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What is the point in having concessions if nobody knows about them? BARRY BRAIM exhorts Customs to spill the beans.
'EXTRA-STATUTORY CONCESSIONS are remissions of revenue that allow relief in specific sets of circumstances to all traders falling within the relevant conditions. They are authorised when strict application of the law would create a disadvantage or the effect would not be the one intended.'
What is the point in having concessions if nobody knows about them? BARRY BRAIM exhorts Customs to spill the beans.
'EXTRA-STATUTORY CONCESSIONS are remissions of revenue that allow relief in specific sets of circumstances to all traders falling within the relevant conditions. They are authorised when strict application of the law would create a disadvantage or the effect would not be the one intended.'
So says paragraph 1.1 of HM Customs and Excise's Notice 48: Extra-statutory concessions which, according to paragraph 1.2, includes details of all Customs' concessions [Paragraph 1.1 of the March 2002 edition].
In an ideal world, there would not be any need for concessions at all, as the legislation itself would ensure that no unintended results could be produced. However, we live and work in the real world and Parliamentary draftsmen cannot be expected to cover every possible angle. Therefore extra-statutory concessions are a fact of life. They are to be welcomed since their raison d'être is the upholding of the spirit, rather than the letter, of the law. Customs are therefore to be applauded for their recognition of the inequities that have been found to exist and the steps they have taken to address them.
Perhaps the best known concession concerns misdirection by officers (set out in paragraph 3.5 of the notice). It recognises that human error on the part of officers can occur and ensures that taxpayers are not disadvantaged as a result. The concession is clearly written and is there in Notice 48 for all to see. As such, taxpayers, their advisers and, equally importantly, officers are aware of it and can act accordingly.
By now readers might be wondering what is the problem. Well, the problem is that paragraph 1.2 of Notice 48 is not fully accurate. The notice does not include all of Customs' concessions, so in this article I will comment upon two unpublished concessions.
Partial business use
The first unpublished concession relates to VAT incurred on goods and services used partly for business and partly for non-business purposes. Section 24(5), VAT Act 1994 provides that only the proportion of the VAT incurred which relates to business use can be treated as input tax. Hence any dual purpose VAT has to be apportioned and only partially recovered. Appendix F of VAT Notice 700 sets this out in some detail [Section 33 of the April 2002 edition].
This is the correct legal position (ignoring for reasons of simplicity the approach in Lennartz v Finanzamt München III (Case C-97/90) [1995] STC 514) and describes the position faced by many taxpayers with non-business activities. However, it is not the full picture. To gain sight of this, it is necessary to read paragraph 5.8 of Volume V1-13, Chapter 2, Section 5 of Customs' internal guidance notes for their own officers. This advises them as follows:
'Where the non-business use is regarded as insignificant, you may use your discretion to allow a waiver of apportionment. There is no statutory de minimis limit in terms of a monetary or percentage figure - it is a matter of judgment as to whether the benefit in terms of revenue is outweighed by the cost to the trader in administering and to the department in checking that it has been carried out. If you decide to allow a waiver of apportionment, you must ensure that the concession applies only for as long as the existing rate of non-business use prevails. If the extent of non-business use increases to a significant level, the trader will need to apply an apportionment.'
Clearly this is a concession, and a valuable one at that, which could benefit many charities, etc., if applied. Not only could this reduce net VAT liabilities, but it would also ease the costs of VAT compliance. Yet the concession appears nowhere in Notice 48.
Pre-registration VAT
The second unpublished concession relates to the recovery of pre-registration VAT amounts upon registering for VAT consequent upon the making of an election to waive exemption over a building. Provisions within Schedule 10 to the VAT Act 1994 permit, in certain circumstances, the partial recovery of input tax incurred prior to the election's operative date.
However, pre-election VAT is not input tax. Its recovery is on an exceptional relief basis, being governed by Regulation 111 of the VAT Regulations 1995. This lays down various conditions, including a time limit of six months for services and three years for goods. The precise rules are clearly explained in paragraph 4.9 of VAT Notice 700 [Section 11 of the April 2002 edition]. No mention is therein made of any exception to those time limits or to the interaction between the Schedule 10 and Regulation 111 provisions. One could therefore be forgiven for thinking that is the end of the matter.
But it is not. A reading of another internal guidance note, paragraph 7.6 of Volume V1-13, Chapter 2, Section 7, reveals:
'Where a registered trader opts to tax a property which he has been using to make exempt supplies, there is statutory provision in paragraph 9 of Schedule 10 to the VAT Act 1994 for a fair and reasonable attribution of input tax to be made so as to reflect the future taxable use of the property … A problem arises where the trader has not previously been registered for VAT and registers solely on account of the option to tax - as he is newly registered, the treatment of the tax incurred before his registration comes within the provisions of Regulation 111. This regulation:
- does not provide for relief for VAT on services (including construction services) received more than 6 months before registration
- does not provide for relief for VAT on goods (including a major interest) bought more than 3 years earlier
- does not provide for relief for services performed on goods bought more than three years earlier irrespective of when the services are received.
'A strict application of the regulation would therefore mean that a newly registered person was not treated equally with a person who was registered when the tax was incurred. It is accepted that this is an anomaly and we will consider granting an extra-statutory remission in suitable cases. When you encounter such a situation, please refer the matter in writing to Land and Property Branch setting out the facts and indicating how much of the tax, while considered allowable as "fair and reasonable", does not fall within the strict terms of Regulation 111, i.e. the sum for which remission is required. If Land and Property Branch considers that an extra-statutory remission is appropriate, it will pass the case to Input Tax Branch who will formally authorise.
'The restriction on services "performed on goods" (see above) also catches any newly registered person who incurs VAT on building services (including those within six months prior to registration) to a property in which he obtained a major interest more than three years before registration. Please refer any cases of this sort to Input Tax Branch, with a short report including the tax involved, and we will consider giving a remission.'
The position set out above is at odds with the guidance published in Notice 700 and no comment on this point has ever been made in Notice 742. To be fair to Customs, a passing reference to the concession is now contained in the recently published Notice 742A (dated March 2002), though this is rather vague. As a result of this internal guidance note, we know not only that pre-registration VAT can be counted as input tax for the purposes of calculating pre-election recovery, but also that affected taxpayers can claim more pre-registration VAT than is normally the case, as the time limits will not be applied. Again, no mention of this concession appears in Notice 48 which claims to include details of all Customs' concessions. I could mention another unpublished concession, but will confine myself to simply confirming its existence, relating to the sale/lease and leaseback of qualifying buildings and the disapplication by concession of the change of use provisions relating to such supplies.
Is publication relevant?
Some readers may think it is irrelevant whether a concession has been published or not, on the grounds that its mere existence is sufficient to guarantee its application in relevant cases. I suppose that is a reasonable expectation, i.e. that even though a concession may not have been published, VAT officers will be aware of it and apply it in appropriate cases. Unfortunately, my own experience suggests otherwise.
For example, in over 14 years of being a VAT adviser in practice, I have only ever seen one example of an officer applying the concession for business/non-business apportionment without being prompted. Yet in the last couple of years two requests from me have resulted in its application. This seems pretty strong evidence that officers do not ordinarily volunteer to forego collection of amounts which the law allows them to collect.
If this is indeed representative, it makes one wonder how many charities and not-for-profit bodies have needlessly applied a restriction.
If further proof is required, consider two cases involving the second unpublished concession. In 2000, a case officer was unaware of the concession, probably due to the fact that at that time it was not even included in the guidance notes. However, once made aware of it, he referred the case to head office and it was applied. I remember at the time how concerned the officer was at the lack of communication. He intimated that had he known of the concession, some past cases might have been treated differently .
The second case arose earlier this year, by which time I understand that the concession was in the internal guidance notes. It concerned a dentist who had a new building constructed. This was to be used partly for his surgery and partly to rent out. Upon completion of the works, he registered for VAT and made an election over the building. On his first return, he claimed a proportion of the VAT incurred on the building's construction and associated professional fees, including VAT on pre-registration services more than six months prior to his registration date. He did so out of ignorance of the pre-registration time limit rules, rather than out of any knowledge of the concession. A VAT officer visited to confirm the accuracy of the return. He applied the normal pre-registration six-month time limit rule, thereby disallowing a proportion of the VAT claimed. Upon being informed of the concession's existence, he referred the case to head office and the disallowance was subsequently dropped.
More proof
Further proof that a concession will not automatically be applied without prompting from a taxpayer is provided by the tribunal decision in The Trustees of Park Avenue Methodist Church (17443). Here, the trustees had building work carried out which was completed in December 1997. They eventually registered for VAT, and made an election in May 1998. Customs disallowed some of the pre-registration VAT claimed on the building works on the basis that the services in question were received more than six months before the date of registration. The trustees appealed unsuccessfully against the disallowance.
This case is particularly disturbing for a number of reasons. Firstly, as in one of my own cases, the assessing officer was either unaware of the concession or chose not to apply it. Secondly, an appeal normally leads to a review of the disputed issue by the responsible headquarters policy branch. I am at a loss to comprehend why the branch concerned failed to consider the concession's application, thereby avoiding the need for a formal hearing. It cannot have been due to a lack of knowledge of its existence, so why was it not applied? Finally, might the tribunal chairman have decided the case differently (or at least recommended that Customs reconsider the assessment), if he had been aware of the concession?
If I were advising the trustees, I would strongly recommend they now write to Customs and/or the Adjudicator to ask for a review of the assessment, and to ask why Customs' discretion was not exercised in that case.
Publish all concessions!
These cases demonstrate the need for all extra-statutory concessions to be published so that taxpayers are aware of instances of acknowledged inequity and can themselves apply for remission. It is not enough to say that officers know of concessions and apply them even when not prompted to do so. The above examples do not bear this out. Even if they did, VAT inspections now occur less frequently for most taxpayers and therefore there is an increased risk of unintended and unfair outcomes being missed.
The plain fact is that, if a concession exists, and I unreservedly acknowledge Customs' right to decide whether one should exist, it must be openly published. In particular, it must be included in any notice that claims to include all of Customs' concessions. Non-publication merely deprives taxpayers of knowledge of its existence, and hence the ability to request its application. As a result, the unintended result prevails. It is a bit like having a party but not inviting any guests. What is the point?
Unintended results
The purpose of this article is not to be critical, but to point out that unpublished concessions exist and that, due to the lack of publicity, unintended results go uncorrected. As I said earlier, Customs are to be applauded for recognising and addressing areas of unfairness. The difficulty, though, is that it is hard to applaud them when one hand is effectively tied behind your back through lack of knowledge.
I therefore urge HM Customs and Excise to do what paragraph 1.2 of Notice 48 states they already have done, i.e. to include all concessions in Notice 48.
In the meantime, the publication of contributions from other readers highlighting the existence of other unpublished concessions, not just in VAT but in all taxes, would no doubt be welcomed by all.
Barry Braim is a partner in Braim VAT Consultancy, an independent VAT practice, and can be contacted on 01740 601114 or by e-mail: barry.braim@ntlworld.com.
