VATease Monthly VAT Newsletter March 2007

We decided not to issue a newsletter in January and February, as we did not want to add to the majority of our readers' mountain of tax returns in January and then the resultant backlog in February! We hope you are suitably refreshed and now able to give a little of your precious time to catching up with the fiscal theme park that is VAT.

Not quite Lemony Snickett ……

As always there has been quite a lot of case law in respect of whether a series of unfortunate events for business constitutes a reasonable excuse for a default surcharge. Not quite as entertaining as Lemony Snicketts' but nevertheless highlighting some interesting issues.

In Pollecoff Solicitors the Tribunal found that despite Her Majesty's Court Service (HMCS) paying Pollecoff late (a mixture of lost cheques and dilatoriness) for their publicly funded criminal work, this was not a reasonable excuse.

The VAT represented 13% of turnover and the Chairman found there was sufficient other income to meet the outstanding liability. Furthermore he stated that "given the uncertainty surrounding the authorisation of payment and the fact that the payment could be delayed, it would perhaps have been sensible for the Appellant to have arranged for a cash accounting scheme for payment".

Cedar House Hotel Company Limited suffered from cash-flow problems following a flood which wiped out the hotel's telephone system. Although the hotel failed to pay its VAT on time for the year December 2004 to December 2005, it only appealed in connection with the maximum level (15%) default surcharge for period 12/05.

The Tribunal observed "whereas an unfortunate event or circumstance may give rise to a reasonable excuse in relation to one quarter, its ability to support a reasonable excuse in later quarters may be more limited because by then it would generally be reasonable to expect the taxpayer to have made arrangements to cope with the need to pay the tax".

In view of this, reasonable excuse was found for the first three periods after the flood but not for periods after.

MTT Consulting appealed against two default surcharges which were as a result of payments made by electronic transfer being two days late. In respect of the first default surcharge, the payment was only transferred to Customs the day before the payment deadline therefore not allowing the standard 3 days for processing. In view of this , no reasonable excuse was allowed.

The second default occurred because the VAT liability was in excess of £100,000,- the bank's on-line transfer limit. On phoning the bank and being advised by the commercial manager, the taxpayer transferred the limit of £100,000 on 5 May, (being only 2 days before the deadline of 7 May) to Customs and faxed a letter to the bank to authorise the remaining liability of £3,954.41. The bank then suffered a power cut so this payment was not processed until the next working day, which was 8 May.

The Tribunal found a reasonable excuse for the amount of £3,954.41, being the amount affected by the bank's power cut, but for the £100,000 there was no reasonable excuse because the transfer was still only actioned on 5 May, thus not allowing the 3 days for processing.

Mr Newman a cartoonist and comedy writer submitted payment for a VAT Return that was only received by HMRC on 8 March, (being one day after the seven day extension allowed for electronic payments).

The Tribunal heard there had been a combination of family illness, absence of the bookkeeper for a longer period than expected and this coupled with Mrs Newman's misunderstanding of requirements for an estimated return had resulted in late payment.

Despite this, the Tribunal found that by the very fact Mrs Newman called Customs on 4 March about the Return, she was aware of her responsibilities and there was therefore no reasonable excuse.

In two further Tribunal cases where the decisions were not required to be recorded in written documents, it was found that mild forgetfulness is not considered to be a reasonable excuse nor is the doubling of turnover over a period of four months.

Mitigation of Late Registration Penalty

A late registration penalty was issued in the sum of £6,268 to Leslie Ringer.

At the Hearing Mr. Ringer tried to argue his accountant had failed to advise him about the VAT liability. Furthermore he put forward that HMRC should have warned him earlier about the potential registration.

Although the Tribunal found these were no reasons for mitigation, the fact that Mr. Ringer co-operated fully with HMRC in providing details of the outstanding liability was. The penalty was therefore mitigated from £6,268 to £3,760.

Cash Bingo

A Revenue & Customs brief has been issued about participation and session fees paid by cash bingo players and tells us HMRC's policy on calculating these fees for VAT purposes.

If you have a client involved in the bingo trade and need further information, please contact VATease and we will be happy to help.

VAT Fraud Tackled

European law enforcement and tax authorities have promised greater cooperation in an effort to fight the multi-billion pound crime spree hitting the VAT system. They have pledged that:-

· Information will be exchanged between Member States quicker and more efficiently.

· Each Member State will have designated contact points on criminal and civil investigations.

· A common approach is to be developed by Member States to civil interventions under EU VAT law, together with an improvement of both the quality and speed of the response.

· An MTIC fraud threat assessment is to be developed by Europol to support targeting and prioritisation of criminal interventions.

Beverage or Not?

A company producing "shots" of concentrated fruit and vegetables were issued with a ruling that these "shots" were in fact beverages and therefore excluded from zero-rating. The company however, appealed stating that these products were not beverages but a means of boosting the recommended daily intake of fruit and vegetables, which therefore would qualify for zero-rating. The tribunal accepted this argument and allowed the appeal, finding that the shots had neither been sold nor consumed as a product to be drunk for pleasure and were therefore not within the definition of a beverage.

Method of Apportioning Input Tax

A physiotherapy and sports clinic in Farnham applied to Customs to use a 'floor-based' method for apportioning its input tax. Customs rejected this application and the clinic appealed. The Tribunal said the partnership's proposal "did not achieve a fair and reasonable attribution and was not a reasonable method" and therefore dismissed the appeal. On dismissing the appeal the Tribunal said the partnership's proposal would achieve "something over a 70% recovery when half the building is used to make exempt supplies".

Vatease comment:

Floor area methods continue to be quite controversial when it comes to negotiating a special partial exemption method. However from 1 April, it will be possible to submit a method declaration; a new requirement for businesses to declare their proposed method is fair and reasonable. It is thought this declaration will speed up special method approval but there are also clear worries that HMRC could deem an approved method as not being fair and reasonable and then retrospectively assess for input tax which in their opinion has been recovered incorrectly. VATease hopes HMRC will only look at retrospection when it can be proved the declaration was made in bad faith.

Tour Operators

A holiday company operated the Tour Operators' Margin Scheme (TOMS) and wanted to deduct charges they had paid to credit card companies for credit card transactions. An assessment was issued by Customs as it was decided that these charges were not deductible. The company appealed arguing that these charges should be regarded as a direct cost of making the relevant supplies. The appeal was dismissed by the Tribunal who ruled that "the relevant charges were an indirect cost and were not deductible in the TOMS calculation.

Registration and Deregistration Thresholds

As from 1 April 2007 the VAT registration threshold will increase from £61,000 to £64,000 and VAT deregistration will be increased from £59,000 to £62,000.

Scale Charges of VAT on Fuel

Apart from new thresholds for registration and deregistration, from 1 May 2007 there will be new VAT fuel scale charges. For further information regarding these changes please follow this link Revenue and Customs

Help for Smokers!

Trying to stop smoking? VAT has now been reduced to 5% with effect from 1 July 2007 on all "over the counter" smoking cessation products.

Transfer of Going Concern

Changes to record keeping as from 1 September 2007 for businesses transferred as a going concern will mean that the seller retains his records apart from the few cases whereby the purchaser retains the seller's VAT number.

Retail or not Retail?

A person selling ice cream and milkshakes from a kiosk in a public square appealed against a decision that classified his business as "catering services including restaurants and takeaways" for the flat rate scheme. The practical implication of this being a 10% difference in the flat rate percentage. It was argued that because the milk shakes and ice cream were prepared by the Appellant and he also provided two tables and six chairs, the business should be classed as catering. However it was counter argued that no hot food could be sold from the kiosk, there was no element of service of food, no crockery or cutlery were provided nor waitress service therefore no catering services were provided. The appeal was allowed and the business is now correctly classed as "retailing food, confectionery, tobacco, newspapers or children's clothing" at 2%.

Auction Sites

Beware when selling your old tools, toys, ornaments, clothes etc on eBay ………

As part of the crackdown on tax evasion HMRC is monitoring all internet auction sites including eBay. As with any other sole trader, sellers on these sites must pay income tax, National Insurance and possibly VAT. Traders plying their wares online must, within three months of starting to trade, register their activities or face £100 penalty and interest charges on any unpaid tax.

Chewing the Fat

Weight Watchers as we all know, provide weekly weigh- ins and meetings for people wishing to lose weight.

But what is the liability of their supplies?

1. A standard rated supply of a weight loss programme or ….

2. A multiple supply of zero rated printed matter and standard rated weight loss programme?

The Tribunal found, after a hearing of 4 days that there is indeed a multiple supply, with apportionment being necessary between the standard and zero rated elements.

Hot Chillies

Chilli Club Restaurant fitted out a shop to make, in the Tribunal's words, "an exceedingly attractive Thai restaurant".

HMRC disallowed the input tax incurred on the fit out because it was a supply of services made prior to six months before the VAT registration date, (under the pre registration input tax rules).

The Tribunal firstly considered whether the fit out was indeed a supply of goods or services. If a supply of goods then the VAT would be recoverable because there is a three year period to recover VAT on goods prior to the registration date. It was found that the supply was indeed one of services and therefore correctly refused by HMRC.

The Tribunal then went on to consider whether the date of registration should be amended in order that the input tax became recoverable under the pre registration input tax rules. Although they quashed HMRC's decision not to allow retrospective alteration to the registration date, they adjourned the Hearing for HMRC to consider whether correction of the VAT registration date was appropriate.

Incorrect Date of VAT Registration

A self employed electrician became liable for VAT registration in August 2003 but upon submitting his application for VAT registration in August 2005 the certificate had the mistaken effective registration date as August 2005. The mistake was quickly noted by the Officer concerned who issued a revised certificate. In June 2006 a mis-declaration penalty in the sum of £2,572 was issued against the electrician, however he argued that the incorrect date on his VAT certificate was HMRC's error and therefore HMRC had to carry the consequence of their mistakes. Regardless of the date of the certificate (which HMRC are not in fact required to issue), the Appellant was still liable for VAT from 2003 and the Tribunal therefore dismissed this part of the Appeal.

An assessment for late notification of registration was also issued against the electrician in the sum of £2,284 as he only registered for VAT in August 2005 although being liable since 2003. In his defence, the Appellant submitted all his paperwork promptly.

The Tribunal accepted the argument and finally allowed the appeal against the late notification penalty saying that he had been imposed with double penalties for the same default. The late notification penalty was ultimately reduced to nil.

VATease Comment:

A point to remind your clients of; irrespective of whenever they become liable for VAT, HMRC are not required under statute to issue a certificate and this has no legal force. Moreover, the date on the certificate does not necessarily determine the date from which a person becomes liable for VAT.

Notice of Security

HMRC recently issued a notice of requirement to give security to Mr. Geoffrey David Sear in the sum of £42,470.27.

This was as a result of a late payment of one return and two subsequent returns submitted without payment.

The Tribunal upheld the notice of security despite the Appellant stating the decision was unfair and would lead to unnecessary hardship if not bankruptcy.

VATease Comment:

This is a reminder to businesses who have a poor compliance record that HMRC do have the power to request money up front in lieu of a future VAT liability

And finally …………

Stiff Decision?

Mr Tomlinson, a VAT registered trader in 'health products' advertised Viagra on the internet. The orders he received from customers were then passed onto a doctor who then issued private prescriptions. He appealed against an assessment raised by HMRC in the sum of £11,398.95 contending he was basically an agent and therefore outside the scope of VAT.

HMRC argued he was operating a business. He actively marketed Viagra on a regular basis and on sound business principles, as per the business principles laid down by Morrison's Academy Boarding Houses Association Tribunal Case.

In addition to the assessment being upheld, the Tribunal also awarded costs to HMRC because the Appellant did not turn up at the Hearing nor furnished sufficient explanation for his absence.

May we take this opportunity to wish you all a very happy Easter!

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

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