In this month’s VAT Update, we highlight the forthcoming deadline for non-resident VAT refund applications and also flag HM Revenue & Customs’ (HMRC) attempt to identify non-established businesses registered as resident businesses, and the reasons for it. We also take a look at two recent cases: one where a change in contractual terms still did not favour the taxpayer and one about demonstrating a trade or intention to trade.
Businesses who do not have a presence in the UK but incur UK VAT on costs for the purposes of their business can apply to HMRC for a refund of this VAT. The deadline for submitting a claim for VAT incurred in the year 1 July 2022 to 30 June 2023 is 31 December 2023. Non-resident businesses are encouraged to review the level of UK VAT incurred on business related costs (eg hotel costs for employees visiting the UK for business purposes), and submit a claim before this deadline. Once the deadline has passed, applications for the year ending 30 June 2023 will not be considered by HMRC, with the deadline applied strictly.
The process for applying for a refund of UK VAT requires the claimant to be registered as a business outside the UK and in a country which has a reciprocal agreement with the UK (which would allow UK businesses to apply for VAT refunds in that jurisdiction where applicable). Most common trading partners have this reciprocal agreement.
The non-resident business must not be (or be liable to be or eligible to be) registered for VAT in the UK, must not have a place of business, or residence, in the UK, or make any supplies in the UK (other than those subject to the reverse charge where the custom is liable to account for the VAT due, or transport services related to the international carriage of goods).
The usual UK rules on recovering VAT apply so that valid VAT invoices must be held. VAT cannot be recovered on the purchase of cars or on goods or services used for business entertainment or non-business activities. Additionally, the usual rules for partial exemption and attribution between business and non-business purposes must be applied when calculating the value of a claim.
If a non-UK business imports goods into the UK, and the importation of the goods and the prevailing circumstances do not create a liability to register for VAT, then the VAT payable on import may also be included in the claim.
Applications can be made electronically or by post, although be aware that the electronic system is still in its testing phase, and access has to be specifically requested from HMRC. If you’d rather make an electronic submission, your application to use the system must be made no later than 30 November, with the claim then being made no later than 31 December.
If you make a claim by post, make sure you keep evidence of your claim being posted before 31 December. Under UK legislation, a postal submission must be made using a specific application form. Original invoice documents must be submitted with the claim and copies aren’t accepted.
A certificate of status from the tax authority where the business is established must be submitted with a first claim and every 12 months thereafter. UK legislation requires that the certificate must either be form VAT66A or a similar form produced by an official authority in the non-resident’s country, which contains the same information set out in VAT66A.
Comments
The non-resident VAT refund process is a useful mechanism for non-UK businesses incurring costs in the UK. Preparing claims and gathering the necessary supporting documentation can be time-consuming, and the rules and conditions around these claims are strictly enforced by HMRC. Non-UK businesses planning to make a claim should make sure they understand the correct process and gather all relevant documentation well in advance of the 31 December deadline.
It’s not a requirement to appoint a UK VAT representative or agent to submit the claim, however the support of a UK VAT specialist is recommended to ensure your claim has the best opportunity of success.
Please contact Nick Hart (VAT Director) for further advice and guidance on the application process for obtaining a refund of UK VAT, for non-UK established businesses.
From January 2021, online marketplaces became liable for the VAT from sales made by overseas sellers on their platforms. HMRC has noted since then, there’s been an increase in the use of high-volume addresses being used as the principal place of business (PPOB) of UK VAT registered businesses. They believe that some non-established taxable persons (NETPs) using online marketplaces have incorporated in the UK and are providing UK PPOB addresses to these platforms to avoid any liability rules, potentially gaining an advantage over genuine UK businesses by not declaring VAT on their online sales.
To obtain an understanding of the extent of the issue, HMRC has announced it will be writing to certain VAT registered businesses to ask for evidence that they’re established in the UK. Failure to respond to this correspondence will result in HMRC treating that business as being non-established, and there’s the potential for their VAT registrations to be cancelled as a result.
HMRC will outline what evidence they’ll expect to see from the businesses to prove they’re established in the UK.
Comments
VAT registered businesses that aren’t established in the UK for VAT purposes may discover that the historic treatment of their income and expenditure is incorrect as a result of HMRC’s exercise. Where this is the case, those VAT registered business may need to disclose errors to HMRC to correct the historic VAT position. For example, a UK incorporated company that has no establishment in the UK and has historically been recovering VAT on expenditure incurred in the UK on their UK VAT returns. This incorrectly recovered VAT will need to be repaid to HMRC. Non-established businesses need to use a specific mechanism for reclaiming VAT incurred on costs in the UK. For some services, the suppliers may have incorrectly charged VAT if the company receiving the service is not established in the UK.
It seems HMRC’s proposed action is to combat the impact of online marketplaces not collecting and paying the VAT due on behalf of NETPs, and the competitive advantage this is giving NETPs against genuine UK businesses. It will be interesting to see the full outcome of HMRC’s campaign. There’s also the possibility HMRC may extend the campaign and contact businesses registered at common PPOB addresses, as there may also be instances of UK companies not actually having a UK establishment for VAT purposes. While in different circumstances the context to this may be more innocent than the context for online sellers, it may still indicate where some companies are incorrectly registered for VAT, and incorrectly reclaiming VAT incurred on costs.
If you think HMRC’s establishment campaign may impact you in any way, please get in touch with Nick Hart (VAT Director) to discuss your options.
In order to claim VAT on business purposes, VAT registered people must be able to support the claim with evidence of making, or an intention to make, supplies of goods or services that are subject to VAT at any rate.
In the case Heartlands House Limited [2023]UKFTT 747 TC08927 the First Tier Tax Tribunal (FTT) found on behalf of the appellant and concluded it had provided sufficient evidence. The case is an appeal against a decision by HMRC to refuse input tax recovery by the appellant on the basis that the appellant did not at the time provide sufficient evidence to support the claim that it had made, or intended to make, taxable supplies.
The appellant had registered for VAT in October 2018, with a registration backdated to 9 June 2016. The first VAT return period ran from the date of registration to 30 September 2019.
During this period, the business undertook a number of development projects, including a project to construct a residential extension, a project to refurbish several commercial properties, and a project to develop its own office premises. Evidence of the first two projects presented to HMRC included a tender proposal, subcontractor invoices, and invoices issued by the appellant (including both VAT invoices and pro formas).
The sub-contractor hired for the works on the three projects was dissolved in 2019 by compulsory strike off. It had not filed any corporation tax or VAT returns with HMRC. For two of the projects, the customers had become dissatisfied with the quality of the work and the progress made. Ultimately, the projects were never finished by the appellant, and there were disputes regarding the payments due from the customers.
HMRC argued that they couldn’t see any real evidence of taxable supplies having been made. They maintained that pro forma invoices issued in respect of one project didn’t correlate to invoices received from the sub-contractor, and it would be reasonable to expect invoices to the client to reflect the work done. Furthermore, HMRC contended that there was no planning permission and no correspondence or invoices to make it clear what was being paid for.
It was further argued that it wasn’t credible that the appellant performed several stages of work without receiving payment; there was no evidence of reasonable steps to pursue payment being taken until the input tax claim was refused.
Finally, the lack of information surrounding the sub-contractor used cast doubt on the evidence, as the majority of VAT had been incurred on their services. In HMRC’s view, it would be reasonable to expect the appellant to carry out a certain degree of due diligence to verify they were a suitable business to engage with. HMRC also argued that the failure to register for the Construction Industry Scheme (CIS) cast further doubt, as the payments to the sub-contractor were not declared through CIS returns.
Ultimately, the FTT found in favour of the appellant and concluded that sufficient evidence of making taxable supplies, or intending to make them, had been provided. The presence or otherwise of planning documentation was not considered a relevant factor. The FTT, not unsurprisingly, held that payments eventually received from customers with respect to the uncompleted projects, as well as communications with them regarding the termination of contracts, wouldn’t have been applied if works had not been agreed and started. While there was an identifiable lack of control and diligence with certain aspects of the appellant business and tax compliance, this didn’t mean there was no evidence of taxable supplies being made.
Comments
First returns that report a VAT refund being due to the taxpayer (where recoverable VAT on purposes exceeds payable VAT on supplies) are generally reviewed by HMRC prior to refunds being released for payment. HMRC will expect the taxpayer to provide sufficient evidence to support the VAT being reclaimed, particularly in instances where minimal and no supplies have been made. This is not new, but businesses can register for VAT without knowing that evidence to support the taxable supplies being made, or to be made, will likely need to be provided to HMRC, either as part of the VAT registration process or following submission of the first VAT return. Being ready with a comprehensive and robust bundle of evidence is recommended, as it can help HMRC’s enquiries run smoothly and potentially result in the timely repayment of VAT. Failing to prepare this evidence, or even being aware that it might be required, will lead to delays in receiving the VAT repayment or could even result in the repayment being rejected.
Please get in touch with Nick Hart (VAT Director) for further advice on the best type of evidence to provide for your specific circumstances, particularly if you’re in the process of submitting a first VAT return, on which you’ll report a VAT refund position.
The First Tier Tribunal (FTT) has dismissed an appeal by All Answers Limited (AAL), a platform company that facilitates the sale of academic papers, finding that the company was acting as a principal as opposed to an agent for VAT purposes.
AAL is an online business that sells essays, dissertations, and pieces of coursework to students. When a student orders an essay, the request is advertised on a separate portal, where writers (typically lecturers, teachers and PhD students) bid to draft the work.
AAL had previously been the appellant in an earlier FTT case, which later went onto the Upper Tribunal (UT): [2020] UKUT 0236 (TCC). AAL then argued that it was acting as an agent of the writers and simply provided a platform for students to connect with these writers, meaning it was not required to account for VAT on the full payment from the student. HMRC however argued that AAL was liable to account for VAT on the full payment, as it was the party making the supply of essay writing services to the student, and the UT agreed.
The UT found that AAL had a significant degree of control over the supply of the services to the student, and it was not simply acting as a passive intermediary. The UT also found that the commercial and economic reality was that AAL was the supplier of the essay writing services. AAL was responsible for marketing and selling the services, and it was also responsible for managing the relationship with the customers.
Following this, AAL updated the terms of its contracts with its customers and writers to be consistent with the position that it held an agency relationship both. AAL then filed an appeal to the FTT against an HMRC assessment for the relevant period, arguing that such revisions altered the VAT position.
AAL claimed that there were two contractual changes that supported its position that it was now acting as an agent:
- Firstly, the intellectual property created by the writer was no longer passed to AAL. Instead the writer retained these rights and the student paid for a restricted right over the work.
- Secondly, a clause in the contract between the writers and AAL was added, which stated that if the writer’s bid for a project was accepted, then a contract was created between the writer and the student.
The FTT found that the contractual changes did not alter any of the relevant facts as referred to in the UT’s decision. The FTT stated that AAL pays consideration to the writer for the supply of the service of preparing the essay. AAL then assumes liability for the obligation to provide the student with a limited right to use the essay and is paid in return. The FTT further considered that the terms of the updated contracts imposed those “core” obligations on AAL, and not on the writer, with the commercial and economic reality being that AAL supplied the essay writing service to the student.
AAL’s VAT position outlined in the UT decision remained unchanged; AAL was still deemed to be providing essay writing services to students, and this was reflected by both the contract and the commercial reality (which was largely unchanged despite the contract adjustments). The FTT added that, even if the wording of the contract had supported an agency business model, it still would have found that the commercial and economic reality of the arrangements was that AAL had supplied the service itself as a principal for VAT purposes. As a result of the FTT decision, AAL was liable to VAT on the full value of the fees paid by the students, not just on the net fees it retained after paying the writers.
Conclusion
The agent vs principal argument is regularly the main point in VAT tribunal cases, and it’s important that parties within a supply chain understand if they’re acting as agent or principal, as this will then determine what their VAT position is.
The FTT’s decision here is a reminder for businesses that operate a platform that connects other parties with each other in some way, that the VAT treatment of supplies will depend on the specific facts of the case. The commercial and economic reality will often overpower the wording of the contracts when determining whether the third-party platform is acting as an agent or principal for VAT purposes.
Businesses potentially impacted by the agent/principal provisions should carefully consider whether they’re required to account for VAT on the full payment received from customers. If you have agency agreements in place similar to those that formed the basis of this case, and you’d like to confirm that your VAT treatment of such supplies are correct, please contact Nick Hart (VAT Director).
