VAT insights - July 2023

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This issue of tax penalties has been much in the news recently, with a particular focus on the unfairness of the fixed penalty for failure to file a tax return on those who in fact owe no tax at all. The issue of the relationship between the imposition of a penalty and the liability to pay VAT has also arisen in a recent VAT case, where, due to the delay in raising an assessment, no VAT was actually due. Nevertheless, the FTT has held in that case that HMRC could still assess the taxpayer to a VAT penalty, as the penalty was not dependent on the VAT being actually payable.

As well as looking at the recent decision in Maxxim Residential Design, in this edition we also cover the following recent VAT and indirect tax developments:

• Another CJEU decision on the extent to which a subsidiary can be a fixed establishment of its parent for the purposes of receiving the supplies it makes to its parent
• New guidance and an online tool for determining how to correct VAT errors
• HMRC's consultation on whether a voluntary standard should be introduced for customs intermediaries
• The European Commission's tax plan for 2023
• Publication of the draft implementing regulations for the EU CBAM.

We also have updates from across our European network, including Ireland.

In addition, we produce more detailed reports on the most significant tax developments so if you scroll to the bottom, there's a list of the most important issues we have covered, with a link to our more detailed report.

If you are interested in finding out more about the below or have a specific indirect tax query, please don't hesitate to get in touch.

Out of time assessments and penalties

Can HMRC charge a penalty for VAT due but unpaid even where they fail to assess a taxpayer for the relevant VAT in time? Perhaps surprisingly, the FTT has held that they may in Maxxim Residential Design v HMRC [2023] UKFTT 474. HMRC investigated repayment requests by a trader and found that it

had falsified certain invoices. As a result, HMRC sought to assess the taxpayer for unpaid VAT from March 2013 to June 2014 as well as penalty assessments for deliberate inaccuracies under FA 2007 schedule 24 para 19.

On appeal, it was held that assessments made in October 2015 for the periods March to September 2013 were out of time, since HMRC had discovered the errors in August 2014. In those circumstances, the taxpayer argued that the penalty assessments made should be reduced since the assessments for the earlier periods were invalid. The FTT rejected that argument (in agreement with an earlier FTT decision in Albany Fish Bar v HMRC [2021] UKFTT 221). The penalties were calculated by reference to the "potential lost revenue" and this was defined as the additional tax "due or payable" - rather than "due and payable". In this case, additional VAT had been "due" for the relevant periods in the sense there had been a liability to VAT. As such, the legislation did not limit penalties to the situation when where extra tax was actually payable, but allowed penalties to be issued where there was only a liability.

Read the full case here

Fixed establishments and toll manufacturing arrangements

It was not so long ago that the CJEU held (in Berlin Chemie A) that a subisidiary did not amount to a fixed establishment of its parent for the purposes of receiving the supplies it made to its parent in the context of marketing, advertising and support services. One reason was that the same resources cannot be used both for making and receiving the same supply - that would be, frankly, illogical! And yet, the Belgian tax authorities have essentially raised the same arguments again in Cabot Plastics Belgium (Case C-232/22), a case concerning toll manufacturing services provided by a Belgian subsidiary to its Swiss parent. It is perhaps not surprising, therefore, that the CJEU rejected the argument that the Belgian subsidiary amounted to a fixed establishment of its Swiss parent for the purposes of receiving the supplies that it was making to its parent!

Whilst a subsidiary might amount to a fixed establishment of its parent and whilst exclusive contractual arrangements might be enough to provide the parent with the necessary technical and human resources to amount to a fixed establishment, it would (at the very least) be necessary to distinguish between the resources used by the subsidiary to provide the toll manufacturing services and those which it was alleged amounted to the sufficient resources to receive the supplies. Since the Belgian tax authorities had failed to make that distinction, it was really inevitable that their arguments would fail.

The decision is important, however, as toll manufacturing services are widely used in group arrangements and the decision that, if correctly structured, they will not give rise to supplies for VAT purposes at the place where the supplier is located may be important.  

Read our full review here

New guidance on VAT errors

Talking of VAT errors, it can be confusing to work out how to correct errors on a VAT return. In general, they can be adjusted in a VAT return where the net value of the errors is either less than £10,000 or between £10,000 and £50,000 and does not exceed 1% of the net outputs for the VAT return period in which the error was discovered. Errors which exceed these limits must be notified to HMRC. Helpfully, HMRC has issued new guidance to help businesses determine how they should report VAT errors. The guidance links through to a new an online tool which helps businesses determine whether the business can adjust the errors in their next VAT return, or should report the errors separately to HMRC using form VAT652.

However, early reports on social media indicate there may be some teething difficulties with the tool and hence we would not recommend relying on it at present.

The new guidance and tool can be found here.

Introducing a voluntary standard for customs intermediaries

At Spring Budget 2023, the Chancellor set out a package of measures to simplify customs import and export processes to support the UK's competitiveness. This followed on from the 2022 'Call for Evidence: An Independent Customs Regime', which included a chapter seeking views on the customs intermediary sector. The consultation recognises the significant role that customs intermediaries play in the facilitation of smooth international trade for UK businesses. But feedback from the call for evidence indicated that it can be difficult for traders, who may be new to customs processes, to identify a good quality intermediary to support them with trade.

Therefore, the government is consulting on the introduction of a voluntary standard for customs intermediaries and seeks views on: the objectives of a voluntary standard, and what format it could take; how a voluntary standard could be designed and implemented; the potential content of a voluntary standard; and training and educational offerings for the intermediary sector, which would support the introduction of a voluntary standard.

The consultation, which can be found here, is open for responses until 30 August 2023

EU: DG TAXUD management plan

The Directorate-General for Taxation and Customs (DG TAXUD) has published its management plan for 2023. The plan highlights that the DG TAXUD will continue to work towards the agenda set out in the Business Taxation in the 21st Century Communication published in 2021. The plan contains a number of items of relevance to indirect taxes, including:

• DG TAXUD will continue to provide guidance and explanations to Member States seeking derogations from EU excise duties and VAT rates for environmental and climate friendly products
• DG TAXUD will seek to secure an agreement on the VAT in the Digital Age package 
• DG TAXUD will present, in the first half of 2023, proposals for reform of the EU Customs Union to make the Customs Union fit for a more globalised and digitalised world, including simplifying processes, improving risk management, exploiting the full potential of data sharing and creating and improved governance structure. Digitalisation will be a key part of this reform involving development of IT systems needed for the reforms.
• In 2023, DG TAXUD will start work on implementing the EU Single Window Environment for Customs designed to improve digital cooperation and facilitate quicker and more efficient data sharing between border authorities.

One notable omission from the plan is any mention of the Commission's review of the VAT treatment of financial services. It is currently unclear whether the Commission is actively seeking to progress this proposed reform and, if so, what is the (delayed) timetable.

Read our Insights article here

EU: Implementing the EU CBAM

In December 2022, the EU reached agreement on the introduction of a carbon border adjustment mechanism (CBAM) to prevent carbon leakage on the importation of items such as iron, steel, cement, fertiliser, aluminium, electricity and hydrogen. The scheme will involve importers being required to buy CBAM certificates to compensate for carbon emissions in the country of production.

The CBAM is to commence from October 2023, but with an initial period of reporting only. Full implementation is due to be phased in between 2026 and 2034. During the initial period, importers will be required to make CBAM reports on a quarterly basis, no later than one month after the end of each quarter. Accordingly, the first report will be required to be made by end January 2024. CBAM reports are required to include a range of information including (a) the quantity of goods imported; (b) the actual total embedded emissions; (c) the total indirect emissions; (d) the carbon price due in a country of origin for the embedded emissions in the imported goods.

Much of the detail of how importers are to make the reports was left to be determined by implementing regulations. The Commission has now published those draft implementing regulations for the initial reporting period for public consultation. These include details of how reports are to be made, the information to be included and how the necessary emission calculations are to be made. They also provide for penalties in the event of failure to report and failure to correct inaccuracies of between EUR 10 and EUR 50 for each tonne of unreported embedded emissions.

The implementing regulations are a crucial aspect of the CBAM reporting regime and is essential that they provide clarity on the obligations of affected importers. Any businesses affected by the regime should take the opportunity to engage with the consultation which is open for responses until 11 July 2023.

Read our full review here

Ireland: VAT fraud and no other reasonable explanation hurdle

The Tax Appeals Commission (TAC) recently made a determination (31TACD2023) in favour of a taxpayer where the Revenue Commissioners had raised Notices of Assessment disallowing VAT input credits on the basis that the taxpayer knew, or should have known, that the transactions to which the VAT inputs related were connected to VAT fraud by its counterparties. The taxpayer appealed the Notices of Assessment on the grounds that:

• their right to a defence under EU was violated; and
• the Revenue made an incorrect finding that the taxpayers knew or should have known that they were involved in transactions connected with the fraudulent evasion of VAT.

The TAC found in favour of the taxpayer on both grounds. The Notice of Assessment was invalid based on the "abuse of rights" principle. In particular, the failure to provide the taxpayer with the information on which the assessment was based and the failure to provide the taxpayer with the opportunity to put a defence before the assessment was made was contrary to EU law.  On the second ground, the level of knowledge required for "ought to have known" was the "no other reasonable explanation" standard. The TAC was satisfied that the Revenue had not shown that the taxpayer met this hurdle.

The determination shows the TAC's willingness to accept arguments based on EU law, including the "abuse of rights" doctrine. The Revenue has appealed the decision to the High Court but we expect that the High Court's ruling will not adversely impact the taxpayer.

Read the full Insights article here

Ireland: Emergency accommodation and the "Big Swing" adjustment

Some hotel and hostel owners in Ireland have been entering into Government contracts to provide accommodation to Ukrainian refugees. In doing so, many are unwittingly triggering large VAT clawbacks under the Capital Goods Scheme (the CGS).

Where a hotel owner reclaimed input VAT on acquisition or refurbishment of the hotel, they must monitor its ongoing use under the CGS. If the ratio of taxable to exempt use changes, when compared with the initial interval, the hotel owner must make a CGS adjustment. Where there has been a significant change in taxable use i.e. where the taxable use differs by more than 50 percent from the taxable use for the initial interval, there has been a "big swing" requiring a larger adjustment to "reset" the CGS. In Ireland the supply of hotel accommodation is taxable whereas the supply of emergency (such as to Ukrainian refugees) accommodation is exempt. Hotel owners have been making wholesale changes to the use of their hotels from fully taxable to fully exempt by signing up to Government contracts to provide emergency accommodation for Ukrainian refugees. There is little awareness, however, that these good deeds come at a cost - potentially a very significant, and we would argue, unfair cost to the hotel owner. 

Just a few short years ago, big swing adjustments were disapplied for supplies of emergency accommodation to the State or the HSE (Health Service Executive) to alleviate the burden of Covid-19. Those measures expired on 30 June 2022 and we understand that there are no plans to afford the same CGS concessionary treatment to refugees of the Ukrainian war.

The Netherlands: VAT and real estate transfer tax update

Earlier this year, the Dutch government carried out a consultation on proposed measures to address the structuring of real estate transactions using share based arrangements. The Dutch government proposed to amend the exemption in the real estate transfer tax (RETT) provisions in such a way that the acquisition of new immovable property through shares would no longer be exempt from RETT. Following that consultation on proposed changes to the application of RETT and VAT to share based real estate transactions, the Dutch government has presented revised proposals which will both limit the scope of the rules, introduce transitional provisions and defer the date of implementation until 1 January 2025.

Read our full article here

Other issues we have recently covered

Consultation on reforming transfer pricing, PE and DPT rules

HMRC has published a significant consultation on updating international aspects of the UK's tax legislation, covering transfer pricing (TP), permanent establishments (PEs) and the diverted profits tax (DPT). The consultation makes significant proposals in all three areas and is open for responses until 14 August 2023. We are keen to hear your views and can feed into the consultation response anonymously on your behalf. Please get in touch with Tomoko Ikawa or Kapisha Vyas if you would like to input or discuss the impact of the proposed reforms on your business.

Common EU-wide withholding tax procedures?

The European Commission has published for consultation a proposal for a directive which aims to introduce a common EU-wide system for withholding tax on certain dividend or interest payments. The proposals will include a system for issuing an EU-wide digital tax residence certificate, simpler withholding tax relief procedures as well as a system for tax authorities to exchange information and cooperate with each other.

The OECD's Crypto-Asset Reporting Framework

The OECD has published the final version of its Crypto-Asset Reporting Framework and 2023 update to the Common Reporting Standard (CRS). The Crypto-Asset Reporting Framework (CARF) was developed in the light of the rapid growth of the crypto-asset market and provides for the reporting of information on transactions in crypto-assets in a standardised manner, with a view to automatically exchanging such information with the jurisdictions of residence of taxpayers on an annual basis.

Simmons response to consultation on taxation of decentralised finance

Simmons & Simmons has submitted a response to HMRC's consultation on the tax treatment of decentralised finance (DeFi). In summary, the government is consulting on proposals to introduce legislation to disregard from CGT the transactions that would otherwise occur when cryptoassets are lent or staked.

Modernisation of stamp taxes on share transactions: Simmons response

Simmons & Simmons has responded to HMRC's consultation on proposals to end stamping by introducing a new single tax on transactions in securities, largely based on the existing SDRT framework. Our response sets out, in particular, our views on the key elements (liability, tax base, geographical scope etc.) of the proposed single tax that would replace the current stamp duty and SDRT framework, as well as assessment and administration considerations.

Termination payments and the disability exemption

The FTT has held that a payment made on account of ill health as part of a termination agreement falls within the exemption in ITEPA 2003 s.406 for payments "on account of injury to, or disability of, an employee, rejecting HMRC's argument that for a payment to fall within the disability exemption, it must be paid on account of the disability and nothing else.

Spanish courts clarify criteria to determine Spanish tax residence

Recent court decisions have shed light on the criteria for assessing the Spanish tax residence of a taxpayer. These decisions address issues as diverse as the computation of the number of days to attract sufficient permanence in Spanish territory, the means of proof admitted in this regard and the relevance of assets held in Spain and abroad.

Tax podcasts

Our contentious tax podcast series covering tax controversy and transfer pricing issues can be found here. More general tax podcasts can be found here.