In Farmyard Funworld Ltd v HMRC [2015] TC04741 the First Tier Tribunal (FTT) agreed that a lack of funds caused by an unexpected heatwave could constitute a reasonable excuse for a late VAT payment.
VAT Cases & News
Summaries of interesting VAT cases for the SME owner.
In John David Pryor t/a Purfleet Post Office v HMRC [2015] TC04702 the First Tier Tribunal (FTT) agreed that HMRC had not been unreasonable to deny retrospective relief from a VAT Flat Rate scheme despite the hardship caused.
Background
Mr Pryor ran a Post Office and shop from October 2006 and applied the flat rate scheme (FRS) percentage of 2%, correctly describing his business as 'retailing food, confectionary, tobacco, newspapers, or children's clothing'.
He failed to apply the increased FRS percentage of 4% for this type of business when it was introduced in January 2011.
In March 2014, HMRC notified Mr Pryor of the increase in the FRS percentage and issued an assessment to collect underdeclared VAT of £13,869.
Mr Pryor wrote to HMRC to withdraw from the FRS in March 2014 however his request for retrospective withdrawal was denied by HMRC as there were no exceptional circumstances which would allow a departure from the standard policy of refusing such requests.
Mr Pryor appealed this decision on the grounds that:
- HMRC had not notified him of the percentage change when it occurred in January 2011.
- HMRC could reasonably have checked the Returns earlier which would have resulted in a lower underpayment.
- The hardship caused by the payment of the assessment amounted to exceptional circumstances and should have enabled HMRC to agree to his request.
Decision
In making its decision to dismiss the appeal, the FTT
- Agreed that it would be helpful if HMRC could notify traders of a change in percentage, but noted that there was no statutory obligation for them to do so.
- Confirmed that the onus was on the taxpayer to pay any underdeclared VAT as a result of using the wrong percentage.
- Accepted that the business was in a worse position as a result of refusing the application to withdraw but that this did not amount to exceptional circumstances, and nor did any hardship that followed.
The jurisdiction of the FTT was limited to considering whether HMRC's decision was reasonable, and in this case the tribunal agreed that it was.
Case reference John David Pryor t/a Purfleet Post Office v HMRC [2015] UKFTT TC04702
In New Deer Community Association v HMRC [2015] UKUT 604, the Upper Tribunal (UT) agreed that a building consisting mainly of changing rooms and showers was not used as a ‘village hall or similarly’.
In David Love Marketing Ltd v HMRC [2015] TC04644 the first tier tribunal (FTT) allowed the taxpayer’s appeal against HMRC's cancellation of its VAT registration on the grounds that whilst there had been no taxable sales, commercial activities did continue.
HMRC may cancel a VAT registration with effect from the day on which it ceased to be registerable (VATA 1994, Schedule 1, Paragraph 13).
The last evidence that HMRC had of any taxable supplies made by David Love Marketing Ltd (DLM) was a receipt on 22 June 2010. In December 2013 HMRC cancelled the VAT registration with effect from 23 June 2010, issuing an assessment for input VAT reclaimed on subsequent VAT returns submitted for periods up to 30 April 2013.
Although the scale of the business had reduced from 2007, DLM contended that it continued to carry on its business after that by entering into agreements with yacht brokers, making one sale and narrowly missing out on at least one other. DLM had also written to the editor of Yachting Monthly on 6 October 2011, trying to convince him to run an editorial on its yachts.
DLM also argued that the potential for making sales of new boats still existed but the nature of a trade involving high-value items was that sales can be infrequent and the trade was affected by the recession.
The FTT agreed that there had been evidence of business activity after 23 June 2010, although there was none since 6 October 2011, and also noted that it ‘was perfectly possible for a person to be carrying on an activity with reasonable or recognisable continuity and with the intention of making taxable supplies for a substantial consideration but not be successful in achieving any sales’.
A person is entitled to be registered for VAT if they make taxable supplies or are carrying on a business and intend to make taxable supplies in the course of that business (VATA 1994 Schedule 1, Paragraph 9).
The FTT concluded that HMRC had not been entitled to cancel DLM’s registration from 23 June 2010, as there had been evidence of activity until October 2011.
Comment
This case is noteworthy because the FTT agreed that a commercial business could exist for a considerable period of time despite the absence of any sales. It also re-confirms the importance of keeping evidence of activity even where that activity is not directly linked to any specific cost or receipt.
Case reference: David Love Marketing Ltd v HMRC [2015] UKFTT TC04664
In Mrs Janine Ingram v Church Commissioners for England [2015] UKUT 0495(LC) the Upper Tribunal Judge agreed that VAT charged on services provided to residential landlords by a managing agent was properly charged and could be passed on to the tenants.
The tenant, Mrs Ingram, had misunderstood the scope and purpose of the concession included in VAT Notice 48 relating to service charges.
Case summary:
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A landlord contracted with a managing agent to provide staff and services in connection with the maintenance of his property. The managing agent charged VAT on its services to the landlord who passed the whole cost, including VAT, to the tenants.
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The tenant argued that, by concession, the managing agent should not have charged VAT as the costs were in the nature of service charges. The landlord should therefore not have passed the VAT charge onto the tenants.
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The judge confirmed that the concession would exempt from VAT mandatory service charges which were supplied directly to tenants by residential management companies, and not these services which were supplied by a managing agent to the landlord. The managing agent was correct to charge VAT on its services, and the landlord was entitled to pass the charge onto the tenant.
Useful links:
Case reference: Mrs Janine Ingram v Church Commissioners for England [2015] UKUT 0495(LC)
Extra Statutory Concession: Paragraph 3.18 of VAT notice 48
In Metropolitan International Schools v HMRC [2015] TC04675 the First Tier Tribunal (FTT) found that there was a single supply of zero-rated books and no supply of education. This was later overturned by the Upper Tribunal in HMRC v Metropolitan International Schools Limited [2017] UKUT 0431.
The case of Richard J Finney v HMRC [2015] TC04667 has highlighted the importance of understanding how the sale of an MOT certificate with a second hand car should be treated for VAT purposes.
Mr Finney had incorrectly calculated the margin on some of his sales by deducting the costs of MOT tests, but his helpful attitude and well-kept records enabled him to escape penalties and minimise his additional VAT liability.
The sale of a second hand car with an MOT test is generally treated as a single supply. The sum attributable to the MOT certificate is therefore not deducted from the sales price when calculating the margin.
Mr Finney had wrongly treated the MOT tests as disbursements and excluded them from his margin in about 30% of his sales.
Useful links:
Case reference: Richard J Finney v HMRC [2015] UKFTT TC04667
See our Margin Scheme guide for a more detailed consideration of the case and guidance on the second hand goods scheme.