VAT Update – November 2024

In the recently published Guidelines for Compliance, HMRC set out its expectations for various elements of control and process for VAT registered persons to adopt. As set out in our last VAT Update, HMRC issued these guidelines to help to eliminate the possibilities of VAT reporting errors as much as possible. We now spotlight the section on manual adjustments (Part 8), and some of the most common instances of where these are applicable and take place outside of the digital VAT accounting records held for Making Tax Digital purposes. They include partial exemption and capital goods scheme (CGS) calculations, bad debt adjustments, import VAT accounting and sales made under one of the margin schemes.

As you will be aware the majority of VAT registered persons are required to maintain VAT records digitally in functional compatible software. Where adjustments are necessary, only the total adjustment, not details of the calculation underlying them, must be kept digitally.  The calculation though must be kept for audit trail purposes.

Partial exemption and capital goods scheme

A business which makes both taxable and exempt supplies must use a partial exemption method to work out how much VAT it can recover on its costs. Partial exemption calculations are typically carried out manually using spreadsheets. Similarly, CGS calculations are typically carried out on spreadsheets. HMRC has set out the reviews and controls they see as important to ensure that businesses minimise errors and can demonstrate they took reasonable care completing their returns.  These include:

1. Where practical, automatic linking on spreadsheets is preferable to ‘cut and paste’.
2. Spreadsheets should be version controlled to prevent outdated versions being used.
3. Access to spreadsheets or software tools should be restricted to authorised users.
4. Complex spreadsheets or software calculations should be documented to help establish an audit trail.
5. Sense checking to be used with comparisons to assure the recovery rate calculation.
6. Calculations must adhere to the applicable rounding rules.

Import VAT

Businesses may use postponed import VAT accounting (PIVA) or pay import VAT on importation and reclaim using the import VAT statement (C79) as evidence. PIVA has cash flow benefits and using one only method within the business could reduce the risk of error. The control points set out by HMRC include:

1. For PIVA, including the import VAT in the accounting period which covers the date the goods were imported.
2. Where possible use separate tax codes or indicators to identify PIVA transactions.
3. Retaining monthly online PIVA statements and C79 certificates as evidence.
4. Ensuring the net value of imports claimed under PIVA is included in box 7 of the VAT Return.

Correcting errors

Error corrections where the VAT is £10,000 or less, or between £10,000 and £50,000 but less than 1% of the total value of your sales, can be included on the VAT return for the period in which the error was detected. Finding that an identified error is below these limits and doesn’t require notification to HMRC can be a relief for businesses. However, when accounting for these adjustments, it is important to ensure this is done correctly. Suggested controls include:

1. Document errors with an explanatory note, including the date, reason and amount.
2. Ensure corrections include reversals where new invoices have been raised.
3. Include all applicable VAT corrections from previous return periods in line with the described limits.
4. Ensure VAT corrections do not duplicate previously submitted error correction notices.
5. Fixing the source of error to avoid re-occurrence, with appropriate regularity of review.

Comments

When looking at your processes and controls it is essential they ensure accurate VAT reporting and minimise risk. HMRC’s published expectations with respect to manual adjustments offer valuable guidance and should be considered along the general need to maintain digital VAT records under Making Tax Digital. With respect to error corrections in particular we would say that you should fix the source of error to avoid re-occurrence, regularly review where appropriate, and take a step back to consider if the figures make sense; these are all valuable control tools. Where sufficient controls and process are not being adopted, a business will likely struggle to demonstrate it is taking reasonable care, which could lead HMRC to conclude that the business warrants extra compliance checks and possibly higher rates of penalty for a failure to take reasonable care.

The VAT team at Saffery regularly works with clients to help them implement and maintain VAT accounting controls and process appropriate to the size and complexity of business they are operating. Please get in touch with John Butterfield, VAT Director, if you would like to discuss your approach to VAT accounting.

In Abbeyford Caravan Company (Scotland) Ltd (ACCSL) vs HMRC [2024] TC09324, the First Tier Tribunal (FTT) concluded that a company could use a new and more accurate method of apportioning output VAT between sales of caravans and sales of their removable contents.

The supply of a caravan is liable to VAT at either the reduced rate or zero rate, whereas the supply of removable contents (such as furniture, soft furnishings, utensils and electrical goods) are liable to VAT at the standard rate. This raises the question of how the price paid by the customer should be apportioned between the supply of the caravan (0% or 5% VAT depending on the size of the caravan) and the supply of the removable contents (20% VAT).

At the time of submitting its VAT returns, ACCSL used cost as the basis for apportionment, and applied the same approach adopted by the manufacturer in this case. However, ACCSL concluded that there were significant problems with this approach, and it undertook a detailed valuation exercise resulting in a much lower percentage of the cost being allocated to the standard-rated removable contents. HMRC accepted this method as being more accurate. Error Correction Notices were submitted by ACCSL covering four years. HMRC accepted the new method for future VAT returns but rejected past claims on the basis that no error had occurred. ACCSL appealed to the FTT.

ACCSL argued that HMRC’s guidance allowed for a retrospective change in apportionment methods provided the new method gave a more fair and accurate apportionment of the value.

HMRC argued that the original cost method, being accepted practice, was not incorrect and ACCSL could not retrospectively change methods. Further, they argued that guidance clearly states that another method may be used by a business if they did not think the old method was fair and accurate. It was ACCSL’s decision to originally use the old method, which it assumed to be right at the time, therefore no error had occurred.

FTT found that in accordance with the Supreme Court’s decision in K E Entertainments Ltd UKSC 2019/0094 there can only be one method of calculating the output tax to achieve fairness and equality. The difference in output VAT over the four-year period was substantial. The appeal was allowed.

Comments

A good win for the Appellant in this case, and an important one. HMRC’s acceptance that the alternative method used by ACCSL produces a more accurate result to value the removeable contents, is significant, and in applying K E Entertainments, the FTT came to what seems like the right conclusion.

Operators in the caravan sales sector should review their position and consider making a claim for overpaid output tax, by applying the valuation method adopted by ACCSL to determine whether it produces a significantly different result from the method which they have been using. It will be interesting to see whether HMRC appeals this decision or updates its own guidance as a result of the judgement.

If you are in the business of buying and selling caravans, please get in touch with Nick Hart, VAT Director, to discuss further.

The First Tier Tax Tribunal case of Procurement International Limited vs HMRC [2024] UKFTT 949 (TC) addresses the significance of issuing clear contractual terms when exporting goods to a place outside the UK.

Procurement International supplies goods to reward programme operators (RPOs), who in turn make onward supplies of the goods to employees. Employees that are entitled to receive rewards can select rewards via an online viewing platform operated by the RPOs. RPOs then place an order with Procurement International, who arrange for the goods to be moved from their UK warehouse to the address of the recipient.

The case concerned the VAT treatment of supplies by Procurement International to UK VAT-registered RPOs, where the goods were shipped to recipients located outside the UK. HMRC argued that Procurement International was not entitled to treat its supplies (as described above) as a supply of exported goods subject to the zero rate of VAT, as it was not the exporter of the goods.

HMRC’s principal argument was that there was a transfer of possession of the goods at the point the employee selected its reward. HMRC concluded that Procurement International was making two supplies, namely a supply of goods in the UK and then a separate supply of transport services.

The FTT rejected HMRC’s argument that Procurement International was not making a single supply citing HMRC vs. The Honourable Society of Middle Temple [2013] UKUT 250 (TC) and the ‘12 principles when considering a single or multiple supply’. There was, in the court’s view, a single composite supply of delivered goods. The FTT also cited the contractual arrangements that Procurement International had with its customers, stating that these clearly outlined the relevant terms and referred to when the change in possession and ownership of the goods occurred. Under those terms Procurement International was the exporter and its supply was therefore capable of being eligible for the zero rate of VAT as a supply of exported goods.

Comments

The FTT’s decision to reject HMRC’s argument that Procurement International was not entitled to zero-rate supplies of goods because it was not the exporter illustrates the importance of having clear contractual agreements in place, especially when considering the international movement of goods. Had the contractual terms not been clear on when title to the goods passed to the RPOs and then to the final recipient, Procurement International’s supplies may well not have been eligible to be treated as zero-rated exports.

International trade always presents challenges from a VAT perspective, and the importance of robust and comprehensive supply agreements should not be underestimated. It is important that the relevant teams within companies (sales, operations and finance) work closely together to ensure the terms are workable from a VAT perspective, and do not create additional VAT burdens or inefficiencies.

For assistance with all VAT aspects of international supply chains, please contact Nick Hart, VAT Director, for an initial discussion.

The recent First Tier Tribunal case, Sandra Krywald vs. HMRC [2024] UKFTT 00895 (TC) has highlighted the complexities surrounding the concept of reasonable excuse and the impact of taking a proactive approach to respond to errors in VAT filings.

In this case, Krywald was being penalised by HMRC for the late submission and payment of VAT returns.

The circumstances leading to the penalties initially began as Krywald’s outsourced bookkeeper was classified as a vulnerable person worked remotely during the Covid-19 pandemic. This factor contributed toward relevant figures needed for the VAT return submitted, being produced late, and in Krywald’s opinion, incorrectly.

Another bookkeeper was tasked with resolving these issues. However, the new bookkeeper declined to complete the work, ultimately informing Krywald that he was uncertain that the original figures were correct.

Despite these setbacks, Krywald acted proactively and contacted the HMRC general helpline. Krywald was informed incorrectly by HMRC that the VAT returns were required to have ‘opening balances’. Given the further complexity, Krywald was unable to submit the returns due to a further lack of confidence in the validity of the figures. Krywald acted to speak to a third-party VAT specialist and took on a new bookkeeping firm to identify and correct the errors in the returns and figures.

Considering the approach taken by the appellant, the FTT found that Krywald had a reasonable excuse for the late submission, noting that although reliance on a third party to prepare VAT returns is generally not considered to be a reasonable excuse, in this instance the reasonable care taken by Krywald was deemed sufficient. The fast response of Krywald to act on the situation was additionally highlighted by the FTT has being positive actions of a diligent taxpayer.

The FTT also recognised that the incorrect advice provided from HMRC (regarding opening balances) constituted special circumstances, resulting in delays out of Krywald’s control. The FTT concluded that the special circumstances themselves would have nullified the penalties even if Krywald had not been found to have a reasonable excuse.

Comments

This case is a clear illustration of the importance of acting on the discovery of a mistake or issues contributing towards a delay in filing a VAT return or making a VAT payment, highlighting that taking reasonable care can act as a mitigating factor when HMRC are considering penalties. This case also underscores that the impact of external factors, such as negligence from outsourced bookkeepers, can be viewed as taking reasonable care if proactive measures are taken to rectify the situation. In isolation the actions of a third party (or indeed lack of actions) is not reasonable excuse for VAT errors occurring or for late VAT filings. The underlying obligation to ensure VAT returns are submitted and paid on time rests with the VAT registered person, not the bookkeeper engaged to prepare the returns.

This case further sets a precedence regarding special circumstances, deeming that the provision of incorrect advice by HMRC can remove the burden of the penalties if the wrong information impacts on the preparation of VAT returns, and their timely submission to HMRC.

For further details please contact John Butterfield, VAT Director.