Monthly Archives: March 2016

VAT Self-billing. What is it? The pros and cons

By   24 March 2016
0

Self-billing is an arrangement between a supplier and a customer. Both customer and supplier must be VAT registered.  Rather than the supplier issuing a tax invoice in the normal way, the recipient of the supply raises a self-billing document. The customer prepares the supplier’s invoice and forwards a copy to the supplier with the payment.

If a business wants to put a self-billing arrangement in place it does not have to tell HMRC or get approval from them, but it does have to get its supplier or customer to agree to the arrangement and meet certain conditions.

The main advantage of self-billing is that it usually makes invoicing easier if the customer (rather than the supplier) determines the value of the purchase after the goods have been delivered or the services supplied.  This could apply more in certain areas such as; royalties, the construction industry, Feed-In-Tariff, and scrap metal.  A further benefit is that accounting staff will be working with uniform purchase documentation.

However, there is a high risk of errors, significant confusion and audit trail weaknesses. The wrong rate of VAT may easily be applied, documents can go missing, invoices may be raised as well as self-billing documents, the conditions for using self-billing may easily be breached (a common example is a supplier deregistering from VAT) and essential communication between the parties can be overlooked.  As the Tribunal chairman in UDL Construction Plc observed: “I regard the self-billing procedure as a gross violation of the integrity of the VAT system. It permits a customer to originate a document which enables him to recover input tax and obliges his supplier to account for output tax. It goes without saying that such a dangerous procedure should be strictly controlled and policed.”

The rules

For the customer

You can set up self-billing arrangements with your suppliers as long as you can meet certain conditions, you’ll need to:

  • Enter into an agreement with each supplier
  • Review agreements with suppliers at regular intervals
  • Keep records of each of the suppliers who let you self-bill them
  • Make sure invoices contain the right information and are correctly issued. This means including all of the details that make up a full VAT invoice – details here

If a supplier stops being registered for VAT then you can continue to self-bill them, but you can’t issue them with VAT invoices (and you cannot claim any input tax). Your self-billing arrangement with that supplier is no longer covered by the VAT regulations.

The Agreement

A self-billing arrangement is only valid if your supplier agrees to put one in place. If you don’t have an agreement with your supplier your self-billed invoices won’t be valid VAT invoices – and you won’t be able to reclaim the input tax shown on them.

You’ll both need to sign a formal self-billing agreement. This is a legally binding document. The agreement must contain:

  • Your supplier’s agreement that you, as the self-biller, can issue invoices on your supplier’s behalf
  • Your supplier’s confirmation that they won’t issue VAT invoices for goods or services covered by the agreement
  • An expiry date – usually for 12 months’ time but it could be the date that any business contract you have with your supplier ends
  • Your supplier’s agreement that they’ll let you know if they stop being registered for VAT, get a new VAT registration number or transfer their business as a going concern
  • Details of any third party you intend to outsource the self-billing process to.

An example of an agreement here

Reviewing self-billing agreements

Self-billing agreements usually last for 12 months. At the end of this you’ll need to review the agreement to make sure you can prove to HMRC that your supplier agrees to accept the self-billing invoices you issue on their behalf. It’s very important that you don’t self-bill a supplier when you don’t have their written agreement to do so.

Records

If you are a self-biller you’ll need to keep certain additional records:

  • Copies of the agreements you make with your suppliers
  • The names, addresses and VAT registration numbers of the suppliers who have agreed that you can self-bill them

If you don’t keep the required records, then the self-billed invoices you issue won’t be proper VAT invoices.

Invoices

Once a self-billing agreement is in place with a supplier, you must issue self-billed invoices for all the transactions with them during the period of the agreement.

As well as all the details that must go on a full VAT invoice you will also need to include your supplier’s:

  • name
  • address
  • VAT registration number

All self-billed invoices must include the statement “The VAT shown is your output tax due to HMRC” and you must clearly mark each self-billed invoice you raise with the reference: ‘Self Billing’ (This rule has the force of law).   Details required on invoice here

Input tax

You’ll only be able to reclaim the input tax shown on self-billed invoices if you meet all the record keeping requirements.  When you can reclaim the input tax depends on the date when the supply of the goods or services takes place for VAT purposes.  This is known as the the tax point, details here

For the supplier

If one of your customers wants to set up a self-billing arrangement with you, they will be required to agree to this with you in writing. If you agree, they’ll give you a self-billing agreement to sign.

The terms of the agreement are a matter between you and your customer, but there are certain conditions you’ll both have to meet to make sure you comply with VAT regulations:

  • Sign and keep a copy of the self-billing agreement
  • Agree not to issue any sales invoices to your customer for any transaction during the period of the agreement
  • Agree to accept the self-billing invoices that your customer issues
  • Tell your customer at once if you change your VAT registration number, deregister from VAT, or transfer your business as a going concern.

Accounting for output tax

The VAT figure on the self-billed invoice your customer sends you is your output tax.

You are accountable to HMRC for output tax on the supplies you make to your customer, so you should check that your customer is applying the correct rate of VAT on the invoices they send you. If there has been a VAT rate change, you will need to check that the correct rate has been used.

Tips

  • As a supplier, take care not to treat self-billed invoices as purchase invoices and reclaim the VAT shown as input tax
  • As a customer, carry out an instant check of VAT registration numbers here
  • As a supplier or customer regularly check that the conditions for self-billing continue to be met and ensure good communications
  • As a supplier or customer ensure that the documentation accurately reflects the relevant transactions and the correct VAT rate is applied
  • As a supplier or customer ensure that there is a clear audit trial and that all documentation is available for HMRC inspection
  • It is possible to use self-billing cross-border intra-EC, but additional rules apply.









					

		





		

				

			VAT – New road fuel scale charges from 1 May 2016			
		

					
			

				

					
					 By
					 
					    
					
					 22 March 2016
				

				

					
						0					
				
       
			

				

				

			
If a VAT registered business purchases fuel for business use of its vehicles, but there is also private use of cars and other vehicles, an adjustment is required to ensure no VAT is claimed on the private consumption of fuel. This is called the VAT fuel scale charge


To make accounting for VAT on private use of fuel by car drivers a business may apply a VAT fuel scale charge, this adds back a fixed sum, per VAT period, to account of private consumption of fuel.


The scale charge is calculated according to a car’s CO2 emissions and the charge is added to Output VAT it reflects a charge for the private use of the fuel.  The road fuel scale charges are amended at each Budget.  The new rates come into effect from 1 May 2016 and may be found here


Businesses must use the new scale charges from the start of the next prescribed accounting period beginning on or after 1 May 2016.


Other Budget changes


Apart from the VAT registration limit being raised by £1,000 to £83,000 and the deregistration limit has been increased to £81,000 both with effect 1 April 2016, there were few VAT changes in the budget.









					

		





		

				

			VAT Latest from the courts – importance of invoicing requirements			
		

					
			

				

					
					 By
					 
					    
					
					 16 March 2016
				

				

					
						0					
				
       
			

				

				

			
In the recent case of Gradon Construction Ltd the validity of invoices was considered and whether input tax could be recovered in respect of them.


HMRC disallowed a claim for input tax on the basis that the supplier had retrospectively deregistered on a date prior to the date shown on the invoices.  The Tribunal decided that this was not a reason to disallow the claim.  However, it decided that the claim should be disallowed on the grounds that the invoices did not contain a description sufficient to identify the goods or services supplied, nor did they provide the quantity of the goods or the extent of the services as required by legislation.  Consequently, the documents did not meet the requirements of a valid tax invoice with the result that the recipient could not recover the amount on the documents which purported to be VAT.  HMRC has the discretion to accept alternative evidence in lieu of an invoice, but in this case the Tribunal decided that HMRC acted reasonably in not accepting any other documentation, so the recipient of the supply could not recover the input tax.


This case again highlights the crucial importance of primary documentation when it comes to VAT.  A full guide to invoices here


Information on input tax that it is not possible to claim here https://www.marcusward.co/what-vat-cant-you-claim-2/


It is crucial that a business’ invoices meet all the requirements, and that a procedure is in place to check the validity of invoices received in order to determine whether the input tax is claimable, or whether the invoice issuer should be contacted so that a valid tax invoice may be obtained.









					

		





		

				

			Latest from the courts – More on VAT on food and drink			
		

					
			

				

					
					 By
					 
					    
					
					 14 March 2016
				

				

					
						0					
				
       
			

				

				

			
OK, so most people are aware of the Jaffa Cake case and the appeals relating to smoothies and the VAT oddities that are thrown up by chocolate foods and fruit drinks.  The latest in what many view to be a ridiculous situation is the Nestlé UK Limited case concerning Nesquik powder.


Nestlé appealed against HMRC’s decision not to repay over £4 million in VAT accounted for on the sale of strawberry and banana flavoured Nesquik powder.  Nestlé formed the view that the powder which is used to flavour milk, should be zero rated in the same way that the chocolate flavoured powder and ready to drink milk based drinks it produces are.


The First Tier Tribunal found in favour of HMRC and decided that the fruit flavoured powders were a “powder for the preparation of beverages” covered by the exception from zero-rating for such products and that they were not covered by the items overriding the exceptions to zero-rating, so they remained standard-rated; hence no retrospective claim for overdeclared output tax.


So, there is differing VAT treatment depending on what flavour the Nesquik powders are, and between ready to drink products and ones where the customer has to mix them his/herself.


Fortunately, VAT is completely logical and there are simply no traps for the unwary!  My own view is that the legislation regarding food and drink is so convoluted and complex that it needs a complete rewriting.  I appreciate that case law has caused the current situation, and this has not been helped by political tinkering (pasty tax anyone?) but clarity is long overdue.  I strongly suggest that this is not the last food based case, and of course we have had them going back to the inception of VAT.  Now, this chocolate hot cross bun……









					

		





		

				

			Ten Questions every business should ask about VAT			
		

					
			

				

					
					 By
					 
					    
					
					 8 March 2016
				

				

					
						0					
				
       
			

				

				

			
1. Am I sure that a VAT inspection would not find any errors?  


    

  • An inspection can result in significant assessments, penalties and interest, apart from a business becoming “known” to HMRC. Peace of mind is a valuable benefit for a business owner too!
    • 



 2. Am I sure that I am reclaiming as much VAT as possible?


    

  • We often find that businesses miss out on recovering input tax, this clearly results in an actual cost.
    • 



 3. Do I take full advantage all available VAT reliefs, customs exemptions and duty refund schemes? 


    

  • Failure to do so will create a tax cost and may be putting a business in a less competitive position.
    • 



4. Am I up to date on the indirect tax developments in my key markets?


    

  • Indirect tax changes rapidly, and so does the market place. Being unaware of changes that affect you may result in VAT being overpaid, or penalties being levied if you have underdeclared tax. It may also put you at a competitive disadvantage.
    • 



5. Have I considered the impact of tax rate changes on my pricing and margin, and have I taken the necessary measures?


    

  • Budgeting is affected by VAT.  Failure to consider indirect taxes may eat into profit.
    • 



6. Do I collect all the data about my customers and transactions that could be required by tax authorities?


    

  • As in many VAT circumstances, getting it wrong or missing something results in penalties.
    • 



7. Do I comply with all indirect tax requirements in the jurisdictions where I operate or where my customers belong?


    

  • VAT and GST does exist outside the UK and ignoring overseas indirect tax obligations may result in action being taken by foreign authorities which will prove to be very uncomfortable and expensive.  It is important to understand the rules for indirect tax in each country/area you trade. Don’t get caught out.
    • 



8. Do I have the tools to analyse my indirect tax flows and data?


    

  • Allocating sufficient technical and human resources to VAT is important.  Seeking professional advice at the appropriate time is also prudent.
    • 



9. Could changes in the way my business is structured or how transactions are organised improve my indirect tax position and/or reduce complexity?


    

  • Saving money and reducing tax complications must be near the top of every business’ wish list. Seeking professional advice on structuring a business or a transaction goes a long way to achieving this
    • 



10. Is my business using the right VAT scheme?


    

  • There are many special schemes that a business may use, from the Flat Rate Scheme to Margin Schemes. Most are optional, but some, like the Tour Operators’ Margin Scheme are compulsory. Choose the wrong one, or being unaware of a beneficial scheme could cost.
    • 



It is important to constantly monitor a business’ VAT position.  The nature of trade changes, technology changes, case law changes and the VAT rules are constantly in a state of flux.  It is easy to assume that everything is alright because it has always been done that way, but there may be significant exposures and missed opportunities out there.  We offer services from a basic healthcheck to a full technical review.  A review will let you rest easy in your bed if nothing else!









					

		





		

				

			What VAT CAN’T you claim?			
		

					
			

				

					
					 By
					 
					    
					
					 2 March 2016
				

				

					
						0					
				
       
			

				

				

			
The majority of input tax incurred by most VAT registered businesses may be recovered.  However, there is some input tax that may not be.  I thought it would be helpful if I pulled together all of these categories in one place:






Blocked VAT ClaimsWebsite Images0006


A brief overview


    

  •  No supporting evidence
    • 



In most cases this evidence will be an invoice (or as the rules state “a proper tax invoice)” although it may be import, self-billing or other documentation in specific circumstances.  A claim is invalid without the correct paperwork.  HMRC may accept alternative evidence, however, they are not duty bound to do so (and rarely do).  So ensure that you always obtain and retain the correct documentation.


    

  • Incorrect supporting evidence
    • 



Usually this is an invalid invoice, or using a delivery note/statement/pro forma in place of a proper tax invoice. To support a claim an invoice must show all the information set out in the legislation.  HMRC are within their rights to disallow a claim if any of the details are missing.  A full guide is here: https://www.marcusward.co/vat-invoices-a-full-guide/


    

  •  Input tax relating to exempt supplies
    • 



Broadly speaking, if a business incurs VAT in respect of exempt supplies it cannot recover it.  If a business makes only exempt supplies it cannot even register for VAT.  There is a certain easement called de minimis which provide for recovery if the input tax is below certain prescribed limits. Input tax which relates to both exempt and taxable activities must be apportioned. More details of partial exemption may be found here: https://www.marcusward.co/wp-content/uploads/2014/03/Partial-Exemption-Guide.pdf


    

  •  Input tax relating to non-business activities
    • 



If a charity or NFP entity incurs input tax in connection with non-business activities this cannot be recovered and there is no de minimis relief.  Input tax which relates to both business and non-business activities must be apportioned. Business versus non-business apportionment must be carried out first and then any partial exemption calculation for the business element if appropriate. More details here: https://www.marcusward.co/wp-content/uploads/2014/03/Charities-and-Not-For-Profit-Entities-A-Brief-VAT-Guide.pdf


    

  •  Time barred
    • 



If input tax is not reclaimed within four years of it being incurred, the capping provisions apply and any claim will be rejected by HMRC.


    

  •  VAT incurred on business entertainment
    • 



This is always irrecoverable unless the client or customer being entertained belongs overseas.  The input tax incurred on staff entertainment costs is however recoverable.


    

  •  Car purchase
    • 



In most cases the VAT incurred on the purchase of a car is blocked. The only exceptions are for when the car; is part of the stock in trade of a motor manufacturer or dealer, or is used primarily for the purposes of taxi hire; self-drive hire or driving instruction; or is used exclusively for a business purpose and is not made available for private use. This last category is notoriously difficult to prove to HMRC and the evidence to support this must be very good.


    

  •  Car leasing
    • 



If a business leases a car for business purposes it will normally be unable to recover 50% of the VAT charged.  The 50% block is to cover the private use of the car.


    

  •  A business using certain schemes
    • 



For instance, a business using the Flat rate Scheme cannot recover input tax except for certain large capital purchases, also there are certain blocks for recovery on TOMS users


    

  •  VAT charged in error
    • 



Even if you obtain an invoice purporting to show a VAT amount, this cannot be recovered if the VAT was charged in error; either completely inappropriately or at the wrong rate.  A business’ recourse is with the supplier and not HMRC.


    

  •  Goods and services not used for your business
    • 



Even if a business has an invoice addressed to it and the services or goods are paid for by the business, the input tax on the purchase is blocked if the supply is not for business use.  This may be because the purchase is for personal use, or by anther business or for purposes not related to the business.


    

  • VAT paid on goods and services obtained before VAT registration
    • 



This is not input tax and therefore is not claimable.  However, there are exceptions for goods on hand at registration and services received within six months of registration if certain conditions are met.


    

  •  VAT incurred by property developers
    • 



Input tax incurred on certain articles that are installed in buildings which are sold or leased at the zero rate is blocked.


    

  •  Second hand goods
    • 



Goods sold to you under one of the VAT second-hand schemes will not show a separate VAT charge and no input tax is recoverable on these goods.


    

  •  Transfer of a going concern (TOGC)
    • 



Assets of a business transferred to you as a going concern are not deemed to be a supply for VAT purposes and consequently, there is no VAT chargeable and therefore no input tax to recover.


    

  •  Disbursements
    • 



A business cannot reclaim VAT when it pays for goods or services to be supplied directly to its client. However, in this situation the VAT may be claimable by the client if they are VAT registered. For more on disbursements see here: https://www.marcusward.co/disbursements-vat/


    

  •  VAT incurred overseas
    • 



A business cannot reclaim VAT charged on goods or services that it has bought from suppliers in other EC States. Only UK VAT may be claimed on a UK VAT return. There is however, a mechanism available to claim this VAT back from the relevant VAT body in those States. However, in most cases, supplies received from overseas suppliers are VAT free, so it is usually worth checking whether any VAT has been charged correctly.


Input tax incurred on expenditure is one of the most complex areas of VAT.  It also represents the biggest VAT cost to a business if VAT falls to be irrecoverable.  It is almost always worthwhile reviewing what VAT is being reclaimed.  Claim too much and there could well be penalties and interest, and of course, if a business is not claiming as much input tax as it could, this represents a straightforward cost.