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.
Latest from the courts
In the First-Tier tribunal (FTT) case of Hodge and Deery Limited the issue was whether ground works preparatory to installing flexi vault burial chambers exempt via The VAT Act 1994, Schedule 9, group 8, item 2 – “The making of arrangements for or in connection with the disposal of the remains of the dead.”
Background
The vaulting system was installed in graveyards with unstable soil structures which can result in issues with toxins and in subsidence of an existing grave when another grave is dug in the adjacent plot. The burial plots are ready for use and the element above the plots is landscaped (which was undertaken by a third-party).
The appellant’s case
The appellant considered that the installation of the flexible burial vaults should be treated as the advance digging of multiple graves. It should not be regarded differently from the preparation of “normal” graves. The sole purpose of the preparation of a grave is to dispose of the remains of the dead and it should not matter that the undertaker does not prepare the grave himself.
HMRC’s case
HMRC considered that the installation of flexible burial vaults do not fall within the exemption because:
Decision
The judge considered that the services resulted in the provision of many graves for the disposal of the remains of the dead and that the result of the services satisfied the object of the exemption. The digging of graves is central to the disposal of the remains of the dead, the services are made in connection with the disposal of the remains of the dead and within Item 2.
Commentary
In this case, it did not matter that the services are provided in advance, and nor did it matter that the services are not provided in connection with a specific funeral. It also confirms that the funeral director or undertaker need not provide all the services themselves. It seems obvious that the digging of graves is pivotal to the disposal of the remains of the dead and once it was established that a third party could dig the grave, the appeal was bound to be successful.
Further to my article explaining the changes to late returns and payment penalties, HMRC has now published further guidance on new regime.
These changes, originally intended to be introduced on I April 2022 have been delayed until 1 January 2023 (for VAT periods starting on, or after, this date).
From 1 January 2023, HMRC will charge late-payment interest from the day a VAT payment is overdue to the day the VAT is paid, calculated at the Bank of England base rate plus 2.5%.
Period of familiarisation
HMRC say that to give businesses time to get used to the changes, it will not be charging a first late payment penalty for the first year from 1 January 2023 until 31 December 2023, if the tax is paid in full within 30 days of the payment due date.
More on late returns here and on late payments here.
One query that constantly reappears is that of the VAT treatment of deposits.
This may be because there are different types of deposits with different VAT rules for each. I thought that it would be helpful for all the rules to be set out in one place, and some comments on how certain transactions are structured, so…
Broadly, we are looking at the tax point rules. The tax point is the time at which output tax is due and input tax recoverable. More on tax points here
A business may have various commercial arrangements for payments such as:
I consider these below, as well as some specific arrangements:
Advance payments and deposits
An advance payment, or deposit, is a proportion of the total selling price that a customer pays a business before it supplies them with goods or services.
The tax point if an advance payment is made is whichever of the following happens first:
The VAT due on the value of the advance payment (only, not the full value of the overall supply) is included on the VAT return for the period when the tax point occurs.
If the customer pays the remaining balance before the goods are delivered or the services are performed, a further tax point is created when whichever of the following happens first:
So VAT is due on the balance on the return for when the further tax point occurs.
Returnable deposits
A business may ask its customers to pay a deposit when they hire goods. No VAT is due if the deposit is either:
Forfeit deposits
If a customer is asked for a deposit against goods or services but they then don’t buy them or use the services, it may be decided to retain the deposit. Usually the arrangement is that the customer is told/agrees in advance and it is part of the conditions for the sale. This arrangement is known as forfeit deposit. It often occurs when, for example, an hotel business makes a charge for reserving a room.
VAT should be declared on receipt of the deposit or when a VAT invoice is issued, whichever happens first.
HMRC announced via its Policy Paper Customs Brief 13 (2018) that the VAT treatment of forfeit, or “no-show” deposits changed from 1 March 2019.
The changes affect businesses that receive payments for services and part payments for goods and the customer does not:
Typically, this could be a hotel which reserves a room for a deposit which is retained if the customer is a no-show.
Previous treatment
Prior to 1 March 2019, charges for unfulfilled supplies and the retention of customer deposits are treated as outside the scope of VAT (and consequently VAT free). This is on the basis that either no supply had been made or, in the alternative, the retention of the deposit represents compensation for a loss, or the costs necessarily incurred.
Practically, this means that output tax is payable on the initial deposit, but this is adjusted if subsequently there is a no-show or goods are not collected.
Current treatment
From 1 March 2019, HMRC’s policy is that output tax is due on all retained payments for unused services and uncollected goods. Where businesses become aware that a customer has decided not to take up goods or services after paying, the transaction will remain subject to VAT. No adjustments or refunds of VAT will be allowed for those retained payments.
This means that when a non-repayable deposit is taken, VAT will always be due on the payment, regardless of subsequent events. However, if a deposit is returned, there will be no VAT due on it.
The rationale for the new treatment, according to HMRC is that; “because when a customer makes or commits to make a payment, it is for a supply. It cannot be reclassified as a payment to compensate the supplier for a loss once it is known the customer will not use the goods or services”
Continuous supplies
If a business supplies services on a continuous basis and it receives regular or occasional payments, a tax point is created every time a VAT invoice is issued or a payment received, whichever happens first. An article on tax planning for continuous supplies here
If payments are due regularly a business may issue a VAT invoice at the beginning of any period of up to a year for all the payments due in that period (as long as there’s more than one payment due). If it is decided to issue an invoice at the start of a period, no VAT is declared on any payment until either the date the payment is due or the date it is received, whichever happens first.
Credit and conditional sales
This is where the rules can get rather more complex.
The tax point for a credit sale or a conditional sale is created at the time you supply the goods or services to your customer. This is the basic tax point and is when you should account for the VAT on the full value of the goods.
This basic tax point may be over-ridden and an actual tax point created if a business:
Credit sales where finance is provided to the customer
If goods are offered on credit to a customer and a finance company is not involved, the supplier is financing the credit itself. If the credit charge is shown separately on an invoice issued to the customer, it will be exempt from VAT. Other fees relating to the credit charge such as; administration, documentation or acceptance fees will also be exempt. VAT is declared on the full value of the goods that have been supplied on the VAT Return for that period.
If goods or services are supplied on interest free credit by arranging with a customer for them to pay over a set period without charging them interest then VAT is declared on the full selling price when you make the supplies.
Credit sales involving a finance company
When a business makes credit sales involving a finance company, the finance company either:
Hire purchase agreements
If the finance company becomes the owner of goods, the business is supplying the goods to the finance company and not the customer. There is no charge for providing the credit, so the seller accounts for VAT on the value of the goods at the time they are supplied to the finance company. Any commission received from the finance company for introducing them to the customer is usually subject to VAT.
Loan agreements
If the finance company does not become owner of the goods, the supplier is selling the goods directly to its customer. The business is not supplying the goods to the finance company, even though the finance company may pay the seller direct. VAT is due on the selling price to the customer, even if the seller receives a lower amount from the finance company. The contract between the customer and the finance company for credit is a completely separate transaction to the sale of the goods.
Specific areas
The following are areas where the rules on the treatment may differ
Cash Accounting Scheme
If a business uses the cash accounting scheme here it accounts for output tax when it receives payment from its customers unless it is a returnable deposit
Property
Care should be taken with deposits in property transactions. This is especially important if property is purchased at auction.
These comments only apply to the purchase of property on which VAT is due (commercial property less than three years old or subject to the option to tax). If a deposit is paid into a stakeholder, solicitor’s or escrow account (usually on exchange) and the vendor has no access to this money before completion no tax point is created. Otherwise, any advance payment is treated as above and creates a tax point on which output tax is due to the extent of the deposit amount. Vendors at auction can fall foul of these rules. If no other tax point has been created, output tax is due on completion.
Tour Operators’ Margin Scheme (TOMS)
TOMS has distinct rules on deposits. Under normal VAT rules, the tax point is usually when an invoice is issued or payment received (as above). Under TOMS, the normal time of supply is the departure date of the holiday or the first occupation of accommodation. However, in some cases this is overridden. If the tour operator receives more than one payment, it may have more than one tax point. Each time a payment is received exceeding 20% of the selling price, a tax point for that amount is created. A tax point is also created each time the payments received to date (and not already accounted for) exceed 20% when added together. There are options available for deposits received when operating TOMS, so specific advice should be sought.
VAT Registration
In calculating turnover for registration, deposits must be included which create a tax point in the “historic” test. Care should also be taken that a large deposit does not trigger immediate VAT registration by virtue of the “future” test. This is; if it is foreseeable at any time that receipts in the next 30 days on their own would exceed the turnover limit, currently £85,000, then the registration date would be the beginning of that 30-day period.
Flat Rate Scheme
A business applies the appropriate flat rate percentage to the value of the deposit received (unless it is a returnable deposit). In most cases the issue of an invoice may be ignored if the option to use a version of cash accounting in the Flat Rate Scheme is taken. More on the FRS here and here
Please contact us if you have any queries on this article or would like your treatment of deposits reviewed to:
Latest from the courts
In the First Tier Tribunal (FTT) case of 50 Five (UK) Limited the issue was the VAT rate applicable to energy saving materials. An additional twist was that there was a sale of the business between the tax point of the relevant supplies and HMRC’s assessment.
Background
The appeal was brought in the name of the Appellant in respect of assessments raised by HMRC against the company prior to the date on which it was purchased by the present owners. The present owners were not made aware of the assessment at the time of purchase. It had not been disclosed to them as part of the due diligence which was undertaken.
The Appellant’s business was that of supply and installation of heating and hot water systems. The customers were supplied with fully installed systems. The Appellant did not ask the customers to separately source the parts for such systems and then simply fit them. These supplies were treated as those of energy saving materials and the reduced rate of 5% was applied.
HMRC raised an assessment after taking the view that the supply should have properly been standard rated at 20%.
Decision
The FTT decided that legislation which permits the sale of energy saving materials at the reduced rate of VAT apply only where the supply of those materials is independent of an installation service. In this case, as the Appellant was the provider of the goods, and also the installer, the supply to the end customer was standard rated (a composite supply).
It was noted that this outcome was counter intuitive and the result does indeed seem unfair to the taxpayer, but as there was no reasonable prospect of the appeal succeeding, it was struck out. The assessment and interest was now payable by the new owners.
Commentary
An unfortunate outcome for the new owners, but it highlights three VAT issues:
The only recourse the new owners have now is taking action against the sellers of the business.
VAT: Second Hand Scheme – Global Accounting simplification
Overview
The problem with the VAT Second-Hand Goods Scheme is that details of each individual item purchased, and then later sold, has to be recorded. This requirement can lead to a lot of paperwork and an awful lot of administration which, obviously, many businesses are not too keen to comply with.
Global Accounting is an optional, simplified variation of the Second Hand Margin Scheme (MS).
It differs from the standard MS because rather than accounting for the margin achieved on the sale of individual items VAT is calculated on the margin achieved between the total purchases and total sales in a particular accounting period without the requirement to establish the mark up on each individual item. It is beneficial if a business buys and sells bulk volume, low value eligible goods, and is unable to maintain the detailed records required of businesses who use the standard MS.
There two significant differences in respect of Global Accounting compared to the standard MS. The first difference is that losses on an item are automatically offset against profits on items. Thus losses and profits are offset together in the period. In the standard MS no VAT is due if a loss is made on an item, but that loss cannot be offset against any other profit. There is also a timing advantage with Global Accounting because all purchases made in the period are included, even if those goods are not actually sold in the same period.
Goods which may be included in Global Accounting
Global Accounting can be used for all items which are eligible under the standard MS. However, the following goods cannot be included in Global Accounting:
Starting to use the scheme
When a business starts using Global Accounting, it may find that it already has eligible stock on hand. It may include the value of this stock when it calculates the total purchases at the end of the first period. If a business does not take its stock on hand into account, it will have to pay VAT on the full price, rather than on the margin achieved, when it is sold.
Note: any goods bought on an invoice which shows a separate VAT figure are not eligible for resale under the scheme.
The calculation
VAT is calculated at the end of each tax period. Because you can take account of opening stock in your scheme calculations, you may find that you produce a negative margin at the end of several periods. In other words, your total purchases may exceed your total sales. In such cases, no VAT is due. But you must carry the negative margin forward to the next period as in the following example:
Period One
Margin = c – (a+b) = (4,000)
Because this is a negative margin there is no VAT to pay. However, negative margin must be carried forward into the next period as follows:
Period Two
There is no negative margin to carry forward this time. Therefore, in the third period, the margin is calculated solely by reference to sales less purchases.
The negative margin may only be offset against the next Global Accounting margin. It cannot be offset against any other figure or record.
Global Accounting Records and Accounts
A business does not need to keep all the detailed records which are required under the normal MS – for instance, you do not have to maintain a detailed stock book.
Global Accounting records do not have to be kept in any set way but they must be complete, up to date and clearly distinguishable from any other records. A business must keep records of purchases and sales as set out below, together with the workings used to calculate the VAT due.
If HMRC cannot check the margins declared from the records, VAT will be due on the full selling price of the goods sold, even if they were otherwise eligible for the scheme.
Buying goods under Global Accounting
When a business buys goods which it intends to sell under Global Accounting it must:
You cannot use the scheme if VAT is shown separately on the invoice.
If you are buying from a private individual or an unregistered business, you must make out the purchase invoice yourself.
When selling goods under Global Accounting
If the purchase conditions above apply, Global Accounting may be used when the goods are sold by:
Leaving the scheme
If a business stops using Global Accounting for any reason, it must make a closing adjustment to take account of purchases for which it has taken credit, but which have not been sold (closing stock on hand). The adjustment required does not apply if the total VAT due on stock on hand is £1,000 or less. In the final period for which the business uses the scheme, it must add the purchase value of its closing stock to the sales figure for that period. In this way VAT will be paid (at cost price) on the stock for which the business previously had credit under the scheme.
Items sold outside the scheme
If goods are sold which had been included in a business’ Global Accounting purchase (for example, they are exported), a business must adjust its records accordingly. This is done by subtracting the purchase value of the goods sold outside the scheme from the total purchases at the end of the period.
Stolen or destroyed goods
If a business loses any goods through breakage, theft or destruction, it must subtract their purchase price from your Global Accounting purchase record.
Repairs and restoration costs
A business may reclaim the VAT it is charged on any business overheads, repairs, restoration costs, etc. But it must not add any of these costs to the purchase price of the goods sold under the scheme.
For further advice on any global accounting, used goods schemes, or any other special VAT schemes please contact me.
Aphrodisiacs can be food and therefore VAT free. Capsules, drops, powders and sprays presented as aphrodisiacs that stimulate libido are intended for human consumption and are taken orally. The fact that consumption of the product may have positive effects on the sexual desire of the person ingesting it is irrelevant.
Access the updated VAT Fuel Scale Charges to apply from the 1 May 2022 here They will apply VAT periods starting on or after that date.
HMRC has published new VAT Road Fuel Scale Charges (RFSC) which apply from 1 May 2022 to 30 April 2023.
RFSC
If a business reclaims VAT incurred on road fuel, it will be required recognise the private use element of the fuel.
The RFSC simplifies accounting for VAT on the private use of fuel by motorists. The RFSC is calculated according to a car’s CO2 emissions and the fixed charge is added to output VAT, on the VAT return (in effect, the business supplies to fuel to the individual). The use of this charge is optional, the alternative is to keep detailed mileage records.
Details of these, and other motoring expenses here.
A quick RFSC calculator/ready-reckoner here.
When can Transfer Pricing (TP) adjustments affect the application of VAT?
There is a continuing potential conflict between the way sales are valued. For TP purposes value is determined via arm’s length (open market value) versus the subjective value, ie; the price actually paid, for VAT purposes.
More detail on VAT valuation/consideration here.
Transfer Pricing
The arm’s length principle is the international transfer pricing standard that the Organisation for Economic Co-operation and Development (OECD) member countries have agreed, and which should be used for tax purposes by Multinational Enterprise Group (“MNE group”) and tax administrations, including the price, match comparable market conditions and that profits are fairly divided between the jurisdictions in which MNE operates.
According to the OECD TP Guidelines, by seeking to adjust profits by reference to the conditions which would have been obtained between independent enterprises for comparable transactions and under comparable circumstances, ie; in “comparable uncontrolled transactions” the arm’s length principle treats the members of an MNE group as entities operating separately rather than as inseparable parts of a single unified business. Because the separate entity approach treats the members of an MNE group as if they were independent entities, attention is focused on the nature of the transactions between those members and on whether the conditions thereof differ from those that would be obtained in comparable uncontrolled transactions.
VAT
It is not generally required for VAT purposes that the consideration which must be present in order for a transaction to be qualified as taxable, has to reflect the market value of the goods or services supplied. In fact, as to the concept of “consideration”, it is settled case law of the CJEU that the taxable amount for the supply of goods or services is represented by the consideration actually received for them.
It is an important area of tax and I recommend reading the EC Working Paper for any business or adviser involved in international supplies. It is also an interesting read for students of the tax technical side of such supplies.
We have a strong global structure of skilled advisers which are able to assist if you have any queries.
VAT Basics
Nearly all businesses incur car motoring expenses, so here is a guide to the VAT impact:
Buying a car
A business cannot recover the VAT on a car purchase, unless it:
Leasing a car
If a business leases a ‘qualifying car’ for business purposes it will normally be unable to recover 50% of the VAT charged. The 50% block is to cover the private use of the car.
However, a 100% reclaim is possible if it is to be used for hire with a driver for carrying passengers or providing driving instruction.
The 50% block applies to all the VAT on charges paid for the rental of the car. This includes:
Fuel
The options for claiming input tax on road fuel are as follows:
Road Fuel Scale Charge
A scale charge is a way of accounting for output tax on road fuel bought by a business for cars which is then put to private use. If a business uses the scale charge, it can recover all the VAT charged on road fuel without having to split mileage between business and private use. The charge is calculated on a flat rate basis according to the carbon dioxide emissions of the car. The charges are set out in the fuel scale charge table.
Mileage records
HMRC calculation example:
Fuel paid for by employees
If a business reimburses its employees for fuel used it can treat the VAT they paid as its input tax. But the business must be able to show that it has reimbursed them for their actual expenditure on the fuel. If fuel bought by employees for business is put into private use, the business must account for output tax on the private use using the scale charges or the value.
Electric vehicles
Details of input tax recovery and output tax due here.
Input tax on repairs
If a vehicle is used for business purposes, there is a 100% reclaim of the VAT charged on repairs and maintenance as long as the business paid for the work and the vehicle is used for some business purposes. It does not matter if the vehicle is used for private motoring or if you have chosen not to reclaim VAT on road fuel (see below).
Other motoring expenses
Input tax incurred on all other business motoring expenses, eg; fleet management charges or parking charges is fully recoverable input tax.
Selling a car
If a car is sold on which input tax was recovered, eg; a driving school car, VAT is due on the full selling price. The supply of these vehicles are cannot be made under the second hand margin scheme.
If a car is sold where VAT was charged on purchase but could not be recovered there is no VAT due on the sale of it. Such a supply is exempt and must be consider in any partial exemption calculation. For most businesses this will not be an issue.
If a business sells a car where VAT was not charged when it was purchased, eg: from a private individual or from a dealer who sold it under the second-hand margin scheme, no VAT will be due unless the sale was at a higher value than the purchase price. In which case VAT will be due under the margin scheme.
NB: The VAT rules for commercial vehicles will differ.