VAT Connect – February

Repayment from HMRC of Overpaid VAT Liable to Corporation Tax

Shop Direct Group have lost their appeal and will have to pay Corporation Tax on repaid VAT that they had overpaid over a number of years.

Back in 1978, Shop Direct Group incorrectly charged VAT on supplies – an error that continued until 1996. When the mistake came to light, Shop Direct made a claim to HMRC for overpaid VAT of £124m and this was repaid.  HMRC then pursued the company for Corporation Tax on the amount received.

This is the fourth appeal on the point for Shop Direct, with the First Tier Tribunal, Upper Tribunal, Court of Appeal and now the Supreme Court all ruling that Corporation Tax is payable on the VAT repayment.

Mitigating the Cost of Partial Exemption

Partly exempt businesses may find themselves breaching the partial exemption de minimus limit at the end of the partial exemption tax year. But have you considered timing your purchases to keep your exempt VAT down?

Under the partial exemption standard method, if the total exempt input tax incurred in relation to exempt activities in the year is less than £7,500 and less than 50% of the total input tax that you have incurred, then all of your business input tax is recoverable.  As part of your budget planning, you could consider the timing of costs in relation with your partial exemption tax year which will end on 31 March, 30 April, or 31 May, depending on your VAT periods.

With careful financial planning, you could consider staggering your purchases/capital expenditure, or even arranging part payments with your supplier so that the costs (and the input tax) ‘straddle’ the tax years and keep the exempt input tax below the de minimus limit. An exercise that could save you at least £7,500 per year.

Flat Rate Scheme

Several years after a business registered for VAT and opted into the Flat Rate Scheme (FRS), HMRC assessed them using an FRS percentage that the taxpayer incorrectly picked; not the FRS sector that actually reflected their business activities.

When KDT Management Ltd registered for VAT, they signed up to FRS accounting.  On their application they stated that they were ‘consultants for advertising industry’, but chose their main business activity as ‘management consultancy’ which selected the FRS percentage for that sector.  The business then applied the advertising FRS percentage to their gross income, rather than the management consultancy rate originally applied for.

When HMRC visited they assessed KDT on the basis that they had not used the appropriate rate for the Management Consultancy sector; this was despite the taxpayer being able to demonstrate that his activities were appropriate to advertising, and claiming that they had made a mistake in choosing that sector when they registered.

The First Tier Tribunal found that HMRC had acted unreasonably in basing their assessment on a mistake on the form rather than the reality of the business, and that the law did not empower them to assess on this basis.

Alcohol Wholesaler Registration Scheme (AWRS)

Existing businesses who wholesale alcohol have until 31 March 2016 to register for the Scheme.

Originally scheduled for last year, registration was postponed to 1 January 2016, but established businesses only have a short window in which to apply. The application is made online, and does not apply to businesses who make incidental sales to other businesses.

For any new businesses that begin after 31 March 2016, you must apply for AWRS at least 45 days before you intend to start trading.

You can read more about the scheme here.

Not Long Until the Sun Sets on Energy-Saving Savings

If you are looking to save money through the installation of solar panels, wind or water turbines, then you may only have a few months until the full rate of VAT at 20% is introduced.

As we mentioned in December’s VAT Connect, HMRC are seeking parliament’s approval to remove solar panels, wind turbines, and water turbines from the items that can be installed with the lower VAT rate of 5%.

If you were planning to go greener at some point, then you may want to bring it forward as you may only have until 31 July this year to take advantage of the reduced VAT rate. For businesses that install these items, this will represent an opportunity to drive sales before the rate of VAT potentially increases.

If any of these articles raise further questions for you, please contact any member of our VAT team.