HMRC announce postponement of MTD for some charities and others

On 16 October 2018 HMRC announced that mandatory compliance with MTD for VAT will be postponed for 6 months for VAT registered businesses which have more complex requirements until 1 October 2019. The MTD VAT pilot will be open for these ‘deferred’ businesses in Spring 2019. The 6-month deferral applies to those who fall into one of the following categories:

  • Trusts
  • ‘Not for profit’ organisations that are not set up as a company,
  • VAT divisions
  • VAT groups
  •  Public sector entities that are required to provide additional information on their VAT return (Government departments, NHS Trusts),
  • Local authorities,
  • Public corporations,
  • Overseas based traders
  • Traders who are required to make payments on account
  • Annual accounting scheme users

If your VAT registered business is trading over the VAT registratoin threshold and you do not fall into one of the deferred categories you must keep records digitally and use software to submit VAT returns from 1 April 2019. Those in the deferred categories should be able to access a pilot scheme in early 2019, but are not eligible for the current MTD pilot process, announced on 16 October 2019.

Charities

The date charities are able to join the MTD VAT pilot and are required to comply with the MTD VAT rules depends on their individual circumstances and whether they fall into one of the deferred categories. For example, a charity that is :

  • a not for profit organisation that is set up as a company is mandated for MTD VAT from 1 April 2019, unless they fall into one of the deferred categories (e.g. VAT group)
  • a trust or a not for profit organisation not set up as a company is mandated for MTD VAT from 1 October 2019.

The Charity Tax Group ( CTG) reports that HMRC is still reviewing whether mandation for CIOs and SCIOs will be deferred or not. Also disappointingly, HMRC have confirmed to CTG that there is no change to the “soft landing” regarding digital links requirements, which covers VAT periods commencing between 1 April 2019 and 31 March 2020. This will mean that charities with deferred status, which do not participate in the pilot process, will have less time to adapt to the new rules.

CTG states that for most charities it should not be too difficult to comply with the first stage of Making Tax Digital (where only an API connection is required to send VAT data to HMRC), for example by using bridging software from spreadheets, but that the requirement to implement digital links could be a lot harder.

The advice we and CTG are giving to all charities is to start preparations for MTD now, read HMRC’s Notice and to talk to your software providers ASAP to find out what products they will be offering.

CIOT and ICAEW issue BREXIT Factsheets

The Chartered Institute of Taxation (CIOT) and the Institute of Chartered Accountants in England and Wales (ICAEW) have issued the first in a series of fact-sheets on the impact of the UK’s withdrawal from The European Union. The main purpose of the first fact-sheet is to outline the purpose and effect of The Taxation (Cross-border Trade) Act 2018, which received Royal Assent on 13 September 2018.

ADR agreements with HMRC do not always give taxpayers certainty

ADR agreements do not always give taxpayers certainty

The First Tier Tribunal decision in the case of The Serpentine Trust Ltd (‘TST’) http://financeandtax.decisions.tribunals.gov.uk/judgmentfiles/j10680/TC06719.pdf  illustrates how an Alternative Dispute Resolution (ADR) agreement with HMRC may not necessarily give certainty to a taxpayer even though both parties have agreed its terms.

TST ran five supporter schemes under which supporters made payments in return for a range of benefits. During a VAT inspection, HMRC raised various points and identified that in respect of four of the schemes, TST was not accounting for VAT, but was treating the payments made by the supporters as donations. The fifth scheme (the Council Scheme) was subject to a ruling from HMRC in 2003 which allowed that if TST identified a value for the benefits, on which it accounted for VAT, and a value for a donation, the donation element was treated as outside the scope of VAT.

A series of ADR meetings were held to seek agreement on the points in dispute. All points were agreed, including the treatment of supporter schemes with effect from 1 April 2013.The agreement between HMRC and TST in relation to supported schemes stated “From 1/4/13 where the value of the ‘benefits’ package for supporter schemes is identified and this is clearly stated (both in the application forms and on the website), this will be treated as the consideration. Any sums paid above the price charged for the benefits package is to be treated as a donation.”

For periods before 1 April 2013, HMRC assessed TST for VAT on total supporter scheme income and TST appealed to the First Tier Tribunal (‘FTT’). The FTT upheld the assessment finding that TST was making a single standard rated supply of the right to take part in various events organised by TST in return for the total payment. However, in making her decision, the Judge expressed surprise that a mere change of wording in the Taxpayer’s literature was sufficient to mean that after 1 April 2013 the VAT liability was confined only to the portion of the income which corresponded to the benefits supplied to Scheme and commented that:

“The Trust is of course entitled to rely on the clearances it has been given by HMRC, even when they are, as they appear to be in this case, wrong in law. I express the view that it is inappropriate for HMRC to give private rulings inconsistent with their published position.”

The reference to HMRC’s published position was a reference Notice 701/1 in which HMRC state that it must be clear to supporters that the benefits of membership can be purchased by paying only the minimum payment (benefit value).

Three months after the first FTT decision, HMRC withdrew the Council Scheme ruling allowing TST to account for VAT only on the benefits value, and seven months after the decision, HMRC wrote to TST advising that TST may have ‘misunderstood’ the ADR agreement. Following a period of further correspondence, HMRC issued an assessment to TST in relation to its treatment of supporter schemes from 1 April 2013, stating that VAT should be charged on all payments received from members of the Supporter Schemes and not just the amount deemed to cover the value of the benefits. TST therefore appealed again to the FTT again on the basis that it had a written agreement with HMRC. The main questions to be decided by the FTT were:

  • whether the FTT had jurisdiction to rule on the issue;
  • whether TST or HMRC had correctly interpreted the Supporter schemes paragraph in the ADR meeting note;
  • whether HMRC and TST had a contract and, if so, whether there was legal agreement between the parties, or an omission of a central term so as to void the contract;
  • if there had been a contract, whether HMRC had made a unilateral mistake; and
  • if there was no mistake, whether HMRC had the power to make such a contract.

It was agreed that the FTT had jurisdiction to hear the appeal, and therefore had to decide the issues set out above. The FTT found that the terms of the ADR agreement for the treatment of supporter schemes from 1 April 2013 was unambiguous and therefore TST was bound to account for VAT only on the value ascribed to the benefits.  It rejected HMRC’s arguments and found that the agreement constituted a binding contract intended to create a legal relationship between the parties. There was no unilateral mistake by HMRC in consenting to the agreement and so the contract was not void.

In considering the evidence and the facts, the FTT found that:

  1. HMRC had adopted the approach in the Council Scheme ruling in relation to at least some other charities;
  2. HMRC withdrew those rulings prospectively after the first Serpentine tribunal case was published; and
  3. TST’s adviser genuinely believed that HMRC operated a practice of requiring only that the benefits provided to members of supporter schemes be quantified and communicated to those members and did not require those benefits to be made separately available for purchase. The FTT also determined that the evidence of the HMRC mediator should be set aside as being ‘unreliable’.

However, and unfortunately for TST, on the last question the FTT found that what HMRC had agreed was wrong as a matter of law. For VAT to apply only to the benefit value, it must be clear to supporters that they can purchase the benefits separately.  HMRC could not depart from applying the correct taxing provisions without direction from parliament or an extra statutory concession and the ADR agreement was therefore ultra vires.

This was a frustrating outcome for TST, especially as it was clear that HMRC had been applying the terms agreed at ADR to the Council Scheme and to other taxpayers for several years. The only remedy for TST now would be to take judicial review proceedings against HMRC, on the basis that it had a legitimate expectation that it could rely on the ADR agreement. JR proceedings are however expensive, and it is notoriously difficult to obtain a favourable ruling against the state.

The case shows that the ADR process is not a failsafe and raises the question of how much certainty a ruling from HMRC gives to taxpayers. It is concerning that the evidence of the HMRC mediator was set aside as unreliable, and therefore one of the points to take forward when considering an ADR process is the use of an independent mediator with the necessary VAT expertise.

Any organisations accounting for VAT on a similar basis to the TST ADR agreement, should review the position and take action accordingly.

Socrates Socratous of SOC VAT Consultants gave evidence on behalf of TST.