The Blog

Should conveyancers class search fees as disbursements?

It’s a tricky question and one that’s been attracting widespread interest and speculation as a result of the recent Brabners V The Commissioners for HMRC case.

This particular case has really caused a stir within the world of conveyancing as it questioned whether or not electronic searches should be classed as disbursements when charging conveyancing clients.

Brabners V The Commissioners – a quick case overview

Brabners argued that these searches should be classed as disbursements because they are conducted at their clients’ request and the search reports belong to their clients. All solicitors have historically treated this cost as a disbursement that’s incurred on behalf of the client, which means it isn’t subject to VAT.

However, HMRC challenged this practice by arguing that these searches form part of the overall service that’s provided by solicitors and should therefore be subject to VAT.

Last month (September), the judge concluded that search fees should not be treated as disbursements and are therefore liable for VAT to be charged. The decision was based on the fact that Brabners prepares separate reports on the search results and is therefore using the search information as part of its overall service. As a result, Brabners were liable to pay more than £68,000 in VAT.

What does the ruling mean for conveyancers?

Ideally, solicitors need to err on the side of caution. This particular case may potentially be appealed as it appears to directly contradict the principles previously agreed between HMRC and The Law Society.

The Law Society has stated that it’s currently considering the implications of the case findings and intends to provide solicitors with updated advice as soon as possible.

Until that guidance is given and a clear outcome has been reached, the best option for solicitors is to make sure they don’t treat search fees as disbursements. If they do, they run the risk of potentially becoming the next Brabners and having to pay thousands of pounds in unpaid VAT in the process.

If you’re unsure about what the recent ruling means for your business or would like some more advice about the situation, contact VAT Specialists on 01905 777600 or hello@ormerodrutter.co.uk.

My taxes are being investigated! What’s going to happen next?

My taxes are being investigated! What’s going to happen next?

Tax investigations can happen to businesses of all sizes, whether you’re a sole trader who’s been running for a year or a corporate enterprise with multiple offices that have been established for two decades. Individuals can also receive an enquiry letter from HMRC too.

 Here, our Tax Inspection Manager, Anthony Middleton, lifts the lid on what businesses and their owners can expect when they’re being investigated by HM Revenue and Customs (HMRC), as well as the steps they can follow.

All tax investigations, whether that’s PAYE, Corporation Tax, Income Tax or individual Self Assessments, are carried out by HMRC, with most companies or owners first finding out that their tax affairs are going to be scrutinised via letter. In some circumstances, HMRC will call organisations to tell them they’re going to investigate them, which tends to mainly be for VAT-related enquiries.

There are formal notices and informal requests for information, the details of which we’ll cover in a separate article at a later point. Businesses will typically be given 30 days’ notice to respond to any requests for information. If they’ve received a telephone call, then a tighter schedule may be involved. However, in all situations, it’s up to the company that’s being investigated to decide whether or not what’s being requested is manageable in terms of their own timescales. Early discussions with HMRC to amend timescales are preferable.

There are two different routes HMRC can choose to go down. They can either look at a whole return, which is known as a Full Enquiry, or a single item or area of a return, referred to as an Aspect Enquiry. 

Regardless of the route that’s being taken, investigations tend to follow a similar process, which should ideally be dealt with as follows:

STEP 1: Notify your accountant

This may seem like a really obvious point, but companies or individuals who have an accountant (or ‘agent’ in HMRC’s language), don’t always tell them that they’re going to be investigated. They assume their accountant knows everything, but this isn’t always the case. For instance, HMRC, might write to the company about three taxes, but only write to their accountant about two as they only have the authority to discuss matters where a relevant authority has been signed. Never assume that your accountant knows that HMRC has been in touch with you.

STEP 2: Analyse what’s required

So, now that you know HMRC want to look into your tax affairs, the next step is to ascertain exactly what is it they’re after. What information are they requesting to see? How can you help them answer the question(s) they’re posing? And is what they’re asking for accurate?

It’s worth noting here that the type of tax that’s being explored and how many taxes that are being investigated will impact the length of the investigation.

STEP 3: Don’t be afraid to say ‘no’

Obviously, it’s important that you’re as co-operative as possible with HMRC and provide them with the details they require within the given timescales (usually within 30 days). In fact, it’s a common fact that companies that give, help and tell during the course of their enquiry are more likely to receive reduced penalties if errors have been made and additional tax is due.

However, co-operation aside, there are instances, when HMRC do ask for information in Opening Letters that they aren’t necessarily entitled to know about at that given time.

For example, you might be a limited company and you’re being asked in your Opening Letter to share all of your personal bank statements as a company director. Usually, this is something HMRC are actually not entitled to see at this stage. It’s essential that their requests for information are made at the right time and that they’re not just simply ‘fishing’ around for information. If you’ve followed the advice in Step 1 and notified your accountant, then they’ll be able to advise you on what can and can’t be divulged at this stage. Alternatively, you may want to seek professional help from a tax investigation specialist.

STEP 4: Provide what’s required

It’s important that you do provide HMRC with the details they’re entitled to see within the given timescales. Ideally, you should produce the information that’s been requested of you through your accountant.

STEP 5: Be patient (and potentially expect to hear from HMRC again)

HMRC will analyse the information you’ve shared with them and, if they have any further questions or if there are any causes for concern raised by what you’ve divulged, then you’ll receive another letter from them.

STEP 6: If there are no problems, look out for your Closure Notice

Assuming everything’s ok and your tax affairs all add up, you’ll be issued with a Closure Notice that confirms your enquiry is over and no additional tax is due. End of investigation.

STEP 7: Check HMRC’s calculations

When a Closure Notice is issued, and HMRC issue revised assessments or calculations based on their findings, be sure to check them. These computations should be correct, but they can sometimes be wrong. Make sure any adjustments have been entered correctly, and the tax rates that have been used are correct. In certain circumstances, it can be difficult to amend them at a later date or even get them revised.

STEP 8: If there are any issues, be prepared to discuss them

If HMRC do identify any problems, there are different ways you can choose to progress your enquiry. You might want to call a meeting with them, which you can attend with your accountant or ask your accountant to attend on your behalf. The aim of this meeting should be to ascertain what the issues are that have been identified and what HMRC requires going forward.

Hopefully, by scheduling the meeting and discussing your enquiry face-to-face, any queries can be quickly identified and ironed out and you’ll hopefully receive your Closure Letter quickly. HMRC often request a meeting to see company directors or representatives. There’s no legal requirement to attend a meeting with them. All meeting requests should therefore be discussed and carefully considered.

STEP 9: Weigh up your options

If your further communication with HMRC has resulted in you having a disagreement with them (unfortunately this can happen), then now’s the time to weigh up your options.

More often than not, businesses continue to debate the issue(s) at hand for a number of months, which finally results in HMRC issuing a Closure Notice through a Decision Letter.

OPTION 1 – Internal review

If you don’t agree with the Closure Notice, then you can ask for an Internal Review to be carried out by a HMRC employee who wasn’t involved in the original investigation. There’s no additional cost involved in requesting an Internal Review. However, you do need to ensure it’s done within the correct time parameters.

OPTION 2 – Alternative Dispute Resolution (ADR)

Alternatively, you can go to ADR, where members of HMRC’s dedicated ADR team act as a mediator between the taxpayer, accountant and HMRC, and look to identify if there’s a way around the particular problem. It could be that there’s been a genuine mistake or information has simply been misinterpreted. This can be a sensible option to hopefully avoid the need to go to a Tax Tribunal.

OPTION 3 – Tax tribunal

Beyond ADR, there are two tax tribunals (1) First Tier (for the vast majority of enquiries) and (2) Upper Tier (for more complex enquiries, as well as First Tier Tribunal appeals).

There are four different types of First Tier Tribunals:

  1. Paper (can be conducted informally, so there’s no need for the taxpayer to attend).
  2. Basic case.
  3. Standard (for middle of the road investigations).
  4. Complex

Most tribunal hearings are chaired by legally qualified tribunal judges, who often sit with specialist, non-legal members – for example, doctors, accountants, surveyors or those with particular experience of disabilities or the armed services – depending on the subject matter of the hearing.

It’s worth bearing in mind that the longer your investigation takes to sort, the greater the cost implications, which could include appointing a solicitor or tax barrister at this stage. You may need to consider the commerciality of continuing with an enquiry, even if you disagree with HMRC. Tribunals can be extremely time consuming to prepare for and, as a result, expensive.

The scale and complexity of tax investigations do vary from business-to-business and individual-to-individual however, by following this best practice advice, taxpayers and their businesses stand a much greater chance of navigating their way around the investigation process as efficiently and effectively as possible. Always consider penalties when responding to HMRC as they’re tax geared and can be reduced if you fully co-operate with HMRC.

For more information or to discuss your tax investigations with one of our tax investigation specialists, contact us on 01905 777600 or mail@ormerodrutter.co.uk.


DSC6529 (1)About the author

Anthony Middleton is responsible for monitoring all of Ormerod Rutter’s tax investigations and deals specifically with Corporation Tax and Income Tax enquiries. He has been a member of the team for 13 years.

 


 

VAT: Flat Rate Scheme Changes

HMRC has announced that, as from the 1 April 2017, all businesses using the Flat Rate Scheme or intending to use the Scheme will have to consider (in addition to the existing conditions) whether or not their VAT inclusive expenditure on goods is either:

  • less than 2% of their VAT inclusive turnover in a prescribed accounting period; or
  • greater than 2% of their VAT inclusive turnover but less than £1000 per annum, or proportion thereof (ie, £250.00 per quarter or (£83.33 per month).

If this criteria is met then the business will be regarded as a “limited cost trader” and MUST apply a fixed Flat Rate percentage of 16.5% to its’ VAT inclusive turnover.

All businesses using or considering using the Flat Rate Scheme should now review their status.

If you would like to discuss anything in this article please contact either David Pegg or Leanne Macgregor on 01905 777600

Pre VAT registration input tax claims – HMRC approach challenged

Have you been affected by HMRC seeking to restrict input tax claims on pre VAT registration costs?

A newly VAT registered fully taxable business has historically been allowed to fully recover VAT incurred in the following circumstances:

  • on services incurred up to 6 months prior to VAT registration and that have not been supplied on to a third party
  • on stock and assets purchased up to 4 years prior to VAT registration, to the extent that the goods or assets are still on hand at the date of VAT registration and are being used by the business (an apportionment may be required if some have been sold).

However, HMRC has recently been seeking to restrict VAT on qualifying goods and services by attempting to view the “use” of such goods or services over their useful, economic life, and dis-allowing, proportionately, any “use” of the goods, assets or services prior to VAT registration.

A number of businesses have received Assessments of VAT or have been instructed to amend their VAT returns.

This approach has been found to be incorrect and inconsistent with EU legislation and HMRC has now issued Revenue and Customs Brief 16 (2016) confirming that taxpayers who have been assessed or had their input VAT restricted in this way may now seek a refund.

Correcting Errors – Making a Claim?

If you need help with making an input tax claim, please contact us now.

Be warned there are time limits in place to correct errors, which are as follows:

  • 4 years from the end of the VAT period in which any adjustment was made; or
  • 4 years from the end of any VAT period Assessed by HMRC.

If you would like to discuss anything in this article please contact either David Pegg or Leanne Macgregor on 01905 777600.

What does Brexit mean for VAT?

On 23 June the UK voted to leave the EU. This decision will have implications for businesses, individuals, the economy and the tax system.

However, the decision to invoke Article 50 and give official notice to exit the EU has not yet happened, and we will remain a member of the EU for at least the next 2 years.

It’s important to remember that the UK economy is essentially strong, and whilst we will see movements in exchange rates and the markets in the short term, they will eventually find their level.

The Chancellor has discounted the possibility of an emergency Budget in response to ‘Brexit’, but we can expect a clearer roadmap of how the UK’s tax and spending plans will evolve going forward to be outlined in the Autumn Statement.

One significant area likely to be affected will be VAT.

Value Added Tax derives from European law and was introduced in the UK as part of our original accession to the Common Market in 1973. However, it is one of the largest revenue generating taxes for the UK government, so it is unlikely to be abolished or significantly changed as a result of Brexit.

The way VAT currently operates is closely connected to our EU membership in many different ways. For UK businesses operating mainly within the UK, the effects of any changes are likely to be less than those for more internationally-focused businesses.

Going forward, the UK government will have more flexibility over the setting of VAT rates and liabilities. The current single claim mechanism will cease to apply and the process for UK businesses to reclaim VAT incurred in EU member states will become more administratively complex.

Cross border reclaims will need to be made to individual member states and will depend on the UK offering reciprocity (i.e. paying UK VAT claims from EU member states).

The changes for VAT on international transactions are likely to be more significant, and will be more dependent on the terms of the UK’s exit.

As a full member state of the EU, the UK is currently within the single market and the customs union, which means borderless movement of goods within the EU. If we negotiate a similar position to Norway and other EEA states, this will give us continued access to the single market. However, Norway is not within the EU customs union. This has significant implications for the VAT treatment of the movement of goods.

If we are outside the EU customs union, all goods moving between the EU and the UK will require customs clearance for VAT purposes, although there may be no customs duties imposed. For good entering the UK from the EU, import VAT will need to be paid or deferred before they can be cleared. This is likely to lead to delays and increased administrative costs, and increases the likelihood of a customs border being needed between Northern Ireland and the Irish Republic.

Businesses with complex supply chains will need to keep these under review and assess the implications as the financial position becomes clearer. Future plans will need to be flexible and take into account potential future changes.

Businesses selling good online to consumers in EU member states will need to review their business models, unless specific arrangements are negotiated. Currently, UK VAT is charged until sales reach a certain level when local VAT registration is needed. When the UK leaves the EU, the default position would be that EU customers would need to pay the import VAT due on their online purchases before the goods could be delivered to them.

Although nothing will change in the short term, and very little may change for UK focussed businesses in the future, there will be major considerations for any business with significant trading relationships with the EU. This will need to be kept under review as the situation develops.

However, it is important not to act in haste while so much remains unclear. Over the coming months we should start to see some clarity over how the UK’s relationship with the EU will evolve and these detailed negotiations will determine the exact arrangements going forward.

If you have any concerns or questions about your VAT position, please contact us to speak to our expert VAT advisors today.

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