V@ update – July 2024

Welcome to the July 2024 edition of RPC's V@, a monthly update which provides insightful analysis and news from the VAT world.

News

1. HMRC has announced that all changes to VAT registration details must be carried out online from 5 August 2024, and that form VAT 484 will be withdrawn from that date, except for those unable to access and use digital services.
   
   
2. HMRC has launched a digital tool to help businesses estimate the consequences of registering for VAT.
   
   
3. Since our last update, a new UK government has been elected.  Its manifesto commitments, insofar as they relate to VAT, include not increasing headline rates of VAT and removing the exemption from VAT for private school fees. 

Case reports

Collagen drink not 'food of a kind used for human consumption' 

The appellant, Bottled Science Ltd (BSL), submitted to HMRC an error correction notice for overdeclared output VAT for periods from December 2016 to September 2020, on the basis that the collagen drink that it supplied, Skinade, was properly zero-rated as food.  HMRC refused its claim on the basis that Skinade was properly standard-rated.  BSL appealed to the First-tier Tribunal (FTT).

Section 30, Value Added Tax Act 1994 (VATA 1994) provides for zero-rating of goods or services of a description specified in Schedule 8, VATA 1994.  Group 1 of Schedule 8 to VATA 1994, provides that 'Food of a kind used for human consumption' (which is defined in Note 1 as including drink) is to be zero-rated.  However, two potentially relevant exceptions from this general rule apply: Excepted item 4 provides that '[o]ther beverages (including fruit juices and bottled waters) and syrups, concentrates, essences, powders, crystals or other products for the preparation of beverage' are not to be zero-rated.  Excepted item 4A provides that '[s]ports drinks that are advertised or marketed as products designed to enhance physical performance, accelerate recovery after exercise or build bulk, and other similar drinks, including (in either case) syrups, concentrates, essences, powders, crystals or other products for the preparation of such drinks' are not to be zero-rated.

The FTT adopted a strict approach to the zero-rating provisions.  It determined that asking whether Skinade was a beauty product rather than a food would set up a false dichotomy; the proper question was whether Skinade was a food (and not whether it could, better or additionally, be described as a beauty product).  While the FTT heard no evidence as to cost, it noted from the appellant's website that a 30-day supply cost £128.  It did not set much store by Skinade's name, noting that while its name sounded like lemonade (a drink), it also sounded like 'first aid' (and the FTT even considered, in a macabre way, that it might also suggest a drink containing skin as a key ingredient).  The FTT considered that food needed to contain some nutritional value (as a product with no nutritional value could not be food) and also noted that the level of nutritional value (above a zero threshold) was relevant in the multi-factorial assessment that it had to undertake.  While Skinade was palatable, neither member of the FTT would 'rush to drink [it] for its own sake' or serve it to an unexpected guest. 

The factor that influenced the FTT's thinking the most was the packaging of the product and the way it was marketed.  The packaging appeared 'quite clinical' and was redolent more of a product to be found at a chemist's shop than a grocer's store.  It was not described as a food in its marketing material, but was marketed squarely as a skincare product.  The directions for usage similarly suggested a skincare product rather than a food product. 

The FTT therefore concluded that a well-informed, broad-minded VAT payer would consider that Skinade was not a food, and in light of this conclusion dismissed BSL's appeal. 

Why it matters: This decision contains a useful analysis of the factors to be considered in applying the zero-rating to food.

The decision can be viewed here.

Late appeal application refused

The appellant, Ibrahim Amir, sought permission to make a late appeal against a decision of HMRC to charge customs duty and import VAT, totalling £28,924.27, in respect of three importations of goods in July and August 2019.  HMRC had opened an inquiry into the appellant's customs and trade records in January 2020; the progress of the enquiry was delayed due to Covid-19.  On 3 May 2022, HMRC sent a 'reasonable doubts' letter to the appellant inviting him to provide any information or documents by 30 May 2022; on 7 May 2021, HMRC wrote to the appellant seeking certain documentation; on 17 June 2022, HMRC sent a 'right to be heard' letter to the appellant, and on 20 July 2022, HMRC sent a decision letter demanding payment, and explaining that the appellant could appeal, or seek a review of the decision, and that any such appeal was to be made within 30 days.  On 28 July 2022, this was followed by a C-18 post-clearance demand.

On 14 October 2022, HMRC received a letter, dated 19 August 2022, from the appellant, which suggested that he had received no correspondence before the C-18 demand.  On 21 October 2022, HMRC provided copies of the decision letter and supporting documents, and explained that an appeal was the only option available to the appellant and that an appeal would be out of time.  On 11 November 2022, HMRC received a further letter from the appellant, indicating that he wished to appeal and suggesting that he had not been in a state of mind to read and respond to correspondence prior to the C-18 demand owing to his wife's ill-health and the responsibility of caring for his wife and their six children. 

In January 2023, the appellant notified his appeal to the FTT.

The FTT found that that the appellant had a professional adviser at the start of the compliance check; that none of HMRC's correspondence (sent to all addresses that HMRC had on file for him, including his principal place of business) had been returned undelivered; that the appellant had not notified HMRC that he was caring for his wife and had moved accommodation to care for his children, and that he had moved only in July 2022; and that he had continued to trade throughout the period and had clearly received and responded to the C-18 demand.  Further, the FTT considered that he had been an evasive witness.

The FTT held that the delay in making an appeal, of 122 days (in the context of a 30-day deadline) had been serious and significant.  In all the circumstances, the appellant's claim not to have received correspondence went against the weight of evidence.  He had been able to deal with suppliers in Turkey, Dubai and China, and had carried on business throughout the period during which he was said to be caring for his children (and had done so from his principal place of business, where HMRC's correspondence had been sent).  In all the circumstances (including a substantive case that appeared to be 'extraordinarily weak'), the balance between the prejudice to the appellant, the prejudice to HMRC and the administration of justice through the finality of litigation, fell 'firmly' on the side of an extension of time being refused.  The application for a late appeal was therefore refused.

Why it matters: This decision provides a helpful overview of the circumstances in which a late appeal may (or may not) be allowed by the FTT.

The decision can be viewed here.

Assessments, penalties and PLNs upheld in suppression of sales case

The first appellant (the Company) operated a Chinese takeaway business.  It was incorporated in November 2016 and ceased to trade in March 2020.  The second appellant (Mrs Guo) was its sole director. 

At an HMRC inspection visit in May 2018, Mrs Guo was advised to ensure that the Company kept till records.  In May 2019, the Company registered for VAT.  In November 2019, HMRC opened a VAT and corporation tax check on the Company, and requested its records. Records provided comprised purchase invoices, handwritten weekly sales figures, business bank account details and WorldPay statements.  HMRC also obtained purchase data for the period from July 2017 to January 2018, from one of the Company's suppliers.  This data indicated that purchases had been made using both invoice and cash accounts and only the invoice account purchases appeared in the data provided to HMRC by the Company.  Mrs Guo maintained that the cash purchases were for family use only (rather than business use). However, the cash purchases comprised more than £20,000 (out of total purchases of £33,190.37).  Following a meeting in February 2020 and correspondence, HMRC concluded that purchases and sales had been suppressed, and prepared revised gross sales figures using the suppression rate for cash purchases calculated from the purchase data, applying that rate to sales declared in the Company's corporation tax accounts, and applying the presumption of continuity.  HMRC then used the VAT information to raise assessments both in relation to VAT (the VAT Assessments) and corporation tax (the CT Assessments).  

HMRC also assessed penalties based on deliberate conduct, and served personal liability notices (PLNs) on Mrs Guo.

The Company appealed to the FTT.  In relation to the VAT Assessments, it did so on the basis that HMRC had: (1) failed to carry out any 'test eats' or observations of the business; (2) not shown that any of the alleged cash was witnessed, counted or seized by HMRC; and (3) not established how the alleged cash was used by either appellant, and accordingly the VAT Assessments had not been made to HMRC's 'best judgment'.

The FTT concluded that the VAT Assessments had been made to best judgment.  In light of the evidence from the supplier, HMRC had reason to believe that the returns were incomplete or inaccurate, and had already advised the appellants that they needed to ensure that records were complete.  A failure by HMRC to demonstrate unexplained wealth on the part of Mrs Guo and her family did not mean that there had been no suppression of takings. Likewise, the lack of any PAYE assessments (which would have to be raised against named individuals) did not displace the quantum of the VAT Assessments.  There was nothing to demonstrate that it was improper to apply a presumption of continuity across the period during which the Company had operated its business.  The Company had not, in the FTT's view, discharged the burden of proof (which lay with it) to displace the quantum of the VAT Assessments.

Further, the FTT held that HMRC was in time to raise the CT Assessments on a discovery basis, based on an insufficiency of tax and conduct, that was at least careless (in that the Company had a second undeclared supplier account).  The FTT also held that the evidence of omissions in one year's return was sufficient to allow HMRC to apply a presumption of continuity unless, and until, that presumption could be displaced.   The appellants made no particular submissions with regard to the CT Assessments and they therefore stood.

Finally, in relation to the penalties and PLNs, the FTT held that the Company's behaviour had been deliberate and the PLNs had been correctly imposed as Mrs Guo was the sole director and directing mind of the Company and the Company had ceased to trade.

Why it matters: This decision contains an interesting discussion of the presumption of continuity principle in relation to enquiries where HMRC has evidence for only part of the period in question.

The decision can be viewed here.