Category Archives: Latest VAT news

VAT DIY Housebuilders’ Scheme – useful information

By Marcus Ward 9 September 2019

The DIY Housebuilders’ Scheme is a tax refund scheme for people who build, or arrange to have built, a house they intend to live in. It also applies to converting commercial property into a house(s). Details here.

However, there are often uncertainties and disputes over precisely what tax may be claimed on various expenditure. To this end, HMRC has published a comprehensive list of items, sorted alphabetically, which should avoid a lot of potential disagreements on claims.

It should be noted that a claim for services can only be made for conversions (at the reduced rate of 5%) as any services in respect of a new build property should be zero rated.

What else can a housebuilder not claim for?

There is no claim available for:

building projects outside the UK
materials or services that are not subject to VAT, eg; are zero-rated or exempt or provided by a non VAT-registered supplier
professional or supervisory fees, eg; architects and surveyors
the hire of plant, tools and equipment, eg; generators, scaffolding and skips
building materials that aren’t permanently attached to or, part of, the building itself
some fitted furniture, electrical and gas appliances, carpets or garden ornaments
supplies for which you do not have a VAT invoice.

If you would like assistance with making a claim, please contact us.

VAT: Exempt medical treatment – The Skin Rich case

By Marcus Ward 9 September 2019

Latest from the courts

In the Skin Rich Ltd [2019] TC 07310 First Tier Tribunal (FTT) case, the issue was whether Botox and nail treatments could be exempt as health and welfare services: “The supply of services consisting in the provision of medical care” by a “registered person” (principally, doctors, opticians, osteopaths, chiropractors and nurses).

Background

Skin Rich Ltd operated a skin culture and aesthetics clinic offering a range of specialist skin treatments including, but not limited to, Botox and dermal filler treatments or ‘Injectables’ and fungal nail treatments it contended were exempt from VAT.

The appellant employed several medical professionals to administer the injectables arguing it was a medical procedure and exempt under VATA 1994, Sch. 9, Grp. 7, items 1 and 2. It was not enough, however, that the services were provided by persons registered as appropriate, they had to be providing “medical care” in order to meet the terms of the exemption. Their principal purpose had to be the protection, including the maintenance or restoration of health. Whilst it was conceded a cosmetic benefit would not preclude a treatment having a primary purpose to protect, restore or maintain the health of an individual.

Decision

The FTT dismissed the appeal that Botox services and fungal nail treatment supplied by them were exempt under VATA 1994, Sch. 9, Grp. 7, items 1 and 2, or alternatively item 4. Consequently, output tax was due on the full value of these supplies. The FTT was not persuaded the services were principally to protect, restore or maintain the health of an individual. They did not, therefore, meet the definition of medical care established by the relevant case law. Furthermore, they did not consider the taxpayer to be “state regulated” as required by item 4.

Commentary

This can be a difficult area of the tax. I have dealt with a number of cases where apparent cosmetic surgery (breast augmentation and liposuction etc) were argued to have beneficial mental health outcomes. Case law on this matter is sometimes conflicting. Care should be taken when determining the VAT liability of certain procedures. The tests are more than something being “sort of medical”.

This was not an unexpected outcome, but presumably the appellant thought that, for the tax involved, it was worth going to court.

VAT: Domestic Reverse Charge for builders – introduction delayed

By Marcus Ward 9 September 2019

As you were…

The UK Government has announced that it is to delay the introduction of the VAT Domestic Reverse Charge (DRC) for construction businesses by a year after a coalition of trade bodies and organisations highlighted its potentially damaging consequences. Details of DRC here

The DRC was due to come into force from 1st October this year, but it has been announced via Revenue and Customs Brief 10 (2019): domestic reverse charge VAT for construction services – delay in implementation that it has been deferred for a year. The new implementation date will be 1 October 2020 unless there are further delays.

The move has been welcomed by all parties affected by the rules and HMRC said that it was committed to working closely with the sector to raise awareness and provide additional guidance to make sure all businesses will be ready for the new implementation date.

Invoices etc

HMRC have also recognised that some businesses have already put changes in place to anticipate the original introduction date and appreciate that it may not be possible to reverse these changes before 1 October 2019. Where “genuine errors” have occurred, HMRC has stated that it will take into account the late change in its implementation date.

Comments

The Chief Executive of the Federation of Master Builders said “I’m pleased that the government has made this sensible and pragmatic decision to delay reverse charge VAT until a time when it will have less of a negative impact on the tens of thousands of construction companies across the UK. To plough on with the October 2019 implementation could have been disastrous given that the changes were due to be made just before the UK is expected to leave the EU, quite possibly on ‘no-deal’ terms.” The situation hasn’t been helped by the poor communication and guidance produced by HMRC. Despite the best efforts of construction trade associations to communicate the changes to their members, it’s concerning that so few employers have even heard of reverse charge VAT.”

It has been stated by certain trade bodies that more than two-thirds of construction firms had not heard of the VAT changes and of those who had, around the same number had not prepared for them. My own experience backs this up and talking to other tax people and building businesses it is clear that this is not an issue which has been publicised widely and despite accountancy firms doing their best to bring it to the attention of relevant clients and contacts, many remain unaware.

Commentary

Discussions over Brexit (obviously!) have been blamed for the situation, although there is no word about why HMRC waited until a month before the intended implication to decide to delay the DRC. A lot of work has been carried out on this matter, and changes to documentation, processing and systems have taken place which will need to be reversed before 1 October 2019. At least the delay will provide HMRC with a new chance to let affected parties know next time and gives them time to identify why so many building businesses were unaware of the reverse charge.

Whether the DRC IS introduced next year remains to be seen. To my mind, it does not deal with the major sources of tax leakage in the construction industry and, as usual, complaint business will play by the book and those that do not will find a way round the rules. To exclude labour only services appears to be a folly. Perhaps they will be amended before next year.

VAT EU Gap Report

By Marcus Ward 5 September 2019

Mind the gap

EU countries lost €137 billion in VAT revenues in 2017 according to a study released by the EC on 5 September 2019. The VAT Gap has slightly reduced compared to previous years but remains very high.

This gap represents a loss of 11.2% of the total expected VAT revenue.

During 2017, collected VAT revenues increased at a faster rate of 4.1% than the 2.8% increase of VAT Total Tax Liability (VTTL). As a result, the overall VAT Gap in the EU Member States saw a decrease in absolute values of about EUR 8 billion or 11.2% in percentage terms.

Member States in the EU are losing billions of Euros in VAT revenues because of tax fraud and inadequate tax collection systems according to the latest report. The VAT Gap, which is the difference between expected VAT revenues and VAT actually collected, provides an estimate of revenue loss due to tax fraud, tax evasion and tax avoidance, but also due to bankruptcies, financial insolvencies or miscalculations.

In 2017, Member States’ VAT Gaps ranged from 0.6% in Cyprus, 0.7% in Luxembourg, and 1.5% in Sweden to 35.5% in Romania and 33.6% in Greece. Half of EU-28 MS recorded a Gap above 10.1%.

Overall, the VAT Gap as percentage of the VTTL decreased in 25 Member States, with the largest improvements noted in Malta, Poland, and Cyprus and increased in three – namely Greece, Latvia, and Germany.

The variations of VAT Gaps between the Member States reflect the existing differences in terms of; tax compliance, fraud, avoidance, bankruptcies, insolvencies and tax administration. Other circumstances could also have an impact on the size of the VAT Gap such as economic developments and the quality of national statistics.

The UK

In the year 2017, in the UK the VTTL was £158421 millions of which £141590 millions was actually collected. This leaves a VAT gap for the UK of £16831 millions which represents 11% of the amount which is estimated was due to HMRC. About a mid-table performance compared to other Member States.

VAT and Customs Duty: Brexit latest

By Marcus Ward 20 August 2019

HMRC has been issuing guidance in readiness for Brexit, and in particular, a No Deal Brexit.

They generally provide information on preparations and actions required by business that trade cross-border.

Imports

If a business bring goods into the UK from the EU there are actions you should take before and after you’ve imported the goods. This applies to:

importers
freight forwarders
fast parcel operators
customs agents
traders who move their own goods

(This guidance does not apply to moving goods between Ireland and Northern Ireland). A border on the island of Ireland is a whole other matter.

The full guidance for importers.

Exports

Again, this guidance relates to:

exporters
freight forwarders
fast parcel operators
customs agents
traders who move their own goods.

The full guidance for exporters.

Email updates on Brexit

We recommend that business falling within the above definitions sign up the free HMRC Brexit email alert service.

This service covers: information about Brexit including the Article 50 process, negotiations, and announcements about policy changes as a result of Brexit.

It is crucial that businesses understand the impact of a No Deal Brexit and make preparations for all eventualities of the political negotiations. Sign up here

VAT: What is an economic activity? The Pertemps’ case

By Marcus Ward 12 August 2019

Latest from the courts

In the Upper Tribunal (UT) case of Pertemps Limited the issue was whether the operation of the respondent’s salary sacrifice scheme to provide travel and subsistence payments to employees was a supply for VAT purposes and, indeed, whether it was an economic activity at all.

I have considered what is an economic activity (business) many times, examples here, here, here and here. It is a perennial VAT issue and goes to the very heart of the tax. EU legislation talks of economic activity, which is taken to be “business activity” in the UK. There is no legal definition of either economic or business activity so case law on this point is very important.

Background

Employees of the respondent were offered the option of;

being paid a salary, from which they would have to meet any travel and subsistence expenses, or
participating in Pertemps’ scheme where they would be paid their travel and subsistence expenses but receive a reduced salary.

The amount of the reduction was equal to the amount of the expense payment plus a fixed amount to defray the costs of running the scheme. The issue was whether the charge for using the scheme was taxable.

HMRC’s appeal against the FTT decision [2018] UKFTT 369 (TC) was based on the view that the scheme involved a taxable supply of services by Pertemps to its participating employees such that output tax was due of the fixed payments. The FTT concluded that Pertemps did supply services to the employees. but the supply was not within the scope of VAT because the operation of the scheme was not an economic activity. It allowed Pertemps’ appeal. The FTT also held that, if there had been a supply, it would have been exempt.

Decision

The UT decided that, although the FTT erred in law when it concluded that Pertemps made a supply of services to the employees who participated in the scheme, it was correct when it concluded that Pertemps was not carrying on any economic activity when it provided the scheme for employees. The charge only arose in the context of the employment relationship, and it could not be compared to an open market supply of accountancy services.

Therefore, HMRC’s appeal was dismissed.

Commentary

Care should always be taken with salary sacrifice schemes. Some, but not all, sacrifices are subject to output tax. HMRC internal guidance on the subject here. This case is a helpful clarification on the matter of certain charges to staff. It also adds another layer to the age-old issue of what constitutes a business activity. VAT is only due on business supplies, and it is crucial to appreciate what is, and isn’t an economic activity. This is especially important in respect of charities and NFP bodies.

VAT: What are zero rated animal foodstuffs?

By Marcus Ward 12 August 2019

Modelled by Lola. (R) Collar: models’ own

Latest from the courts

The First Tier Tribunal (FTT) case of Westland Horticulture Limited highlights the complexities of; the VAT treatment of food, animal foodstuffs, seeds, crops and how these are all held out for sale. One only has to consider the myriad VAT liabilities of seemingly similar products sold at, say, a garden centre, to realise that this is can be a VAT minefield.

Examples

Food for a budgerigar is standard rated, but pigeon grit is zero rated.
Peanuts and sunflower seeds are zero rated, unless advertised as wild bird food when they are standard rated
Food for a Labrador is standard rated, unless the dog is used as a gun dog when it is zero rated
Lavender seeds are zero rated. Daffodil bulbs are standard rated.

This is a very small list of examples where the VAT treatment of precisely the same product may change depending on use, and/or where a slight difference of the type of goods can have a surprising tax outcome.

A full guide to garden centre liabilities here

The case

HMRC state in Public Notice 701/38 para 5.3

“Most grass seed is zero-rated because of the extensive use of grass as animal feed. This includes supplies to and by garden centres, local authorities and grass seed to be grown on set aside land.

But pre-germinated grass seed and turf are not used for the propagation of animal feed and are therefore standard-rated.”

Zero rating is available per VAT Act 1994, Schedule 8, Group 1, item 3: “…seeds or other means of propagation of plants comprised in animal feeding stuffs”

In Westland’s case, it sold a product called Aftercut Patch Fix, which, although was 90% grass seed, also contained sowing granules and an ingredient called Clinoptilolite which, apparently, neutralises the effects of excess salts and ammonia found in pet urine. The grass seed was of various varieties and is not in itself any different to “ordinary” grass seed sold without any additives.

Having a new puppy, I can verify the damage one small hound can do to lawns and this is a product I may will need to invest in. The product was held out (see below) to help fix damage to grass that, in my case, a small Lola (and larger Libby) can do.

Decision

Unsurprisingly, the judge ruled that the product was standard rated on the grounds (no pun intended) that it was clearly intended to be used on people’s gardens rather than to be planted to grow animal food. Therefore, the zero rating provided via PN 701/38 does not apply.

The Product was physically different to generic grass seed as it contained more than just seed. The product (as distinct from the seed within the product) is therefore not a similar product to generic grass seed for the purposes of fiscal neutrality.

Commentary

A discrete issue you may think. However, the tax in this single case amounted to over half a million pounds. It illustrates how much care must be taken in establishing the correct liability of; food, animal foodstuff, pet food and ornamental versus edible plants, seeds, bulbs, shrubs and trees.

One of the salient tests is how the goods are “held out for sale” (held out)

Held out means the:

way a product is labelled, packaged, displayed, invoiced, advertised or promoted
heading under which the product is listed in a catalogue, web page or price list

In this case, the packaging and description on the appellant’s website was a major factor in the decision.

Manufacturers and retailers may need to review how their products are described, what the contents are and how they are displayed in-store. Even the location of the goods, how they are displayed, and the signage used may affect the VAT treatment (it doesn’t matter if I buy zero rated working dog food and feed it to my two who are never going to do a day’s work in their life….).

VAT: Brexit – Retail Export Scheme benefits

By Marcus Ward 2 August 2019

VAT free shopping for all! Save 20% on anything you buy!

This seems very unlikely I hear you mutter, but, but…..

If you live in the UK after a No Deal Brexit, there is a simple way of never paying VAT on any retail purchases for your own use. From a piano to a gymnasium, from a teapot to a lawnmower – all may be purchased completely VAT free and legally. It does not appear that the Government has considered this, it certainly does not feature in the recent report on the “Alternative Arrangements”. This is especially relevant to the Northern Ireland/Republic of Ireland land border. It may be that if we believe hard enough in Brexit we can avoid UK residents not paying UK VAT…

So how will this fabulous shopping opportunity come into being?

There is an EU-wide system (set out at Article 131 of The Principle VAT Directive) which provides for the recovery of VAT incurred by individuals from outside the EU. Clearly, after a No-Deal Brexit, that will be anyone in the UK. This is called the Retail Export Scheme (RES). After a hard Brexit, any goods moving from an EU Member State into the UK will now be classed as exports (pre-Brexit there is free movement of goods within the EU, so there would be no exports when goods move cross-border within the EU).

How does RES work?

When an individual buys goods in an EU Member State and exports them for his/her personal use, the retailer will charge VAT at the rate applicable in that country. The shop will also issue a certain document. This document is stamped when the goods are physically exported buy the buyer and the customer returns the form to the retailer. It is a quite painless procedure. When this evidence that the goods have been exported is received by the retailer, it will refund the VAT paid – The result = VAT free shopping. Also, the scheme has no minimum sales value.

And after Brexit?

The UK has said its 2017 Customs Bill that VAT will not be charged on personal imports. This is effectively inviting tax free cross-border shopping and consequently, logically, reducing retails sales in the UK. I am sure that that is not what the Government had in mind. It is likely that there could be wide scale use of RES. After all, what is a bit of paperwork and a short drive to save 20%?! This is even before one considers the abuse of the arrangements, which, with the obvious financial benefits, could be significant. A day trip to mainland Europe will be very inviting, and then, there is our land border…

Some politics…

The Irish border

Clearly, the most relevant issue is the Irish border. Regardless of the political noises, there will be a “difference” between EU and “third country” (which the UK will be after a No Deal Brexit) rules between the two countries. These differences facilitate the use of the RES. There is nothing in any proposals which will prevent cross-border shopping on the island of Ireland. I can imagine retailers in Dublin rubbing their hands together while those in Belfast gloomily survey empty shops. Perhaps new retailers will pop up on the Irish side of the EU/UK divide to make matters even more helpful for bargain hunting shoppers from the UK. Another issue which I doubt the UK has considered is that if there is no border (which we are told by the Government will happen even though a No-Deal Brexit will definitively and specifically not permit this) there will be nobody to stamp the forms. I won’t get into the politics of the Good Friday Agreement (GFA) and a No Deal Brexit, but it seems almost certain that there will have to be a deal with the EU to ensure there is no border, OR the UK must renege on the GFA which could bring terrifying consequences to peace in the area, amongst a lot of other issues. What a mess.

Importance of a border with the EU

No two countries outside of the EU have ever removed border checks between themselves. They try to streamline checks where possible, as everybody wants smooth trade, but always retain border checks. Why? Simply, for goods trade, a border post is the only place where you can guarantee to have the vehicle, the items definitely being transported, and all relevant paperwork in one place. You can and do make other checks, but the border is at the core. One of the reasons for the EU legal and regulatory framework is to be able to trust that goods trade between members can take place without border checks. This means common tariffs, common rules, and legal redress. Without being a part of the regulations, there can be no such trust and a hard border is necessary.

Unsurprisingly, there have been no studies on the cost to UK retailers, and apparently, no recognition whatsoever, that this could be a serious issue. Given the political issues with the Irish border, and the serious consequences of going against the GFA, this is another issue which has been either; overlooked, dismissed, politically ignored, or relegated to the bottom of a list of so many issues caused by an ill-considered No Deal Brexit.

What the government has continually, apparently deliberately, failed to recognise is that there is no fudge that provides both freedom from EU rules and frictionless trade with a No Deal Brexit. There is no current way to reconcile Northern Ireland remaining aligned with the UK, Ireland staying fully in the EU, pure Brexit, and no border checks. Tax is simply one area in the commercial world which has been ignored, for political reasons. VAT is just one area of tax, and the RES is just one area of VAT.

VAT: Land and property – A “fun” quiz

By Marcus Ward 26 July 2019

VAT: Land and property

I am quite often asked the seemingly straightforward question: Can I recover VAT on this land purchase? So, by way of a little quiz, I look at why this can be a loaded question.

Background

A person purchases bare land in the UK for £450,000 which is subjected to the option to tax. So, VAT of £90,000 is incurred. Your task, should you wish to accept it, is to say yes, no, or maybe to input tax recovery in the following situations (assume the purchaser is VAT registered).

Questions

On the purchased land the person constructs:

a dwelling and supplies the house on a 25-year lease
an office and uses it for his own business supplying FS to a client in China
a storage facility and a fully taxable company leases it to another company in the same partly exempt VAT group after opting to tax
a block of ten flats with a gym and swimming pool which tenants are entitled to use. Grants 99 years leases on all flats
a dwelling but uses it for short term holiday lets of no more than a fortnight.
a warehouse which is sold on completion but without an option to tax being made before the sale
the land is held with the intention of constructing dwellings at some time in the future, which could be over six years
a factory which is not subjected to an option to tax but is leased to an US company
a block of three flats which are rented for six months before freehold sale
a sport hall by a school Academy which is leased to sporting charities and also used for its own educational purposes. No option to tax
a manufacturing plant which a company rents to a connected (non-VAT grouped) party which makes and sells toys. The option is taken
a car showroom and offices which a company uses for its own business of selling cars, providing finance and brokering insurance
a care home for the elderly which a company uses for that purpose
a small cabin office and the remaining land is used for a forestry business which will have no sales for ten years (when the trees are grown)
a residential block which is immediately transferred to an associated company (an arm’s length transaction) on completion. No tenants are in situ.

We are looking at recovery of input tax on the land purchase here, ignoring other (say; construction and professional) costs. That is another article in itself.

The questions have been simplified, usually, they tend to be rather more “involved”.

Answers

…soon!

VAT Glossary – Partial Exemption

By Marcus Ward 9 July 2019

The VAT world of partial exemption can be complex with some arcane language used in guidance. Here is your “cut out and keep” guide:

A general guide to partial exemption here.

VAT Glossary Partial Exemption
Term	Explanation
Allocation	Some special methods have different sectors where the recoverable element of residual input tax is different. Allocation is the means by which residual input tax is distributed to specific sectors within a method.
Annual adjustment	At the end of the tax year the partial exemption calculation is recalculated using annual figures.
Apportionment	Residual input tax must be apportioned to reflect the extent to which the purchases on which it is incurred are used in making onward taxable supplies. The partial exemption method carries out this function.
De minimis tests	Tests designed to allow recovery of minimal amounts of exempt input tax.
Direct attribution	The identification of input tax on supplies that are wholly used, or to be wholly used in making taxable supplies or are wholly used or to be wholly used in making exempt supplies.
Exempt input tax	Input tax incurred on purchases which are used or to be used in making exempt supplies. It comprises input tax directly attributable to exempt supplies and, after the partial exemption method has been applied, the exempt element of residual input tax identified by the partial exemption method.
Exempt supplies	Supplies made by a business, which are listed in Schedule 9 of the VAT Act 1994. VAT incurred in making exempt supplies is non-recoverable, unless they are ‘specified’ supplies, subject to the de minimis test.
Input tax	VAT incurred by a VAT registered person on goods and services purchased for the purposes of a business.
Longer period	This is usually the tax year for annual adjustment purposes but may in certain circumstances be shorter than a tax year. It may also be longer in the case of a mid-year stagger change.
Foreign supplies	Supplies made by a business which are made outside the UK but which would be taxable if they were made in the UK.
Residual input tax	Input tax which is used, or to be used, to make both taxable and exempt supplies. It is apportioned between taxable and exempt supplies by the partial exemption method. Residual input tax is commonly referred to as ‘non-attributable input tax’ or ‘the pot’.
Special method	Any partial exemption method, other than the standard method, used to identify the taxable element of input tax incurred. Special methods require prior approval from HMRC.
Specified supplies	Supplies specified by Treasury Order which are not taxable supplies, but which carry the right to recover input tax incurred in making them.
Standard method	This is the default partial exemption method. It is specified in law and is suitable for most smaller businesses.
Taxable input tax	Input tax incurred on purchases of goods and services which are used or to be used in making taxable supplies and other supplies which carry the ‘right to deduct’.
Taxable supplies	Supplies made by a business, which are either standard, reduced or zero-rated. Input tax incurred in making taxable supplies is deductible.
Tax year	Every VAT registered business has a tax year. This usually ends at the end of March, April or May each year, depending on the business’s VAT return periods.
VAT Groups	Two or more corporate bodies accounting for VAT under a single VAT registration number. One acts as representative member and any supplies between the members of the group are disregarded for VAT purposes.

Any business which receives income from the following sources may be affected by partial exemption:

Property letting and sales – potentially all types of supply of land
Financial services
Insurance
Betting, gaming and lotteries
Education
Health and welfare
Sport, sports competitions and physical education
Cultural services

This list is not exhaustive.

If your, or your client’s business is partially exempt I always recommend a review.