Covertax and vulnerable people

In addition to our vulnerable customers’ policy Covertax also has a Disability and Employment policy.

This policy has some useful definitions as well as a link to the Equality Act 2010. HMRC is not exempt from this Act of parliament, but from our work with vulnerable people, we know that any training given by HMRC on it can only be rudimentary, and certainly many inspectors and officers seem to be unaware of it – I cannot say that they deliberately ignore it as it does appear to be ignorance. Nevertheless, it seems that HMRC may on occasions cross the line in terms of the Equality Act 2010.

One instance where in our view HMRC consistently fails to undertake their responsibilities to adapt to the needs of vulnerable customers is in respect of Information Notices. It now appears to be normal practice to issue Information Notices at the first instance as opposed to following initial enquiries where a taxpayer has failed to co-operate. Penalties tend to be issued without trying to understand the facts. In one case the Information Notice pack was issued to a dyslexic person. The pack, as you may know, is dense and difficult for any taxpayer to cope with, let alone for a person who is dyslexic. Perhaps worse was that an Information Notice was given to a person who had encountered a life altering event in his brain. Following the issue of the pack, and penalties, HMRC established that the vulnerable person had issues, but did not even bother to check out the impact of those issues. Indeed, HMRC claimed that he should be “better”, something that five minutes on Google would have established is impossible. As it was, the practical impact for the purposes of an Information Notice was not dissimilar to the customer with dyslexia – the dense pack was just too much to cope with. HMRC did respond to an initial complaint made by the vulnerable customer and laid the blame at the customer’s feet on the basis that if he had read the pack sent to him, he would have known that he could have sought support. Yes, really.

Our response to that attitude is twofold. The first is that HMRC should carry out initial enquiries to determine the facts, including whether the customer is vulnerable. Secondly, HMRC should then ensure with ALL customers that what they ask for is proportionate and, in the words of the Notice, reasonable. The Equality Act 2010 does not mean that vulnerable customers should be treated differently. What it does say is that, in this case HMRC, should adapt to meet the needs of the vulnerable person. Our view in the case of Information Notices is that changes to procedure are necessary for ALL taxpayers and not just vulnerable customers – there is absolutely no need to amend any law to achieve this result.

We act for vulnerable customers, our policy is published, and all staff at Covertax have had enhanced DBS checks. On that point, we have not met a single inspector or officer who deals with vulnerable customers and who has been DBS checked.

More and More Compliance

Like many professional practices we have spent much of the last few months dealing with various new compliance challenges. Our view is that we are compliant in the various regimes but thought it best to share with you what we have done and what we are still to do.
Part of the work under GDPR (not the sole challenge) is to ensure that suppliers and, where necessary, third parties are GDPR compliant. If they are not we have tough decisions to make. Sadly, only one body has failed to confirm that it is not GDPR compliant – read down to find out who it is.

Reasonable care – HMRC won’t answer the phone

A report indicates that HMRC failed to answer 4,000,000 calls from taxpayers. Their record for call handling has been very poor for years and continues to be so. It is also worrying that HMRC still seems prone to provide incomplete or incorrect answers to some callers. Ironically, HMRC would not put up with such poor compliance from taxpayers, which we think is a bad show – the benchmark should be the same for both HMRC and taxpayers. Indeed, given HMRC’s role in reasonable care, arguably it should be significantly higher.
Please remember that one of the ways to show that you have taken reasonable care is to take advice from HMRC on the call line – yes, the same one that they don’t answer for 4,000,000 callers and the one where the courts have decided that HMRC has no liability if they get the answer wrong.
If you do call HMRC and are lucky enough to get through, please ask for the CCELL reference for the call – this makes the call record easier to track down if HMRC disputes any advice was given at a later date (or indeed, what the advice was). Ask HMRC for a copy of their file note – some will give it whilst others refuse. In any event: –

  1. Write down what you are going to ask them beforehand, along with any supplementary questions; and
  2. Write down their replies; and
  3. Write down any names that you are given by HMRC (it is usually first names only, which they would not accept from a taxpayer); and
  4. Stay on the line until you are satisfied you have all the information you need and have read the technical notes back to HMRC for their agreement; and
  5. Keep your record, dated and timed, somewhere safe – and somewhere you can find it in four years’ time!

Remember, taking advice from an adviser that you believe knows what he or she is doing also counts as “reasonable care”. As for Artificial Intelligence, there are no guidelines on using that for tax queries so for the time being I suggest it is avoided. Please remember that the pensions and CEST routines on HMRC’s website have been found to be at best unreliable.

EU VAT Modernisation – the vassal state option

An EU project has been ongoing to modernise VAT. Remarkably the UK has remained involved despite Brexit. Indeed, HMRC is claimed to be a driver to help stamp out fraud costing an estimated £56bn a year across the EU.
And even more remarkably, HMRC tells us that the modernised VAT system will be implemented across EU member states, and the UK whether it is in or out of the EU, from 1 January 2021. Yes, be clear, the UK’s intention is to take its lead on VAT from the EU irrespective of what our politicians are telling us. That would also indicate that the European Court of Justice would remain the highest court for VAT following Brexit. I bet you didn’t read that in the Daily Mail!
My personal view is that this is just common sense. The EU will, hopefully, remain our largest trading partner and having a parallel VAT system is far more sensible than divergent VAT systems. It is just a pity the UK won’t be able to directly influence the development of VAT once we leave the EU – this seems to commit us to VAT rules agreed by the EU27 (the dreaded “vassal state” option).

GDPR – New engagement letters

Yes, I’m sick of it and it has cost us a fortune in time as well as cash costs, just like you.
We are GDPR compliant. We have amended our client management system to include a record to prove that we are compliant.
However, because the standard draft professional engagement letters were updated and published by the accounting and tax bodies just a few weeks ago, we will be reissuing all of our engagement letters. I know that this will be as much of an annoyance for you as it is for us, but our hands are tied.
We will also amend our rates effective from 1 July 2018. This will involve dropping some fee bands which are rarely used, and also involve our first increase in some hourly rates since 2006. No, that is not a typo. Our costs have increased by over 25% since then and we can hold our rates no longer. I’m afraid the latest set of compliance costs was the straw that broke the camel’s back.

MTD for VAT

We are compliant and will be ready to go on 1 April 2019.
We are Xero partners and will use the package for all of our VAT clients, both UK and overseas. We chose this route for a number of reasons, but the key one was that we know MTD will follow for personal tax and corporate tax, so we will also be ready for those changes (no double dip of compliance costs in this respect for us!).

Trust and Service Company Providers (“TCSP”)

Through the Chartered Institute of Taxation, we have been registered for the TCSP legislation. We have also amended our accounting software, so we can maintain and provide when we receive an enquiry, a list of our clients for whom we provide these services.
However, given the loose wording of the measure, we have made enquiries of the CIOT as to whether TCSP clients include: –

  • clients where we act as UK VAT Agent. We think this is likely to be the case
  • clients where we act as tax representative. We think that this is likely to be the case
  • clients where we are a 64-8 agent with HMRC – we do not believe that this will be the case as the principle address for the client will be the client’s address
  • clients where we are the representative within the Tribunal. We think not as, despite Tribunal correspondence being addressed to us.

We have also enquired whether someone undertaking such roles, but who is not UK based can be registered under TCSP in the UK. At present it seems not almost certainly because they cannot pass the “fit and proper” test within the legislation based on what has been published so far. If we are correct in this, it would seem to prevent, for example, agents in other countries, including other EU member states, from taking any of these roles.
We suggest you check with your service provider what they are doing in this respect.

DBS checks on owners and senior staff

As a body supervised for money laundering purposes (in our case by the Chartered Institute of Taxation), we are now required to carry out standard DBS checks on all owners and senior staff.
For once we have no quibbles as we have already carried out enhanced DBS checks on ALL staff in accordance with our vulnerable customers policy.

Anti-Money Laundering (“AML”) Record Keeping

We have adopted a new software package to carry out our AML identification checks. We have checked that it is GDPR compliant. The new package includes a record keeping element, but we have also amended our new practice management software to provide a record. The intention for the future is to maintain the records solely within the client management software (which we have checked is GDPR compliant).

Personal and Corporation Tax Software

We have adopted new personal tax software which can be used via the cloud. We have confirmed that it is GDPR compliant.
We understand that along with our new accounting software, we will be MTD compliant for personal and corporation tax.

Windows 10 via Office 365

We now operate on this windows package across all machines used within the company. We are assured that it is GDPR compliant and is secure.
However, we are looking to implement further security measures in the coming months. Because we cannot share passwords under GDPR (a nonsense in my view), I can assure you that your data will be secure when we use this software and strictly any files created should be saved on our practice management software (we are slowly migrating from Dropbox which is in itself GDPR compliant). However, forgotten passwords looks like it may be an issue given that they are now required to be changed regularly!

HMRC – GDPR

We have tried on several occasions, both directly and through our professional body, to establish whether HMRC is GDPR compliant. We have not received a reply.
Given that they have difficulty in updating addresses across their various records, we have had to take the view that HMRC is neither exempt from GDPR nor compliant.
This does create issues for professional advisers in particular in responding, say, to HMRC information notices. You must respond within a fixed time frame or the taxpayer gets a penalty. We recommend that advisers seek agreement from their clients to respond to HMRC whether HMRC is GDPR compliant. It is possible that advisers are covered in any event (there is a test they can follow on the ICO website which will help determine this).
However, we do not recommend that this is left to chance as I’m afraid that this is one of those damned if you do and damned if you don’t situations.

A second professional body seeking to extend its remit

We are supervised by the Chartered Institute of Taxation. However, a second professional body has sought to extend its remit to our activities, which demands the right to see client records. At present we are trying to resist this approach as we believe that it could represent unauthorised access to personal data, contrary to GDPR.
However, the approach is forceful, and we are seeking the advice of the ICO before making a decision. Just to be clear, we refuse to be bullied by a professional body, much as we refuse to be bullied by HMRC. If it is right to provide the information to that body, then we will do so. But not until we are satisfied that the privacy of our clients has been protected.
In the meantime, we have been advised to include the possibility of that second body having access to client records in our new engagement letters.
Naturally, if we are to provide such access our own compliance costs will increase.

Newsletter sign up

We have had an above average sign up to the GDPR compliant opt-in newsletter. Thank you if you have signed up.
However, if you do not receive the newsletter by email (we do not publish all newsletters on our LinkedIn and Facebook pages) please sign up  (it is on the right-hand side of all of our pages). You will also find our privacy policy published on the website. It is quite simple, as it has been for many years now – we only use the information to send out the newsletter – no other marketing.

Steve Botham

 

 

 

 

 

 

Cyber Blitz on UK Government?

We have been warned today of a potential cyber blitz being launched against the UK following the action it took in Syria.  The sources include the UK Foreign Secretary (Mr Johnson), as well as some more reliable sources such as the better quality newspapers.

If you think the thought of a cyber blitz is science fantasy, on 11 April 2018 the UK announced that it had carried out a cyber blitz against Islamic State.  In May 2017 a large number of National Health Service bodies were subject to a successful cyber attack.  The attack was helped by so much hardware running obsolete unsupported Windows software.  I would suggest that all UK Government bodies be treated as being at similar risk.

Accordingly, please take care when dealing with UK Government bodies, including HM Revenue & Customs, until the “all clear” is given.  Please also treat any communications from UK Government bodies with great care.

I have seen no communication from HMRC to the effect that it is GDPR compliant, but last week asked one of the UK professional bodies to make enquiries as to HMRC’s status.  For the time being, I’d recommend HMRC be treated as non-compliant.

Please take care when using any HMRC online products, such as those for submitting VAT and tax returns.  You may think it sensible to contact your own IT specialists before doing so.

For the time being, we are treating HMRC as “high risk” and will be checking all communications with them.  We will also be asking HMRC, as well as the Tribunal Service, to minimise the electronic traffic until the level of risk of those organisations has been assessed and we are told that suitable safeguards have been put in place.

Moving more into opinion, if I were to be the person setting up a cyber blitz I would attack a country’s financial system, hence leaving HMRC well up the list, but putting the banks at risk.  For example, if the bank clearing system were to fail it would cause massive damage very quickly (though I’m not sure it is time to take cash out of the bank and store it under the bed!).

So, please be careful out there.

Steve Botham

Brexit: Suspensive regimes are going to be more important

I am going to start this article with a whacking great assumption.  And it is not that these regimes are going to become more important following Brexit, because that is an inevitable fact for managing Duty and VAT in the post-Brexit hinterland.

Whacking Great Assumption

No, the assumption is that the UK will not see any significant change to its suspensive regimes.

Why would I hope this, when my norm with Brexit is to plan for the worst and hope for the best.  I believe if the UK Government really wants frictionless trade and to remain as close as possible to the EU27 in respect of Customs (which it says it does), then to not to scrap or change the suspensive regimes so that they are divergent from the EU27 suspensive regimes, seems to be the only sensible way forward.

Yes, there are some big issues with these assumptions, but given that UK politicians have made it clear they don’t really understand Customs we have a reasonable chance that the regimes will see minimal or no change.  After all, there is really no UK political capital to be had by making cross border trade even more difficult after Brexit for UK businesses or their suppliers from the EU27 (and vice versa).  Quite the opposite since, for example, the UK motor industry is very important to the UK, and we know that goods move back and forth across the channel; suspensive regimes are going to be needed.  The same goes for aerospace and other technology-based industries.

Using existing suspensive regimes for trade between the EU27 and the UK provides at least some oil for the proposed frictionless solution (whatever that is).  To put that another way, retaining the suspensive regimes is something the UK and the EU27 would not have to work on in the limited time left.

Why are they important?

Having sought to justify my huge assumption (I find myself cringing already) perhaps I should explain why the suspensive regimes will become more important.  Unless either the UK or the EU27 puts up massive trade barriers, which in my view is in the interest of neither party, then trade will, still go on between the UK and the EU27.  Without the suspensive regimes costs will be increased and goods could be delayed in their movement putting, for example, just in time processes at risk.

New UK subsidiaries

We know that some EU businesses have decided to set up UK subsidiaries to manage their activities in the UK, and that is certainly a solution, not least because of the UK’s relaxed regime for setting up incorporated companies and the UK’s already favourable corporation tax regime.  It may also become easier as regards employment as it is clear that the UK Government is scrapping EU employment rights and as yet has not started to put any replacement system in place.  It is, however, clear that one aim of the UK Government is that it will become easier to both employ and fire people in the UK.

Suspensive Regimes and AEO

However, another solution is the use of suspensive regimes.

Can I first say that I believe that Authorised Economic Operator (“AEO”) status will remain important and most probably become far more important.  Basically, AEO means showing that you are compliant in return for an easier regime at borders.  It is a bit like having a golden passport for your business.  I’ll come back to the subject in more detail in a future article.

“Suspensive regimes” are ways of managing Duty and VAT on movement of goods between Customs regimes (so between the UK and the EU27).  Here I’m restricting myself to look at three regimes – Inward Processing, Outward Processing Relief and Customs Warehousing.

Inward Processing

You can currently use Inward Processing (IP) to obtain Duty and VAT relief on goods brought from outside the EU into the UK.  Clearly following Brexit, it makes sense to retain IP but to extend it to goods coming to the UK from the EU27 for processing and repair (there I go again with another assumption).

At present IP can be used by EU businesses bringing goods into the UK.  It is most likely that following Brexit, IP will only be available for businesses based in the UK.

In brief, the goods come into the UK, undergo their process and then leave the UK.  This operation is performed VAT and Duty free in principle – you can get involved in a regime where you can claw back the duty paid, but I always feel that getting tax back off the taxman is harder than keeping control of it in the first place.

If you’re Importing goods for process regularly then you need authorisation to use the procedure.

Outward Processing Relief

Outward Processing Relief (OPR) is the opposite of IP.

Thus, right now it looks at goods leaving the UK to a country outside the EU for processing (say the USA) and then returning after processing.  The idea is for the goods to leave and come back into the UK without an additional charge as to Duty and VAT.

One difference to IP is that authorisation is always required.

Customs Warehousing

Then there is Customs Warehousing.

You can store imported goods with duty and VAT suspended.  At the minimum it provides a cash flow cost.  In some circumstances it can create savings, certainly if the goods imported suffer damage, for example, and must be scrapped – scrapping in warehouse is possible and then saves the Duty which would have been paid on the goods.

You can have your own warehouse, or else use a public warehouse.  It is even possible to have a virtual warehouse which effectively sits upon a modified stock control system.

One of the key issues when considering warehouses is dwell time – the longer the potential dwell time, the greater the case for the use of a warehouse.

Another whacking great assumption

Well if these regimes are not already on your radar, then the next step is to get advice to set them up.

I have a second great assumption, and that is that right now we won’t need them on 29 March 2019, but instead after 31 December 2020.  I cannot say that for sure, such is the nature of the Brexit process.  If things go badly, we will need to use them from 29 March 2019.  If they go unbelievably well, we may not even have to use them after 31 December 2020 – right now I think the chances of that are as close as you can get to nil, without being nil, but you never know.

Don’t forget the suspensive regimes are available in the EU27

And of course, we are not just taking about using these regimes in the UK.  Right now, they are EU regimes and so I anticipate that they will continue to be used in the EU27.

Hence UK companies which decide to set up a company, say, in France following Brexit, may wish to use the procedures and in any event UK businesses sending goods for processing to the EU27 should ask their processors (or repairers) to confirm that they will be setting up IP, for example.

Summary

As usual, there is a lot more to these regimes – record keeping is king if you wish to avoid big bills, for example.  But if we cannot help you with adopting the regimes ourselves, we have partners throughout the EU27 who are happy to help.

However, ignoring the possibility of adopting such regimes could cost you money and may even hold up your business.  So, if you haven’t already investigated suspensive regimes, please do so with some urgency.  They don’t get put in place overnight and the closer to Brexit we get, the longer the lead time I expect between HMRC receiving applications and their authorisation.

Steve Botham

Brexit so far – I’m on Lucky 7

I will try to summarise the position on Brexit as I see it right now.  I’ll start by saying that some of it appears to be a game of chance leaving the future down to a turn of the roulette wheel as much as planning.

Good news

The latest agreement indicates that we have something settled between the UK and the EU27 taking us through to 31 December 2020.

That can only be described as “good news”.

In or out of the Single Market?

The next part is a little hard to grasp.

The UK is leaving the EU on 29 March 2019.  Strictly it is also leaving the Single Market and the Customs Union (as well as several other bodies) on 29 March 2019.

However, during the “transitional period”, as it is now being called, the UK will be treated as if it is in the Single Market and the Customs Union.  I have no idea whether the UK will remain in the Single Market and the Customs Union, but it has agreed to be covered by the rules of these organisations. That is an important point legally, as tax and Customs legislation as it stands relies on the UK being a member of those institutions and not just treated as a member of those institutions.  Quite a body of law will need to be amended and, of course, that will apply to all 28 current member states.

The UK will continue to obey the laws of the EU, including on the Single Market and the Customs Union, but will have no say in making or changing laws.

The UK will continue to pay contributions to the EU during the transitional period.

There is legislation to deal with transactions which covers the end of the transitional period. At present they seem simple and workable.  Let’s hope they stay like that.

No change then?

So far so good for businesses trading between the UK and the EU27.  It should mean “no change” until 31 December 2020.  So, some certainty.

Or at least that is what I thought initially.

Ireland

We have the issue of the land border in Ireland (and, indeed, Gibraltar it now seems).

The position on Ireland has not changed since 8 December 2017, despite the statements coming from various UK ministers.  The UK and the EU27, principally Ireland, are to try to work out a practical solution.  This means thinking up something new, which relies on technology, and which can be put in place working efficiently by 31 December 2021. And which is agreed upon by all the parties. With the greatest of respect to the Irish from both sides of the border, that would be a tall order in any event and will be all the more difficult to achieve in Ireland.

The UK Government has made some suggestions, but little work seems to have been made otherwise, even to work up the suggestions.

The fall-back position is that Northern Ireland will remain in both the Single Market and the Customs Union.  Whilst that is in black and white in the agreement, there is little doubt it would be unacceptable for Unionist politicians in Northern Ireland, as well as many in the UK Government and official opposition.

Unhappy hard Brexit supporters

Perhaps a more difficult issue with the transitional period is that it could be ended by the EU27 at any stage if the UK does not comply with the rules.

The fact that has been made clear in the agreement is hardly a surprise – even after the Belfast agreement on 8 December 2017, the UK’s head negotiator Mr Davis said the UK would walk away from that agreement if it suited the UK.

And we know that even staying within a mechanism linked to the Single Market and the Customs Union where the UK has no say during the transitional period is an anathema to hard Brexit supporters.

In the meantime, there is strong opposition to the agreement from hard Brexit supporters in respect of, but not restricted to, fishing rights.

Some hard Brexit supporters have expressed their opinion that the agreement sells them down the river – quite how that will manifest itself over the coming weeks is hard to tell.

Given the UK’s track record since the referendum, there is therefore a risk that the UK could create an early end to the transitional agreement.  There lies the uncertainty for businesses trading between the UK and the EU27 during the transitional period.

Clarity on tax rules in the UK and in the EU27?

In the meantime, I look forward to HMRC (the UK tax department) providing clarity on which legislation and which administrative arrangements will remain in place after 29 March 2019.  This is important.

Equally important is what the environment will be for UK businesses trading in other member states.  Will it remain the same?  It should, but we don’t know for sure.

What do we think of it so far?

So, how I see it is that some good progress has been made, but there is a long way to go before we know what is happening from 29 March 2019 until 31 December 2020.

In the meantime, what will happen from 1 January 2021 remains shrouded in mystery.

We know the UK aspiration is for the UK to have a parallel administrative, taxation and regulatory environment to that of the EU27, in the hope that whilst being outside of the Single Market, the Customs Union and the EEA, as well as various EU bodies, trade between the EU27 and the UK will continue as it does now.  If that can be achieved, it will be an incredible achievement by all concerned.

But we already know that both in the UK and the EU27 that is probably a step too far for most.  For example, issues related to the European Space Agency contracts have had the UK crying “foul”, whereas it seems clear that the UK chose to leave the EU and as such it should have expected that it would lose access to that market.

So, fingers crossed – our “plan for the worst and hope for the best” strategy remains intact.  In the meantime, my money is on lucky 7.

Steve Botham

VAT After Brexit – Installed Goods

Assuming a deal cannot be done, the UK will sit outside of the Single Market and the Customs Union. Even if a deal is done, the UK Government is currently adamant it will sit outside of the Single market and the Customs Union.

That means we will see changes on contracts involving the supply and installation of goods. My view is that these changes will both increase red tape and costs for both suppliers and supplied.
I will use the UK as an example of how things work now. Please remember that each member state has its own administrative requirements.

The law throughout the EU at present

To quote from the Principal VAT Directive: –

“Where goods dispatched or transported by the supplier, by the customer or by a third person are installed or assembled, with or without a trial run, by or on behalf of the supplier, the place of supply shall be deemed to be the place where the goods are installed or assembled.”

The effect of the law

So, if a business in the UK contracts with a Belgian supplier to provide installed goods, then the place of supply is the UK, and the tax must be accounted for in the UK.
The default position in the UK is that the supplier MUST register for VAT and charge local VAT.

However, there is a simplification solely for intra-community supplies whereby the supplier can notify HMRC that the recipient of the supply will reverse charge the supply – i.e. no UK VAT ID needed by the supplier. The notification MUST be sent before the first invoice is issued on EACH contract.

In other member states the system is somewhat simpler – an intra -community supply in similar circumstances is treated as a reverse charge (but check!).

However, suppliers from outside the EU are required to register for VAT in the UK and to account for VAT in the UK, subject to a simplification mentioned later.

What is “supply and installation”?

This aspect of the tax also causes problems, especially in the UK, as the dividing line between “supply and installation” and “supplies related to land” – broadly construction – are at best grey, despite clarification at EU level.

Because of inconsistency on the interpretation of what is and what is not the supply and installation of goods, the EC issued a binding regulation with definitions.

They said: –
“For the application of Directive 2006/112/EC, the following shall be regarded as “immovable property”:

(a) any specific part of the earth, on or below its surface, over which title and possession can be created;
(b) any building or construction fixed to or in the ground above or below sea level which cannot be easily dismantled or moved;
(c) any item that has been installed and makes up an integral part of a building or construction without which the building or construction is incomplete, such as doors, windows, roofs, staircases and lifts;
(d) any item, equipment or machine permanently installed in a building or construction which cannot be moved without destroying or altering the building or construction.

“Immovable property” is what we treat in the UK as “land and property”. Items c and d are the important ones for supply and installation purposes. If the supply complies with these descriptions, then it is construction services (for UK VAT), and if it does not it is the supply and installation of goods. There are still grey areas.

UK simplification for suppliers from outside the EU

As regards the simplification, it does NOT apply to suppliers from outside of the EU. This will also be the position post-Brexit if a deal is not done to cover this aspect of the tax. HMRC summarises a one-off concession: –

There is a more limited simplification arrangement for installed or assembled goods imported from a third country. So long as it is a one-off supply the supplier can exceptionally treat the supply as taking place outside the UK. This requires the customer to act as the importer of the goods and the full contract price to be declared on the import entry.

Now there are two things that stand out.

The first is that it is a one-off arrangement. Thus, it can only be used by the SUPPLIER once. If the supplier has more than one contract in the UK, then it cannot use the arrangement. It must therefore register for VAT in the UK, and charge local VAT. At the moment it is not clear whether businesses from the EU27 will be permitted to use the UK VAT Agent route or else be required to appoint a tax representative. Tax representatives are harder to find, because they are jointly and severally liable for any tax due the fees for representation tend to be higher, and they may also want a bank guarantee to manage their risk. Reciprocal issues will need to be managed for UK businesses with supply and installation customers in the EU27.

The second is the mechanism. The sale of goods is treated as being made outside the UK (usual contractual issues apply, including which court is to be used for disputes, for example) and then the full contract value is used at importation. So that mans the value of the services is added into the value of the goods, as well as the other cost additions (CIF for example), to create a value of duty (more duty duty) and then the value for VAT. Higher VAT will be due by the importer, creating a greater demand on cash flow – but see my earlier article on possible ways to manage this- and a higher guarantee needed for deferment (additional bank charges).

UK Suppliers

Quite how the EU27 intend to manage the issue is not known at this stage, but I think UK suppliers would be sensible to plan on the basis that they will have to get local VAT ID’s anywhere they install or assemble goods in the EU27.

EU27 suppliers to the UK

Indeed, I think it would be sensible for EU27 suppliers to the UK to think in terms of obtaining a local VAT ID as I cannot say whether the concessionary treatment will survive Brexit.

The UK VAT registration process

Just a final few words about registering for VAT.
Covertax has prepared a lot of VAT registrations in the UK for supply and installation contracts. They take time. Lots of questions are asked. HMRC needs to satisfy itself that the contract is not one that can be reverse charged.
We’ve even had issues on EU VAT refunds, where the contract was reverse charged, but one part of HMRC refused the refund as they thought there should be a local VAT registration in place and the VAT Registration Unit refused registration because it thought that there should not.
So please do not leave it until the last minute. Start planning now. The HMRC VAT registration service norm is around six weeks presently. That will increase significantly as Brexit draws closer – more registrations will be needed in the UK and as far as I know, no extra resources have been deployed by HMRC to address this. I suspect waits in excess of three months will not be a surprise towards the end of this year and during 2019.

Construction Industry Scheme (“CIS”)

Further complications arise in the UK as most supply and installation contacts, even where covered by a VAT simplification, also require registration under the Construction Industry Scheme – a withholding tax scheme. Look into that early as failing to do so could result in up to 30% of your invoice value being withheld.
At present, it is possible to gain “Gross Payment Status” – you get paid without stoppage – provide you have a good tax compliance record. HMRC cannot discriminate against companies from other member states, and so will take into consideration evidence produced as to the EU27’s tax compliance record.
We do not know if that will continue after Brexit. If not, the cost of doing supply and installation business in the UK will increase for many EU27 businesses.

So, we need a deal?
Of course, a deal might get done to avoid all of this cost and red tape for businesses. One can but hope.

Steve Botham

VAT: Consignment and Call Off Stocks Post Brexit

At the moment, whilst the UK is a member of the Single Market and sits within the Customs Union, the UK benefits for call of stock and consignment stock simplifications for intra EU transactions.  That’s both for goods coming into the UK from the EU27 and to the EU27 from the UK.

In brief, in the UK call off stocks (roughly, stock under the control of a single customer) do not require a local VAT registration, whereas Consignment stocks (roughly, your stock held to distribute to several customers) does.  The registration involves a little red tape, but once set up it is fairly straightforward.  There are similar, but not identical rules, in the EU27.

At the moment, consignment stocks and call off stocks moving into the EU (including the UK) from third countries (for example the United States) are treated as imports with VAT and duty incurred at importation.  Stocks then distributed from a stock within the EU (effectively consignment stocks, but dependent upon your contractual arrangements, this can include call off stocks) require a local VAT ID – so once again some red tape which is fairly routine to manage once set up, but you have the extra cost and hassle of importing the goods.

Unless a deal can be done to replicate the current arrangements (and the prospect changes daily) movements between the UK and the EU27 will follow the third country rules.  Imports with VAT and duty, plus a local VAT registration in many if not all cases.

Some businesses are already moving stocks around the EU, both to and from the UK, in order to manage the position post 29 March 2019 – once again planning on a “no deal” or “no single market and Customs Union” solution, or just outright confusion (for example, the Customs authorities may struggle to cope or the IT solutions proposed may have issues).  This is currently being driven by the logistics risks, but some are also changing the way they do business.  Certainly, if you have call off stocks, or are moving goods for processing between the UK and the EU27, you would wish to minimise the logistics delays at import or export.  Therefore, consideration needs to be given now as to whether local VAT registrations are required.

Indeed, some businesses which do not current use consignment or call off stock arrangements may need to start to do so because of Brexit, if only to protect their supply chain.  In my opinion, the cost of an unneeded VAT registration is far outweighed by the cost of getting goods trapped at the port or being unable to set up a VAT registration timeously post Brexit.

There are some technical issues with applying early for a UK VAT ID, for example.  This is because if you are moving call off stocks from the EU27 to the UK, you currently enjoy a simplification and it is possible that HMRC will refuse a registration until matters are clear.  That is going to create problems for all businesses concerned because, if they do, HMRC is highly unlikely to have the resources to meet their current level of efficiency – six weeks.  In brief, you could be waiting months for a VAT ID.  It may be better to consider provoking a registration, perhaps by forming a consignment stock in the UK.  And if the registration isn’t needed – cancel it.

Steve Botham

EU Draft Withdrawal Agreement – the basis of a good plan

In my life, one gift horse I grab with both hands is the basis of a good plan. It may need a little work, but could then involve an extra trip to the pub. This skill is also useful when transferred to my working life.
And the EU Draft Withdrawal Agreement, which I link to, is undoubtedly the basis for a good plan.

I’ve been through the draft UK EU Withdrawal agreement – all 118 pages. I’ve not read every word, but I know enough to say that there’s the makings of a very good deal in there for brave and imaginative politicians. It should make very good reading for business people in both the UK and the EU27. And could resolve visa issues.
And remember, this is a draft, so there is time to work it up to a final working version, as is normal with most EU agreements.

Unfortunately, it was shot down by the UK Government on 28 February 2018 because of talk of a regulatory environment within the Irish draft Protocol which is within the draft agreement. The draft protocol recognises it is made in the light of the 8 December 2017 Belfast Agreement, which the UK agreed with and signed at the time.
The basis of the UK’s rejection appears to be that Northern Ireland will be separated from the rest of the UK. If you read the agreement related to the movement of goods and people, you’ll find that it contains the basis of an agreement which could well suit all parties. It was certainly not worthy of being rejected out of hand. And in my opinion it goes not one step further than was agreed in Belfast on 8 December 2017.

Dealing with people, the Republic of Ireland sits outside the Schengen area, as does the UK. As far as I understand things, they operate the same admission criteria as the UK – i.e. they too already have control of their borders. Indeed, they already rely on us to control people moving into the Republic and we already rely on them to control people moving into Northern Ireland. So, unless the UK says that it does not trust the Republic to continue to manage people at its borders honestly and effectively, the UK can rely on the Irish to manage that side of things (and vice versa).

Then with what the draft withdrawal agreement says, there is no reason to believe that the UK would have more unwanted migrants than it would in any event, whilst keeping a pretty free environment for the movement of labour. Indeed, on 28 February 2018, the UK and the EU moved a further step in that direction, albeit that agreement was overshadowed by the rejection of the draft withdrawal agreement and largely unreported.
But a neat solution for the Irish Land Boundary as regards people, and probably a neat solution for all UK borders with the EU given that the UK already operates border controls for people moving into the UK from the rest of the EU. These controls could probably be tightened up further if the UK adopts the EU free movement opt outs which it has failed to do so far. The opt outs address most of the alleged problems identified in the UK with EU migration in any event, but still allow employers to attract EU workers.

As for goods, the draft Northern Ireland protocol refers to the Belfast Agreement of 8 December 2017, which the UK agreed to and was unambiguous. There is nothing about an EU controlled regulatory environment.

There is reference to a regulatory environment which would be quite normal for any agreement between nations dealing with matters like Customs Duty and taxes. This is an agreed (or more properly, to be agreed) joint regulatory environment between the UK and the EU27.

Earlier in the draft there is detail provided on the essential day to day mechanisms needed to manage cross border movement of goods (including the Irish Land Border). Calling upon existing mechanisms (not new as yet undeveloped as well as untried and untested information technology, cameras, scanners etc). Providing a regulatory solution for Ireland and possibly the whole of the UK. And offering a path to a sensible Customs Agreement (please call is something other than “Customs Union” – even “Wendy” if that’s acceptable) solution to all parties.

If you read the draft carefully it creates room for the UK to do its own trade deals if it wants to (without being explicit, which is definitely the EU way), but provides a solution as regards taxes etc on third country goods brought into the UK for onwards shipment to the EU (and vice versa). This allows both sides to maintain their fiscal integrity of their respective borders and businesses to continue trading as they are now (basically following “origin” rules) with a minimum of intervention (or red tape if you must).

So, I think it is the basis of a good plan. I might discuss it at the pub on Friday evening. And my companions will of course talk about something completely different.

Brexit VAT Implementation – a dangerous game of Brussels roulette

On 6 January 2018, The Guardian, a quality UK newspaper renowned for misprints, published an article related to the imposition of VAT on imports from the EU following Brexit.  To say this awakening was at the eleventh hour is a bit of an understatement – the relevant legislation passed through the UK Parliament on 8 January 2018.

A problem came to light – well, not really

However, it is good to see that the UK press, and so it seems the influential Parliamentary Treasury Committee, has caught up with what just about every VAT specialist in Europe has been pointing out since before the referendum in 2016.  Cross border VAT law is changing.  I said “just about every VAT specialist” because the newspaper quoted “experts” who seemed unaware of the full position at present with imported goods, were clearly unaware that VAT changes for services are indeed far from simple, and that there are problems for UK exporters to the rest of the EU and of course for EU importers from, and exporters to, the UK following Brexit unless something is resolved both in the UK and in the rest of the EU.

What has since become clear is that ministers have either spoken off the cuff on the subject or that their briefings have been incomplete at best.

So, I am setting out here what we know so far.  And I will be parochial and address goods imported into the UK from the rest of the EU.

That does not mean that exporting goods from the UK to customers in other EU member states will not be a problem.  It could well be.  Indeed, some UK business may find that they need to change the way they trade (holding stocks in France or Holland, for example), and others may find their margins squeezed as customers seek to share the burden of their added costs of importation form the UK.

Background

In theory the change will happen on 29 March 2019.

I say “in theory” because the implication of the Brexit Phase I agreement on 8 December 2017 was that we would have a transitional period on broadly similar rules to what we have now (I celebrated – briefly).

Sadly, the UK Government then made it clear that it would renege on that agreement if it suited them, creating big issues at the time.  Things have been smoothed over since, barring the occasional sabre rattle, and so we are now to believe that all will be OK on 29 March 2019, and there will be no change for VAT on imports into the UK from 29 March 2019.

That is until 31 December 2020, according to the EU negotiators, when they expect the transition to be completed.

Of course, none of that has been agreed between the UK and the EU27, the contradictory messages from the UK Government have not been helpful for anybody considering international trade, and an influential cabal within the Conservative Party (the political party forming a minority Governing in the UK) seems determined for the UK to fall out of the EU and all EU mechanisms from 29 March 2017.  No, I don’t understand why.

In the meantime, Mrs May, the UK Prime Minister has suggested recently that we may need a longer transitional period – no surprise there for those of us living in the real world, but this of course contradicts what is wanted by her colleagues who wish to cut the ties as soon as possible.  And then the UK Government is yet to tell us what it wants out of Brexit.  We are promised something “concrete” shortly.

Why all of this background?  Just to highlight that it is difficult if not impossible to second guess what will happen from 29 March 2019 onwards.

So once again I can only advise that we plan for the worst and hope for the best.  As far as international trade is concerned, dropping out of the EU on 29 March 2019 with no transitional arrangements is the worst scenario, whilst allowing a reasonable period to put the new mechanisms in place (an extended transitional period) is what I’d hope for.

Right now, the UK reversing the Brexit decision is but a dream or a nightmare dependent upon which side of the UK fence you sit.

A step back in time

At this stage, for those who remember the completion of the Single Market in 1992, I would remind you that the solution Europe came to then on VAT is the one we have now.  So, it is those far reaching measures that are being reversed for trade between the UK and the rest of the EU.

And as you will also recall there was a five-year transition period lasting until 1997 to finalise the completion of the Single Market for VAT.  And you will know that deadline was eventually abandoned, which is how we get to where we are today.  The 1992 transitional period has either lasted for 25 years or else the transitional rules were adopted as the final rules in 1997, dependent upon your point of view.  I subscribe to the latter.

There are many things I could extrapolate from this set of facts, but I will stick to one – the transitional period cannot be finalised on 31 December 2010.  It cannot be done.  So, provided Mrs May’s cabal are kept under control and the EU27 also take a sensible approach, common sense suggests an extended transitional period.  Probably not one which goes on for ever, as with what happened in 1992, but maybe one for five years.

Brussels Roulette – where will you place your bets?

But that is a sideshow of reality within a difficult technical scenario.

According to the UK judiciary, “Beyond the everyday world… lies the world of VAT, a kind of fiscal theme park in which factual and legal realities are suspended or inverted”.  I think that it is more akin to a “game” of Russian Roulette, but with the life of businesses at risk – Brussels Roulette.

So, let us look at the facts from a worst-case scenario, based on planning for the worst and hoping for the best.

These are the loaded chambers of the gun if the UK just falls out of the EU on 29 March 2019.

Do Nothing

Goods imported from the remaining EU member states will bear UK VAT at importation at the prevailing rate (let’s assume 20%).

If you do NOTHING, then the VAT must be paid to Customs at importation and payment will be by cash or bankers draft and you will reclaim the VAT on your current VAT return.  That is a cash flow hit, an administrative hit and, if you delay payment you don’t get your goods, thus putting your business at risk.

Freight Forwarder

But you can ask your freight forwarder to pay the VAT for you, which they will do, generally for a fee of up to 2%.  You then pay the freight forwarder according to your commercial terms, and then reclaim the VAT on your current VAT return.  This is still a cash flow hit but does at least provide some certainty which may well make the 2% cost worthwhile.

Duty Deferment

If you are a regular importer you can apply for “duty deferment”.  An important part of the process is to obtain a bond from a UK bank or insurer equal to twice the maximum VAT (and customs duty) you expect to pay each month.

Typically, a bank will try to charge you 1% of the value of the bond each year.  Also, typically, the bank will take the value of the bond out of your overall facility – you could find your overdraft reduced substantially if you are not careful.

If approved, your goods will move “smoothly” off the port and the VAT and Duty will be collected by direct debit two weeks into the following month.  The VAT can then be reclaimed on your VAT return for the month of importation.

Sorry for the “smoothly”.  As a rule, goods do move smoothly now.  However, there are doubts as to how prepared UK Customs will be for Brexit, so “smoothly” is not a word I expect UK importers (or exporters) to use for at least a period of time following Brexit (and “frictionless” seems even less likely).

For that cynicism, I will atone by dropping in a planning tip – model your VAT as if you will no longer use acquisition tax, but instead just reclaim the VAT on imports as you do now.  If the result is that you look like you will be in a regular repayment position, apply for monthly VAT returns from March 2019 onwards.

But I digress.  This is still a cash flow hit, but as a rule not as bad as paying by cash or bankers draft or using a freight forwarder to pay the import VAT for you.

Simplified Import VAT Accounting (SIVA)

Not to be confused with the Hindu God Lord Shiva, sometimes spelt Siva.  Shiva is the quintessential destroyer. His duty is to destroy all the worlds at the end of creation and dissolve them into nothingness.  SIVA, however, should be good news, and something businesses currently paying VAT on imports should consider applying for in any event.  But not as potent as Lord Shiva.

You must apply to be SIVA authorised.  You will need a very good compliance record to be accepted.  However, once accepted, the impact is that, whilst you will still have a duty deferment guarantee for Customs Duty, it could well be much reduced or even nil for imported goods that do not attract any Duty.  The scheme lets you defer the VAT on imports so that you account for the VAT very much as you already do with goods acquired from other EU member states.

My recommendation would be to start preparing for your application immediately and to try to get it in early.  There could be a mad rush come 1 January 2019 – maybe not the January sales, but still too much for HMRC to cope with.

Postponed Accounting System (PAS)

You need to be quite old to remember PAS, scrapped in 1985 by the then Chancellor Nigel Lawson as he needed a cash flow boost and so took £200m out of the cash flow of UK importers.  PAS works very similarly to SIVA.  Except that everyone could use it – even if you had a bad compliance record.

During the last UK Budget a suggestion was made as to the return of PAS, although all has gone quiet on this since.  And it was this suggestion from the Treasury that the many “experts”, ministers and politicians omitted to mention during the hysteria in January.  At a stroke, a return to PAS could eradicate the import VAT issue for UK VAT registered businesses, cut down the need for Customs staffing and resources, and help “frictionless” trade between the UK and the EU27.

But of course, this is right at the “hope for the best” end of the scale.

Suspensive regimes

Pretty much standard reliefs can also be looked at for specific circumstances such as Customs Warehousing (it can even be on a computer for some goods), temporary importation, inward processing relief and outward processing relief.

More businesses will need to look at these, especially those that for the time being will retain their current manufacturing process with goods moving backwards and forwards between the UK and the EU27.

Once again, my view, because of the limited staff available in HMRC, is that businesses should start considering and applying for these processes now.  Leaving it too late could mean that you are not “approved” come the day (whenever that is).

Brussels Roulette

The name of the game is very unfair, but that is the nature of British politics.

You’ll see I’ve come up with six alternatives, much like the six chambers in a revolver used in a game of Russian Roulette.  You’ll note that there are no empty chambers!  You’re going to catch something.  You’re aim, though, is simple – identify your risk and manage it.  Yes, we can all hope for a return to PAS, but even then, Customs Duty will be payable on imports from the EU27, so you will need to get duty deferment in place for goods coming from the EU27 or, if you can, apply for one of the suspensive regimes.

If you fail to manage it, then you risk going out of business – it is that stark.  I’d like to think that the UK Government would set up some form of safety net but given how far on the politicians seem to be with the high level strategic thinking, that is more likely to be thought about on April Fool’s Day 2019, rather than before.

Steve Botham

HMRC Penalties and the “Answer to the Ultimate Question of Life, the Universe, and Everything”

In this article I will disclose to you the similarity to the way in which HMRC applies penalties and the Answer to the Ultimate Question of Life, the Universe, and Everything.  This disclosure you will find is as important to you as the output of Deep Thought in The Hitchhiker’s Guide to the Galaxy (Douglas Adams).  But, a bit like The Hitchhiker’s Guide, where we follow the journey of Arthur Dent and Ford Prefect, there is a story to follow here.  I’m not sure I would describe HMRC as The Vogons (I’ve never been quoted poetry by a tax inspector), but this tale is not fiction, so I’ll leave you to make up your mind.

 What underpins the tax penalty regime?

On 17 September 2015 HMRC published a Summary of Responses to document called “HMRC Penalties: A Discussion Document”.

In the introduction to that document, at paragraph 1.2 on Page 3, HMRC stated: –

“1.2. The Discussion document proposed five broad principles that HMRC consider should underpin any new penalty regime. These principles are:

  1. The penalty regime should be designed from the customer perspective, primarily to encourage compliance and prevent noncompliance. Penalties are not to be applied with the objective of raising revenues.
  2. Penalties should be proportionate to the offence and may take into account past behaviour.
  3. Penalties must be applied fairly, ensuring that compliant customers are (and are seen to be) in a better position than the non-compliant.
  4. Penalties must provide a credible threat. If there is a penalty, we must have the operational capability and capacity to raise it accurately, and if we raise it, we must be able to collect it in a cost-efficient manner.
  5. Customers should see a consistent and standardised approach. Variations will be those necessary to take into account customer behaviours and particular taxes. “

I am not aware of any legal changes to this approach.  Neither am I aware of any published change of policy.  This leads me to believe that this must still be the policy of HMRC and vicariously enacting the Intention of Parliament.

I think any right-minded taxpayer (and that includes advisers!) would not quibble with these aims.

But are these aims being met, or is something else happening?

However, it has long been my view that this is not how the tax civil penalty regime acts in practice in the UK.  And evidence is now starting to accrue which indicates that my view is more likely to be consistent with the reality than what HMRC had to say on 17 September 2015.

There are a number of issues with the civil penalty regime in the UK.  In theory such issues should not exist, but they do.

Carelessness

As a rule, the “carelessness” penalties – the frontline tax geared penalties – are not supposed to be applied for a simple mistake.  Yet it seems that the norm is for a penalty to be sought, leaving the taxpayer to fight that decision.

In direct taxation a carelessness penalty means that HMRC can assess the tax back six years instead of four (there is no such measure for VAT).  There is no doubt in my mind that penalties have been sought with the view to assessing tax back six years.  And of course, maximising the revenue from the penalty.  That is certainly an abuse of process, and probably an abuse of power.

Deliberate

Similarly, when it came to the deliberate penalties, when these were to be imposed the expectation, we heard from HMRC, was that for such a penalty to be applied the admission of deliberate behaviour would come from the mouth of the taxpayer.  We were assured that it would not be taken lightly and that HMRC would apply the penalty responsibly.  And HMRC’s guidance even now still appears to adhere to these principles.  For example, there is a definition of “Deliberate”: –

This is where you knew that a return or document was inaccurate when you sent it to us. Examples of deliberate inaccuracies include deliberately:

  • overstating your business expenses
  • understating your income
  • paying wages without accounting for Pay As You Earn and National Insurance contributions”

[Source: HMRC Compliance checks series – CC/FS7a]

I am not sure just how effective this guidance is as to the term” deliberate” since it uses the term to define itself, but if I am being fair, in normal usage I think we would all say we’d know this when we saw it.  Except of course that relies upon a subjective judgment, and you and I may have greatly differing views as to what is and what is not done “deliberately”.  The point is, however, that the term cannot be used subjectively – it must be used objectively if the penalty principles published on 15 September 2015 are to be abided by.  Why?

Use of penalties other than as Parliament intended?

Well, apart from the deliberate, and deliberate and concealed penalties having a tariff of up to 100%, they also open the door to HMRC to seek collect tax from up to twenty years ago.

And there is evidence that HMRC have increasingly used the deliberate category in a quite startling trend.

And there is now a case decision that makes it quite clear that the rule of thumb of being able to know it when you see it is not a reliable yardstick in the hands of HM Revenue & Customs.

Knowingly

However, there is something HMRC skips over.

A deliberate act is committed knowingly.  The perpetrator knows that he or she is doing it.  And in my view admission to that effect must come from the mouth of the person concerned.  It is not something to be assumed.  It is not something where an assertion could be relied upon.

There is no “should have known” test.

And frequently HMRC omits any work whatsoever in this respect and jumps straight into “deliberate”.  In the example of one case on a transfer of a going concern, the taxpayer was accused of a deliberate and concealed action because the transfer of a going concern treatment had not been disclosed separately to HMRC – there is no legal requirement or even guidance from HMRC that this is required to be done.

“Special knowledge”

And elsewhere you will also find a concept of what I call “special knowledge”.  This asserts that certain taxable persons, whether individuals or companies with internal advisers, know more about the taxation matter than Joe Public.

One such example we have dealt with is a physics teacher who HMRC is determined had special knowledge of taxation because of his professional qualification.  This particular taxpayer  took the advice of someone holding himself out to be an expert who missed out an important piece of advice, resulting in HMRC treating the case as “deliberate”.  Now, I would say that a physics teacher is likely to be a pretty bright person.  I would also say that a toolmaker, for example, is on a level with a physics teacher, but I suspect that a toolmaker may not have received such a challenge.

It is a bit like the Frost Report Sketch including John Cleese, Ronnie Barker and Ronnie Corbett; I look down on him etc.  HMRC won’t have it as they clearly look up to the physics teacher.  This may be because he speaks in a language that they do not understand.  But what they do not recognise is that the physics teacher does not speak their language either.

So, apart from a very useful piece of case law, we were tempted to send the inspector a Quantum Physics paper from the University of Southampton and ask him, without help or any other guidance, to answer all nine questions completely and correctly in two hours.  For this is no less than HMRC expects of a taxpayer, it would seem, in that unrealistically, and unreasonably, HMRC expects a taxpayer to know all about every tax, something I will illustrate that not even someone advising on tax is expected to be able to do.  Which then puts this “special person” status firmly at risk, or even completely debunked.

Cannon

The commentary in the decision of Cannon TC6354 is, in my opinion, and excellent dissection of the relevant law for not only “reasonable care”, but also the meaning of “deliberate”.  It also looks at the concept of special knowledge and just how far that can be taken.  This is very relevant as Mr Cannon is a barrister who advises on Stamp Duty Land Tax.  He though sought and followed advice on his tax affairs from an adviser he believed knew what he was doing (we come back to that).  And let me make something very clear – Cannon breaks new ground.  It looks at the law as it stands.

In respect of “reasonable care” it argues that you have to look at each of the words – “reasonable” and “care”.  In tax law, certainly amongst VAT specialists, the separation of the elements of a phrase including “reasonable” is not at all a strange concept.  There the analysis fell upon the phrase “fair and reasonable”, mainly in the context of a partial exemption method.  Each element must be examined to determine that the test has been passed.

So it is, argues Judge Geraint Jones QC with “reasonable care”.

No room for subjective judgments by HMRC

And here it is also pertinent that the judge considered whether such an assessment was subjective or objective.  It is not sufficient for HMRC to assert subjectively that reasonable care has not been taken.  Nor indeed, that an act was deliberate. The judgement must be objective.  That should set alarm bells ringing in many penalty cases, whether appealed or not.  It also helps explain why we take the approach we have and will continue to do on penalties.

What is reasonable for a taxpayer to do?

In respect of what is “reasonable” for an ordinary taxpayer, like our physics teacher, to do – it is to take and implement advice received from a professional person acting as an adviser, and that will normally lead to the conclusion that the taxpayer has acted reasonably.

Negligent adviser

This is so even if the professional adviser has acted negligently, provided that the taxpayer has no reason to believe that the adviser did not know what he or she was doing.  This set of facts is not unusual in my opinion.  But HMRC argues, and indeed argued in Cannon, that a taxpayer is careless even if the negligence or carelessness is that, and only that, of the professional adviser even where that advisor is acting in a truly professional capacity.  The judge was of the opinion that this approach is wrong in law.

And once again, this is something we see and have fought on the same grounds.

What is “care”?

Having addressed “reasonable”, the judge in Cannon then examined “care”.

Now this is remarkable in that it goes back to precisely the training HMRC provided to accountants and advisers, which we were told was the same training officers and inspectors received, upon the introduction of the penalty regime.  I know, because I took that training.  More than once.  And I worked through the online packages provided by HMRC at the time.

The penalty regime is not there to penalise simple mistakes.  Indeed, I would argue that this is no more and no less than the intention of Parliament.

To quote from Cannon: –

We should also mention that the very phrase “reasonable care” indicates that the test will be satisfied, provided that the care taken is reasonable. It carries with it the implication that perfection need not be reached, and it necessarily recognises that errors might occur even when a reasonably prudent taxpayer has taken that degree of care which is requisite when dealing with the respondents. A taxpayer might genuinely and honestly misconstrue legislation; a taxpayer might inadvertently make an arithmetic error or press an inappropriate key on a computer keyboard (and fail to notice having done so); or genuinely mis-remember a salient fact. The test is not to ask whether any such error or failure would have occurred in a perfect world, because that would be to elevate the test beyond that which is applicable. The test is not to ask whether the taxpayer could have done something else which, if done, might have revealed the error unless the doing of that other task is itself something which a reasonable taxpayer ought to have done, and which, if done, would have revealed the initial error.”

Good law

Now dragging this back into the VAT world and indeed mainstream law, we already have the concept of what a reasonable taxpayer would reasonably have done, within a decision which called upon Lord Denning’s “man on the Clapham Omnibus”.

My point is simple, Judge Jones was not breaking new ground here.  This is good law and it is old law and it has already been applied in respect of the previous VAT penalty regime.

As such, as a basis of arguing cases, it is a sound footing and taxpayers and advisers should not be put off by the usual refrains from HMRC: –

  • “a Tribunal decision does not create law”. Correct, but it is persuasive as it help us to understand the law: and
  • each case turns on its own merits”. True, each case does indeed turn on its own facts, but each case will also address the law.  The facts will change, but the law does not.  This argument is also a double edged sword for HMRC.

Is HMRC “policy” a good enough reason?

Too often now we are told that something has been done because it is policy, or because that is what the officer or inspector has been told to do.

An example, here is penalties issued for failing to produce records where now officers are issuing the penalty warning at the first application for information, whereas , at least until quite recently, the application of the power relied upon a process which involved contacting the taxpayer first.  The penalty regime would only be applied in a case of lack of co-operation.  But if each case turns on its own merits, there cannot be a one size fits all approach by HMRC and the first step just cannot be a threat to impose a penalty.  As an example, we have a case where repeated penalties have been issued to a dyslexic taxpayer who was just issued the detailed letter and rights paperwork by HMRC with no attempt to establish the facts and, quite frankly, the taxpayer could not deal with it.  There is no doubt in our mind that the taxpayer’s human rights have been violated in this case – which again the Judge in Cannon has something to say about.

How the law on penalties should be interpreted

My point here is that HMRC will have difficulty is walking away from the law as interpreted in the Cannon case.  To summarise, the Judge in Cannon says

“it seems to us to be counter-intuitive to speak about a taxpayer being negligent when he has placed his affairs in the hands of an accountant or sought specific advice on a specific matter and the professional adviser has then been negligent in providing that advice.“

The Judge then looked at “deliberate” –

By contrast, a deliberate error in a tax return requires that the taxpayer knew about the error and intended to misrepresent the true position to the respondents. Nothing short of that will do, save in circumstances where a taxpayer has deliberately shut his eyes to the true factual position, sometimes referred to as “Nelsonian blindness.””.

So that is not subjective either; it requires knowledge to be proven – i.e. from the mouth of the taxpayer, and in my view does not include a “must have known” test.

The judge is clear that where such a serious allegation of deliberate conduct is made by HMRC, then the Tribunal will undertake more assiduous fact finding to ensure that the allegation being made by HMRC is sufficiently credible, relevant and cogent to warrant such an adverse finding.

Minimum standard of evidence of HMRC’s decision

I would argue that this standard of evidence is the one which HMRC must also rely upon when making such an allegation, and a mere assertion, perhaps related to the amount of the tax, or the continuity of an error is not sufficient.

The Judge in Cannon reminds us not only of the legal basis (once again the Judge does not break new ground), but also that the principle is not only well recognised, but also necessary to render a decision where such a serious allegation is made compatible with Article 6 of the European Convention on Human Rights.

Failed tax avoidance schemes – penalties

In this respect, you may also wish to have another look at what HMRC says in respect of penalties for failed tax avoidance schemes, where they seek to apply the dishonesty test, but where in reality the taxpayer is acting upon professional advice (setting aside the emotionally furore surrounding the phrase “tax avoidance”.

Correct deliberate approach

I would contend, therefore, that the approach I suggest in respect of the “deliberate” penalties is the correct one, and it is not the approach often taken by HMRC, and one which is resisted by HMRC when challenged.

Putting HMRC to Proof

Well the key to it all is that objective tests must be applied by HMRC when coming to their decisions, they must look at each element firstly, in my view, beginning at the “reasonable care” end of the spectrum, and then working up the scale toward “deliberate” or “deliberate and concealed”.  I have not tried to go into “concealed” here, as that too is contentious although suffice to say my view is clear in that following professional advice is not concealment.

HMRC must also be prepared to evidence their contention.  HMRC starting with an assertion, or an assumption, is just not good enough.  But many advisers would say that this is exactly what we see from HMRC.  For example, I personally have seen the physics teacher alleged to have “special knowledge”, which is patently incorrect, and a taxpayer appointing an accountant having carried out due diligence on that accountant who turned out to be both incompetent and a liar as to his professional qualifications being dismissed by HMRC as taking “reasonable care”.  It is clear that HMRC must be put to proof.

Grounds for complaint

And certainly in cases where HMRC say that a challenge to their decision would be seen as lack of co-operation, or else any concession given to date would be withdrawn, they should be put immediately into the HMRC complaints procedure as such coercion has no place in the penalty system and indeed may well be an abuse of power and contrary to Article 6 of the Human Rights Convention.

Vulnerable customers

Finally, whilst not part of the Cannon case, it is our view that HMRC must have proper regard to vulnerable customers before starting the penalty process.  For example, it is no good issuing pages of complicated paperwork to a dyslexic person, and expecting that person to deal with it in the same was as a director of a multinational company.

Number 42

To put what I argue in another way, the number 42 is, in The Hitchhiker’s Guide to the Galaxy by Douglas Adams, the “Answer to the Ultimate Question of Life, the Universe, and Everything”, calculated by an enormous supercomputer named Deep Thought over a period of 7.5 million years.

Unfortunately, no one knows what the question is.

Thus, to calculate the Ultimate Question, a special computer the size of a small planet was built from organic components and named “Earth”.

The similarity is that we are often asked by HMRC to have more faith in their penalty decisions than we place in the number 42.  I would contend that the Hitchhiker’s Guide contains more evidence than HMRC uses in many of the cases we see.

Penalty decisions need to be challenged to ensure that they have been properly made.

Quantum Physics

The quantum physics?  Well I do have the answer paper as well as the question paper.  Sadly, I understand the answers about as much as the average taxpayer understands the intricacies of tax law.  And that, of course, is at the heart of reasonable care as examined in the Cannon case.

As for the quote from 17 September 2015?

Analysis has been made of the number of “deliberate” penalties issued by HMRC.  It keeps increasing year on year at rates which cannot, in my view, be put down to better training, more fraudulent taxpayers, or chance.

I have heard from the mouth of an officer how HMRC looks towards penalties being issued at the outset.

I am not alone in thinking that penalties are being used as a revenue raiser by HMRC.  It may not be a diktat from the Treasury, nor even from senior management in HMRC, but many advisers feel that there are targets to be met and that meeting the targets has become the be all and end all.

One much maligned former Prime Minister talked about “outcomes” rather than “targets”.  And my suspicion is that the civil penalty system has become corrupted by targets and does not aim itself at outcomes, as indicated by the declaration by HMRC on 17 September 2015.

The system does not need reform.  It needs to be put back on track.  Perhaps this is one for The Public Accounts Committee?

Steve Botham