If your shop is burgled, it’s best to let the robbers take your stock. Goods lost to theft are not subject to VAT, but if cash (which customers have paid for goods) is taken from the till a VATable supply has still been made and output tax is due on it.
HMRC has published two new policy papers covering their position on VAT debts.
The first covers HMRC’s approach to tax debt and covers:
The second provides guidance on HMRC’s support for taxpayers with tax debt and includes:
Interestingly (well, it is all relevant I suppose!) HMRC say that it typically has more than half a million TTP arrangements in place at any one time, and nine out of ten are completed successfully.
Planning
There are a number of schemes and methods to legitimately defer or reduce VAT payable. These include the Flat Rate Scheme, Cash Accounting, margin schemes, global accounting. Other basic planning may involve; tax point planning, invoice timing, ad use of Bad Debt Relief (BDR).
Advice
Our advice is always to contact HMRC as soon as possible if a business has tax payment problems. In some cases, the department is surprisingly helpful. As the statistics demonstrate TTP arrangements are, on the whole, a very successful method for both sides to deal with tax debt.
Reminders
These policy papers provide helpful guidance and explanation of HMRC’s approach, especially in these difficult economic times as a result of COVID 19 and Brexit.
Why? How? Where? When? What? Who?
Why?
It is impossible for any business to do such a basic thing as set its prices properly unless it understands its VAT position and ensures that this is reflected in those prices, terms and contract terms etc. The aims of tax planning are:
How?
The “How?” is dependent on the specific business and its needs. We offer a flexible and tailored service from start-ups to multi-national companies. We offer:
The VAT planning process – “The four As”
More details of this approach here.
Where?
VAT, or its derivations applies in most countries around the world. So, the answer is probably “everywhere”. This is particularly relevant with cross-border transactions. A common issue is the “Place Of Supply” (POS) rules which dictate where a supply takes place and thus the VAT liability of it.
When?
Planning needs to be done in advance of transactions. Once a contract has been entered into without thought for the VAT consequences, the damage may have already been done.
Where there is a one-off transaction (eg; sale of premises, sale of know-how, issue of shares), this is, by definition, something of which the business has little experience. It is an occasion to assume that advice is needed, rather than to assume that the most obvious treatment is correct.
Since the impact of a change in the pattern of a business’ activities will continue down the years, rather than being restricted to a single occasion, it is doubly important to ensure that the correct treatment is identified from the outset.
Periodic reviews are a good time to look, not only at the future, but also at the past, to see whether developments in case law reveal past overpayments which may be reclaimed. This is particularly important since repayments are subject to the four-year capping provisions.
The essential step is to have some means of becoming aware of changes and monitoring these with VAT in mind. The means to be adopted are various and will depend on the size and type of the business.
What?
“Right tax, right time”. This means compliance with the relevant legislation but not paying any more VAT than is necessary. As one wag once said; “You must pay taxes. But there’s no law that says you have to leave a tip.”
Since VAT is a transaction-based tax, timing is often crucial and the objective is to legitimately defer payment to HMRC until the latest time possible, thus improving cash flow and retaining the use of VAT monies for as long as possible. The converse of this of course, is to obtain any repayments of VAT due from HMRC as soon as possible. We must also consider avoiding VAT representing an actual cost and taking advantage of any beneficial UK and EC legislation, determinations, guidance, case law and Business Briefs etc available.
VAT Planning objectives
Who?
Marcus Ward Consultancy of course!
In very welcome good news from the Charity Tax Group (CTG) the zero rating for charity advertising has been extended to previously standard rated supplies
Background
Certain (“traditional”) advertising services received by a charity have always been zero rated. However, the zero rating did not cover advertising that was ‘selected” or targeted”. HMRC has always been of the view that websites which use cookies which target certain potential donors fall within the exemption such that standard rating applied which commonly represented an additional cost to a charity.
Changes
However, the CTG has announced that lengthy ongoing discussions with HMRC have finally borne fruit. HMRC have indicated that they have “relaxed“ their position and now agree that supplies of digital advertising to a charity may qualify for zero rating, even if cookies are used. This is not a blanket policy, but it does broaden the availability of zero rating which will mean an absolute saving for most charities.
Exceptions
Advertising which is sent to a social media personal accounts, or where the recipient has paid a subscription for the site, continues to be standard rated.
Action
Charities should review their advertising activity for the last four years to establish whether they have a retrospective claim. Measures should also be put in place to ensure that VAT is not overpaid in the future. We can assist with making claims if required.
Latest from the courts
In the Y4 Express Ltd (Y4) First Tier Tax Tribunal (FTT) case the issue was whether an individual was in business such that he was entitled to be VAT registered.
Background
Y4 imported goods from China on behalf of UK customers. This entailed collecting the goods from the airport, storing them and then arranging delivery of them to the final customers. Y4 had an arrangement with Royal Mail (RM) for a discounted delivery rate. RM subsequently withdrew this discount resulting in Y4 incurring increased delivery costs. In order to mitigate this, Y4 put a structure in place using an individual (Mr Man) to contract with RM for the discount and letting Y4 use the account to take advantage of the reduced rates: RM invoiced Mr Man and Y4 would arrange payment from its own funds via direct debit. Y4 dealt with Mr Man’s VAT compliance and raised self-billing documents to itself on which it recovered input tax. It was reported that Mr Man considered this as a favour to a friend rather than as a business venture with a view to making a profit, and indeed, the charges made by RM were not marked up. Mr Man was not involved with the arrangement of deliveries of Y4 carried out by RM.
HMRC disallowed the input tax claimed as it considered that the individual was not in business, so no VAT was due on the charge made to Y4. This was on the basis that the individual was not carrying on an ‘economic activity’.
Decision
The FTT agreed with the respondent and upheld the decision to disallow Y4’s claim for input tax. This was on the basis that Mr Man was not in business so could not make supplies to Y4, which in turn meant that there was no input tax for Y4 to claim.
Commentary
The issue of whether an entity is “in business” goes back to the earliest days of VAT. I have considered the issue and recent case law here here here here and here. HMRC relied heavily on the age-old (well, 1981) tests in the Lord Fisher case:
The judge found that the tests were not met by Mr Man and, even if they were, the evidence; the self-billing documents, were insufficient. It was also found that a penalty was due, although the quantum was reduced to reflect the cooperation of the taxpayer during the enquiries.
This appeal further demonstrates the ambiguity that often surrounds the definition of a business, and/or an economic activity (the EU legal definition). This is often an issue for charities and NFP bodies, but can extend to other areas such as in this case.
From 1 January 2021 there will be changes to the VAT treatment of low value consignments (LVC). These are goods with a value up to £135 – the threshold for customs duty liability. The HMRC guidance states that VAT will be collected at the point of sale rather than on import.
The changes are intended to ensure that goods from EU and non-EU countries are treated in the same way and that UK businesses are not disadvantaged by competition from VAT free imports.
Brief summary
In the recent (16 July 2020) CJEU case of UR C‑424/19 a Romanian taxpayer argued that the provision of legal services by a lawyer was not a taxable supply. Unsurprisingly, the court did not agree. So it is official; lawyers do provide a service…
The EU has announced on 15 July 2020 a new Action Plan for fair and simple taxation. The Tax Action Plan is a set of 25 initiatives the European Commission will implement between now and 2024 to make tax “fairer, simpler and more adapted to modern technologies”. Full details of the ‘Tax Package” here.
The main areas may be summarised as:
This list is not exhaustive and is a guide only.
The Commission says it aims “to lead the transition into a greener and more digital world that is compatible with the principles of our social market economy”. And that “Fair, efficient and sustainable taxation is central in delivering on those ambitions”. It added that this “will be even more important in the months and years ahead, as the EU and the global community seek to recover from the fallout of the COVID-19 crisis”.
Comment
How these intended changes impact the UK after Brexit remains to be seen, however, in an increasingly worldwide marketplace lead by technology, it is difficult to understand how the UK can live in isolation.
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VAT and property transactions are uneasy bedfellows at the best of times. Getting the tax wrong, or failing to consider it at all can result in a loss of income of 20% on a project, or forgoing all input tax incurred on a development. Even a simple matter of timing can affect a transaction to a seller’s detriment. Here I take a brief look at issues that can impact residential property transactions. It is important to recognise when VAT may affect a project so I hope that some of these triggerpoints may prove useful.
General points
The following are very general points on residential properties. No two cases are the same, so we strongly recommend that specific advice is obtained.
Refurbishing “old” residential properties
Broadly speaking, the VAT incurred on such work is not reclaimable as the end use of the property will be exempt (either sale or rent). There is no way round this as it is not possible to opt to tax residential dwellings. It may be possible to use the partial exemption de minimis limits if there are any other business activities in the same VAT registration. If this is the only activity of a business, it will not even be permitted to register for VAT. There are special rules if the number of dwellings change as a result of the work (see below).
New residential builds
The first sale (or the grant of a long lease 21 years plus) of a newly constructed dwelling by “the person constructing” is zero rated. This means that any VAT incurred on the construction is recoverable. Care should be taken if the new dwelling is let on a short term basis rather than/before being sold as this will materially affect input tax recovery. Advice should always be taken before such a decision is made as there is planning available to avoid such an outcome. VAT incurred on professional and legal costs of the development may also be recovered such as; architects, solicitors, advisers, agents etc. VAT registration is necessary in these cases and our advice is to VAT register at the earliest stage possible.
The construction of new dwellings is zero rated, along with any building materials supplied by the contractor carrying out the work. The zero rating also extends to sub-contractors. It is not necessary for a certificate to be provided in order to zero rate such building works.
Conversions
There are special rules for refurbishments which create a different number of dwellings (eg; dividing up a single house into flats, or changing the total number of flats in a block, or making one dwelling by amalgamating flats). Generally, it is possible for contractors to invoice for their building work at the reduced rate of 5%. This rate may also apply to conversions. A conversion is defined as work undertaken on a non-residential property, such as a barn, office or church, into one or more self-contained dwellings. Once converted the sale of the residential property will be zero rated and all of the input tax incurred on associated costs is recoverable (similar to a new build).
Renovation of empty residential premises
Reduced rating at 5% is also available for the renovation or alteration of empty residential premises. Such a premises is one that has not been lived in during the two years immediately before the work starts. HMRC will insist on documentary evidence that the property has been empty for that time.
Purchase of a commercial property intended for conversion
If it is intended to convert a commercial property into residential use and the vendor indicates that (s)he will charge VAT (as a result of the option to tax having been exercised) it is possible for the purchaser to disapply the option to tax by the issue of a certain document; form VAT 1614D. This means that the sale will become exempt. Advice should always be sought on this issue by parties on each side of the transaction as it very often creates difficulties and significant VAT and other costs (mainly for the vendor).
Mixed developments
If what is being constructed is a building that is only in part a zero-rated dwelling, a contractor can only zero-rate its work for the qualifying parts. For example, if a building containing a shop with a flat above is constructed, only the construction of the flat can be zero-rated. An apportionment must be made for common areas such as foundations and roof etc. The sale of the residential element when complete is zero rated and the sale of the commercial part will be standard rated if under three years since completion. If the commercial part is over three years old at the date of sale, or is rented rather than sold, the supply will be exempt with the option to tax available – details here. If an exempt supply is made, the recovery of input tax incurred on the development will be compromised and it is important that this recognised and planning put in place to avoid this outcome.
DIY building projects
There is a specific scheme for DIY Housebuilders to recover input tax incurred on the construction of a dwelling for the constructor to live in personally. Details here https://www.marcusward.co/?s=diy
Sale of an incomplete residential development
There are two possible routes to relief if a project is sold before dwellings have been completed (either new build or conversion). This can often be a complex area, however, there is some zero rating relief which may apply, and also it may be possible to apply TOGC (Transfer Of a Going Concern) treatment to the sale. In both cases, it is likely that input tax previously claimed by the developer should not be jeopardised.
Overview
There are VAT complications for the following types of transactions/developments and issues:
This list is not exhaustive, but I hope it gives a broad idea of where VAT needs to be considered “before the event”. As always, we are available to assist.
In today’s Summer Statement Rishi Sunak announced that VAT will be cut from the current rate of 20% to 5% for the next six months in respect of hospitality and tourism which includes;
The cut lasts from 15 July 2020 until 12 January 2021.
Around two million people work in the hospitality sector and it has been one of the hardest hit by Covid-19 and the government has recognised that it warrants further support. It is estimated that the move will benefit more than 150,000 businesses and consumers. This should encourage more consumer spending and help UK tourism.
Updates
HMRC has updated the relevant guides:
Notice 701/14 Food products and Notice 709/1 Catering, takeaway food
Notice 709/3 Hotels and holiday accommodation
Reductions to the relevant flat rate schemes (FRS) rates have also been announced. The two most relevant categories are catering and accommodation.
Commentary
A temporary cut of the standard rate from 17.5% to 15% was put in place during the financial crisis of 2008, but, by common consent, its impact was limited. So it remains to be seen how successful this announcement will be. It is not anticipated that the cut will be passed on to end consumers, but rather used to support potentially faltering businesses.