principles of business taxition

Principles of Business Taxation ‘Finance Act 2006’ This฀page฀intentionally฀left฀blank Principles of Business Taxation ‘Finance Act 2006’ Chris Jones, BA CTA (Fellow) ATT Amst er dam Bost on Heidelber g London New Yor k Oxf or d Par is San Diego San Fr ancisco Singapor e Sydney Tokyo Elsevier But t er wor t h-Heinemann Linacr e House, J or dan Hill, Oxf or d OX2 8DP 30 Cor por at e Dr ive, Bur lingt on, MA 01803 Fir st published 2007 Copyr ight © 2007, Lexis Nexis UK All r ight s r eser ved The r ight s of Lexis Nexis UK t o be ident if ied as t he aut hor s of t his wor k has been asser t ed in accor dance wit h t he Copyr ight , Designs and Pat ent s Act 1988 No par t of t his publicat ion may be r epr oduced in any mat er ial f or m (including phot ocopying or st or ing in any medium by elect r onic means and whet her or not t r ansient ly or incident ally t o some ot her use of t his publicat ion) wit hout t he wr it t en per mission of t he copyr ight holder except in accor dance wit h t he pr ovisions of t he Copyr ight , Designs and Pat ent s Act 1988 or under t he t er ms of a licence issued by t he Copyr ight Licensing Agency Lt d, 90 Tot t enham Cour t Road, London, England W1T 4LP Applicat ions f or t he copyr ight holder ’s wr it t en per mission t o r epr oduce any par t of t his publicat ion should be addr essed t o t he publisher Per missions may be sought dir ect ly f r om Elsevier ’s Science and Technology Right s Depar t ment in Oxf or d, UK: phone: (+44) (0) 1865 843830; f ax: (+44) (0) 1865 853333; e-mail: per missions@elsevier co.uk You may also complet e your r equest on-line via t he Elsevier homepage (www.elsevier com), by select ing ‘Cust omer Suppor t ’ and t hen ‘Obt aining Per missions’ British Library Cataloguing in Publication Data A cat alogue r ecor d f or t his book is available f r om t he Br it ish Libr ar y Library of Congress Cataloguing in Publication Data A cat alogue r ecor d f or t his book is available f r om t he Libr ar y of Congr ess I SBN 10: 7506 8457 I SBN 13: 978 07506 8457 For inf or mat ion on all Elsevier But t er wor t h-Heinemann publicat ions visit our websit e at ht t p:/ / books.elsevier com Typeset by I nt egr a Sof t war e Ser vices Pvt Lt d, Pondicher r y, I ndia www.int egr a-india.com Pr int ed and bound in Gr eat Br it ian Working together to grow libraries in developing countries www.elsevier.com | www.bookaid.org | www.sabre.org CONTENTS Preface ix A: Introduction to the UK Tax System B: Computation of Taxable Trading Profit B1: Tr ading I ncome and t he Badges of Tr ade B2: Adj ust ment of Pr of it 14 B3: Capit al Revenue 23 B4: Capit al Allowances – Def init ion 30 B5: Capit al Allowances – Comput at ion 37 B6: I ndust r ial Buildings Allowances 47 B7: I nt angible Fixed Asset s 64 B8: Resear ch and Development Expendit ur e 73 B9: Tax Law and Account ing Pr act ice 84 C: Taxation of Limited Companies 91 V C1: Comput at ion of Cor por at ion Tax 91 C2: Associat ed Companies 102 C3: Shor t Account ing Per iods 110 C4: Long Per iods of Account 116 C5: Cor por at ion Tax Self Assessment (CTSA) 125 C6: Payment of Cor por at ion Tax 141 C7: I nt er est on Lat e Paid Tax 151 C8: CTSA Penalt y Regime 156 C9: I ncome f r om Pr oper t y 161 C10: Loan Relat ionships 167 C11: Relief f or Tr ading Losses 177 C12: Relief f or Ot her Losses 187 C13: Cor por at e Capit al Gains 192 C14: Rollover Relief 201 C15: Shar es and Secur it ies: Mat ching Rules 208 C16: Subst ant ial Shar eholding Exempt ion 223 C17: The Pr inciples of Gr oup Relief 228 C18: Gr oup Capit al Gains 241 C19: Close Company Def init ion 252 vi Cont ent s C20a: Close Company I mplicat ions – Par t 261 C20b: Close Company I mplicat ions – Par t 266 C21: I nvest ment Companies 271 C22: Cor por at e Vent ur ing Scheme 279 D: Employee Tax Matters 288 D1: Employed or Self Employed? 288 D2: I nt r oduct ion t o Employment I ncome & Benef it s 295 D3: Company Car & Fuel Benef it s 308 D4: Living Accommodat ion – Taxable Benef it s 318 D5: Loans t o Employees & Use of Asset s 325 D6: Miscellaneous Benef it s 335 D7: Expenses of Employment 343 D8: Calculat ing t he I ncome Tax Liabilit y 353 D9: I nt r oduct ion t o PAYE 360 D10: PAYE End of Year Ret ur ns 369 D11: Class Nat ional I nsur ance Cont r ibut ions 376 D12: Class 1A and 1B Nat ional I nsur ance Cont r ibut ions 388 D13: Ter minat ion Payment s 396 D14a: Occupat ional Pensions and Fur bs 408 D14b: The Ent er pr ise I nvest ment Scheme 417 E: Value Added Tax 423 E1: Over view of t he VAT Syst em 423 E2: Regist r at ion 432 E3: Def init ion of Supplies 444 E4: Liabilit y of t he Supply 451 E5: Schedule VATA 1994 – Zer o Rat ing 455 E6: Schedule VATA 1994 – Exempt ions 463 E7: Deemed Supplies 470 E8: Value of t he Supply 481 E9: Time of Supply 489 E10a: I nput Tax: When t o Recover 496 E10b: Par t ial Exempt ion 511 E11: VAT Recor ds and Ret ur ns 527 E12: Account ing f or VAT 539 E13: Bad Debt Relief 551 E14: Cont r ol Visit s, Appeals and Assessment s 559 E15a: Misdeclar at ion Penalt y 571 Cont ent s vii E15b: Lat e Regist r at ion Penalt y 577 E15c: Def ault Sur char ge 583 E15d: Repeat ed Misdeclar at ion Penalt y 590 E15e: Ot her Penalt ies, I nt er est and Mit igat ion 596 E16: Ref unds, Repayment Supplement and I nt er est 611 This฀page฀intentionally฀left฀blank PREFACE This book pr ovides all t he mat er ial you need f or t he CI MA Pr of essional Development Cer t if icat e in Business Taxat ion Wit hin each chapt er you will f ind some examples f or you t o t r y, t o t est you on t he impor t ant r ules cover ed in t he chapt er At t he end of each chapt er , t her e is a shor t summar y which cont ains a “pocket digest ” of t he r ules cover ed wit hin t he chapt er These individual summar ies f or m a compr ehensive over view of t he syllabus As t his manual has been wr it t en specif ically t o cover all ar eas of t he syllabus we ar e conf ident you will f ind t his an invaluable t ool leading t o success in t he examinat ion Ot her Penalt ies, I nt er est and Mit igat ion 607 Eit her : a) t ot al t axable and exempt supplies in t he year pr ior t o t he r et ur n or r et ur n per iods included in a volunt ar y disclosur e af f ect ed by a scheme must exceed £ 10 million; or b) t he t ot al t axable and exempt supplies must exceed t he appr opr iat e pr opor t ion of £ 10 million in t he pr escr ibed account ing per iod immediat ely pr ior t he pr escr ibed account ing per iod in which t he r equir ement t o not if y ar ose 608 Pr inciples of Business Taxat ion ‘Finance Act 2006’ Answer Paul will pay a penalt y t hat is t he gr eat er of t wo t hings; t he f ixed daily r at e penalt y or t he t ax gear ed penalt y St ar t ing wit h t he f ixed daily r at e penalt y wit h one f ailur e in t he pr evious t wo year s Paul would be looking at a f ixed daily r at e of £ 10 per day The r et ur n is 55 days lat e at £ 10 per day which would give Paul £ 550 of penalt y Alt er nat ively, Paul could be looking at t he t ax-gear ed penalt y wit h one f ailur e in t he pr evious t wo year s t hat would be one-t hir d of 1% of t he t ax due The t ax due is £ 8,900, a t hir d of 1% of t his daily, so f or 55 days £ 1,632 The gr eat er of t he t wo f igur es is t he penalt y which Paul will have t o pay which comes t o £ 1,632 Answer VAT evasion; Dishonest conduct 5% of VAT due Failur e t o r et ain r ecor ds 100% of t he under char ged mont hs lat e r egist er ing f or VAT 100% of VAT lost I ssuing a VAT invoice when not VAT r egist er ed 15% of t he VAT due or £ 50 if gr eat er Cer t if icat e of zer o-r at ing issued when pr oper t y did not qualif y f or zer o-r at ing £ 500 VAT Ot her Penalt ies, I nt er est and Mit igat ion 609 Answer The way t o appr oach t his sor t of quest ion is t o look at t he out put t ax and t he input t ax separ at ely Out put t ax I nput t ax £ £ 31.3.07 (4,000) 30.6.07 (1,000) 30.9.07 2,000 31.12.07 4,500 1,000 500 £ 1,000 out put t ax payable and £ 500 input t ax r epayable means net £ 500 out put t ax payable I n t he r et ur n t o t he end of Mar ch t he t r ader has over st at ed input t ax by £ 4,000 - £ 4,000 of input t ax or iginally claimed back f r om Cust oms which we now owe t o Cust oms I t is a negat ive £ 4,000 in t he input t ax column I n t he r et ur n t o J une t he t r ader has over st at ed out put t ax, and paid Cust oms £ 1,000 of out put t ax t oo much I t is a negat ive f igur e, but t his t ime in t he out put t ax column I n t he quar t er t o Sept ember t he t r ader has under st at ed out put t ax by £ 2,000, - £ 2,000 owed t o Cust oms in t he out put t ax column I n t he r et ur n t o December t he t r ader has under st at ed t he input t ax by £ 4,500 – t hus anot her £ 4,500 claimed as input t ax f r om Cust oms in t he input t ax column I n summar y, looking at t he out put t ax column, Cust oms owe t he t r ader £ 1,000 and t he t r ader owes Cust oms £ 2,000 Over all t he t r ader owes £ 1,000 Looking in t he input t ax column, t he t r ader owes £ 4,000, Cust oms owes t he t r ader £ 4,500 so over all Cust oms owe £ 500 Ther e is £ 1,000 of out put t ax payable and £ 500 of input t ax r epayable, so t he net f igur e is £ 500 of out put t ax payable and because t his is £ 2,000 or less t he t r ader will adj ust f or it on t he next VAT r et ur n t o be submit t ed 610 Pr inciples of Business Taxat ion ‘Finance Act 2006’ SUMMARY – OTHER PENALTIES, INTEREST & MITIGATION Cust oms have a choice of cr iminal pr osecut ion or a civil penalt y when encount er ing f r aud Unaut hor ised issue of invoices and incor r ect cer t if icat es of penalt ies zer o r at ing r esult in EU sales list s must be t imely and accur at e or penalt ies ar e char ged Ther e ar e also new non-compliance and evasion penalt ies f or impor t er s and expor t er s I n addit ion Cust oms have a whole r ange of misdemeanour s penalt ies f or a whole r ange of I f VAT has not been shown as due on a VAT r et ur n and is lat er collect ed by assessment , t hen Cust oms may char ge int er est on t hat unpaid VAT I nt er est is not char ged in cases wher e it does not r epr esent commer cial r est it ut ion I nt er est is calculat ed on a daily basis f r om t he dat e t he or iginal VAT was due t o t he dat e t he assessed VAT is paid I n pr act ice Cust oms only assess int er est unt il t he dat e an assessment is act ually issued I nt er est cannot r un f r om a dat e mor e t han year s bef or e t he dat e of t he assessment Net er r or s of £ 2,000 or less can be cor r ect ed by a t r ader adj ust ing t he VAT account and no int er est will be char ged Net er r or s exceeding £ 2,000 r equir e a f or mal disclosur e t o Cust oms and int er est will be char ged Cust oms have t he power t o mit igat e any penalt y char ged by up t o 100% in r espect of cer t ain of f ences Those of f ences ar e: t ax evasion; misdeclar at ion penalt y; r epeat ed misdeclar at ion penalt y; lat e not if icat ion of a liabilit y t o r egist er f or VAT; unaut hor ised issue of VAT invoices, and t he invest ment gold penalt y Mit igat ion can be given by Cust oms or by a VAT Tr ibunal on appeal Ther e is a r equir ement f or cer t ain businesses t o not if y Cust oms of t heir use of VAT avoidance schemes E16: REFUNDS, REPAYMENT SUPPLEMENT AND INTEREST This chapt er cover s f our t opics: r ef unds; r epayment supplement ; int er est ; secur it y E16.1 Introduction This chapt er cover s f our t opics; r ef unds, r epayment supplement , int er est and secur it y The f ir st t hr ee it ems ar e r oughly connect ed because t hey ar e all t o wit h t he sit uat ion when VAT is r ef unded t o t he t axpayer Secur it y is a dif f er ent t opic and shall be dealt wit h on it s own at t he end of t he session E16.2 Refunds Ref unds of VAT can t ake t wo f or ms; f ir st ly Cust oms will make a r ef und of VAT when t he out put t ax is less t han t he input t ax on a VAT r et ur n I n such a case t her e will be a negat ive f igur e calculat ed on t he VAT r et ur n and t his f igur e will be r ef unded t o t he t r ader , usually when t he VAT r et ur n is submit t ed s.80 The t r ader may also get a r ef und of VAT t hat he has over paid at an ear lier point in t ime – an over payment may have occur r ed if he incor r ect ly classif ied somet hing as st andar d r at ed when it should have been zer o-r at ed, et c Thus t he VAT he paid over and above t he amount due will be r ef unded t o him E16.3 Refund of VAT shown on a VAT return Once a VAT r et ur n showing t hat VAT is r epayable t o t he t axpayer is submit t ed t o Sout hend t he r ef und due will be aut omat ically dealt wit h by t he VAT Cent r al Unit They will issue inst r uct ions t o issue a cheque or make a r ef und payment int o a not if ied Bank account I f t he t ime t aken t o sor t out t he r epayment exceeds t he set limit t hen r epayment supplement will be added on t o t he r epayment made s.80 E16.4 Repayment Supplement Repayment supplement is added t o a r epayment if t he Commissioner s f ail t o issue an inst r uct ion f or a r epayment wit hin a 30-day per iod s.79 Pr ovided cer t ain condit ions ar e met , r epayment supplement is t he gr eat er of £ 50 or 5% of t he r epayment of t ax due Not ice 700/ 58/ 02 The 30-day per iod is not t he 30-day per iod f r om submit t ing t he r et ur n The 30day per iod begins on t he later of t wo dat es; 612 Pr inciples of Business Taxat ion ‘Finance Act 2006’ • t he day af t er t he last day of t he pr escr ibed account ing per iod t o which t he claim r elat es • t he dat e of t he r eceipt of t he claim, i.e t he day t hat t he VAT r et ur n is submit t ed The f ir st of t hese dat es count er s t r ader s submit t ing VAT r et ur ns bef or e t he end of t he quar t er end when a r epayment is due Cer t ain per iods ar e ignor ed when calculat ing t hat 30-day per iod The per iods lef t out of account when calculat ing t he 30-day per iod ar e t hose wher e it is necessar y t o r aise r easonable enquir ies or cor r ect er r or s The per iod t o leave out of t he 30 days is def ined as beginning when t he Commissioner s f ir st decide t hat it is necessar y t o make enquir ies and t hen ends when t hey sat isf y t hemselves t hat t hey have r eceived complet e answer s t o t he quest ions t hey r aised, or when t hey decide not t o pur sue t he enquir ies any f ur t her Any delay on Cust oms par t in act ing on t hat decision is included I n pr act ice it is Cust oms policy not t o “st op t he clock”, unt il t hey have not if ied t he t r ader of an enquir y Repayment supplement is denied if t he r epayment on t he r et ur n t ur ns out t o be incor r ect and t hus no r epayment supplement will be given t o t he t r ader f or his r epayment The def init ion of “incor r ect ” is t hat t he r et ur n is over st at ed by mor e t han t he gr eat er of £ 250 or 5% of t he cor r ect r epayment I n addit ion t o t his, no r epayment supplement is paid at all if t he VAT r et ur n in quest ion was submit t ed lat e Repayment supplement will not be paid on • r ef unds paid t o EU t r ader s; • r ef unds t o do-it -your self house builder s; • claims r elat ing t o ser vices r eceived af t er der egist r at ion; • amount s not if ied by Cust oms as over declar ed (including t hose r esult ing f r om volunt ar y disclosur es made in wr it ing t o Cust oms); or • claims f or int er est as a r esult of of f icial er r or VAT Not ice 700, par a 21.6 Ref unds, Repayment Supplement and I nt er est 613 Illustration J oe submit s his VAT r et ur n f or t he quar t er t o 31 December 2006 on 28 J anuar y 2007 showing a VAT r epayment due of £ 1,800 J oe is r ar ely in a r epayment sit uat ion so Cust oms decide on Febr uar y t o st ar t an enquir y and t hey not if y J oe of t his enquir y on 10 Febr uar y 2007 Af t er answer ing a f ew quest ions and amending t he r epayment due f r om £ 1,800 down t o £ 1,700, t he enquir y is complet ed on 20 Febr uar y 2007 Due t o and administ r at ive er r or , t he r epayment is not made t o J oe unt il 12 Mar ch 2007 Will t her e be any r epayment supplement paid t o J oe in addit ion t o t he £ 1,700 r epayment ? To answer t his quest ion t he f ir st st ep is t o decide whet her t he r epayment was issued lat e; lat e being in excess of t he 30-day per iod St ar t by looking at t he t ime bet ween t he r eceipt of t he r et ur n, which was 28 J anuar y 2007, and t he issue of t he r epayment or der , which was 12 Mar ch 2007 which is 42 days I nit ially it looks as if a r epayment supplement will be due since 42 days is def init ely in excess of 30 days However , t her e was an enquir y dur ing t his per iod of t ime and t he enquir y per iod has t o be deduct ed f r om t he 42 days The enquir y per iod was f r om 10 Febr uar y 2007 t o t he 20 Febr uar y, which is 11 days long 42 days minus 11 days is 31 days This exceeds t he 30-day cut -of f point and hence r epayment supplement will be due However , t he or iginal r epayment claim f or £ 1,800 had t o be amended and was adj ust ed downwar ds by £ 100 To be ent it led t o r epayment supplement t he £ 100 adj ust ment needs t o be less t han t he gr eat er of t wo f igur es – t he gr eat er of £ 250 or 5% of t he cor r ect payment The cor r ect r epayment was £ 1,700, which at 5% gives £ 85 The gr eat er of £ 250 and £ 85 is £ 250 So, t he £ 100 adj ust ment needs t o be less t han £ 250, which it is By being less t han £ 250, r epayment supplement is due which is 5% of t he r epayment made of £ 1,700, i.e £ 85 The r epayment paid t o J oe will be £ 1,700 plus £ 85 One f ur t her t hing t o not e about t he or iginal 42-day per iod I t is t he t ime bet ween t he dat e t he r et ur n was r eceived by Cust oms and t he issue of t he r epayment or der Do not include 28 J anuar y or 12 Mar ch when wor king out t he per iod A common er r or is t o calculat e a per iod of 44 days by count ing t he f ir st day (t he st ar t dat e), and t he last day (t he end dat e) Those dat es ar e act ually ignor ed When looking at t he enquir y per iod add a st ar t and end dat e Thus include 10 Febr uar y and 20 Febr uar y t o get t o 11 days 614 Pr inciples of Business Taxat ion ‘Finance Act 2006’ Example Alpha Limit ed submit s it s VAT r et ur n f or t he quar t er t o 31 Mar ch 2006 on 22 Apr il 2006 The r et ur n shows a r epayment of £ 2,500 On May 2006 Cust oms st ar t an enquir y int o t he r et ur n not if ying Alpha Limit ed of t his on May 2006 Af t er a cont r ol visit , which discover s no ir r egular it y, t he enquir y is closed down on 24 May 2006 Alpha Limit ed r eceives it s r epayment on J une 2006 Will r epayment supplement also be paid? E16.5 Refund of overpaid VAT A r ef und of over paid VAT would occur wher e a per son has paid mor e VAT t o Cust oms t han was or iginally due For example, a t r ader has t r eat ed cer t ain supplies as st andar d r at ed when r eally t hey should have been zer o-r at ed On t he r eceipt of t he claim, Cust oms will make a r ef und of t he over paid VAT t o t he t r ader s.80(1) Ther e is a r est r ict ion wher e a t r ader makes t he claim f or a r ef und of VAT which he or iginally paid because he had a mist aken assumpt ion about t he way t he VAT r ules applied I n a case like t his a r ef und will only be made t o t he ext ent of t he loss or t he damage which t he t r ader can show he has suf f er ed as a r esult of t he mist aken assumpt ion Ot her wise, Cust oms will allege t hat any r epayment will give unj ust enr ichment s.80(3A) – (3C) A number of changes (BN CE 8) wer e made wit h ef f ect f r om 23 Mar ch 2005 t o t he r ules on unj ust enr ichment As ment ioned above a def ence of unj ust enr ichment is available t o Cust oms in most cases when an incor r ect VAT char ge has been passed on t o cust omer s I n f ut ur e, however , t he def ence by Cust oms will be available t o all claims and not mer ely t hose wher e businesses have over paid VAT Thus it will not mat t er whet her t he claimant is in a net payment or r epayment posit ion Claims f or input t ax and f or duplicat ed payment s of VAT will not be subj ect t o t he def ence of unj ust enr ichment Repayment s will be allowed on t he basis t hat t hey will be r epaid t o t he cust omer – t his will pr event t he t axpayer being unj ust ly enr iched and Cust oms have t he power t o make r egulat ions f or over seeing t he r eimbur sement of t r ader s’ cust omer s wher e a r ef und has been made t o t he t r ader j ust f or t hat pur pose By t he same t oken, Cust oms can make r egulat ions t o claw back any r ef und which was supposed t o be passed on t o t he cust omer but t he t r ader did not t his Not ice 700/ 5/ 02 Ref unds, Repayment Supplement and I nt er est 615 Cust oms ar e not liable to refund tax paid to them more than years before the date of the claim, or year s bef or e t he dat e t he t r ader commenced legal pr oceedings if t his is ear lier This year limit applies t o all claims f or input t ax, cor r ect ion of er r or s, adj ust ment s t o t ake account of a change in t he consider at ion f or a supply, pr e-r egist r at ion expenses, post der egist r at ion expenses, adj ust ment s under t he Capit al Goods Scheme and claims f or bad debt r elief I t is an all encompassing t hr ee year limit Following FA 2005 t he st ar t dat e f or t he t hr ee year t ime limit f or claiming in t he case of er r or s on r et ur ns or volunt ar y disclosur es or t ax account ed f or on assessment s is t he end of t he r elevant account ing per iod I n t he case of a duplicat e payment , it is t he dat e of t he payment Example Paul mist akenly char ged st andar d r at e VAT on all Widget A supplies made since J anuar y 1980 He appealed t o a VAT Appeal Body on 14 Apr il 2006 t hat supplies of Widget A should be zer o-r at ed The Appeal Body r uled in Paul’s f avour on 12 Sept ember 2006 A claim was lodged f or a VAT r ef und t he next day The r ef und is r est r ict ed t o VAT paid f r om which dat e? A J anuar y 1980 D 14 Apr il 2003 B 14 Apr il 2006 E 12 Sept ember 2003 C 12 Sept ember 2006 F 13 Sept ember 2003 E16.6 Protective claims Legally t her e is no such t hing as a ‘pr ot ect ive’ claim However , Cust oms accept t hat , wit h a t hr ee-year t ime limit f or making claims, it is impor t ant f or businesses t o pr ot ect t heir posit ions when submit t ing claims subj ect t o longt er m lit igat ion Wher e t her ef or e • an Appeal Body has not r esolved an issue, or • an issue has been decided in f avour of Cust oms but is subj ect t o appeal, Cust oms policy is t o inf or m businesses t hat t hey not consider t hat a valid claim can be made in light of t he cur r ent lit igat ion but , t o avoid a needless appeal, t he claim submit t ed will be held on f ile and r econsider ed in light of any j udgment which subsequent ly suppor t s t he validit y of t he claim Once t he claim has been r econsider ed it is eit her paid or r ej ect ed I f r ej ect ed, t he business may lodge an appeal 616 Pr inciples of Business Taxat ion ‘Finance Act 2006’ Cust oms will not f ollow t his cour se of act ion in all cases For example, t hey will r ej ect speculat ive claims submit t ed on t he basis t hat f ut ur e lit igat ion of benef it t o t heir claim may be under t aken by an unconnect ed par t y, i.e f or a claim t o be valid eit her t he claimant must be pr epar ed t o def end t he basis of t he claim bef or e an Appeal Body or t her e must alr eady be on-going lit igat ion E16.7 Interest on overpaid VAT This will be int er est t hat is paid in addit ion t o t he over paid t ax being r ef unded t o t he t r ader I f a t r ader has over paid VAT t hen t her e has been a per iod of t ime when he has been unable t o use his own money because ef f ect ively Cust oms have had his money I f t his over payment ar ose as a r esult of an er r or on t he par t of Cust oms, t hen int er est can be paid t o t he t r ader Ther e ar e many r easons why VAT might have been over paid ; maybe t oo much VAT was paid t o Cust oms in t he f ir st place; maybe t oo lit t le input VAT was r eclaimed on a VAT r et ur n; or maybe t he t r ader in some way was pr event ed f r om r ecover ing VAT at t he pr oper t ime I nt er est will be applied t o t he r epayment of VAT and is calculat ed on a daily basis at f ixed r at es Ther e is a three-year restriction as seen bef or e J ust as over paid t ax is r est r ict ed t o t ax paid in t he pr ior t hr ee-year per iod, similar ly int er est is r est r ict ed t o t he same t hr ee year s To claim t he int er est a t r ader must make a claim in wr it ing wit hin t hr ee year s of t he end of t he per iod t o which it r elat es I nt er est is calculat ed on a daily basis but t her e ar e some days t hat Cust oms can ignor e f or t he calculat ion These days ar e per iods of t ime r esult ing f r om an unr easonable delay by t he claimant in making t he claim, or maybe in pr oviding inf or mat ion so t hat Cust oms can est ablish t he claim bot h in quant it y and suit abilit y f or r epayment Example This is a summar y of t he chapt er so f ar - f ill in t he missing wor ds, out of t he t hr ee opt ions, only one of which is cor r ect Select t he cor r ect answer : • Repayment supplement is t he gr eat er of £250 / £150/ £50 or 15% / 10% / 5% of t he r epayment due and is given on r epayment s of VAT wher e t he VAT r et ur n was submit t ed on t ime and wher e a r epayment or der was not made wit hin 10 / 30 / 60 days • Over payment s of VAT will be r ef unded pr ovided t he claimant will not be unjustly enriched / unfairly gained / unjustly profited • The r ight t o a r ef und and, if appr opr iat e, int er est is limit ed t o VAT paid in t he / / year s pr ior t o t he claim s.78 Ref unds, Repayment Supplement and I nt er est 617 E16.8 Compensation by Customs in cases of official error (ex gratia payments) The Tr easur y has pr ovided guidance on compensat ion payment s by gover nment depar t ment s and agencies in cases wher e maladminist r at ion has occur r ed t o t he det r iment of an individual, company or ot her body or t he sub-st andar d qualit y of t he ser vice pr ovided has had a similar ef f ect The guidance does not cover • cases wher e t her e is a st at ut or y or ot her legal obligat ion t o make payment s by way of compensat ion; or • out of cour t set t lement s or claims f or compensat ion f or br each of cont r act or negligence (on t he assumpt ion t hat , in such cases, t he depar t ment involved will act on t he basis of specif ic legal advice) The quest ion of whet her f inancial r edr ess should be paid may ar ise • as a r esult of a r ecommendat ion by t he Par liament ar y Ombudsman; • in cases wher e t he complaint has been made dir ect ly t o Cust oms which concludes t hat maladminist r at ion has occur r ed; • in cer t ain cases wher e t he st andar d of ser vice pr ovided has f allen below t hat t o which Cust oms has publicly commit t ed it self (in t he cont ext of t he Cit izen' s Char t er or ot her wise); and • in cases of maladminist r at ion discover ed by Cust oms it self r at her t han r aised by a complainant Claims against Cust oms ar e most likely t o ar ise wher e t he complainant has been put t o addit ional expense or f r uit less expendit ur e I f it is accept ed t hat maladminist r at ion has occur r ed and t hat f inancial r edr ess is appr opr iat e, t he gener al pr inciple is t o pay compensat ion which is f air and r easonable in t he light of all t he f act s and cir cumst ances of t he case Wher e t he complainant has suf f er ed act ual f inancial loss as a r esult of t he maladminist r at ion, or f aced cost s which would ot her wise not have been incur r ed (and which ar e r easonable in t he cir cumst ances), t he gener al appr oach is t o r est or e t he complainant t o t he posit ion he or she would have enj oyed had t he maladminist r at ion not occur r ed Cust oms will not meet cost s incur r ed by a business in est ablishing it s obligat ions under t he t ax or in dealing wit h r easonable enquir ies by visit ing st af f Tr ader s or t heir r epr esent at ives should submit t heir claims t o Cust oms in wr it ing Any claims f or cost s r elat ing t o wor k car r ied out should gener ally be suppor t ed by an it emised bill of cost s including • dat e of wor k; • t ime spent ; • descr ipt ion of wor k; • st at us of per son involved (e.g par t ner , VAT consult ant ); and • hour ly r at es involved 618 Pr inciples of Business Taxat ion ‘Finance Act 2006’ Ther e is no pr ovision f or ex gr at ia payment s t o be set of f against any VAT liabilit ies which may exist C&E Manual V133, par as 15.115.3 Appendices C&D E16.9 Security Secur it y is wher e Cust oms ask f or some money up f r ont , nor mally because t he t r ader has def ault ed in t he past Secur it y can be pr ovided in cash or by guar ant ee f r om an appr oved f inancial inst it ut ion and is usually r equir ed wit hin 30 days f r om t he dat e of Cust oms’ not ice r equir ing secur it y Sch 11 Par a Ther e ar e t hr ee sit uat ions in which Cust oms may r equir e a per son t o give secur it y The f ir st st at es t hat as a condit ion of making a VAT cr edit t o a per son if it appear s necessar y f or t he pr ot ect ion of t he r evenue I t will be held unt il Cust oms consider t he r isk t o collect ion no longer applies s.48(7) and s.83(6) The second st at es t hat as a condit ion of allowing t hat per son t o supply goods or ser vices by way of a t axable supply; again such act ion is necessar y f or t he pr ot ect ion of t he r evenue I n pr act ice Cust oms will nor mally seek secur it y on pr ot ect ion of r evenue gr ounds if t he per son or per sons concer ned in a business have a bad VAT hist or y For example, t hey have f ailed t o pay VAT in t he past or t hey have commit t ed a VAT of f ence or , pr eviously wer e ver y poor at meet ing VAT compliance Businesses t hat ar e r un by disqualif ied dir ect or s or undischar ged bankr upt s ar e also likely t o be subj ect ed t o a r equir ement t o give secur it y Wit h ef f ect f r om 10 Apr il 2003, Cust oms’ power s t o r equir e secur it y wher e t hey consider t hat a business r epr esent s ‘a dir ect r isk t o t he collect ion of VAT’ wer e ext ended The new pr ovisions ar e int ended t o af f ect businesses ‘which, despit e war ning, cont inue t o deal wit h ot her businesses or individuals t hat evade paying t ax’ by deliber at ely using VAT r egist r at ion number s belonging t o ot her businesses wit hout t heir knowledge; by going missing; or by becoming insolvent while owing VAT The aim of t he new pr oposal is ‘t o t ackle ser ious cases of VAT evasion wher e sever al businesses act t oget her t o at t ack t he VAT syst em’ The new pr ovisions will allow f or a pr opor t ionat e secur it y r equir ement f r om each business, in or der t o pr ot ect t he t ot al t ax at r isk in a VAT supply chain The t hir d sit uat ion wher e Cust oms may r equir e secur it y is wher e a per son has f ailed t o act upon Cust oms’ dir ect ion r equir ing him t o appoint a VAT r epr esent at ive The amount of secur it y t hat Cust oms gener ally ask f or is mont hs est imat ed VAT liabilit y This can be r educed and of t en, f or t r ader s t hat make mont hly VAT r et ur ns it is r educed t o mont hs of t he est imat ed VAT liabilit y Ref unds, Repayment Supplement and I nt er est 619 Answer Dat e r et ur n submit t ed (Not e 1) Dat e r epayment made 22 Apr il 2006 J une 2006 46 days Less: Enquir y not if ied (Not e 2) Enquir y ceased May 2006 24 May 2006 17 days Tot al (46 – 17) (Not e 3) 29 days Repayment not lat e – no r epayment supplement due Not e 1: Fir st wor k out t he init ial per iod of t ime, i.e f r om t he dat e t he r et ur n was submit t ed, which was 22 Apr il 2006, unt il t he dat e t he r epayment was made, which was J une That is 46 days r emember ing not t o count 22 Apr il or J une but r at her look at t he per iod in bet ween t hese dat es Not e 2: Fr om t he 46 day per iod deduct t he enquir y per iod and t hat st ar t s when t he enquir y was not if ied t o t he company, May, unt il t he enquir y ceased on 24 May This t ime include and 24 May - 17 days Not e 3: Tot al per iod of t ime of 46 days minus 17 days is 29 days The r epayment ef f ect ively was made 29 days lat e, which is not in excess of 30 days, so it was not made lat e enough f or r epayment supplement t o be added t o it Thus t her e is no r epayment supplement due on t op of t he r epayment f or Alpha Limit ed 620 Pr inciples of Business Taxat ion ‘Finance Act 2006’ Answer The cor r ect answer is D year s pr ior t o ear lier of : Dat e legal pr oceedings st ar t ed 14 Apr il 2006 Dat e of claim 13 Sept ember 2006 14 Apr il 2006 less year s = 14 Apr il 2003 The claim is r est r ict ed t o a t hr ee-year per iod which is t he t hr ee year s pr ior t o t he ear lier of t wo dat es Fir st is t he dat e legal pr oceedings wer e st ar t ed which in t he example was 14 Apr il 2006 The second dat e is t he dat e of t he claim The claim was not lodged unt il af t er t he appeal hear ing was hear d on 13 Sept ember 2006 So t he ear lier of t hose t wo dat es is 14 Apr il 2006 Go back t hr ee year s f r om t his dat e and t he claim can be made on VAT char ged since 14 Apr il 2003 Answer • Repayment supplement is t he gr eat er of £50 or 5% of t he r epayment due and is given on r epayment s of VAT wher e t he VAT r et ur n was submit t ed on t ime and wher e a r epayment or der was not made wit hin 30 days • Over payment s of VAT will be r ef unded pr ovided t he claimant will not be unjustly enriched • The r ight t o a r ef und and, if appr opr iat e, int er est is limit ed t o VAT paid in t he year s pr ior t o t he claim Ref unds, Repayment Supplement and I nt er est 621 SUMMARY – REFUNDS, REPAYMENT SUPPLEMENT & INTEREST Ref unds of VAT can occur when input t ax exceeds out put t ax on a VAT r et ur n On submission of t he VAT r et ur n, a r ef und will aut omat ically be made by t he VAT Cent r al Unit Repayment supplement will be added t o a r epayment if Cust oms f ailed t o issue a r epayment inst r uct ion wit hin a 30 day per iod Repayment supplement is t he gr eat er of £ 50 or 5% of t he r epayment of VAT due VAT will also be r ef unded if it was over paid in an ear lier per iod, f or example supplies which wer e t r eat ed as st andar d r at ed when r eally t hey should have been zer o r at ed On r eceipt of a claim Cust oms will make a r ef und of t he over paid VAT t o t he t r ader The Commissioner s have t he power t o wit hhold a r ef und of VAT if t hey f eel it would unj ust ly enr ich t he claimant Wher e VAT has been over paid, int er est will also be paid in addit ion t o t he r ef und of over paid t ax if t he over payment ar ose as a r esult of an er r or on t he par t of Cust oms I nt er est is r est r ict ed t o t he pr ior year per iod and is calculat ed on a daily basis I n cases of of f icial er r or t her e ar e pr ocedur es available t o claim compensat ion f r om Cust oms Wher e a t r ader wishes t o t ake advant age of a decision subj ect t o f ur t her appeal, it may lodge a pr ot ect ive claim t o ensur e it does not f all f oul of t he t hr ee year cap Secur it y is wher e Cust oms ask f or some money upf r ont because t hey ar e unsur e of t he t r ader Secur it y can be pr ovided in cash or guar ant ee f r om an appr oved f inancial inst it ut ion and is usually r equir ed wit hin 30 days of t he dat e of Cust oms not ice r equir ing secur it y Secur it y is usually asked f or wher e t he t r ader has a poor VAT hist or y in r espect of an ear lier business ent er pr ise .. .Principles of Business Taxation ‘Finance Act 2006’ This฀page฀intentionally฀left฀blank Principles of Business Taxation ‘Finance Act 2006’ Chris Jones,... is t he exist ence of a pr of it 10 Pr inciples of Business Taxat ion ‘Finance Act 2006’ B1.4 Land transactions The Revenue of t en look closely at t he pur chase and sale of land and buildings,... esult s; Profit & Loss Account; Tur nover Cost of sales Gr oss Pr of it Rent al income I nt er est r eceivable Gr oss pr of it Of f ice expenses Pr emises expenses Depr eciat ion Profit before