Walkers’ Sensations Poppadoms – are they subject to VAT?

Walkers’ Sensations Poppadoms were ruled to be subject to VAT at the standard rate in a recent Tribunal decision.

What’s the issue?

Although food is generally zero-rated for VAT purposes, there are several exceptions. Within these exceptions are potato crisps, which are standard-rated and 20% VAT is payable. The guidance clarifies that potato crisps should be packaged for human consumption, without further preparation, and made from potato crisps, sticks, puffs, and similar products.

In a case held at the First-Tier Tribunal, Walkers argued that their Sensations Poppadoms should be zero-rated, as they were made from potato granules, therefore not falling within HMRC’s definition. HMRC disputed this claim, with the view that the product was made using around 40% potato products, including potato granules and starch. Although not listed explicitly in their definition, HMRC argued that potato granules and starch are made of dehydrated potato and the regulation therefore applies. The proof is in the potato, it seems.

Why is this important?

The result of this case will have significant implications for manufacturers in the snack food industry, with similar products on the market now possibly subject to the standard rate. There are some key takeaways which may be relevant for future product analysis:

Walkers’ argument that the products were designed to be used with dips was dismissed, as this was not stated on the product packaging. This highlights that businesses cannot securely rely on certain conditions of the legislation if their product packaging does not support their argument. Promotional material was also assessed, which ultimately suggested that no preparation was required to enjoy the product.

HMRC was successful with their argument that the product was “made from the potato”, despite the product having only 40% potato-based ingredients. This shows that a product does not need to have a majority of potato-based ingredients, as with potato crisps, but that a significant proportion will suffice.

HMRC disregard Walkers’ argument that the product is more similar to traditional poppadoms, which are zero-rated, than to potato crisps. In response, it was argued that the product’s similarity to other products is irrelevant; the only similarity that matters in this context is its similarity to a potato crisp.

The Tribunal drew on the concept of nominative determinism in response to Walkers argument that the products are called “poppadoms”, not potato crisps. They argue that simply by naming the product “poppadoms” does not change the fact that it is ultimately a potato crisp. With a highly memorable line, it was put forward that “calling a snack food “Hula Hoops” does not mean that one could twirl that product around one’s midriff”.

This decision sheds light on the relevance of fiscal neutrality, supporting the principle that similar products should have a similar VAT treatment to ensure fair market conditions.

As the discussions surrounding snack foods and VAT continue to roll on, we anticipate that HMRC may consider revisions to the legislation to reduce the scope for dispute and confusion. In light of this, businesses should ensure they continue to monitor the guidance to ensure they remain compliant with any changes.

How can we help?

The Sensations Poppadoms case emphasises the complexity and ever-changing nature of this area of VAT.

 Businesses selling any potato-based snack foods may require review to confirm the VAT liability. To book your free consultation with our specialists, please contact us by using the form below. 

Deregistering for VAT when assets are on hand

Why should I read this?

If your business deregisters for VAT and still owns business assets, it may be required to pay VAT to HMRC. It is known as making a ‘deemed supply’. Your business could have assets on hand including stock, commercial vehicles, computers, plant/equipment, and property. The VAT payable is calculated by using the market value of the assets on hand if you were to sell them at the date of deregistration.

The exceptions are:

  • If the total price you would expect to pay for all the assets or similar in the present conditions is less than £6,000.
  • If you have assets on hand which you did not incur VAT on when you originally purchased them.
  • If you incurred VAT when you purchased the asset but did not reclaim the VAT as input tax.

If one of these exceptions applies, you do not need to pay VAT to HMRC on the market value of the assets.

In general terms, HMRC do not impose the requirement to pay VAT on any assets on hand at the date of deregistration if you were not entitled to recover VAT when the assets were bought by the business.

This is a lucrative area for HM Revenue & Customs in terms of raising VAT assessments. We believe that HMRC are paying closer attention to the deregistration process, because their questionnaire which has been revised and requires a more detailed response by the business.

Practical example

A retail business identified a reduction in its taxable sales and the annual turnover went below the VAT deregistration threshold of £83,000.

The retailer decided to deregister for VAT as it would reduce the administration when completing VAT returns and as it would no longer need to charge VAT to customers, it could reduce its prices.

At the date of deregistration, the business had stock, fixtures and fittings, a van and a small area of land which was rented to a third party, and VAT was charged to the tenant.

The total market value of these assets was £120,000, and the business had reclaimed the VAT it incurred when the assets were originally purchased.

At the date of deregistration, the business has made a deemed supply and would be required to pay 20% VAT to HMRC (£24,000).

How can we help?

If you are required to deregister or considering deregistering for VAT because your business has fallen below the threshold and your business holds an interest in land or property or still owns business assets, it is worth pausing to understand if there are any VAT implications or possible traps.

Our team are experienced at assessing the risks associated with deregistration and can confirm how best to mitigate any VAT payable when your bu

Tax – A Risky Business?

Have you ever stopped to think about what the tax risks are in your business? What about tax governance?

For directors of many SME’s this isn’t uppermost in their mind, but the larger a company grows, the more important this becomes and for large corporates, this is definitely something that significant attention should be given to. 

Tax Strategy 

For all businesses, a worthwhile starting point is to think about what their approach to tax risks in the business, and how do they want to act in their dealings with HMRC.

Do the directors want to take a cautious approach, avoiding risks wherever possible, or are they happy to adopt more uncertain tax treatments (which large businesses are required to disclose to HMRC) or perhaps take a chance on risky tax avoidance schemes? How transparent does a business want to be, and does it want minimal disclosures or is it happy to disclose as much as possible?

For larger corporates – those with turnover of over £200m or total assets of over £2 billion, as well as multi-national enterprises with worldwide turnover over €750m – it is a requirement to publish a Tax Strategy Document on its website and update annually.

Many businesses that fall below the threshold nevertheless find the process of developing a Tax Strategy helpful and if published is a signal that they are a professional organisation with good governance.

Senior Accounting Officer

UK companies or groups that have consolidated turnover of more than £200m and/or total assets of more than £2bn not only need to have a Tax Strategy, but they will also fall with the Senior Accounting Officer (SAO) rules.

This requires companies to nominate an individual to take on the role of Senior Accounting Officer, and submit a certificate to HMRC certifying that the company had appropriate tax accounting arrangements in place each year, which means companies have to get serious about their tax data and procedures.

Identifying & Documenting Risk 

One of the first steps in managing the tax risks in your company is to identify what risks there are, and whether they are low, medium or high risk. Consider the different taxes that your business pays and the tax returns and other filings that it does. Next look at how robust the processes are which underpin this.

Risks will vary widely across different sectors, and all businesses will be different, but some key risk areas worth thinking about include:

  • Contractors & Employment Status
  • Transfer Pricing
  • Cross border tax issues
  • Global mobility & international workers
  • Tax reliefs & claims

A business’s tax systems can be an important risk area to consider too, for instance, do the systems in place adequately categorise income and expenditure for tax purposes and identify non-allowable expenditure?

For some businesses certain taxes will create higher risks than others, for instance in the construction industry, the Construction Industry Scheme (CIS) may be a high risk area for some, whereas for partially exempt businesses, VAT may be a big risk area.

Once a business has identified its high risk areas, it can put in place to mitigate this, along with with a tax risk map and procedures to ensure this is regularly reviewed and updated.

Corporate Criminal Offences – Not Just Your Own Risks

You might think that your company has enough to worry about dealing with its own risks, but unfortunately you also need to be vigilant against facilitating the tax evasion of other parties thanks to the Corporate Criminal Offences (CCO) regime. This doesn’t have any threshold so applies to all companies.

It creates a risk of failing to prevent the facilitation of tax evasion of another party by one of your associates (which could be employees, agents or suppliers) in the course of your business activities.

To have an adequate defence, you need to ensure you’ve reviewed your risks from a CCO perspective, have a suitable policy and procedures in place and training for staff. You also need to review your supply chain and conduct appropriate due diligence.

So there’s a lot to think about here, and while it is the larger corporates that have more legal requirements when it comes to tax risk, it is worthwhile for all businesses no matter their size to consider their tax risk position and start reaping the benefits, whether that’s a low risk rating and hands off approach from HMRC, a more attractive proposition for any future purchaser when it comes time to sell your business or just the peace of mind which comes from having a coherent, sensible and informed approach to tax.

How can we help?

If you’d like to discuss anything covered in this article, get in touch with your local MHA contact today by filling in the form below.

Research & Development Tax Relief – new requirement to pre-notify HMRC

Companies who carry out Research and Development projects can claim Corporation Tax relief on some or all of the costs of their projects, subject to the project meeting HMRC’s definition of R&D. 

HMRC has recently introduced several changes to the Research and Development (R&D) tax relief scheme, and whilst claimants are now getting to grips with the new ‘Additional Information Form’, which became compulsory on 8 August 2023, the next change on the horizon is a requirement to pre-notify HMRC of a company’s intention to claim R&D relief. 

This latest requirement will be particularly crucial for companies who haven’t claimed the relief before or haven’t claimed relief for a few years. 

It is considered that this rule has been introduced as a further measure to tackle abuse and improve compliance with the scheme. 

When will a company be required to pre-notify HMRC? 

Pre-notification will apply to all accounting periods beginning on or after 1 April 2023.  This means that the first accounting period which will be affected will be the year ended 31 March 2024.   

A company must notify HMRC within six months of the end of the accounting period in which the R&D project took place, to be able to claim the R&D tax relief. For example, a company with a year-end of 30 April 2024 must notify HMRC that it intends to claim R&D tax relief by 31 October 2024. 

What information does HMRC require? 

Aside from some general company details, a company will be required to provide a summary of the ‘high-level planned activities’, e.g., if a company has developed software, it should state what the software will be used for, to show that the project meets HMRC’s definition of R&D.  The company will not be required to include evidence – this should be provided on the Additional Information Form when the claim is submitted. 

Pre-notification is submitted to HMRC via an online form which is accessed through a Government Gateway account and can be completed by a representative of the company or an adviser acting on behalf of the company. 

What happens if a company does not notify HMRC? 

In a similar vein to the rules on the Additional Information Form, any R&D claim submitted to HMRC without first notifying will be removed from the company tax return and the relief will be denied, regardless of whether the claim is eligible.   

Are there any exemptions from this requirement? 

Yes, companies who have previously claimed R&D tax relief, are exempted from the requirement to pre-notify if the company has made an R&D claim during three years ending with the deadline for pre-notification.   

For example, if a company has a year-end of 30 September 2024, it will have a deadline to notify HMRC of its intention to claim by 31 March 2025, however, it is exempted from pre-notification if it has made an R&D claim at any point between 1 April 2022 and 31 March 2025. 

This exemption may catch out companies who have extended their accounting period at any point in the last three accounting periods but have not claimed R&D tax relief every year. 

What does this mean for my company? 

If your company hasn’t claimed R&D tax relief before, or hasn’t claimed relief in the last three years, you need to ensure that your company notifies HMRC of its intention to claim the relief at any point between the start of the accounting period and six months after the end of the accounting period. 

If your company is not sure if it can make an R&D claim, it is still worthwhile submitting a pre-notification form as the company will not be required by HMRC to submit a claim if it later decides not to pursue a claim or finds that the project does not qualify. 

VAT and private hire – Government announces consultation

MHA Indirect Tax partner, Jonathan Main, discusses the latest update on the Uber v Sefton Council high court decision from earlier this year.

Why should I read this?

In my last article, I discussed the implications of the Uber v Sefton Council High Court decision on the private hire sector.

Uber succeeded in convincing the court that English and Welsh private hire operators (“PHOs”) outside London should be licensed as principals with the implication that PHOs would need to pay VAT on both account and private journeys. This would be a fundamental change for the industry, affecting profits in the sector and the financial viability of operators.

The parties to the case have sought leave to appeal the High Court decision and to be granted an injunction against any local authorities changing their licensing arrangements until the conclusion of the litigation.

Given the request for the case to be referred to the Court of Appeal and the potential injunction to prevent local authorities pre-empting the outcome of the case, my advice at the time was “steady as she goes”. HMRC’s guidance has not changed, and you can therefore continue to act as agent for private journeys.

Although this position has not changed in the short term, there is now an issue which I believe requires your urgent attention.

Buried in Page 95 of the Autumn Statement published on 22 November, HM Treasury (“HMT”) made the following announcement, “VAT Treatment of Private Hire Vehicles – The government will consult in early 2024 on the impacts of the July 2023 High Court ruling in Uber Britannia Ltd v Sefton MBC.”

Why does this matter?

Think of a consultation process as the starting pistol being fired at the beginning of a race. Unfortunately, this could be a sprint, rather than a marathon. In my experience HMT typically issue a consultation when they have already decided on their preferred outcome. For example, the two most recent HMT consultations published in September and November 2023 invited views on draft legislation designed to implement its preferred outcome.

From HMT’s perspective, a consultation is a chance for them to stress test their preferred future tax treatment, rather than invite ideas on a potential way forward.

It is far easier to influence the content of a consultation than to derail a process which is already underway. I have observed the progress of or been involved in many consultations over the last 30 or so years in the profession and can only recall one high profile consultation in the education sector, which ran aground once it became clear that HMT had failed to reconcile opposing views in the sector.

I have spoken to operators, industry experts, and presented at a recent industry webinar. I have heard widely differing views on the future for the industry, which leads to the inevitable conclusion that not everyone, including me, can be right!

What can I do?

A brief recap on the current situation. Why are private journeys in a minicab like Schrodinger’s cat, both subject to VAT and VAT free at the same time?

  • The fare paid for a journey in a vehicle that carries less than 10 passengers is subject to VAT.
  • Unless you either employ the driver or the driver has worker status, you will be their agent and they will be liable to pay any VAT to HMRC.
  • The VAT registration threshold at which a self-employed driver must register for VAT is £85,000 per year. As minicab drivers typically earn less than £85,000 per year from their self-employed business activities, they do not need to register for VAT.
  • Private minicab journeys are therefore both subject to VAT and VAT free at the same time!

As the cat is now out of the bag, hoping that nothing changes does not feel like a viable option. The option to act as an agent feels less certain going forward, leading to a potential shift in VAT liability from driver to operator.

What options are available?

  • We are waiting for the publication of the decision in the litigation at VAT Tribunal involving Bolt and HMRC. I understand that Bolt is arguing that VAT should only be paid on the profit it earns, rather than the full fare. For most operators, this may preserve the status quo if you compare profit on the fare to the fees earned from drivers.
  • There is a well publicised industry campaign to preserve the VAT free status of private journeys by extending zero-rating to journeys in all vehicles, not just those which carry at least ten passengers.

The fact that HMRC are in litigation with Bolt confirms that they do not agree with the extension of a VAT scheme for Tour Operators (the Tour Operator’s Margin Scheme or “TOMS”) to the private hire sector.

The most coherent approach I have seen is the industry drive to extend zero-rating for all passenger journeys. This approach can be an end in itself or may encourage HMT to consider a reduced rate of 5% VAT as an alternative for the sector.

At this stage, I would urge you to support any lobbying activities to preserve the status quo, namely no VAT on private journeys. I have said previously that private hire is the only form of passenger transport with VAT.

There is no VAT if we travel by bus, minibus, coach, train or aircraft. There will be no VAT for a journey in a licenced hackney cab unless the driver earns more than £85,000 per year.

Private hire is a lifeline for many parts of our communities who cannot afford a car, may find it difficult to access other forms of public transport because of their personal circumstances, or simply because there is no available bus or train service. It seems grossly unfair to single out this form of transportation purely because of unrelated licencing regulations.

I mentioned in my webinar presentation that inaction leads to the Government’s preferred outcome. Now that we know that there will be a consultation exercise, this is clearly the case.

Finally, this could also be presented as an unexpected Brexit dividend. The UK could not extend zero-rating to private hire pre-Brexit, because we were bound by the restrictions of EU law. This is an opportunity to convince the Treasury and your local MP to support our local communities by providing targeted relief from VAT.

What is CESOP?

New CESOP reporting guidance for Payment Service Providers (PSPs)

The European Commission has created a Central Electronic System of Payment Information (CESOP) to help detect and combat VAT fraud on cross-border e-commerce.

From 1 January 2024, new European regulations will require all EU payment service providers (PSP) to collect and report data relating to certain cross-border payments.

Who is subject to CESOP?

The CESOP obligations relate to PSPs as defined in the Payment Services Directive 2015/2366 “PSD2”, which includes Credit, Electronic money and Payment Institutions. Also included are institutions that benefit from the Small Payment Institutions exemption (SPIs). Therefore, almost all PSPs that provide payment services to EU customers will be in scope.

PSPs will be required to report transactional data on cross border payments where the payer is located in the EU. All types of payments are in scope, including credit transfers, direct debits and e-money transactions.

PSPs will be required to transmit data on a calendar quarterly basis to their local member state tax authority. Reporting should be made in a standardised XML format.

Latest CESOP guidance and updates

On 24 November 2023, the Commission issued an updated version of its CESOP guidance and FAQ documents.

These documents expanded on previously provided guidance. In particular, it develops on how PSPs should determine the location of payer and payees. These changes are made following the Commission’s workshop on 15 September 2023 and makes clearer previous guidance that PSP’s should not solely rely on the IBAN to determine a parties location but must consider if alternative data is available.

The revised guidance also gives further guidance on how PSPs should apply aggregation when determining whether more than 25 payments have been made to single payee. This has been an area of concern since CESOP was first discussed and the new guidance still leaves some questions unanswered on how this will apply in practice.

Next Steps

All PSPs with activity in the EU should review the amended guidance and assess the impact on their organisations approach to CESOP.

Be aware of the VAT rules surrounding business gifts, meals, and parties

Traditionally, businesses may give gifts at Christmas to reward employees for good work or show appreciation to clients. Generally, when a business incurs VAT on these expenses, the VAT will be recoverable as input tax if the gift is a ‘business gift’.

There are unlikely to be any invoices raised to, or monetary payment received from, the lucky recipient, so it is easy to overlook the VAT implications when you come to pass the gift on.

Many businesses will also be looking forward to bringing colleagues together at dinners, lunches, or parties to celebrate the season. Later in this article, we will break down the VAT treatment of these events and explain the rules for recovery.

Input tax incurred on the purchase of gifts is only recoverable if it is given away, as a ‘business gift’. Concerning gifts, if the gift costs less than £50 (excluding VAT), no output tax will be due.

The £50 limit applies per person within a rolling 12-month period. So, if you provide an individual customer with 3 gifts in a period of 12 months, each costing £20 plus VAT, you have breached the annual limit and would need to pay output tax for each gift given, in the corresponding return period. The threshold applies to individuals, not businesses, so you can spend up to £50 on employees working within the same organisation or on individual customers.

A business gift is a gift which:

  • Is made in the course of promoting the business;
  • You were entitled to reclaim the VAT charged on its purchase; and
  • Is voluntarily and unconditionally given, with no consideration received from the recipient in return (whether monetary or non-monetary).
  • The gift can be given to customers as well as employees, and it doesn’t need to be branded with the business logo or name to qualify.

You won’t be able to recover input tax in the first place on goods which are given away for non-business purposes, for example to friends, relatives, or the owners of the business, so there is no need to account for output tax.

You might have noticed that we have only mentioned goods so far. This is because the gift of a supply of your own services for no charge is generally not seen as a supply and no output tax will be due. However, if services are purchased from a third-party and later given away, free of charge, output tax will be due.

When it comes to Christmas parties and meals, you are probably familiar with the idea that for business entertainment, you can only recover VAT on hospitality when it is provided, free of charge, for your staff. This includes directors and partners, as long as the event is open to all staff.

Recovery of input tax incurred on entertainment which is freely given to non-staff is blocked. ‘Business entertainment’ refers to hospitality of any kind, including the provision of food and drink, accommodation, or tickets to events. If you do decide to invite customers, plus-ones, or previous employees, you will need to apportion your input tax claim based on how many of your guests are members of staff.

For VAT there is no limit on the cost of entertaining employees. Input tax is recoverable regardless of the amount spent per staff member.

What can I take away from this?

This festive season, you might like to consider a VAT-efficient approach as follows.

Gifts

The most cost-effective gifting option would be to keep the cost of your gifts below £50 plus VAT per person (within a 12 month period). If you do this, you can recover the input tax incurred, without having to pay over any output tax. It’s a win-win!

Perhaps, your business might specialise in the manufacturing of corporate gifts. Considering the above, keeping your prices below £50 could boost your sales!

Meals and parties

For maximum input tax recovery, the simplest option is to only invite your own staff, directors, and partners to your Christmas party. However, if you would like to invite other guests, you might consider charging a small admission fee. 

Do you remember that business entertainment is only blocked from recovery if the entertainment is provided free of charge to non-staff? In charging an entry fee, the party is no longer supplied free of charge and the input tax is fully recoverable. 

The fee cannot be optional (or ‘discretionary’), but there is no set minimum.

What does this mean for me?

At VAT compliance visits and checks, HMRC will routinely review VAT recovery on entertainment expenditure. It is therefore important to know when input tax is recoverable and when output tax is due on gifting or staff entertainment expenses, to ensure you have accounted for VAT correctly and do not run the risk of incurring VAT assessments, interest, and penalties. 

You should make sure that your accounting system can cope with the different treatment and implications of any parties planned or gifts to be given.

How can MHA help?

If you would like clarification on any of the points discussed in this article, please contact our VAT and Indirect Taxes team using the form below.

Our specialist team are also able to provide a risk-assessment review of your supplies or, in the event of any errors, assist with your error correction with a view to mitigating penalties.

Is the way you calculate your profits changing?

Currently, unincorporated businesses have the option to either use the accruals basis (AB), which is the default method, to calculate the profit or loss for their business or adopt the cash basis (CB) of accounting.  

The latter is generally used by smaller businesses, as it offers a simplified regime – when accruals basis (AB) can be convoluted – that reduces the complexity of reporting income to HM Revenue and Customs (HMRC), while still providing an appropriate measure of trading profits.  

However, the use of cash basis is subject to a number of restrictions, as it can only be elected if the gross receipts of a business is less than £150,000.  

In addition, such businesses are forced to disapply their claim, in certain circumstances, if their turnover is more than £300,000 and will therefore need to use the accruals basis (AB). Finally, qualifying businesses are subject to a maximum deduction on their interest payments and the way losses can be used by a sole trader or a partner in a general partnership is limited. 

What has changed?

Following the Autumn Statement 2023, while there was obvious attention to the national insurance contribution changes  – which we have discussed in our Autumn Review – for unincorporated businesses, HMRC announced that, from 2024/25 onwards, the cash basis (CB) will be the default method for calculating business profits. The accruals basis (AB) will still be available, but businesses will have to opt in, which is a reversal of the current position. 

Alongside the change to the default method of calculation, the restrictions noted above will also be removed from the start of the next year. This will mean that cash basis (CB) will now be open to businesses regardless of their size of turnover.  

In addition, unincorporated businesses will no longer be limited to a max deduction of £500 on their interest payments, which considering the high interest rates currently in place provides a more realistic deduction as opposed to the current limit.  

Finally, under current rules, losses available under the cash basis (CB) could only be carried forward and set against future profits of the same trade. The new measure will allow losses under cash basis (CB) to be used in the same way as losses under AB and so a loss can be relieved by way of sideways relief against general income of the same or an earlier tax year. Furthermore, the availability of the loss relief claims will be particularly beneficial for new start-ups, who may be expecting a loss in their earlier years of trade, that can then be relieved in a prior year against their other income. 

Should I change to cash basis (CB)? 

With the removal of the restrictions to cash basis (CB), you might wonder whether your business should change their basis of accounting and so consideration needs to be made to the following: 

  • Whether the use of accruals basis (AB) is more appropriate for your business? & 
  • If your business is eligible for the cash basis (CB)? 

Businesses that will not qualify for cash basis (CB) are a mixed partnership, that has a corporate member, a limited liability partnership and business that have made a claim for farmers’ or artists averaging. 

How can MHA help? 

Here at MHA, we have a team of tax advisory specialists who can assist you in your decision making as to whether your business model is appropriate for cash basis (CB) or if even the new measure is applicable to your entity.  

Please contact us should you wish for us to look at your business tax affairs and we can advise accordingly.