VATease Monthly VAT Newsletter July 2007

It's been quite some time since our last issue and we would like to welcome you all back! We hope that not too many of you have been affected by the recent inclement weather and floods and that you are all looking forward to your summer holidays.

Combating VAT Fraud in the EU - the way forward

This is the title of a report by the International VAT Association (IVA) highlighting how fraudsters thrive on the varying differences between EU states in their approaches to tax fraud.

Having been presented to the European Commission, it brings attention to the 'haemorrhaging' of Europe's VAT system. A cross-border VAT enforcement unit has been suggested together with a consistent application of standard compliance checks.

VAT Cash Accounting Scheme - Survey

As an alternative method for small businesses accounting for VAT, the VAT Cash Accounting Scheme (CAS) was introduced in 1987 and HMRC are now trying to establish the awareness and take up of this Scheme in order to support small businesses.

For those who may be unaware, the Scheme is available for any businesses with an annual turnover of up to £1.35 million (excluding VAT) as from 1 April 2007. Although it will not be useful for all, i.e. firms who don't issue invoices or may use other schemes, it does have the potential to improve the cash flow of small companies. A business using the Cash Accounting Scheme accounts for their VAT when payments are received or made instead of accounting for VAT when invoices are issued or received. This is naturally useful if a business has problems with bad debts or gives extended credit.

New EU Law Requiring Cash to be Declared by Travellers

Comes into force on 15 June 2007 in all EU Member States.

This is an attempt to prevent money laundering by anyone entering the UK from a non EU country or someone travelling from the UK to a non-EU country and who will be carrying €10,000 or more (or other currency equivalent). Individuals who will be carrying €10,000 (or equivalent) will be required to declare the cash at the place of departure or arrival in the UK.

Declaration forms will be downloadable via the HMRC website and available at all ports and airports. Failure to provide correct information or comply with this regulation may result in a penalty of up to £5000. Under the Proceeds of Crime Act 2002, if an officer has reasonable suspicions that it is intended for unlawful use, cash may be seized.

Increase in Rates - Climate Change Levy

As from 1 April 2007 the Climate Change Levy rates have increased as follows:-

· Electricity - £0.00441 per kilowatt hour

· Gas supplied by a gas utility or any gas supplied in a gaseous sate that is of a kind supplied by a gas utility - £0.00154 per kilowatt hour

· Any petroleum gas or other gaseous hydrocarbon supplied in a liquid state - £0.00985 per kilogram

· Any other taxable commodity - £0.01201 per kilogram.

Fruit Juice or Beverage?

A product of raw fresh fruit and/or vegetables was liquidised into a thick drink similar in consistency to cold soup and sold in disposable takeaway cups to the general public. The product was classified as a beverage by the Commissioners and was therefore standard rated. An appeal was made by the producer contending that their product was in fact a 'soft form of food'. The VAT and Duties Tribunal however decided that the product was indeed a beverage and therefore standard rated.

House Purchase and Construction

A house with planning permission for the construction of a second house on the same land had been purchased. The purchaser subsequently built the second house and then let it to friends in need of temporary accommodation. He then claimed a refund of tax under the DIY self build scheme. The claim was rejected as the Commissioners felt the individual had intended to build, let, then sell the property. It's construction therefore was treated as being "in the course of any business". An appeal was made by the owner arguing that he had intended to keep ownership of both properties for a period of time to pre-empt any problems with his current partner in the event of a break down, thus enabling both parties to have a property to live in if such an event occurred. His evidence was accepted by the Tribunal and the appeal was allowed. It was held that the letting of the newly built house "was not a transaction in the course of business letting, but a short term expedient". The owner's intention to move into the new house meant "that any possible business as regards the property never commenced".

CHAPS or BACS?

A trader was allowed an appeal by the Tribunal after his bank made a payment by BACS (which takes 3 days to clear) rather than CHAPS. It was found that neither his bank or the VAT office has explained to the trader's bookkeeper, the difference between the two methods of payment. This was found to be a reasonable excuse.

VATease Comment:

It is essential to advise Clients the importance of making the correct types of payment to HMRC in order to prevent any unnecessary late payments and ultimately worries!

Unclear Invoices!

More than £1.5 million input tax was reclaimed by a trader in respect of a purported purchase of a large quantity of CPU's. However an opinion was formed by the Commissioners that the purchase invoices held failed to meet VAT requirements and did not represent real transactions. The input tax claim was therefore rejected. The evidence was reviewed in detail by the Tribunal who dismissed the trader's appeal holding that the invoices submitted were invalid as they did not give a "description sufficient to identify the goods".

VATease Comment:

To avoid problems like this it is vital to be aware of the importance of all invoices and indeed all paperwork relating to transactions to be clear and detailed.

Does a Payment Mean When Money Leaves An Account or When it is Received?

A surcharge at the rate of 10% in the sum of £1,851.04 was appealed against by a Company distributing/supplying egg cartons and packaging to the farming industry throughout the UK. The Company had a short history of default with payments being received between 1 and 2 weeks late. In respect of the current default the due date was 31 May but as the Company used the electronic payment method this date was extended to 7 June. The payment was received a day later on 8 June.

The Appellant had two arguments against the default surcharge - firstly he had considered that he had paid by the due date as his bank was instructed on 6 June to pay the VAT. In his opinion once the money had left his account, the outstanding VAT bill was paid. He did not consider that it must also be received by HMRC before it was classified as being paid. He also felt that £1800 was an excessive amount for being just one day late. The Appellant was unaware that by using the electronic method of payment it would not be received in time.

Because it clearly states on the VAT returns ?"You could be liable to a financial penalty if your completed return and all the VAT payable are not received by the due date" it became unlikely that the Appellant, as a managing director of the firm would be so naïve as to think just because the funds had left his account it was now in the hands of the Commissioners. The appeal was finally dismissed as the Tribunal felt there was no reasonable excuse for late payment.

Jolly Hockey Sticks!

A sports club that had a number of artificial hockey pitches constructed along with other sporting facilities. They appealed against a decision from the Commissioners which stated their supply of a licence to use the pitches was a VAT exempt supply. The sports club contended it was a standard rated supply.

Legislation sets out that exemption can apply to the grant of facilities for playing sport where the grant meets certain criteria, one of which is that the grant is for a continuous period of use exceeding 24 hours and the intervals between each period of use is not less than one day and not more than 14 days.

It was the meaning of the continuous period of use and the meaning of 'interval between each period of use' the Tribunal examined in detail.

The result of this was that the Tribunal unanimously allowed the appeal. It was also interestingly noted that it was the Commissioners who claimed that the exemption rules apply and therefore it should be for them to prove exemption.

MOT Charges

A motor mechanic appealed against an assessment of £2,475 being VAT charged on amounts invoiced for MoT tests. The Appellant was not approved to carry out tests himself so he outsourced customer's vehicles to two approved testing stations. The Appellant charged the customer £44 and paid the £35 test fee to the testing station and retained the remaining £9.00 himself. He did not itemise his invoices although his customers were fully aware that another party was involved in carrying out the MoT test.

It was ultimately decided that as the Appellant was lawfully unable to provide or supply a service (i.e. an MoT) he cannot be made responsible for paying the VAT. He can only be liable for what he provides or supplies and therefore only becomes liable for the remaining of the invoice (i.e. £9.00). The appeal was allowed but costs were not.

Lap Dancing - Supply of Goods or Services?

A series of "gentlemen's clubs" that members of the public could gain admission to for a fee and be able to socialise, drink and observe partially clad women dancing, appealed against the Commissioners contention that the services supplied were by the club and not the "ladies".

The arrangement at these clubs was that for a further fee, the customer could have a woman perform a private dance and an agreement could be made between dancer and customer for a 'sit-down' where the woman would socialise for an hour with the customer. The dancers were all self employed and paid a fee to the club in order to operate, they paid a further sum of £40.00 for every 'sit-down' session. All the money paid for the dances and sit-downs went to the dancers. Basically the Commissioners argued the girls were acting as agents for the club, whereas the club strenuously argued they were all self employed and were just using these clubs as their place of work. The appeal was allowed and it was found that the Tribunal had erred in its analysis.

Application for Costs

Two motor companies made repayment claims in 2004 for overpayment of output tax on demonstrator cars. The claims were rejected but the companies appealed. The appeals were due to be heard in February 2007 but in January the Commissioners accepted the claims. After finding no justification for the delay by the Commissioners in this matter, the Tribunal granted application for costs to both companies.

VATease Comment:

Lack of resource or in some instances through pure strategy of the Commissioners can result in unfavourable decisions made against businesses being pulled at the last minute. This case provides hope for those businesses who have put in time and money to defend a disputed decision which could perhaps have been agreed with the Commissioners a lot earlier.

Conversion of Unoccupied Property

A property vacant since 1990 had been converted into living accommodation and the owner claimed a refund under the DIY self build scheme. The claim was rejected by the Commissioners as it had previously been used as living accommodation but on appeal, the owner's evidence that it had been vacant for such a long period of time had been accepted, the Tribunal allowed the appeal.

VATease Comment:

If you don't ask - you don't get!

Transfers of Going Concerns

Three hotels were sold from one Company to another. A ruling was issued that the seller was required to account for output tax on the sale. The company appealed as the sale was the transfer of a going concern and no VAT was chargeable. The Tribunal allowed the appeal even though the purchaser entered into a 'leaseback' arrangement - this did not alter the fact that the sale went through as the transfer of a going concern.

The Fruits of Ill Gotten Gains!

A money service business in London was used to launder almost £6 million. Father and son ran the business. When two men carrying a box of fruit were stopped at the premises by investigators and £100,000 in cash was found under the fruit. About £200,000 of cash deposits made were undeclared takings from a nearby greengrocery business. Prosecutors argued that the greengrocer had siphoned off this undeclared turnover and was putting it through this money service business. Once records were scrutinized it was found that approximately £60 million had been deposited through the money service business but a lesser amount was shown in the daily reconciliation sheets. The Court of Appeal, Criminal Division allowed an appeal by Revenue and Customs Prosecutions Office against a previous ruling and that the persons involved, obtained a pecuniary advantage as a result of criminal conduct and the fruits of the ill gotten gains could be criminal property for money laundering purposes.

Value Added Tax (Reduced Rate)

As from 1 July 2007 the reduced VAT rate of 5% will now apply to:-

· The supply of pharmaceutical goods to assist in Stopping Smoking Tobacco products (the reduced rate in this instance will only apply till 30.06.08

· Supply of mobility aids by someone installing them for domestic use by a person over the age of 60.

· Supply of services of installing mobility aids for the benefit of someone over 60 and for domestic use.

New Requirements to VAT Invoicing

As from 1 August 2007 the EC Invoicing Directive will come into effect. Briefly these changes will mean that invoices for zero rated dispatches (exports to other EC member states) and VAT exempt transactions or reverse charge transactions will now need a legislative reference included. In addition to this, these new rules will also apply to TOMS and second hand margin scheme invoices.

Drop in UK Exports

According to HMRC estimates, a news release based on the new EU27 country group (which includes Bulgaria and Romania), shows that for the last quarter of 2006 and the first quarter of 2007 most of the UK's total exports dropped.

Match of the Day?

A well known premier league football club renewed contracts of existing players and took on new players. The majority of these players had agents acting on their behalf who would do the negotiations. The agent then charged a fee to the Club including VAT which they recovered as input tax. The Commissioners disallowed the deduction of input tax by the club stating that this was a supply of service to the player only. The Club was therefore assessed accordingly. The Club's appeal was dismissed by the VAT and Duties Tribunal as the agent was not acting for the Club and that the VAT claimed was therefore not the Club's input tax .

The Club appealed against the tribunal's decision saying it was fundamentally flawed because it made the mistake of basing its analysis on what contracts stated instead of what actually happened.

VATease Comment:

Time and again problems arise because people still tend to go by what is written in contracts rather than by what is actually carried out in practice. It is vital to make clear to clients that contracts are not always binding - it can be a case of "possession is 9/10's of the law" - always consider what 'normal' practice takes place.

Let's Get off the Carousel (Fraud)

Earlier this year a House of Lords committee warned that attempts by HMRC to stamp out carousel fraud are unsustainable and they say that fraud will only be stopped if there is a total overhaul of the European VAT system. EU finance ministers have now given the European Commission until the end of the year to have definite policy proposals to tackle this problem.

One proposal at addressing this problem is having taxation in the member state of departure instead of the destination country. Naturally there will be possible obstacles with this system, not least the complexities of introducing a new system of reimbursing VAT to the importing country, tax competition and not to mention even more new methods of fraud. The International Vat Association have pointed out that as ever, some fraudsters will take advantage of new VAT regimes but that generally cross border cooperation between member states with an import/export database will go a long way to alleviate this problem.

Happy Holidays!!

We're off on our holidays for a well deserved rest and expect to come back fully charged and fighting fit!

Look out for our next issue at the end of September.

Adios Amigos

If you require further information please contact us on 0121 778 4299.

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