Category Archives: HMRC Publications

VAT: Insurance partial exemption

By Marcus Ward 24 January 2023

HMRC has issued new guidance for the insurance sector. It will be relevant to those dealing with partial exemption for insurers, including business and HMRC when discussing how partial exemption applies in practice for an insurer.

The guidance is intended to help insurers agree a fair and reasonable partial exemption special method (PESM) with the minimum of cost and delay. It also helpfully sets out definitions of various insurance/reinsurance transactions and business structures.

Background

Insurance businesses usually make a mixture of exempt and taxable supplies and may also provide specified services to customers located outside of the UK which incur a right to recover input tax.

When determining how to calculate the recoverable elements of input tax, the starting point is with the standard partial exemption method, as defined within The VAT Regulations 1995, regulation 101, but this will rarely be suitable for the insurance sector.

Many insurance businesses are complex organisations that provide many different services of differing liabilities to customers, often in different countries, using costs form suppliers around the world in different proportions. In addition, certain costs may have little relation to the value of the supplies for which they are incurred.

Therefore, most insurance businesses will need to apply to HMRC for approval to use a PESM.

Fair and reasonable

Partial exemption is the set of rules for determining recoverable input tax on costs which are used, or intended to be used, in making taxable supplies which carry a right of deduction. The first step is usually allocating costs which are directly attributable to taxable or exempt supplies. The balance (overhead input tax, or “the pot”) is required to be apportioned by either a standard method (The “standard method” requires a comparison between the value of taxable and exempt supplies made by the business) or a PESM.

A PESM needs be fair and reasonable, namely:

robust, in that it can cope with reasonably foreseeable changes in business
unambiguous, in that it can deal, definitively with all input tax likely to be incurred
operable, in that the business can apply it without undue difficulty
auditable, in that HMRC can check it without undue difficulty
fair, in that it reflects the economic use of costs in making taxable and exempt supplies

HMRC will only agree the use of a PESM if a business declares that it has taken reasonable steps to ensure the method is fair and reasonable. HMRC cannot confirm that a special method is fair and reasonable but will make enquiries based on an assessment of risk and will never knowingly approve an unfair or unreasonable special method.

Attribution of input tax

In the insurance sector, relatively few costs are either used wholly to make taxable or exempt supplies.

The VAT regulations (see above) require direct attribution to be carried out before cost allocation to sectors. However, direct attribution at this stage can cause difficulties where tax departments are unaware of how particular costs are used and have a large number of such costs to review.

It has therefore been agreed between HMRC and the Association of British Insurers that, whilst direct attribution must still take place, it need not always be the first step, and could, for some costs, follow the allocation stage. Methods could refer to direct attribution both pre- and post-allocation, so that costs are dealt with in the most appropriate way. The underlying principle is that the method must be both fair and reasonable.

Types of PESMs

The guidance gives the following examples of special methods:

sectors and sub-sectors
multi pot
time spent
headcount
values
number of transactions
floor space
cost accounting system
pro-rata
combinations of the above methods

with descriptions of each method.

VAT: Increase in interest rates

By Marcus Ward 11 January 2023

As a consequence of the change in the Bank Of England base rate from 3% to 3.5%, HMRC’s interest rates for late payment and repayment will also increase.

These changes will come into effect on:

26 December 2022 for quarterly instalment payments
6 January 2023 for non-quarterly instalments payments

The HMRC publication Information on the interest rates for payments will be updated shortly.

HMRC interest rates are set in legislation and are linked to the Bank of England base rate. Late payment interest is set at base rate plus 2.5%. Repayment interest is set at base rate minus 1%, with a lower limit, or “minimum floor” of 0.5%.

VAT: How to remove penalty points under the new system

By Marcus Ward 9 January 2023

HMRC has introduced new penalty and interest rules for late returns and payments from 1 January 2023. Details here.

On 4 January 2023 HMRC published guidance on how to remove these points to avoid a penalty. This is particularly important if a business has reached the penalty point threshold.

The penalty thresholds are:

annual returns – 2 points
quarterly returns – 4 points
monthly returns – 5 points

If a business is at the limit and has the maximum points allowed for its accounting periods, it can remove them by meeting two conditions which are:

to complete a period of compliance, submitting all returns by the deadline
to submit all outstanding returns for the previous 24 months

The guidance sets out how these tests are calculated and applied.

VAT: Selling goods using an online marketplace – new guidance

By Marcus Ward 3 January 2023

HMRC has published new guidance for use when a business sells goods using an online marketplace (an e-commerce site that connects sellers with buyers where transactions are managed by the website owner) or direct to customers in the UK.

It can be used to check when a seller is required to pay UK VAT.

It is important, especially for sellers based outside the UK, to understand the tax consequences when such marketplaces are used. It is not always possible to rely on the platforms to deal with output tax on sales made to UK recipients.

The guidance covers:

selling goods using an online marketplace
selling goods direct to customers in the UK
checks online marketplaces need to do
VAT when goods are returned to the seller

VAT: Museums and galleries – update

By Marcus Ward 13 December 2022

Museums and galleries which offer free admission to the public may be eligible for refunds of VAT under the Museums and Galleries VAT Refund Scheme. Eligible bodies are listed Value Added Tax (Refund of Tax to Museums and Galleries) Order 2001. This list published as an annex to VAT Notice 998. This list has been updated.

HMRC has announced that the scheme has now reopened for eligible museums and galleries. The closing date for this round of applications has been extended to 5pm Wednesday 1 March 2023.

To be considered for inclusion in the scheme museums or galleries must:

be open to the general public for at least 30 hours per week, without exception
offer free entry, without prior appointment
hold collections in a purpose-built building
display details of free entry and opening hours on the museum or gallery website

Background

Museums and galleries offering free access are not regarded as being engaged in any business in relation to this activity. They may, of course, have other activities that in their own right are business activities, for example, catering, sales of books and gifts and exhibitions for which there is a charge.

Via the usual VAT rules, it is not possible to recover the VAT incurred on goods and services purchased to support non-business activities. Thus VAT incurred in connection with the free admission of the public is not normally recoverable.

However, the government will reimburse this otherwise irrecoverable VAT. For this to be the case, the provisions of section 33A of the VAT Act 1994 must apply, and the museum or gallery must be named in an order made by HM Treasury.

Examples of acceptable claims are for VAT incurred on:

items and collections on display
goods and services necessary for their upkeep
upkeep of the part of the building in which they are housed
provision of free information in relation to the items or collections on display, including advertising and other promotional material

Claiming

Application forms may be requested by emailing vat33a@dcms.gov.uk

VAT Domestic Reverse Charge technical guide

By Marcus Ward 12 December 2022

An overview of the Domestic Reverse Charge (DRC) here.

HMRC has published amended guidance on the DRC. The main change involves the supply of scaffolding on zero-rated new build housing. The guidance confirms the change to HMRC’s previous policy and that there will be transitional period up to 1 February 2023 where businesses can use either reverse charge accounting or normal VAT rules.

Updated guidance on agents VAT registering clients

By Marcus Ward 7 December 2022

HMRC has published updated guidance for agents registering business for VAT. Broadly, the new document covers what information agents require, which may be summarised as:

the agent’s Government Gateway user ID and password for either agent services account or HMRC Online services
agent’s name
agent’s phone number
agent’s email address
the client’s name
client’s date of birth
details of client’s turnover and nature of business
client’s bank account details
client’s National Insurance number
a form of ID from the client, eg: passport or driving licence
client’s Corporation Tax Payments, PAYE, Self-Assessment Return, recent payslip or P60

Limited companies

If an agent is registering a limited company client, they must have a Company Registration Number and a Corporation Tax Unique Taxpayer Reference (UTR) to complete the VAT registration process.

Individuals and partnerships

These applications do not need to have a Self-Assessment UTR to register for VAT, but if they do, it must be supplied.

An agent will be asked to verify the entity it is registering, therefore it is prudent to obtain the basic history and background of the applicant’s business before starting the process. Cleary this is good practice generally!

A VAT Did you know?

By Marcus Ward 28 November 2022

Colouring books are zero rated unless they contain swear words, nudity or theft – in which case they are standard rated.

Claiming UK VAT from overseas

By Marcus Ward 28 November 2022

With news that HMRC is testing a new electronic submission portal – the Secure Data Exchange Service (SDES) system for overseas businesses to recover VAT incurred in the UK, I thought it timely to look at the process. Especially as the deadline is 31 December 2022 for VAT incurred between 1 July 2021 and 30 June 2022.

The SDES is currently being tested. However, it is available to businesses to make claims, but during the testing period a claimant will need to email HMRC to request access.

Access to SDES request

Claimants wishing to use SDES, are required to email newcastle.oru@hmrc.gov.uk and should include:

‘SDES’ in the subject field
confirmation that the business would like to use the SDES
whether there is a Business Tax Account already set up

HMRC says it will contact the requestor within 15 calendar days to start the registration process and provide registration guidance.

Any queries on the registration process, may be addressed to the Overseas Repayment Unit on 0300 322 9279

If it goes wonky

HMRC states that during testing there may be times when SDES be stopped without notice. If it is stopped, claimants will be told by HMRC updating its online guidance. Further: If the service is stopped, it will not affect the claims that have already been submitted through it.

The alternative to claiming during testing is the good old-fashioned paper claims.

Claims in the UK

A non-UK based business may make a claim for recovery of VAT incurred in the UK. Typically, these are costs such as; employee travel and subsistence, service charges, exhibition costs, tooling, imports of goods, training, purchases of goods in the UK, and clinical trials etc.

Who can claim?

The scheme is available for any businesses that are:

not VAT registered in the UK
have no place of business or other residence in the UK
do not make any supplies in the UK

What cannot be claimed?

The usual rules that apply to UK business claiming input tax also apply to claims from overseas. Consequently, the likes of; business entertainment, car purchase, non-business use and supplies used for exempt activities are usually barred.

Amount

There is no maximum claim amount, but for most periods of less than twelve months a minimum of £130 of VAT must be claimed. For annual claims or for periods less than three months ending on 30 June, the VAT must be at least £16.

Process

The business must obtain a Certificate Of Status (CoS) from its local tax or government department to accompany a claim.

The CoS must be the original and contain the:

name, address and official stamp of the authorising body
claimants name and address
nature of the claimant’s business
claimant’s business registration number

The CoS is only valid for twelve months. Once it has expired you will need to submit a new CoS.

HMRC has previously announced (RCB 12 – 2018) that it is taken a firmer stance on what constitutes an acceptable CoS.

Claim form

The application form is a VAT65A and is available here Original invoices which show the VAT charged must be submitted with the claim form and CoS. Applications without a certificate, or certificates and claim forms received after the deadline are not accepted by HMRC. It is possible for a business to appoint an agent to register to enable them to make refund applications on behalf of that business.

Deadline

Claim periods run annually up to 30 June and must be submitted by 31 December of the same year. With the usual Christmas rush and distractions, it may be easy to overlook this deadline and some claims may be significant. Unfortunately, this is not a rapid process and even if claims are accurate and the supporting documents are in all in order the claim often takes some time to be repaid. Although the deadline is the end of the year HMRC say that it will allow an additional three months for submission of a CoS (only).

Payment

Refunds are made within six months of a “satisfactory application”.

Further information is available here HMRC guidance.

VAT: New process to support repayment claims

By Marcus Ward 14 November 2022

HMRC has announced a useful new tool for speeding up repayment payments.

When a business submits a repayment return (when input tax exceeds output tax) HMRC may carry out a “pre-cred” (pre-credibility check) inspection or queries. This is to ensure that a claim is valid before money is released.

If not subject to a visit, a business is likely to be asked for information to support a claim. Such requests are more common if a business normally submits payment returns or it is a first return. The requested information is usually in the form of copy purchase invoices or import documentation.

Prior to the changes, HMRC sent a letter by snail mail and the information would also be returned by post. This was often subject to delays and “misunderstandings”.

From this month, HMRC has launched an online form so that a claimant, or an agent, can upload documents to support the claim via the Government Gateway. It is hoped that this will result in businesses receiving a repayment in shorter order.

HMRC require:

the VAT registration number
the CFSS reference number from the HMRC letter
details of the main business activities
the date the business began
the VAT rates that apply to sales
details of any VAT schemes
the detailed VAT account
the five highest value purchase invoices, and
any additional specific information requested by HMRC

Depending on circumstances, HMRC may also need:

bank statements
export sales invoices or supporting documents
import VAT documents
hire purchase or lease agreements
completion statements and proof of transfer of funds for the purchase of land or property
the planning reference and postcode of construction
sales invoices where non-standard VAT rates were charged

HMRC aim to look at this information within seven working days and will contact the claimant or agent when a decision is made, or if any further information is required.

Let us hope that speeds up the process.