OTS review of Value Added Tax BT s Response June 2017

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1 OTS review of Value Added Tax BT s Response June 2017

2 OTS review of Value Added Tax We welcome the opportunity to respond to the OTS interim report on its review of how to simplify VAT to ensure it is fit for purpose in the UK s modern economy. BT Group plc (BT) is the holding company for a number of subsidiaries providing fixed-line mobile and broadband services. BT is the biggest provider of telecommunications services in the UK and controls a number of large subsidiaries, including EE (which is the largest mobile operator in the UK with over 30 million connections of which 15 million are 4G). In addition BT has a consumer division which supplies telephony, broadband, and subscription television services in the UK to around 18 million customers and a business division which sells communications and IT services to over 900,000 customers in the UK (including Corporates, SMEs and public sector bodies). It also operates a Global Services division which supplies telecoms services to corporate and government customers worldwide. BT pays a significant amount of VAT each quarter (usually around 500m). It was announced at Autumn Statement 2016 that the OTS has been asked to conduct a simplification review into the VAT system. Following the initial phase of work an interim report paper has now been published along with a list of questions and a call for evidence. Please note that BT has only given a general response to those areas that directly relate to it. Partial Exemption BT s exempt income is less than 0.25% of BT s total turnover and the vast majority of that exempt income relates to mobile handset insurance sold to its customers. Partial exemption can also arise unexpectedly in the following areas: Treasury functions which are ancillary to the efficient running of a taxable business and should not result in a partial exemption position. Real estate transactions can cause uncertainty in terms of whether or not they are deemed to be incidental. Allocating directly attributable input tax to exempt income is a relatively straight forward exercise. However, as a consequence of the size of BT and the input tax it incurs, a partial exemption special method is required in relation to residual input tax. This results in a disproportionate amount of time being spent on partial exemption by HMRC and BT where the business itself is nearly fully taxable. A flat-rate or sector specific method for partial exemption calculations would be beneficial for businesses who wish to use such a facility. A significant amount of time is spend by both parties in agreeing a special method and there would be merit in HMRC working in partnership with trade bodies and associations to agree an industry-specific partial exemption framework.

3 Where a flat-rate or sector specific method does not give a fair and reasonable result HMRC or the business should be allowed to apply a bespoke method. Option to Tax Many business will have a policy of opting to tax on all their commercial properties. Where properties have been held for a number of years both the business and HMRC may no longer have formal confirmation of when the property was originally opted. As an example BT recently sold a property it had owned for a number of years and on which it is likely it would have exercised the option to tax in the early 1990s (which is BT s policy). However, BT no longer holds such confirmation and neither did HMRC. BT then had to re-submit an option for the property to confirm to the buyer that VAT was due. The Real Estate Election ( REE ) is available to businesses at the moment. However, our understanding is that it only applies to interests in property acquired from the date the REE is agreed. Can the REE be extended so that it covers all commercial properties already held by a business? From BT s perspective it would be preferable if the default was that the option to tax automatically applies to all commercial properties. The decision then has to be consciously made by a business that an option will not apply. There are many valid reasons why a business may not want to opt a commercial property and if it is in the businesses commercial interests not to opt they will make sure that the appropriate records are kept to prove that VAT is not due. Administration The search facility on the GOV.UK site is limited and makes it difficult to find information unless you already have a good idea of what you are looking for. There are other sources of information available to tax professionals at a cost (for example Tolley s online services) and they are easier to navigate, search, are up to date and explain matters in a more easily understandable manner than some of HMRC s publications. For a large business with a tax function these on-line reference services are an invaluable resource. However, there are many smaller businesses who will not have the resource to use such a facility and will rely on HMRC s website for information. BT employs a large number of finance staff who have a knowledge of tax and VAT through their technical training. On many occasions the BT VAT Team have been contacted by finance staff who have tried to use the HMRC website but have not been able to find what they want or have been confused by what they have found. A site guide for on-line guidance would be useful but the search also facility needs to be improved. An automatic notification service would also be a useful feature.

4 Penalties The application of penalties seems to be a very subjective exercise by HMRC officers and there should be more consistency of approach across the board in relation to definitions of prompted/unprompted, when a penalty should be suspended and the conditions to be applied to a suspension. There should also be openness in the process at the moment it seems that the Penalty Consistency Panel and Tax Disputes Resolution Board are involved in some way but it is unclear whether that is only if there is a dispute or when a penalty is not applied. The lack of openness creates an atmosphere of mistrust which does not encourage a full and frank dialogue. It must be remembered that businesses like BT do not deliberately make errors. Any errors that do occur are usually as a result of an administrative mistake, a miscoding, a posting or a breakdown in a control process. BT wants to make sure that it accounts for the correct tax at the correct time in order to minimise any future liability. HMRC has a four year period in which any errors can become a liability. This can create great uncertainty for a business especially if an error from previous year ends is reflected in the current years accounts. As a consequence BT s tax team is constantly reviewing figures to try and mitigate any potential exposure. Where any errors are found HMRC are informed. The penalty regime should be used to encourage best practise and good behaviours and not to punish businesses that are trying to meet their tax obligations. The aim of the penalty regime is to influence taxpayer behaviour to generate better compliance. A system more like speeding fines could be helpful in achieving this end, provided that penalties are not applied by reference to the size of the business or transaction values. The most important factor is that businesses should be encouraged to actively look for and notify errors to HMRC so that the correct tax is paid. With regard to VAT errors, prior to the introduction of the current penalty regime, penalties were not applied when an error was voluntarily disclosed (provided the disclosure was unprompted) and this approach should be reinstated. Appeals procedure Litigation can be a long and costly exercise for both business and government. It does seem that ADR is currently under used as it is not clear when such a route is applicable. The ADR route should be promoted as a way forward where-ever practical. When HMRC issue a decision letter the taxpayer is informed that they can either have a decision reviewed by an HMRC officer independent of the dispute or they can appeal. This decision letter should also give consideration to the use of ADR if appropriate.

5 There is a mistrust of the review process (which is viewed mostly as a rubber stamp exercise with the reviewing officer upholding the original decision) but there is much more positive feedback when the ADR process has been followed. Even if no settlement can be reached at ADR the process means that the full facts have been debated which assists all parties if litigation is ultimately pursued. Formal ruling system BT is a large and complex business operating in an industry which is at the cutting edge of technology. If it requires a formal ruling from HMRC it is usually because the issue at hand is related to the VAT treatment of a new product or commercial operation which is either unclear in HMRC s current guidance or is not included at all. In many instances the BT Large Trader team will answer the question and will respond quickly. In some circumstances it is necessary for the matter to be passed to HMRC Policy for a decision and this seems to happen once or twice a year. When a matter does go to Policy the time delay increases significantly. For example, BT requested a formal ruling on one matter in November 2016, the matter was passed to Policy and as of June 2017 BT had still not received a reply. Where a ruling relates to a new product launch or to an imminent commercial operation this type of delay creates uncertainty and the transaction will likely have passed by the time the ruling is received. In these circumstances HMRC could offer a service whereby a formal ruling is guaranteed to be offered by an agreed date for a set fee (we understand this facility is offered in other countries). VAT and Making Tax Digital Alignment Opportunities It is currently unclear how MTD will affect VAT within large businesses. More clarification and consultation on how MTD will impact VAT and HMRC processes is needed before a view can be given on this. We would be happy to discuss these issues further. Further enquiries can be directed to David Pincott, Head of Political Research, Policy and Briefing, BT Group. Tel: / david.pincott@bt.com.