Deeks VAT News issue 43

Welcome to this months Newsletter    April 2024 issue 43    Keeping you up to date on VAT changes    In this months newsletter we cover the following:    The interaction between Transfer Pricing and VAT VAT registration HMRC update New report finds HMRC performance the worst ever. HMRC plans to make permanent cuts to VAT helpline now reversed […]

Welcome to this months Newsletter   

April 2024 issue 43   

Keeping you up to date on VAT changes   

In this months newsletter we cover the following:   

The interaction between Transfer Pricing and VAT

VAT registration HMRC update

New report finds HMRC performance the worst ever.

HMRC plans to make permanent cuts to VAT helpline now reversed

Customs: Example declarations for exports from GB updated

HMRC videos and seminars for new businesses on VAT basics

VAT and influencers

The Prudential Assurance Company Ltd: VAT groups and continuous supplies – Court of Appeal

WTGIL Ltd: VAT Dispute on Black Box Insurance Services – Upper Tribunal Decision

VAT deregistration and EORI numbers

Top 10 VAT Tips for small businesses and start-ups

News Bulletin

Deeks VAT Consultancy Announced as Finalist for Tolley’s Taxation Award 2024 in Best VAT/Indirect Tax Team Category

Deeks VAT Consultancy is thrilled to announce our selection as a finalist for the esteemed Tolley’s Taxation Award 2024, specifically within the Best VAT/Indirect Tax Team category. This nomination stands as a testament to our team’s unwavering commitment and exceptional proficiency in the field of VAT aswell as Direct and Indirect taxation. As finalists, we eagerly anticipate the upcoming awards ceremony, where the winners will be unveiled. This momentous occasion not only acknowledges our firm’s dedication to excellence but also shines a spotlight on the collective effort and hard work of our team.

A VAT Did you know?

Dead mice, rats and day-old chicks sold for feeding to exotic pets such as reptiles may be zero-rated

The interaction between Transfer Pricing and VAT

Are Transfer Pricing (TP) adjustments subject to VAT? – Usually no, but…

What is TP?

A transfer price is the price charged in a transaction between two parties. The transfer pricing legislation concerns itself with the prices charged in transactions between connected parties as, in such circumstances, the price charged may not necessarily be that which would have been charged if the parties had not been connected.

The UK’s transfer pricing legislation details how transactions between connected parties are handled and in common with many other countries is based on the internationally recognised ‘arm’s length principle’.

The UK allows only for a transfer pricing adjustment to increase taxable profits or reduce a tax loss. It is not possible to decrease profits or increase a tax loss.

The UK’s transfer pricing legislation also applies to transactions between any connected UK entities.

The arm’s length principle applies to transactions between connected parties. For tax purposes such transactions are treated by reference to the profit that would have arisen if the transactions had been carried out under comparable conditions by independent parties.

So, is a TP adjustment additional consideration for a supply?

VAT

Value of the supply – what is the consideration?

TP is a direct tax concept which does not necessarily align with VAT considerations. Unhelpfully, there are no provisions in UK legislation which provides for the VAT treatment of TP adjustments. Additionally, there is no case law on this subject.

As a TP adjustment is solely for direct tax purposes, it does not usually affect the value of the supply for VAT purposes. Consequently, such adjustments are usually outside the scope of VAT.

However, price adjustments of previous supply of goods/services must be recognised for VAT market value rules only when: 

  • the supply is taxable
  • the relevant input tax is not fully recoverable and
  • HMRC issues an ‘Open Market Value Notice’ to the parties requiring them to apply market values for VAT. 

VAT Act 1994, Schedule 6, Part 2, para 1 gives HMRC the vires to issue such a Notice.

Latest

We understand that a case: Arcomet Romania is due to be heard by the CJEU on whether TP adjustments represent consideration, and we await the outcome which may provide clarity. (Although after Brexit, the previous position: that the UK VAT Act is to be interpreted with EU case law and general principles of EU law has ended. UK courts whilst still relying on the UK VAT Act and its EU VAT Directive principles, will be able to deviate from ECJ case law).

VAT registration HMRC update

HMRC has updated VAT Notice 700/1 – Who should register for VAT. The publication explains when a business must register for VAT, and how to do it.

The changes are to para 2.7 – Specified Supplies which sets out what needs to be included during the application process when describing business activities.

Businesses affected

Those that supply; finance, insurance services, or investment gold to customers in countries outside the UK, or make supplies of insurance or finance services which are directly linked to the export of goods outside the UK.

Specified Supplies 

These are supplies which would be exempt from VAT if they were made in the UK, but are treated as taxable if made outside the UK.

Benefit to business

A business making Specified Supplies may register for VAT on a voluntary basis and claim UK input tax incurred in making those supplies. We strongly recommend that all businesses in the above categories consider registering in the UK.

The amendment

If a business is registering because it makes Specified Supplies, it must ensure that it clearly states ‘SPECIFIED SUPPLIES’ in the free-text box when asked to describe the business activities during the application process. Failure to do this will likely cause delays and create additional HMRC queries.

New report finds HMRC performance the worst ever

A report by the Public Accounts Committee (PAC) has found that HMRC’s services continue to deteriorate and are now at an “all time low”.

In summary, Anne Olney MP who sits on the committee said of the new report:

  • PAC expressed disappointment over the five-year decline of service levels
  • Taxpayers are “exasperated”
  • In 2022/2023 the number of callers waiting ten minutes or more for HMRC to answer has increased from 46.3% in 21/22 to 62.7%
  • HMRC stated that it “did not have the resources to meet rising demand for its phone and post services at expected standards”
  • HMRC agrees that it will not now require digital interaction until a service is of a suitable standard
  • Criminal prosecutions fell from 691 in 2019/20 to 240 in 2022/23 which “sends the wrong message” (my comment: although this could partly be due to backlogs in the criminal justice system)
  • The report results were “quite predictable” and were a “letdown for taxpayers”
  • It is “distressing” to find people who “want to get it right, and who have no intention whatsoever of defrauding the Exchequer, but just find it really, really difficult to access the right support”.
  • In failing to access the right support, taxpayers are liable. It is not on HMRC – even if the services are difficult to access, it is still the responsibility of the taxpayer to pay the right amount of tax
  • There is “probably” a need for more investment and recruitment
  • A smarter allocation of the resources HMRC has could see a better return for taxpayers
  • Finally: “It really is important that HMRC get this right.”

 In terms of VAT, we can confirm from personal experience that HMRC’s performance is at an unacceptably inferior level; from telephone responses, to written replies and a generally poor “attitude”. This is supported anecdotally by clients and colleagues’ experiences.

HMRC plans to make permanent cuts to VAT helpline now reversed

The VAT helpline will be open for five days every month ahead of the deadline for filing VAT returns – outside of this time, customers will again be directed to use HMRC’s online services.

CIOT stated that:

“We are deeply dismayed that, so soon after the criticisms levelled at them by the Public Accounts Committee, and in the light of an inconclusive evaluation, HMRC have decided to make these big, permanent cuts to the help they provide to taxpayers”.

This again illustrates that HMRC cannot cope and that the service provided to businesses is truly awful.

Update! One-day later…

HMRC has now reversed the above planned cuts less than 24 hours after they were announced!

After strong criticism from many sources HMRC said that while “making best use of online services allows HMRC to help more taxpayers and get the most out of every pound of taxpayers’ money by boosting productivity”, the pace of this change “needs to match the public appetite for managing their tax affairs online”.

“We’ve listened to the feedback and we’re halting the helpline changes as we recognise more needs to be done to ensure all taxpayers’ needs are met, whilst also encouraging them to transition to online services.”

A statement on behalf of the Treasury Committee noted it was “extremely pleased to see that common sense has prevailed”, called the planned cuts “mismanaged from the beginning” and commented that the announcement was “ill-advised”.

“We welcome the decision to reverse yesterday’s announcement. While we do not oppose expansion of digital services for those who want to use them, we remain entirely unconvinced that HMRC is adequately prepared to impose such a significant change in how it serves taxpayers. It further pondered over the extent to which the department is prioritising its own needs over those of law-abiding and vulnerable taxpayers.

Customs: Example declarations for exports from GB updated

This Guidance provides examples to help with the completion of declarations on the Customs Declarations Service for exports. It has been updated with the addition of a standard pre-lodged export declaration document.

HMRC videos and seminars for new businesses on VAT basics

HMRC has updated its guidance to businesses on VAT. The helpful instruction includes: email updates, videos and seminars which cover such subjects as: 

  • VAT basics
  • registration
  • registering and joining webinars
  • accounting Schemes
  • late submission and payment penalties and interest changes
  • error corrections
  • the reverse charge for construction services
  • accounting for VAT on the sale of cars on finance
  • HMRC community forums

VAT and influencers

A Warning

There has been a great deal of debate on the subject of VAT and influencers, with HMRC issuing assessments for underdeclared output tax on “gifts” received by them.

What is an influencer? 

An influencer is someone who has certain power to affect the purchasing decisions of others because of their; authority, knowledge, position, or relationship with their audience. These individuals are social relationship assets with which brands can collaborate to achieve their marketing objectives.

In recent years the growth of social media means that influencers have grown in importance. According to recent statistics, the projected number of global social media users in 2023 was 4.89 billion. This is a 6.5% rise from the previous year.

What is the VAT issue?

Business gifts to influencers

A business is not required to account for VAT on certain dealings if they meet certain conditions. For free gifts, the condition is that the total cost of all gifts to the same person is less than £50 in a 12-month period. Further, if the goods are “free samples” – used for marketing purposes and provided in a quantity that lets potential customers test the product, then the £50 rule does not apply. If an influencer receives free gifts or samples, there are no VAT implications for them.

HMRC Action

 However, we understand that HMRC has decided that, in the majority of cases, the supply of goods to influencers were not ‘free gifts” but rather consideration for a taxable supply of marketing or advertising. They were also not considered free samples as, generally, influencers would not be in the position to test the goods, having no expertise in the field. It is also concluded that influencers, in most cases were “in business“.

The payment for the marketing, promotion or advertising services (the VAT treatment is similar, regardless of how the services are categorised) is by way of the supply of goods, rather than monetary consideration. That is; consideration is flowing in both directions. Consequently, output tax is due on this amount if the influencer is, or should be, VAT registered.

What is the value of the supply?

Non-monetary consideration

Non-monetary consideration includes goods or services supplied as payment, for example in a “barter” (including part exchange) agreement. If the supply is for a consideration not consisting or not wholly consisting of money, its value shall be taken to be such amount in money as, with the addition of the VAT chargeable, is equivalent to the consideration. Where a supply of any goods or services is not the only matter to which a consideration in money relates, the supply is deemed to be for such part of the consideration as is properly attributable to it.

In determining the taxable amount, the only advantages received by a supplier that are relevant are those obtained in return for making the supply should be recognised. Non-monetary consideration has the value of the alternative monetary payment that would normally have been given for the supply.

VAT Registration 

If an influencer receives gifts valued at over £90,000 in any 12-month period, or these gifts plus other monetary consideration, VAT registration is mandatory. 

The Prudential Assurance Company Ltd: VAT groups and continuous supplies – Court of Appeal

The Court of Appeal has sought to resolve the tension between VAT Groups (s 43) and time of supply rules in relation to continuous services (VAT Regulation 90). In November 2007, Silverfleet Capital Ltd completed a management buy-out and left the Prudential VAT group. Since 2002 it had been providing fund management services to one of Prudential’s with-profits funds and was entitled to an additional performance-related fee if the fund exceeded certain benchmarks. 

In 2014 and 2015 those benchmarks were eventually met, which triggered performance payments of £9.3m.  The burning question was as Silverfleet carried out its fund management services before it left the VAT group, but received the performance-related payment several years afterwards, should it charge VAT?

Silverfleet’s management qualified as a continuous supply of services, and HMRC therefore considered that VAT had to be charged by reference to when the performance fee was invoiced and paid. 

The Court of Appeal, by a majority, agreed with HMRC.  Silverfleet was still a member of Prudential’s VAT group when the rules on time of supply treated its services as supplied. By 2014 it was no longer a VAT group member and must therefore charge VAT. Silverfleet’s appeal was dismissed.  Since input tax was not recoverable by Prudential, a substantial sum was lost.

It is advisable to consider VAT when making such agreements and agree whether the performance-related fee is VAT inclusive or exclusive.

WTGIL Ltd: VAT Dispute on Black Box Insurance Services – Upper Tribunal Decision

WTGIL Ltd is an insurance intermediary that provided black box insurance to young drivers and the drivers were required to have WTGIL Ltd’s telematics devices fitted to their cars. WTGIL Ltd made a claim of around £2m to HMRC to recover VAT on purchasing the devices, which was rejected. The Upper Tribunal dismissed WTGIL Ltd’s appeal, ruling that there was no taxable supply of services for consideration WTGIL Ltd was not supplying goods to the drivers at the start of the policy, and there was no direct link between the services provided and any consideration from the driver. Therefore, there was no input tax recovery. 

VAT deregistration and EORI numbers

The Chartered Institute of Taxation (CIOT) has reported that HMRC have notified them regarding an update to VAT and EORI guidance, namely that “If a business deregisters for VAT, any Economic Operators Registration and Identification (EORI) number(s) they hold will also be removed at the same time”. 

If a business still needs an EORI number, they can apply for a new GB EORI number. According to the statement, “the number is usually confirmed immediately”. When a business has a GB EORI number, it will then be able to apply for an XI EORI number (for Northern Ireland trade), which “will be issued within five working days of applying”.

Top 10 VAT Tips for small businesses and start-ups

 At some point it is likely that a small business or start-up will need to consider VAT. Here are a few pointers: 

1.     Should you be registered for VAT? 

If your income is above £90,000 pa of taxable supplies, you have no choice. But you can voluntarily register if below this threshold. There are significant penalties for failure to register at the correct time.

  • Advantages of VAT registration: VAT recovery on expenses plus, perhaps; gravitas for a business
  • Disadvantages: administration costs plus a potential additional cost to customers if they are unable to recover VAT charged to them (eg; they are private individuals) which could affect your competitiveness Potential for penalties and interest for getting it wrong. 

2.     Even non-registered businesses can save VAT

  • Look to use non-VAT registered suppliers, or non-EU suppliers (however, the reverse charge may count towards your registration turnover)
  • If you are purchasing or leasing commercial property, consider looking for non-opted property or raise the issue of your inability to recover VAT in negotiations on the rent
  • Take advantage of all zero, exempt and reduced rates of VAT reliefs available
  • Challenge suppliers if you consider that a higher rate of VAT has been charged than necessary 

3.     Consider using the appropriate simplification scheme 

  • Flat Rate Scheme
  •  Cash Accounting (helps avoid VAT issues on bad debts)
  • Annual Accounting (can generate real, cash flow and/or administrative savings)
  • Margin and Global schemes for second-hand goods 

4.     Make sure you recover all pre-registration and/or pre-incorporation VAT 

  • VAT incurred on goods on hand (purchased four years ago or less) and services up to six months before VAT registration is normally recoverable.

5.     Are your VAT liabilities correct? 

  • Many businesses have complex VAT liabilities (eg; financial services, charities, food outlets, insurance, cross border suppliers of goods or services, health, welfare and education service providers, and any business involved in land and property). A review of the VAT treatment may avoid assessments and penalties and may also identify VAT overcharges made which could give rise to reclaims. Additionally, these types of business are often restricted on what input tax they can reclaim. Check business/non-business apportionment and partial exemption restrictions. 

6.     Have you incurred VAT elsewhere in the EU? 

  • You may be able to claim this from overseas tax authorities.

 7.     Do you recover VAT on road fuel or other motoring costs? 

  • Options for VAT on fuel: keep detailed records of business use or use road fuel scale charges (based on CO2 emissions)
  • If you need a car; consider leasing rather than buying. 50% of VAT on lease charge is potentially recoverable, plus 100% of maintenance if split out on invoice.  VAT on the purchase of a car is usually wholly irrecoverable. 

8.     Remember: VAT on business entertainment is usually not recoverable but VAT on subsistence and staff entertainment is.  

9.     Pay proper attention to VAT

  • keep up to date records
  • submit VAT returns and pay VAT due on time (will avoid interest, potential penalties and hassle from the VAT man)
  • claim Bad Debt Relief (BDR) on any bad debts over six months old
  • contact HMRC as soon as possible if there are VAT payment problems or if there are difficulties submitting returns on time
  • ensure that the business is paying the right amount of tax at the right time – too little (or too late) may give rise to penalties and interest – too much is just throwing money away
  • check the VAT treatment of ALL property transactions

 10.  Challenge any unhelpful rulings or assessments made by HMRC

HMRC is not always right. There is usually more than one interpretation of a position and professional help more often than not can result in a ruling being changed, or the removal or mitigation of an assessment and/or penalty.

We can assist with any aspect of VAT. You don’t need to be a tax expert; you just need to know one… We look after your VAT so you can look after your business.

Forthcoming changes to HMRC services: GOV.UK One Login

HMRC has published guidance on changes to logging into its services. GOV.UK One Login is a new way of signing in to government services. It is said to provide a simple way for you to sign in and prove the user’s identity using an email address and password.

Over time it will replace all other sign in routes including Government Gateway that many businesses currently use.

A user will automatically be asked to create a GOV.UK One Login. It will not happen for everyone at the same time, and you do not need to do anything unless HMRC ask you to.

When you are asked to create a GOV.UK One Login you may need to go through a new authorisation and identity verification process, so will need to have some identification documents ready such as a passport or driving licence. If you are a tax agent, or an organisation with a business tax account, you will continue to use Government Gateway until you’re asked to create a GOV.UK One Login.

At the moment, you can only use GOV.UK One Login to access some government services, which currently does not include VAT. In the future, you will be able to use it to access all services on GOV.UK.

Thankyou for reading our newsletter. If oyu have any queries please contact us we would be delighted to chat with to you, and help you with your VAT or Tax queries in any way we can.

Jane Deeks

Managing Director

jane@deeksvat.co.uk

‭+44 7710 553831‬

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