Category Archives: Penalties

VAT: Property – The Option To Tax Guide

By   8 January 2025
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VAT Bsics

Opting To Tax commercial property

Opting to tax provides a unique situation in the VAT world. It is the only example of where a supplier can choose to add VAT to a supply….. or not.

What is an option to tax (OTT)?

The sale or letting of a property is, in most cases, exempt (VAT free) by default. However, it is possible to apply the OTT to commercial property. This has the result of turning an exempt supply into a taxable supply at the standard rate. It should be noted that an OTT made in respect of a residential property is disregarded and consequently, the supply of residential properties is always exempt (unless it is the first time sale of a new build – in which case it is zero-rated).

Why opt?

Why would a supplier then deliberately choose to add VAT on a supply?

The only purpose of OTT is to enable the optor to recover or avoid input tax incurred in relation to the relevant land or property. The OTT is a decision solely for the property owner or landlord and the purchaser or tenant is not able to affect the OTT unless specific clauses are included in the lease or purchase contracts. Care should be taken to ensure that existing contracts permit the OTT to be taken.  Despite a lot of misleading commentary and confusion, it is worth bearing in mind that the recovery or avoidance of input tax is the sole reason to OTT.

Once made the OTT is usually irrevocable for a 20-year period (although there are circumstances where it may be revisited within six months of it being taken – see below). There are specific rules for circumstances where the optor has previously made exempt supplies of the relevant land or property. In these cases, HMRC’s permission must usually be obtained before the option can be made.

What to consider

The important questions to be asked before a property transaction are:

  • Was VAT incurred on the purchase price?
  • Is the purchase with the benefit of an existing lease (will the tenant remain?) if so, it may be possible to treat the transaction as a VAT free TOGC (see below)
  • Is the property subject to the Capital Goods Scheme (CGS here)?
  • Is it intended to spend significant amounts on the property, eg; refurbishment?
  • What other costs will be incurred in respect of the property?
  • If renting the property out – will the lease granted be full tenant repairing?
  • Will the tenant or purchaser be in a position to recover any or all VAT charged on the rent/sale?

These are the basic questions to be addressed; further factors may need to be considered depending on the facts of a transaction.

Input tax recovery

Input tax relating to an exempt supply is usually irrecoverable. In fact, a business only making exempt supplies is unable to register for VAT. A guide to partial exemption here. So input tax incurred on, say; purchase, refurbishment, legal costs etc would be lost if a property was sold or rented on an exempt basis. In order to recover this tax, it must relate to a taxable supply. If an OTT is taken, the sale or rent of the property will be standard rated which represents a taxable supply. VAT on supply = input tax claim.

Two-part process

The OTT is a two-part process.

  • The first part is a decision of the business to take the OTT and it is prudent to minute this in Board meeting minutes or similar. Once the decision to OTT is taken VAT may be added to a sale price or rent and a valid tax invoice must be raised.
  • The second part is to formally notify HMRC. If the OTT is straightforward the form on which this is done is a VAT1614A. Here. In some cases, it is necessary to obtain HMRC’s permission in which case separate forms are required. HMRC guidance here – para 5.

There can be problems in cases where the OTT is taken, but not formally notified.

Timing

It is vital to ensure that an OTT is made at the correct time. Even one day late may affect the VAT treatment. Generally speaking, the OTT must be made before any use of the property, eg; sale or rent. Care should also be taken with deposits which can trigger a tax point before completion.

Disadvantages

As mentioned above (and bears repeating) the benefit of taking the OTT is the ability to recover input tax which would otherwise fall to be irrecoverable. However, there are a number of potential disadvantages.

  • opting a commercial property may reduce its marketability. It is likely that entities which are unable to recover VAT would be less inclined to purchase or lease an opted property. These entities may be; partly exempt business, those not VAT registered, or charities/NFP organisations.
  • the payment of VAT by the purchaser may necessitate obtaining additional funding. This may create problems, especially if a VAT charge was not anticipated. Even though, via opting, the VAT charge is usually recoverable, it still has to be paid for up-front.
  • an OTT will increase the amount of SDLT payable when a property is sold. This is always an absolute cost.

Transfer of a Going Concern (TOGC)

I always say that advice should be taken in all property transactions and always in cases of a TOGC or a possible TOGC. This is doubly important where an opted building is being sold, because TOGC treatment only applies to a sale of property when specific tests are met. A TOGC is VAT free but any input tax incurred is recoverable, so this is usually a benefit for all parties.

Revoking an Option To Tax

  • The cooling off period – If an OTT has been made and the opter changes his/her mind within six months it can be revoked. This is as long as no tax has become chargeable on a supply of the land, that no TOGC has occurred, and the OTT has actually been notified to HMRC. There are additional considerations in certain cases, so these always need to be checked.
  • No interest has been held for more than six years – An OTT is revoked where the opter has not held an interest in the opted building for a continuous period of six years. The revocation is automatic, and no notification is required.
  • 20 years – It is possible to revoke an OTT which was made more than 20 years ago. Certain conditions must be met, and advice should be taken on how such a revocation affects future input tax recovery.

Summary

Property transactions are high value and often complex. The cost of getting VAT wrong or overlooking it can be very swingeing indeed. I have also seen deals being aborted over VAT issues. Of course, if you get it wrong there are penalties to pay too. For these reasons, please seek VAT advice at an early stage of negotiations.

More on our land and property services here

New HMRC publications: VAT on cladding remediation work

By   6 January 2025
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In the aftermath of the horrific Grenfell fire, a lot of buildings require unsafe cladding to be replaced.

A new Brief clarifies HMRC’s policy on the deduction of VAT incurred on cladding remediation works which are carried out on existing residential buildings. It sets out:

  • the reason VAT costs are incurred when carrying out remediation works to residential buildings with fire and safety defects
  • the circumstances in which the VAT incurred in providing remediation works can be recovered

Broadly, the distinction is whether the work qualifies as snagging. If it does, the VAT treatment follows the liability of the original building work – zero rated if the original construction was of a zero-rated new residential building, ie; they are supplied in the course of construction of a qualifying building.

If not snagging, the remedial work will be standard rated.

If the work is standard rated, it may be recoverable by the recipient in certain circumstances.

Snagging

HMRC’s definition of snagging is “the carrying out of remedial works to correct faulty workmanship or replace faulty materials”.  Normally, it is carried out by the original developer under the terms of the original contract. This means it is not seen as a separate supply of construction services. Snagging covers faults that are:

  • found soon after the building is completed
  • still covered by the building contract

More details on snagging here.

Furthermore, HMRC has published Guidelines for Compliance GfC11. This guidance covers HMRC’s existing policy on the VAT treatment of remedial works and includes:

  • the definition of snagging
  • an explanation of when you can recover input tax
  • examples to help you work out the VAT treatment of remedial works
  • examples of documents and evidence you should keep
  • information about correcting a submitted return

HMRC state that its policy has not changed.

How to apply for a VAT Partial Exemption Special Method

By   6 January 2025
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Partial Exemption

Businesses which makes exempt supplies may be partially exempt (depending on the de minimis limits). A partially exempt business will be prohibited from claiming all of its input tax. A calculation is required to determine the amount of a claim which is blocked. The majority of businesses use what is known as “the standard method” with an annual adjustment.

Partial Exemption Special Method (PESM)

However, use of the standard method is not mandatory and a business can use a “special method” (a Partial Exemption Special Method, or PESM) that suits a business’ activities better. Any PESM has to be “fair and reasonable” and it has to be agreed with HMRC in advance. When using a PESM no rounding of the percentage is permitted and it has to be applied to two decimal places.

HMRC says fair and reasonable means it must be:

  • 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

Types of PESMs

The following are 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

How to apply

You will need to provide documents with your application. These include:

More information on the documentation a business needs provide is set out in Appendix 2 of PN706  

Apply online

You will need to either:

  • sign in with your Government Gateway user ID and password (if you do not have a user ID, you can create one when you first try to sign in)
  • use your email address to get a confirmation code that you can use to sign in

This is done here

A glossary of partial exemption terms may be found here.

A VAT Did you know?

By   20 December 2024
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In or out?

If a biscuit is covered, even partially, in chocolate the VAT is 20%, but if the chocolate is inside, say a choc chip cookie or a bourbon, it is VAT free.

VAT on private school fees – new webinar

By   16 December 2024
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HMRC have released a recorded webinar about VAT on private school fees — what you need to do, and when and how to register.

It covers:

  • if you should register for VAT as an education provider
  • when you should register for VAT
  • how to register for VAT
  • what you need to charge VAT on
  • how and what to reclaim VAT on

VAT: New support for small businesses from HMRC

By   16 December 2024
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HMRC has launched new online guidance and interactive tools aimed at helping small business owners and those considering self-employment understand their tax responsibilities. It is aimed at supporting new and existing ‘sole traders’ and helping them to understand their responsibilities. The new interactive tool explains the records they need to keep, taxes that may apply to their business, and includes other useful information.

The resources include a step-by-step guide for registering as a sole trader and a newly developed VAT registration estimator tool to help businesses assess their VAT registration needs based on turnover.

The guidance and interactive tools are free and available directly from GOV.UK. They have been launched for information purposes only, and users will not be registered for any taxes as a result of using them. HMRC will not collect or store any information about the user.

VAT: Personal Liability Notices

By   16 December 2024
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A Personal Liability Notice (PLN) can be issued by HMRC to a company’s director(s) to transfer the liability to pay VAT or a VAT penalty from the company to an individual. A PLN can also be issued to a member of an LLP.

When a PLN is issued

An officer or officers of a company may be personally liable to pay all or part of the company penalty where:

  • a company is liable to a penalty for a deliberate wrongdoing and
  • the wrongdoing is attributable to the deliberate action of an officer or officers of the company

Additionally, one of the two circumstances below must also apply

  • the officer gained or attempted to gain personally from the wrongdoing, or
  • the company is insolvent or likely to become insolvent

Any grounds for suspicion that the company may become insolvent should to be supported by evidence, for example, where there are cash flow problems, insufficient assets to cover liabilities, or evidence of phoenixism.

An officer’s liability to pay a penalty also applies to inaccuracy penalties.

Liable persons

The company officers are known in HMRC guidance as “liable officers”. These include:

  • elected officers
  • managers
  • directors
  • company secretary
  • any other person managing or purporting to manage any of the company’s affairs.

LLP officers are members.

A PLN’s power gives HMRC the right to recover all or part of the penalty from the liable officer rather than the company/LLP itself.

Where there is more than one deliberate wrongdoing, each deliberate wrongdoing must be considered separately for the purpose of establishing whether it should be attributed to an officer or officers.

Wrongdoings

There are four types of wrongdoings:

  • the issue of an invoice showing VAT by an unauthorised person
  • misuse of a product so that it attracts a higher rate of excise duty
  • the handling of goods on which payment of excise duty is outstanding
  • knowingly disposing of, or causing or permitting the disposal of, material at an unauthorised waste site

The wrongdoing must arise from the deliberate action of an officer of the company.

Personal gain

Once HMRC has attributed the deliberate wrongdoing to one or more company officers it must consider whether any of the officers, by fact or implication, have gained or attempted to gain personally from the wrongdoing. It is sufficient to show that each officer has gained or attempted to gain. It will not however always be possible to establish the full extent to which each officer has gained or attempted to gain, in which case HMRC would issue the PLN based on best judgment of the amount they attempted to gain personally, eg:

  • the officer may accept that there was an actual or attempted personal gain from a deliberate wrongdoing that can be attributed to them, or
  • it may be clear from business records or the officer’s lifestyle that they gained or attempted to gain personally from the results of the deliberate wrongdoing

Appeals

A liable officer can appeal against

  • a decision to pursue them for all or part of the penalty assessed on the company, as set out in the PLN, including whether the penalty is attributable to them, and
  • the amount of the penalty HMRC has allocated to them
  • They cannot however appeal against a decision that they have gained or attempted to gain personally from the deliberate wrongdoing, or that the company is likely to go into liquidation

PLNs are subject to the same procedures as company penalties.

Legislation

Finance Act 2008, Schedule 41: Penalties: failure to notify and certain VAT and Excise wrongdoing.

VAT late payment interest rates reduced

By   12 November 2024
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HMRC has announced that late payment interest rates to be reduced after the Bank of England lowered the base rate.
The Bank of England base rate will be reduced to 4.75% from 5.0%.

The changes will come into effect on:

  • 18 November 2024 for quarterly instalment payments
  • 26 November 2024 for non-quarterly instalments payment

The press release is available here.

VAT Schemes Guide – Alternative ways of accounting for tax

By   5 November 2024
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VAT Basics
There are a number of VAT Schemes which are designed to simplify accounting for the tax. They may save a business money, reduce complexity, avoid the need for certain documentation and reduce the time needed to deal with VAT. Some schemes may be used in combination with others, although I recommend that checks are made first.

It is important to compare the use of each scheme to standard VAT accounting to establish whether a business will benefit. Some schemes are compulsory and there are particular pitfalls for businesses using certain schemes.

I thought that it would be useful to consider the schemes all in one place and look at their features and pros and cons.

These schemes reviewed here are:

  • Cash Accounting Scheme
  • Annual Accounting Scheme
  • Flat Rate Scheme
  • Margin schemes for second-hand goods
  • Global Accounting
  • VAT schemes for retailers

Cash Accounting Scheme

Normally, VAT returns are based on the tax point (usually the VAT invoice date) for sales and purchases. This may mean a business having to pay HMRC the VAT on sales which customers have not yet paid for.

The VAT cash accounting scheme (CAS) instead bases reporting on payment dates, both for purchases and sales. A business will need to ensure its records include payment dates.

A business is only eligible for CAS if its estimated taxable turnover is no more than £1.35m, and can then remain in the scheme as long as it remains below £1.6m.

Advantages

  • usually beneficial for cash flow especially if its customers are slow to pay
  • output tax is not payable at all if a business has a bad debt (other bad debt relief here)

Disadvantages

  • it is generally not beneficial for a repayment business (one which reclaims more VAT than it pays, eg; an exporter or supplier of zero rated goods or services)
  • it is not usually beneficial if a business purchases significant amounts of goods or services on credit

Annual Accounting Scheme

The Annual Accounting Scheme allows a business to pay VAT on account, in either nine monthly or three quarterly payments. These instalments are based on VAT paid in the previous year. It is then required to complete a single, annual VAT return which is used to calculate any balance owed by the business or due from HMRC.

A business is eligible for the scheme if its estimated taxable turnover is no more than £1.35m and is permitted to remain in the scheme as long as it remains below £1.6m.

Advantages

  • reduces paperwork as only the need to complete one return instead of four (although it does not remove the requirement to keep all the normal VAT records and accounts)
  • improves management of cash flow

Disadvantages

  • not suitable for repayment businesses as they would only receive one repayment at the end of the year
  • if turnover decreases, the interim payments may be higher than under standard accounting

Flat Rate Scheme

The Flat Rate Scheme (FRS) is designed to assist smaller businesses reduce the amount of time and complexity required for VAT accounting. The FRS removes the need to calculate the VAT on every transaction. Instead, a business pays a flat rate percentage of its VAT inclusive turnover. The percentage paid is less than the standard VAT rate because it recognises the fact that no input tax can be claimed on purchases. The flat rate percentage used is dependent on a business’ trade sector.

A business is eligible for this scheme if its estimated taxable turnover in the next year will not exceed £150,000. Once using the scheme, a business is permitted to continue using it until its income exceeds £230,000.

If eligible, a business may combine the FRS with the Annual Accounting Scheme, additionally, there is an option to effectively use a cash basis so there is no need to use CAS. Unfortunately, changes to the scheme rules regarding ” limited cost traders” mean that the scheme has become less attractive.

Advantages

  • depending on trade sector and circumstances, may result in a real VAT saving
  • simplified record keeping; no requirement to separate gross, VAT and net in accounts
  • fewer rules; no issues with input tax a business can and cannot recover on purchases
  • certainty of knowing how much of income is payable to HMRC

Disadvantages

  • no reclaim of input tax incurred on purchases
  • limited cost traders impact
  • if a business buys a significant amount from VAT registered businesses, it is likely to result in more VAT due
  • likely to be unattractive for businesses making zero-rated or exempt sales because output tax would also apply to this hitherto VAT free income
  • low turnover limit

Margin Scheme for Second Hand Goods

A business normally accounts for output tax on the full value of its taxable supplies and reclaims input tax on its purchases. However, if a business deals in second-hand goods, works of art, antiques or collectibles it may use a Margin Scheme. This scheme enables a business to account for VAT only on the difference between the purchase and selling price of an item; the margin. It is not possible to reclaim input tax on the purchase of an item and there will be no output tax if no profit is achieved (however, if an item is sold for less than the purchase price, a business cannot offset losses against the profits of other items to reduce the overall VAT liability).

There is a special margin schemes for auctioneers and a variation of the Margin Scheme (Global Accounting) is considered below.

Advantages

  • usually beneficial if buying from (non-VAT registered) members of the public
  • purchaser will not see a VAT charge
  • although no input tax claimable on purchases of scheme items, VAT may be claimed in the usual way on overheads and other fees etc

Disadvantages

  • record keeping requirements are demanding and closely checked, eg; stock records and invoices which are required for both purchases and sales
  • cannot be used for items purchased on a VAT invoice
  • can be complex and create a cost if goods exported
  • although no VAT due on sales if a loss is made, there is no set-off of the loss

Global Accounting

The problem with the Second Hand Goods Scheme is that full details of each individual item purchased and sold has to be recorded. Global Accounting is an optional, simplified variation of the Second Hand Margin Scheme. It differs from the standard Margin Scheme in that rather than accounting for the margin achieved on the sale of each individual item, output tax is calculated on the margin achieved between the total purchases and total sales in a particular accounting period.

Advantages

  • simplified version of the Margin Scheme
  • record keeping requirements reduced
  • losses made on sales reduce VAT payable
  • beneficial for businesses which buy and sell bulk volume, low value eligible goods

Disadvantages

  • cannot be used for; aircraft, boats, caravans, horses or motor vehicles
  • similar to Margin Scheme disadvantages apart from loss set off

VAT Schemes for Retailers

It is usually difficult for retailers to issue an invoice for each sale made, so various retail schemes have been designed to simplify VAT. The appropriate scheme for a business depends on whether its retail turnover (excluding VAT) is; below £1m, between £1m and £130m and higher.

Smaller businesses may be able to use a retail scheme with CAS and Annual Accounting but it cannot combine a Retail Scheme with the FRS. However, retailers may choose to use the FRS instead of a Retail Scheme.

Using standard VAT accounting, a VAT registered business must record the VAT on each sale. However, via a Retail Scheme, it calculates the value of its total VAT taxable sales for a period, eg; a day, and the proportions of that total that are taxable at different rates of VAT; standard, reduced and zero.

According to the scheme a business uses it then applies the appropriate VAT fraction to that sales figure to calculate the output tax due. A business may only use the Retail Scheme for retail sales and must use the standard accounting procedures for other supplies. A business must still issue a VAT invoice to any customer who requests one. It is a requirement of any scheme choice that HMRC must consider it fair and reasonable.

A business can join a retail scheme at the beginning of any VAT period and HMRC does not need to be notified.

Examples of Retail Schemes

  • Apportionment
  • Direct calculation
  • The point of sale scheme

The required calculations vary for each scheme.

NB: There are special arrangements for caterers, retail pharmacists and florists.

Advantages

  • no requirement to issue an invoice for each sale
  • most schemes are relatively simple to administer once set up. Technology assists in a helpful way with EPOS systems
  • simplifies record keeping

Disadvantages

  • it is usual for each line sold to need to be coded correctly for VAT liability
  • smaller businesses without state of the art technology may be at a disadvantage
  • time and resources required to set up and maintain systems
  • in some cases the calculation depends on staff “pressing the right button”
  • often complex calculations and record keeping
  • very precise and complicated rules
  • lack of understanding by a number of inspectors
  • complexity increases the risk of misdeclaration

Overall

As may be seen, there are a lot of choices for a business to consider, especially a start-up.  Choosing a scheme which is inappropriate may result in VAT overpayment and a lot of unneeded record keeping and administration.  There are real savings to be made by using a beneficial scheme, both in terms of VAT payable and staff time. There are also some schemes which are compulsory, like the Tour Operators’ Margin Scheme (TOMS).

We are happy to review a business’ circumstances and calculate what schemes would produce the best outcome.

Please contact us if you require further information.

VAT Groups – updated guidance on penalties

By   5 November 2024
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VAT penalties for late submissions

HMRC has updated its Internal Guidance VGROUPS01530 on penalties for late submissions,

Penalties for late submissions are calculated on the basis of points.

For VAT groups the representative member has a single liability for these points covering the whole group. If the representative member changes, the existing liability is transferred to the new representative member. A new member joining the group will not affect the points total of the group, even if the member joining had points before. If a business leaves the group and registers for VAT separately they will start with zero points, even if the group that they left had a penalty point balance.

For divisions, each one is liable for its own separate points and penalties. Each division will have its own maximum points total.