The recent Upper Tribunal case TalkTalk Telecom Limited v HMRC [2024] UKUT 00284 has highlighted complexities regarding VAT accounting and prompt payment discounts. The issue in this case was with the appellant’s ‘Speedy Payment Discount’ (‘the Discount’) which enabled customers paying within 24 hours of having received a service to receive the Discount of 15%.
TalkTalk accounted for VAT on the discounted amount even if the customers did not pay within 24 hours (and in fact only approximately 3% did). HMRC disagreed with this approach and assessed for under-declared VAT on the basis that the consideration for the supply by TalkTalk was only reduced if the customers paid within 24 hours and were therefore eligible for the consideration to be paid for the services received to be reduced. When this was not the case, VAT should be accounted for on the full consideration, in HMRC’s view. The First Tier Tribunal agreed with HMRC, and the case has now been upheld by the Upper Tribunal.
The contractual arrangements between customer and TalkTalk in this case was key. The terms which applied when customers did not take up the offer of the Discount did not provide for a prompt payment discount. The services supplied to the customers who did not accept the Discount offer were not provided on terms allowing a discount for prompt payment. The terms only changed so that the Discount became available when the ‘speedy’ payment was made. VAT was therefore due on the full consideration payable when the customer did not pay within 24 hours.
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The TalkTalk case relates to VAT accounting periods which pre-date current legislation which applies to prompt payment discounts. It is however a reminder that care should be taken when accounting for VAT when discounted consideration is being paid by the customer.
From April 2015 (and earlier from May 2014 for the broadcasting and telecoms sectors), VAT is accountable on the amount paid by the customer. Suppliers can handle this in two ways from an invoicing perspective. They can raise an invoice for the full amount payable without the prompt payment discount and charge VAT on this basis, with a credit note then issued to correct the VAT position should the customer make payment within the terms to receive a discount.
Alternatively, the invoice is raised within the discount terms included and a statement indicating the customer can only reclaim the VAT actually paid (where applicable). It is common for such invoices to also include the net, VAT and gross amounts payable should the customer pay within the prompt payment discount time limits. Whilst TalkTalk is based on previous rules, the case does serve as a timely reminder for businesses to ensure their VAT accounting with respect to prompt payment discounts, and the corresponding invoicing, is correct.
For assistance with VAT accounting when prompt payment discounts are offered, please contact Nick Hart, VAT Director to discuss.
HMRC has recently released its Guidelines for Compliance which outlines expectations and suggested good practice in respect of VAT accounting and VAT compliance processes. HMRC consider that the guidelines will help businesses to establish an appropriate tax control framework, the aim of which is to eliminate the possibilities of errors as much as possible.
The guidelines are extensive and touch upon many aspects and elements of a business, and what the control points should be in HMRC’s view. One of the key recommendations is to have a well- documented VAT compliance process through which key risk areas are successfully managed through appropriate controls and procedures, taking into account roles and responsibilities of employees and outsourcing to third parties. HMRC’s hope is that the guidelines will assist businesses in improving VAT processes where weaknesses or deficiencies have been identified, so less errors occur, which in turn will help to reduce the risk of VAT assessments, interest, and penalties.
The guidelines are based on the below subjects:
- Parts 1 and 2 – purpose and general approach,
- Parts 3 and 4 – sales processes and transactions and purchase process and transactions along with standard VAT/ accounting adjustments (credit notes, reverse charges, bad debt relief etc.),
- Part 5 – employee expenses,
- Part 6 – accounting system VAT configuration and procedures,
- Part 7 – VAT reporting and checks,
- Part 8 – manual adjustments,
- Part 9 – outsourcing, and
- Part 10 – correcting errors.
In this Update we are spotlighting the section on employee expenses (Part 5), which is concerned primarily with VAT recovery matters for reimbursed employee costs such as travel, accommodation, food and hospitality. Businesses will often use a process or system to capture and manage employee expense claims, which is outside the main accounting system. For some systems or platforms, VAT configuration is possible within it which create efficiencies, but the set-up needs to be correct. Where VAT codes are associated with specific expense types, a review is recommended to ensure that configuration is correct and takes into account VAT recovery rules, particularly those where there is some complexity such as road fuel, EV vehicle charging costs and other motoring costs, entertainment, and mobile phones and internet charges.
There are other important elements such as the retention of supporting invoices and receipts, many of which are only kept electronically with the originals being discarded. Further, employees would need to be trained or have access to training materials which outline how employee expense claims should be correctly entered, and which options to choose for each line item, which could have a bearing on the correctness of VAT recovery.
Given the risk of the initial data input not being accurate, HMRC expect to see the appropriate reviews and controls being implemented to ensure issues with the original input which would result in VAT being incorrectly claimed, are identified and corrected.
Businesses which adopt a more manual approach to their employee expense procedures, are no less prone to risk or errors, and the need for appropriate reviews and controls is equally significant.
Particular emphasis should be placed on a process which seeks to uphold the general principles of VAT recovery, whilst also focusing in particular on specific risk areas, where errors are more commonly identified. It would be recommended that the following risk areas are appropriately addressed within the controls and processes:
a) Ensuring VAT is not being claimed on entertainment costs, but is being claimed where the purpose of the cost is staff entertainment, and hosting overseas clients in the UK for a business meeting.
b) 50% VAT recovery restriction is being applied to leased cars, or the hire of cars for a period of 10 days or more.
c) VAT on road fuel costs is being claimed using a recognisable approach, which takes into account private use.
d) Travel costs such as airfares and trains are being corrected coded as zero-rated rather than subject to the standard rate of VAT.
e) Use of mobile phones and other electronic devices, taking into account private use where applicable.
These are areas which HMRC would typically consider as part of any VAT assurance review.
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Generally speaking, the Guidelines for Compliance serve as a reminder to business no matter how small, or how straightforward from a VAT perspective, that appropriate controls and processes should be in place to ensure VAT reporting is accurate and the risk of errors is minimised.
If you are currently implementing a new accounting or ERP system, or considering doing so, or you are going to be using a new expense reporting platform, it is highly recommended we work with you to ensure there is the appropriate VAT set-up, and also to test existing VAT compliance controls to identify any weaknesses or risks.
Now that HMRC has published the Guidelines, any errors which do occur which indicate the appropriate controls and processes not in place as recommended by the Guidelines, HMRC is perhaps more likely to levy penalties which would otherwise not have been the case.
In future VAT Updates we will be spotlight other elements of the Guidelines, and we are currently advising clients on what the Guidelines mean for them within the context of their particular business.
For further details and support, please contact John Butterfield, VAT Director.
A recent case has highlighted that reclaimed VAT on legal costs incurred is not always a straightforward matter and care should be taken when considering whether such VAT is recoverable or not.
In Visual Investments International Limited v HMRC TC/2022/13121 the issue was whether legal costs incurred by the appellant (‘VILL’) had a direct and immediate link to the taxable supplies made and whether indeed the services had been solely supplied to and received by the appellant. HMRC’s view was that the VAT was not recoverable and raised assessments which VILL appealed. The business activities of VILL comprised management services and the company argued that the legal costs related directly to ensuring its business interests were being protected. The legal fees were incurred because of a commercial dispute with respect to an underlying transfer of shares to a joint venture vehicle in which a company in which VILL held majority shares in, was a minority shareholder.
In considering the position the First Tier Tax Tribunal (‘FTT’) concluded there was no direct and immediate link between the legal costs and the management services being supplied by VILL. The FTT also remarked that it considered there were a number of recipients of the legal services, meaning VILL would not have been entitled to reclaim all of the VAT even if the costs in part had a direct and immediate link to the taxable supplies it was making. The FTT dismissed the appeal.
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Legal costs can be incurred by a business for a variety of different reasons, and businesses which are otherwise able to fully reclaim the VAT they pay on costs should take particular care not to assume that the VAT paid on legal fees is recoverable. The position comes down to basic principles of who has engaged the law firm to receive legal services, and whether those services have a direct and immediate link to taxable business activities of the person to whom the services have been supplied. This is not always straightforward, and the matter should not be determined by the invoices received alone. In terms of the party receiving the supply of legal advice, engagement letters would be a reasonable starting point to determine who the recipient is likely to be. If that is the party which is seeking to reclaim the VAT, it should then consider whether there is a direct and immediate link between the costs and taxable business activities that party makes.
If you are currently incurring significant legal fees of any sort and are unsure of your entitlement to reclaim the VAT being paid, please get in touch with Nick Hart, VAT Director, to discuss further.
