
The CoS must be the original and contain the:
- name, address and official stamp of the authorising body
- claimants name and address
- nature of the claimant’s business
- claimant’s business registration number
The CoS is only valid for twelve months. Once it has expired you will need to submit a new CoS.
HMRC has previously announced (RCB 12 – 2018) that it is taken a firmer stance on what constitutes an acceptable CoS.
The application form is a VAT65A and is available here Original invoices which show the VAT charged must be submitted with the claim form and CoS. Applications without a certificate, or certificates and claim forms received after the deadline are not accepted by HMRC. It is possible for a business to appoint an agent to register to enable them to make refund applications on behalf of that business.
Claim periods run annually up to 30 June and must be submitted by 31 December of the same year. With the usual Christmas rush and distractions, it may be easy to overlook this deadline and some claims may be significant. Unfortunately, this is not a rapid process and even if claims are accurate and the supporting documents are in all in order the claim often takes some time to be repaid. Although the deadline is the end of the year HMRC say that it will allow an additional three months for submission of a CoS (only).
Refunds are made within six months of a “satisfactory application”.
Further information is available here HMRC guidance.
New process to support repayment claims
HMRC has announced a useful new tool for speeding up repayment payments.
When a business submits a repayment return (when input tax exceeds output tax) HMRC may carry out a “pre-cred” (pre-credibility check) inspection or queries. This is to ensure that a claim is valid before money is released.
If not subject to a visit, a business is likely to be asked for information to support a claim. Such requests are more common if a business normally submits payment returns or it is a first return. The requested information is usually in the form of copy purchase invoices or import documentation.
Prior to the changes, HMRC sent a letter by snail mail and the information would also be returned by post. This was often subject to delays and “misunderstandings”.
From this month, HMRC has launched an online form so that a claimant, or an agent, can upload documents to support the claim via the Government Gateway. It is hoped that this will result in businesses receiving a repayment in shorter order.
- the VAT registration number
- the CFSS reference number from the HMRC letter
- details of the main business activities
- the date the business began
- the VAT rates that apply to sales
- details of any VAT schemes
- the detailed VAT account
- the five highest value purchase invoices, and
- any additional specific information requested by HMRC
Depending on circumstances, HMRC may also need:
- bank statements
- export sales invoices or supporting documents
- import VAT documents
- hire purchase or lease agreements
- completion statements and proof of transfer of funds for the purchase of land or property
- the planning reference and postcode of construction
- sales invoices where non-standard VAT rates were charged
HMRC aim to look at this information within seven working days and will contact the claimant or agent when a decision is made, or if any further information is required.
Let us hope that speeds up the process.
Treatment of the Energy Bill Relief Scheme
What is the scheme?
This scheme provides a price reduction to help protect all non-domestic customers in Great Britain from excessively high bills.
All non-domestic customers in Great Britain are eligible for this scheme. This includes businesses, voluntary, and public sector organisations (such as charities, schools, and hospitals).
The scheme administrator will compensate suppliers for the reduced prices that they are charging non-domestic customers and there is no need to take action or apply to the scheme as the price reduction will be applied to bills automatically.
The scheme applies to energy usage from 1 October 2022 up to and including 31 March 2023 with savings first seen in October bills.
Payments made to suppliers under the scheme are grant payments and outside the scope of VAT. VAT is only due on the amount suppliers actually charge their customers for energy supplied.
Any VAT incurred by suppliers in relation to the operation of the scheme relates to the taxable supply of energy and is therefore recoverable, subject to normal rules.
If changes are made to the scheme in the future, VAT liability may change.
New penalties and interest for late returns and payments
Many businesses who have had to deal with the “old” default surcharge regime realised that it could be disproportionate and create unfair outcomes. The new penalties are, in my view, fairer, and, the changes bring some welcome features and some which are less so.
The good news is that the introduction of the new rules mean that businesses will start with a clean slate, regardless of their position under the default surcharge mechanism – there is no carry over form one set of rules to another.
However, for the first time, late rendering of returns can incur penalties and interest if the returns are either:
- nil, or
In the previous regime when “non-payment” returns were filed late, this did not trigger a default.
Businesses which did not carry out any activity in the prescribed period, eg; intending traders, businesses temporary closed, or at the end of their life will have to recognise that a late nil return will now trigger points.
Again, businesses which typically submit repayment returns, such as; new build constructors, exporters, and any business supplying zero rated goods or services will have to recognise tardy submissions will now affect them.
We understand that HMRC is aware of the impact on this sector and is planning to communicate with these businesses to make them aware of the new changes.
An additional point; from 1 March 2021 the Domestic Reverse Charge was introduced for the construction industry. As a result, an increased number of builders found themselves in a repayment position and will now need to ensure timely returns to avoid penalties.
Late payments – penalties and interest
The new late payment penalties regime will replace the default surcharge, which served as a combined late submission and late payment sanction.
Under the new rules, there will be two separate late payment penalties.
The first penalty has two separate elements:
- 2% of the VAT unpaid at day 15
- a further 2% of the VAT unpaid at day 30
The second penalty is triggered from day 31. This is charged daily and is based on an annual rate of 4% of any outstanding amount.
If all outstanding VAT is paid within 15 days of the due date, no late-payment penalty will arise. Although here will however still be late payment interest.
From 1 January 2023, HMRC will charge late-payment interest from the day a VAT payment is overdue to the day the VAT is paid, calculated at the Bank of England base rate plus 2.5%.
HMRC offers the option of requesting a Time To Pay arrangement. This will enable a business to stop a penalty from accruing any further by approaching HMRC and agreeing a schedule for paying their outstanding tax.
Period of familiarisation
HMRC say that to give businesses time to get used to the changes, it will not be charging a first late payment penalty for the first year from 1 January 2023 until 31 December 2023, if the tax is paid in full within 30 days of the payment due date.
It is anticipated that the number of appeals against late filing/payments will be reduced because of the more proportional approach of the new rules. However, it is still possible to appeal if a taxpayer considers the imposition of penalties and interest is unfair. An appellant needs a reasonable excuse to succeed.
Advisers should ensure that clients affected by the new rules, specifically repayment business and those submitting nil returns, are aware of the impact. I know that a lot of these are habitual late filers and some “save up” returns for when they need a cash injection.
It will also be prudent for advisers to monitor penalty points accrued. We understand that HMRC is looking at how this information could be made available to agents and taxpayers. We expect more details about this in the coming months, including how software can be used to display points.
The new system may be fairer; however, the withdrawal of the repayment supplement is not! (I am still quite cross!)
Change of registered details – update
If any of the following details of a business’ registration changes, HMRC must be notified on form VAT484:
- name, or trading name
- address of the business
- accountant or agent who deals with a business’ VAT
- members of a partnership, or the name or home address of any of the partners (a form VAT 2 is also required)
The relevant guidance has been updated to reflect the new requirement that such changes must be notified within 30 days of the change taking place. Failure to do so will result in penalties.
- Change of bank details
HMRC must be notified at least 14 days in advance if a business changes its bank details.
- Taking over someone else’s VAT responsibilities
A person must tell HMRC within 21 days if they take over the VAT responsibilities of someone who has died or is ill and unable to manage their own affairs. Use form VAT484 and post it to the address on the form.
- VAT group changes
- Change of business structure
You need to tell HMRC if the structure of the business changes, eg; incorporation or a Transfer Of a Going Concern.
What is unjust enrichment?
If a business has overdeclared output tax on past returns then it seems reasonable that this should be corrected, either by adjusting a current return or submitting a form VAT652 if the “error” is over £10,000 net. If it is a genuine adjustment, surely HMRC must recognise the correction and either make a repayment or offset the overdeclaration against a current amount of VAT due.
The answer is yes, but… “unjust enrichment”…
HMRC has a defence of unjust enrichment via The VAT Act 1994, sect 80(3)
“It shall be a defence, in relation to a claim under this section by virtue of subsection (1) or (1A) above, that the crediting of an amount would unjustly enrich the claimant.”
This means that HMRC can refuse to repay a claim if they can show that it would unjustly enrich the taxpayer.
It should always be borne in mind that if a claimant absorbed the burden of the wrongly charged VAT himself then unjust enrichment cannot be used as a defence against refusal to repay the claim. Loss or damage to a business due to overpaid VAT is considered in detail here.
A refusal to repay a VAT claim using the unjust enrichment contention is to prevent a business becoming enriched at the expense of other entities who actually bore the cost of the incorrectly charged VAT. The authorities consider that a taxpayer should not be put into a better position by recovering the VAT than if VAT had not been charged at all. HMRC regard it as appropriate for unjust enrichment to be considered every time a claim is made.
The recipients of the corrected supply may be final consumers but can also be businesses, charities, etc, who were unable to deduct the overcharged VAT as input tax.
The salient point being whether the VAT was added to the price charged by the claimant or whether the claimant would have charged less had he known that his supplies were not liable to VAT.
HMRC consider that the process of establishing whether a claimant will be unjustly enriched by payment of his claim is two-stage procedure.
Whether the burden of the overdeclared VAT being claimed was passed on to the claimant’s customers, that is, whether the claimant charged the market rate* plus VAT. This is done on the basis of an economic analysis of the market in which the claimant is operating see; Berkshire Golf Club  UKFTT 627 (TC).
If the customer deducted the wrongly invoiced output tax as input tax, HMRC is entitled to assume that the supplier passed the economic burden of the tax charge on to its customers. In this case, the VAT wrongly accounted for is a cost neither to the supplier nor to the customer.
This stage occurs if the claimant accepts that he passed the burden of the tax charge on to his customers but argues that doing that caused loss or damage to his business, for example, by loss of customers or of profits, ie; has the taxpayer been economically damaged by having to bear the VAT cost?
The burden of proof of establishing that there is unjust enrichment falls upon HMRC. The standard of proof is the civil standard of proof; on a balance of probabilities.
HMRC will require the claimant to provide all of the relevant information on; pricing, policy and any other relevant documentation that establishes the pricing strategy**. It is to the taxpayer’s advantage to demonstrate that their margins have been depressed, as they have been required to charge VAT incorrectly.
Factors that HMRC consider:
- who are the claimant’s competitors?
- what is its market? (Comparisons made with other competitors’ products)
- how does the business set its prices?
- what are the business’ overheads?
- any other factors that may affect the prices
The reimbursement scheme
This is an undertaking to comply with certain reimbursement arrangements. The full text of the required undertaking is set out here.
This scheme applies where a business accepts, or HMRC prove, that by receiving a refund of sums incorrectly accounted for as output tax the business would be unjustly enriched at its customers’ expense and it wishes to refund the money they overpaid. If a customer was able to deduct all of the mistaken VAT charge as input tax HMRC will not regard them as having borne the burden of the charge.
In such cases HMRC will only make a refund of overpaid VAT if the taxpayer agrees to reimburse those customers in accordance with the terms of the scheme. More details Notice 700/45.
If HMRC repay a claim and the claimant is unable or unwilling to reimburse its customers (who bore the cost) with any amounts paid to him by HMRC then unjust enrichment will always apply. See The Deluxe High Court case.
Prices after a claim
It is worth bearing in mind that where a claimant has kept prices the same after he has found out that no VAT was due on the supplies in question, courts are likely to assume that that is because the business was charging the market rate. That assumption is made on the basis that, if the market rate were less, he would be compelled to reduce his prices. HMRC often check any post-claim price changes (or lack thereof).
Case law (summary)
The salient points from European Court of Justice case law may be summarised as:
- a person who has wrongly accounted for VAT is entitled to recover it
- HMRC is entitled to refuse to repay where it can show that the claimant did not bear the economic burden of the wrongly paid tax but passed it on to its customers
- the invocation of the unjust enrichment defence is the restriction of a personal right derived from EU law, and so it is something that should be done only exceptionally
- the unjust enrichment defence cannot be invoked simply on the grounds that the VAT was shown separately on an invoice
- before HMRC can invoke the unjust enrichment defence it must carry out an economic analysis of the market in which the claimant is operating
- the case law of both the European and the UK courts assumes that, in a free market economy, a trader required to account for a transaction-based tax will charge the market rate, not market rate plus tax
* The case law of the European Court of Justice and of the courts in the UK begin with the assumption that in a free market economy (and probably even in a managed economy) a business will charge the market rate and account for any VAT out of his profit margin.
** A pricing strategy is a business’s approach to determining the price at which it offers goods or services to the market. Pricing policies ensure businesses remain profitable and they give them the flexibility to price separate products differently.
Pricing policies refer to the processes and methodologies a business uses to set prices for their supplies. There are various pricing strategies that may be used, but some of the more common ones include:
- value-based pricing
- competitive pricing
- price skimming
- cost-plus pricing
- penetration pricing
- economy pricing
- dynamic pricing
A VAT Did you know?
Colouring books are zero rated unless they contain swear words, nudity or theft – in which case they are standard rated.