VAT Update August 2014

There has been a flurry of interesting VAT cases in July 2014 which will be of interest to many business owners who operate the flat rate scheme (FRS), are a house builder or for anyone who may need some additional assistance in identifying a cake.

  • Flat Rate Scheme

There have been an alarming number of VAT cases recently, where HMRC have challenged taxpayers’ use of the flat rate scheme.  In one instance, HMRC challenged the flat rate scheme percentage chosen by Idess Limited.  The company undertook mechanical engineering and chose the flat rate category of “any other activity, not listed elsewhere” (i.e. 12%). HMRC considered that the category for “architects, civil and structural engineers or surveyors” with a rate of 14.5% was more appropriate, and assessed the business for £8,891 of under declared VAT.

HMRC also charged a company a 35% penalty on the £8,891 assessment for a “deliberate error not concealed”. This was reduced to 15% as a “careless error” after an internal review by a different HMRC officer.

The Tax Tribunal decided in favour of the taxpayer, which it considered was not a civil or structural engineer, as these categories were concerned with land and buildings, whereas Idess’ services were more akin to machinery and equipment.

This heavy-handed treatment by HMRC appears to be a consistent approach with other clients we have supported recently.  HMRC officers are increasingly taking a hard-line - ‘assess now, ask questions later’ approach. However, statistics have shown that over 50% of penalties are overturned, so it is always worth appealing.

If you have chosen the FRS you should ensure that you are:

a) Entitled to use the scheme (maximum turnover £230,000 on the anniversary of joining the scheme);

b) Using the most appropriate rate – and have reasoning for this;

c) Actually benefiting from the FRS – for instance businesses which make some zero-rated (i.e. international) supplies may be worse off under the scheme.

  • Housebuilders

A major housebuilding PLC submitted a claim for input tax for certain items (such as carpets and white goods) which are blocked under ‘items ordinarily incorporated by a builder’ rules.  The First Tier Tribunal rejected the claim under UK Law, but the Tribunal didn’t conclude whether the blocking order is lawful under EU rules.  Its claim is for the period 1973-1997 and is in the sum of £60 million, So we are expecting that this isn’t the last we’ve heard on this matter. 

If you are a house builder and have suffered input tax block on carpets, dishwashers, washing machines, fridge freezers, etc, you may wish to submit a claim pending the outcome of the litigation.

  • Can you have your cake and eat it?

Just when you thought that there was nowhere else for the “is it a cake?” VAT debate to go, following everyone’s favourite VAT cases involving Jaffa Cakes and M&S Teacakes, HMRC have been beaten yet again, in a case surrounding chocolate covered marshmallow ‘snowballs’. HMRC considered that a snowball did not qualify for zero-rating as a cake, and was therefore subject to VAT. 

The taxpayers appealed to the Tribunal, which considered a number of factors, even looking at the snowball alongside other items which are ‘cakes’ using the VAT definition, and decided that, firstly, the Snowball looks like a cake, and was not out of place on a plate of ‘cakes’ - including the M&S teacake and Jaffa Cakes (which we understand they went on to sample!).  Additionally, people would probably enjoy a beverage of some sort whilst consuming it, and wouldn’t eat it on the move.  In what must be an overwhelming win for common sense, the outcome is that the Snowball is a cake for VAT purposes, and is zero-rated.

Therefore my VAT quote of this month is for the humble snowball…

‘Snowballs have “enough of the characteristics of a cake, and should be classified as such”.  So that settles it then.  For now at least.

VAT Contact:

Gemma Gower  

Gemma McCaldon-Gower
VAT Manager

t: 0151 255 2300
Email Gemma

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The content of this VAT update is for reference purposes only. No business decisions should be made without seeking professional advice.

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