Category Archives: Planning

The interaction between Transfer Pricing and VAT

By Marcus Ward 20 February 2024

Are Transfer Pricing (TP) adjustments subject to VAT? – Usually no, but…

What is TP?

A transfer price is the price charged in a transaction between two parties. The transfer pricing legislation concerns itself with the prices charged in transactions between connected parties as, in such circumstances, the price charged may not necessarily be that which would have been charged if the parties had not been connected.

The UK’s transfer pricing legislation details how transactions between connected parties are handled and in common with many other countries is based on the internationally recognised ‘arm’s length principle’.

The UK allows only for a transfer pricing adjustment to increase taxable profits or reduce a tax loss. It is not possible to decrease profits or increase a tax loss.

The UK’s transfer pricing legislation also applies to transactions between any connected UK entities.

The arm’s length principle applies to transactions between connected parties. For tax purposes such transactions are treated by reference to the profit that would have arisen if the transactions had been carried out under comparable conditions by independent parties.

So, is a TP adjustment additional consideration for a supply?

VAT

Value of the supply – what is the consideration?

TP is a direct tax concept which does not necessarily align with VAT considerations. Unhelpfully, there are no provisions in UK legislation which provides for the VAT treatment of TP adjustments. Additionally, there is no case law on this subject.

As a TP adjustment is solely for direct tax purposes, it does not usually affect the value of the supply for VAT purposes. Consequently, such adjustments are usually outside the scope of VAT.

However, price adjustments of previous supply of goods/services must be recognised for VAT market value rules only when:

the supply is taxable
the relevant input tax is not fully recoverable and
HMRC issues an ‘Open Market Value Notice’ to the parties requiring them to apply market values for VAT.

VAT Act 1994, Schedule 6, Part 2, para 1 gives HMRC the vires to issue such a Notice.

Latest

We understand that a case: Arcomet Romania is due to be heard by the CJEU on whether TP adjustments represent consideration and we await the outcome which may provide clarity. (Although after Brexit, the previous position: that the UK VAT Act is to be interpreted with EU case law and general principles of EU law has ended. UK courts whilst still relying on the UK VAT Act and its EU VAT Directive principles, will be able to deviate from ECJ case law).

VAT and BIK – Double cab pick-ups

By Marcus Ward 15 February 2024

VAT and BIK – Double cab pick-ups

The changes to benefit-in-kind tax purposes from 1 July 2024 means that double cab pick-up trucks will no longer be classified as vans but as cars. This brings them into line with the VAT treatment of these vehicles, so here we look at the VAT rules:

HMRC and the Society of Motor Manufacturers and Traders (SMMT) have agreed how the one tonne payload test will be applied in practice to double cab pick-ups.

Cars are treated quite differently for VAT purposes from commercial vehicles:

most ordinary business cars are subject to a block on input tax recovery which is a proxy for taxing the private use of the car
the private use of commercial vehicles is taxed either by means of an input tax apportionment or a periodic output charge on actual private use
a business that converts a commercial vehicle into a car becomes liable to an output tax charge on a “self-supply” of the vehicle to itself para 14 Notice 700/57.

SMMT members will take steps to make dealers aware of the ex-works payloads of their double cab models.

Vehicles are not treated as cars for VAT purposes if they have a payload of one tonne or more. Payload is the difference between a vehicle’s maximum gross weight and its kerbside weight. In practice the change mainly affects those vehicles generally described as double cab pick-ups.

Given the different treatment of cars and commercial vehicles it is important for manufacturers, distributors, dealers, and business customers to know the payload of any double cab vehicle which is bought.

It is especially important to be aware that by adding accessories to the ex-works model they may, by lowering the payload of the vehicle, convert it into a car. This would make the vehicle liable to the self-supply charge. Such conversions are most likely to occur with double cabs that have an ex-works payload of 1000 to 1050 kg.

Accessories fitted by dealers or customers

HMRC will, with one exception, ignore as de minimis the addition of accessories. The exception is the addition of a hard top consisting of metal, fibreglass or similar material, with or without windows. In practice this means that a manufacturer, dealer or customer can fit any accessory to the vehicle, other than a hard top, and still rely upon its payload as being the ex-works payload. HMRC will accord all hardtops a generic weight of 45kgs.

In order to provide simplicity and certainty, HMRC and the SMMT have agreed to simplify the treatment of these vehicles. Full details of the agreement can be found at para 23 Notice 700/57 – Administrative agreements entered into with trade bodies.

Please see the recent The Three Shires Trailers case on input tax recovery and the self-supply of cars/commercial vehicles.

UPDATE!

Double-cab pickups go back to being vans, not cars for BIK (only). A week after the new guidance that classified double-cab pickups as cars rather than vans, the HMG has now reversed this decision on 19 February 2024.

VAT: Evidence for exports. The H Ripley case

By Marcus Ward 13 February 2024

Latest from the courts

In the H Ripley & Co Limited First Tier Tribunal (FTT) case the issue was whether the appellant had satisfactory evidence to support the zero rating of the export of goods (scrap metal).

Background

HMRC denied zero rating on the basis that the appellant did not provide satisfactory evidence to support the fact that the scrap metal was removed from the UK.

The requirements are set out in VAT Notice 725 para 5 and acceptable documentary evidence may include:

the customer’s order – including customer’s name and delivery address
inter-company correspondence
copy sales invoice
advice note
packing list
commercial transport documents from the carrier responsible for removing the goods from the UK, for example an International Consignment Note (CMR) fully completed by the consignor, the haulier and signed by receiving consignee
details of insurance or freight charges
bank statements as evidence of payment
receipted copy of the consignment note as evidence of receipt of goods abroad
a signed CMR document or note
a bill of lading
an airfreight invoice
an invoice from the carrier of the goods
official documents issued by a public authority, such as a notary, confirming the arrival of the goods
any other documents relevant to the removal of the goods in question which you would normally get in the course of business

or a combination of the above.

HMRC advised the appellant that it had received an information request from the Belgian tax authorities in respect of certain transactions and consequently, HMRC required information on the company’s documents in connection with the supplies. On receipt of the information HMRC concluded that the evidence was insufficient to support zero-rating so the sales were treated as standard rated and the appellant’s repayment claim was reduced to reflect this.

In these circumstances the burden of proof is on the appellant to show that it has satisfied the conditions set out in Notice 725 to zero-rate its supplies and provide documentation to show that the goods were removed from the UK.

Decision

The court noted that it was not HMRC’s position that supplementary evidence could not be provided post the required three-months period but that it was entitled to decline the additional evidence when it was provided some 18 to 30 months after the three-month period. It was clear that the evidence of removal must be obtained within three months and not that the valid evidence is brought into existence within the three-month time limit and obtained at some future date.

Notice 725 sets out the conditions which attach to the entitlement to zero-rate supplies. The FTT considered it to be clear from paragraph 4.3 and 4.4 (which have the force of law) that the onus is on the exporter company claiming zero-rating to gather sufficient evidence of removal within three months of the date of the supply. If it does not do so, it is not entitled to zero-rate the supplies.

Specifically, the court considered:

Sales Invoices – did not provide clear evidence that the goods were removed from the UK. Despite the invoices confirming the sale of scrap metal to a Belgium registered company it did not follow that the address of the purchaser is the same address as the destination that the goods were sent to.
Bank Statements – simply provided proof of payment they did not confirm who received the goods nor where the goods were delivered.
Weighbridge Tickets – merely confirm a consignment of scrap metal was sold to a Belgium based company and the goods were collected by a UK registered vehicle.
CMRs – none of the CMRs were fully completed by the haulier and signed by the receiving consignee.
P&O Boarding Cards –a taxpayer must have in its possession valid evidence of export within three months from the time of supply. The boarding cards were not provided to HMRC until 30 May 2018, some 18 to 30 months after the disputed consignments took place. It was not disproportionate for HMRC to state that the time limit for obtaining valid evidence of removal was three months and that the substantive requirements of Notice 725 had not been met. In any event, the court did not accept that the boarding cards evidence the exports of the scrap metal; none of the reference numbers on the boarding card match those used in any of the other documents and none of the lead names on the boarding cards match any of the other names in any other document. The boarding cards do not have any identifying features such that they may be matched with any of the disputed consignments.
E-mails and WhatsApp messages –none of the messages evidence that the loads were exported. At best they evidence a request from the buyer to a carrier to collect goods from the supplier’s yard and the WhatsApp messages were silent on whether the loads were exported from the UK.

The appeal was dismissed, and the assessments were upheld because none of the documents either individually or taken as a whole, were sufficient evidence to support zero-rating.

Commentary

Yet another case illustrating the importance of insuring correct documentation is held. It is not sufficient that goods leave the UK, but the detailed evidence requirements must always be met.

VAT: Input tax claim on Land Rovers. The Three Shires Trailers case

By Marcus Ward 9 February 2024

Latest from the courts

In the Three Shires Trailers Limited First Tier Tribunal (FTT) case the issues were whether an input tax claim on the purchase of two Land Rover Discoveries was appropriate when they were converted from commercial vehicles to cars, or was a self-supply triggered?

Background

The vehicles were commercial vehicles when purchased and input tax was recovered. Subsequently, they were converted by the addition of three fold up seats with seat belts behind the driver seat and removing materials which had blacked out the rear windows which reclassified them as cars. This would have subjected them to an input tax block if purchased in that state.

The purpose of buying the vehicles was for the transport of trailers to customers, the collection of trailers from suppliers and to enable personnel of the appellant to attend trade fairs all over the country.

Technical

“A Motor Car” is defined as:

“any motor vehicle of a kind used on public roads which has three or more wheels and either:

(a) is constructed or adapted solely or mainly for the carriage of passengers; or

(b) has to the rear of the driver’s seat roofed accommodation which is fitted with side windows or which is constructed or adapted for the fitting of side windows…”

Issues

The appellant stated that the vehicles were used only for business purposes. Employees were not permitted to use the vehicles for private purposes and did not do so. The vehicles were kept at the business’s premises. He also explained that the vehicles were not converted to cars, if they were cars, they were qualifying cars and if they were non-qualifying cars, the use was only temporary, and they were converted back to commercial vehicles.

Initially, HMRC disallowed the claim because the vehicles became cars and subject to the input tax block.

Subsequently, HMRC’s case was that the vehicles had been converted from commercial vehicles to non-qualifying cars which triggers an irreversible self-supply under Article 5 of the Value Added Tax (Cars) Order 1992 so output tax equalling the claimed input tax was due.

Decision

The FTT decided that, at the time when the vehicles were acquired, they were indisputably commercial vehicles and the appellant was entitled to deduct the input tax on them.

The judge found that, after conversion, the vehicles were intended for use, and were used, only for business purposes. The appellant did not intend that the vehicles should be used for private purposes and so far as he was aware, there was no private use. The vehicles were therefore qualifying motor vehicles eligible for input VAT recovery. No output tax was due on a self-supply.

The appeal was allowed.

Commentary

Another case on the recovery of input tax on car purchases and the difference between commercial vehicles and cars. It is notoriously difficult to persuade HMRC that there is no private use of cars, but it is possible.

VAT grouping and divisional registration guidance updated

By Marcus Ward 9 February 2024

HMRC has update VAT Notice 700/2: Group and divisional registration.

VAT group registration

VAT grouping is a facilitation measure by which two or more eligible persons can be treated as a single taxable person for VAT purposes. Eligible persons are bodies corporate, individuals, partnerships and Scottish partnerships, provided that certain conditions are satisfied. Bodies corporate includes companies of all types and limited liability partnerships.

The pros and cons of VAT grouping here.

Divisional registration

This is a facility that allows a corporate body which carries on its business through a number of self-accounting units to register each of those units or divisions separately for VAT. Guidance on divisional registration is in section 9.

Updates

Recent updates include:

Information on what happens if HMRC refuses your application and how to request a paper VAT1 form
The list of notifications a business may receive while waiting for a VAT grouping registration number, has been updated at section 2.17. A new section about late payment submission penalties has been added at section 5.11.

Small businesses/start ups: Should I register for VAT voluntarily?

By Marcus Ward 1 February 2024

VAT Basics – voluntary registration

Why?

OK, so why would a business choose to VAT register when it need not? Let’s say its turnover is under the VAT registration limit of £90,000, isn’t it just best to avoid the VATman if at all possible?

Planning

This is not an article which considers whether a business MUST register, but rather it looks at whether it is a good idea to register on a voluntary basis if it is not compulsory. The first time a business would probably consider VAT planning.

Decision

As a general rule of thumb; if you sell to the public (B2C) then probably not. If you sell to other VAT registered businesses (B2B) then it is more likely to be beneficial.

If you sell B2B to customers overseas it is almost certain that VAT registration would be a good thing, as it would if you supply zero rated goods or services in the UK. This is because there is no output tax on sales, but full input tax recovery on costs; VAT nirvana! A distinction must be made between zero rated supplies and exempt supplies. If only exempt supplies are made, a business cannot register for VAT regardless of level of income.

Compliance

Apart from the economic considerations, we have found that small businesses are sometimes put off VAT registration by the added compliance costs (especially since MTD) and the potential penalties being in the VAT club can bring. Weighed against this, there is a certain kudos or prestige for a business and it does convey a degree of seriousness of a business undertaking. We also come across situations where a customer will only deal with suppliers who are VAT registered.

The main issue

The key to registration is that, once registered, a business may recover the VAT it incurs on its expenditure (called input tax). So let us look at some simple examples of existing businesses for comparison:

Examples

Example 1

A business sells office furniture to other VAT registered business (B2B)

It buys stock for 10,000 plus VAT of 2,000

It incurs VAT on overheads (rent, IT, telephones, light and heat etc) of 2,000 plus 400 VAT

It makes sales of 20,000

If not registered, its profit is 20,000 less 12,000 less 2400 = 5600

If VAT registered, the customer can recover any VAT charged, so VAT is not a disincentive to him

Sales 20,000 plus 4000 VAT (paid to HMRC)

Input tax claimed = 2400 (offset against payment to HMRC)

Result: the VAT is neutral and not a cost, so profit is 20,000 less 12,000 = 8000, a saving of 2400 as compared to the business not being registered. The 2400 clearly equals the input tax recovered on expenditure.

Example 2

A “one-man band” consultant provides advice B2B and uses his home as his office. All of his clients are able to recover any VAT charged.

He has very few overheads that bear VAT as most of his expenditure is VAT free (staff, train fares, use of home) so his input tax amounts to 100.

He must weigh up the cost (time/admin etc) of VAT registration against reclaiming the 100 of input tax. In this case it would probably not be worthwhile VAT registering – although the Flat Rate Scheme may be attractive.

Example 3

A retailer sells adult clothes to the public from a shop. She pays VAT on the rent and on the purchase of stock as well as the usual overheads. The total amount she pays is 20,000 with VAT of 4000.

Her sales total 50,000

If not VAT registered her profit is 50,000 less 24,000 = 26,000

If VAT registered she will treat the value of sales as VAT inclusive, so of the 50,000 income 8333 represents VAT she must pay to HMRC. She is able to offset her input tax of 4000.

This means that her profit if VAT registered is 50,000 less the VAT of 8333 = 41,667 less the net costs of 20,000 = 21,667

Result: a loss of 4333 in profit.

As may be seen, if a business sells to the public it is nearly always disadvantageous to be voluntarily VAT registered. It may be possible to increase her prices by circa 20%, but for a lot of retailers, this is unrealistic.

Intending traders

If a business has not started trading, but is incurring input tax on costs, it is possible to VAT register even though it has not made any taxable supplies. This is known by HMRC as an intending trader registration. A business will need to provide evidence of the intention to trade and this is sometimes a stumbling block, especially in the area of land and property. Choosing to register before trading may avoid losing input tax due to the time limits (very generally a business can go back six months for services and four years for goods on hand to recover the VAT). Also cashflow will be improved if input tax is recovered as soon as possible.

Action

Careful consideration should be given to the VAT status of a small or start-up business. This may be particularly relevant to start-ups as they typically incur more costs as the business begins and the recovery of the VAT on these costs may be important. In most cases it is also possible to recover VAT incurred before the date of VAT registration.

This is a basic guide and there are many various situations that require further consideration of the benefits of voluntary VAT registration. We would, of course, be pleased to help.

A VAT Did you know?

By Marcus Ward 22 January 2024

Size matters Part III – Bay plants are VAT free – as long as they are no bigger than 50cm and they have not been clipped or shaped.

VAT treatment of serviced apartments: The Realreed Limited case

By Marcus Ward 11 January 2024

Latest from the courts

In this First-Tier Tribunal (FTT) case the issue was whether serviced apartments qualify for exemption.

Background

Realreed owns a property called Chelsea Cloisters in Sloane Avenue, London. The property comprises; 656 self-contained apartments and some commercial units. 421 of these apartments are let on long leases (no VAT issues arise from these supplies). The appeal concerned the VAT treatment of the letting of the remaining 235 apartments, which include studio, one-bedroom or two-bedroom self-contained rooms. The appellant has, at all times, received a significant number of occupiers from corporate customers when they relocate their employees to London for a specified period, such as a secondment.

The contentions

Realreed argued that the letting of the apartments is a supply of accommodation which is exempt under The VAT Act 1994, Schedule 9, Group 1, Item 1. Chelsea Cloisters operates like a ‘home from home’ for its tenants: it provides residential accommodation. The physical appearance of the building is very similar to that of other residential buildings in the vicinity. It does not have signage suggesting the serviced accommodation is a hotel or similar establishment. It is rare for hotels (or similar establishments) at the booking point to offer long-term availability in the same way as Realreed does. Chelsea Cloisters does not offer room service, or catering of any form. Tenants have fully functioning kitchens and other self-catering facilities within their apartments and have washing machines and dryers to do all their own laundry. Tenants can, and do, stay for extended periods of time (one for around 20 years). The business has always involved the provision of residential accommodation on a longer-term basis than would typically be found in a hotel, with a much higher degree of personal autonomy for the occupant.

HMRC contended that the use of the Apartments is carved out of the exemption in Item 1 by excepted item (d), which applies to “the provision in an hotel, inn, boarding house or similar establishment of sleeping accommodation”. Note 9 to Group 1 provides that “similar establishment” “includes premises in which there is provided furnished sleeping accommodation whether with or without the provision of board or facilities for the preparation of food, which are used or held out as being suitable for use by visitors or travellers”.

Decision

The court considered that Realreed provided sleeping accommodation in an establishment which is similar to a hotel. The two hallmarks of short-term accommodation coupled with additional services (daily maid service, linen changing, cleaning at the end of a stay, residents bar, concierge) mean that Chelsea Cloisters is an establishment in potential competition with the hotel sector, which also offers short-term accommodation with services.

The FTT found that Realreed provided furnished sleeping accommodation, so the remaining question was whether Chelsea Cloisters is used by or held out as being suitable for use by “visitors or travellers” per Note 9.

The FTT interpreted ‘visitor or traveller’ as referring to a person who is present in a particular place without making it their home, ie; they are not staying there with any degree of permanence. The average length of visit was less than a fortnight which must mean that the apartments were indeed made available to visitors or travellers.

The supplies were therefore standard rated.

Commentary

There is a distinction between leases and other room lettings for VAT. The most important issue is the degree of “permanence”, although other factors have a bearing. Businesses which let rooms should consider the nature of their supplies with reference to this case which helpfully sets out which factors need to be considered.

VAT: Electronic Sales Suppression (ESS)

By Marcus Ward 3 January 2024

HMRC has published new guidance on ESS and information on how to make a disclosure.

What is ESS?

ESS is also known as till fraud or till manipulation. It is where a business manipulates their till systems to hide or reduce the true value or number of sales. This is carried out through the use of ESS tools such as misusing built in till functions or installing software specifically designed to suppress sales. HMRC call this sales suppression and it is done either at, or after, the point of sale (POS). The records then appear to be correct and complete.

Businesses do this to reduce their turnover so that they pay less tax. They also do this to try to appear compliant.

Misusing a till system reduces the recorded turnover of the business and the amount of VAT payable, whilst providing what appears to be an accurate and complete record.

ESS is tax fraud. You are involved with ESS if you have made, supplied, promoted, possess or have access to an ESS tool.

You are also involved in ESS if:

you own an ESS tool
have access to an ESS tool
have tried to access an ESS tool

What is an ESS tool?

An ESS tool is a piece of software, computer code script or hardware. It allows a business to hide or reduce the value of individual transactions on its electronic sales records. This includes using and/or configuring a till, or point of sale system, in a way that suppresses sales.

You do not have to have used an ESS tool to suppress sales or pay less VAT for HMRC to charge a penalty for being involved in ESS, it is fraud regardless.

HMRC powers

Finance Act 2022, Schedule 14 allows HMRC to issue an information notice for ESS. This means HMRC can ask for certain information that only applies to ESS. It allows the issue of a Notice to a ‘relevant person’ for a ‘relevant purpose’.

Who is a ‘relevant person’

A ‘relevant person’ is any person who HMRC think it might be able to charge a penalty for being involved in ESS.

What is a ‘relevant purpose’

A ‘relevant purpose’ is the reason that HMRC is asking for information about ESS and ESS Tools. The law allows HMRC to do this in three types of situations which are to help it:

decide whether a relevant person has made, supplied, promoted, or possesses an ESS tool — HMRC would be able to charge this person a penalty
understand how an ESS tool works
identify any other person who has made, supplied, promoted, or possesses the ESS tool

Disclosure

HMRC is offering an opportunity for those involved in ESS to make a disclosure. Early voluntary disclosure could lead to a reduction in financial penalties. Use the ‘Make a disclosure about misusing your till system’ form to tell HMRC that you have been using your till system to reduce your tax bill.

Further reading and more detailed information on penalties here.

A VAT Did you know?

By Marcus Ward 18 December 2023

Chestnuts roasting by an open fire…

Roasted nuts in shells are zero rated, but if the shell is removed they become standard rated.

Ho, ho ho… VAT and nuts in the same sentence. Merry Christmas everybody.