Category Archives: Start Up

VAT: Land and property – A “fun” quiz

By Marcus Ward 26 July 2019

VAT: Land and property

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

Background

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

Questions

On the purchased land the person constructs:

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

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

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

Answers

…soon!

VAT Glossary – Partial Exemption

By Marcus Ward 9 July 2019

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

A general guide to partial exemption here.

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

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

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

This list is not exhaustive.

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

VAT: Evidence to claim input tax

By Marcus Ward 9 July 2019

Latest from the courts

Hot on the heels of my recent article here, a First Tier Tribunal (FTT) case has considered what evidence may be accepted for a claim for input tax.

The Wasteaway case contemplated whether HMRC’s disallowance of the appellant’s claim, (via The VAT Act 1994, section 73) for input tax was correct, or whether they should have allowed the claim based on alternative evidence of receiving the relevant supplies in lieu of missing tax invoices.

It is well known that in order to claim input tax on expenditure a business is required to have a valid tax invoice to support it. But what if there is no VAT invoice? Can, or should HMRC accept any other evidence to support a claim?

Background

It was stated that the invoices were lost during a time when the business was evicted from its premises. The judge formed the view that the appellant’s approach to record keeping was “slapdash”. Which isn’t a good starting point. HMRC issued an assessment because it was decided that the appellant had “not provided satisfactory evidence of the taxable supply to the business and its direct link to your onward taxable supply for discretion to be considered under Article 182 of the Principal VAT Directive. If no invoice, a pro forma invoice or a document stating ‘this is not a VAT invoice’ has been provided…” along with an offer to provide alternative evidence.

It was also discovered, during the inspection, that not only had output tax been underdeclared, but the appellant had a history of poor record keeping.

Decision

Despite the business providing; records of payments, in some cases weighbridge tickets, detailed bank statements, spreadsheets and Sage accounts information – which it was contended amounted to alternative documentary evidence, it was ruled that this was insufficient, so the assessment stood.

The lack of care in obtaining and retaining documents, poor accounting procedures such that output tax was understated and the past behaviour and history of the taxpayer meant that HMRC was not obliged to accept the proffered alternative evidence, The general unreliability of the records counted against the business and that HMRC acted in best judgement.

It was stated that HMRC were perfectly justified in requiring more detailed and convincing documentary evidence to replace the missing VAT invoices than the appellant provided. And the inspector could not be criticised for refusing to accept the extremely thin evidence supplied as an alternative to the missing VAT invoices.

Commentary

It is clear that every business must keep proper records and retain all documents, especially invoices. It was hardly surprising that failure to do that ensured that this appeal was dismissed. It also didn’t help that the appellant had a poor track record of accounting.

HMRC do have the discretion to accept alternative evidence, however, this is more likely if the relevant invoices have been genuinely misplaced, destroyed or not received. There is also the opportunity to go to the supplier and request a replacement invoice.

So, basically: Keep records properly or it will cost you!

I have to charge myself VAT?!

By Marcus Ward 9 July 2019

How comes?!

Well, normally, the supplier is the person who must account to the tax authorities for any VAT due on the supply. However, in certain situations, the position is reversed and it is the customer who must account for any VAT due. Don’t get caught out!

Here are just some of the situations when you have to charge yourself VAT:

Purchasing services from abroad

These will be obtained free of VAT from an overseas supplier. What is known as the ‘reverse charge’ procedure must be applied. Where the reverse charge procedure applies, the recipient of the services must act as both the supplier and the recipient of the services. On the same VAT return, the recipient must account for output tax, calculated on the full value of the supply received, and (subject to partial exemption and non-business rules) include the VAT charged as input tax. The effect of the provisions is that the reverse charge has no net cost to the recipient if he can attribute the input tax to taxable supplies and can therefore reclaim it in full. If he cannot, the effect is to put him in the same position as if had received the supply from a UK supplier rather than from one outside the UK. Thus creating a level playing field between purchasing from the UK and overseas.

Accounting for VAT and recovery of input tax.

Where the reverse charge procedure applies, the recipient of the services must act as both the supplier and the recipient of the services. On the same VAT return, the recipient must

1. 1. account for output tax, calculated on the full value of the supply received, in Box 1;
  2. (subject to partial exemption and non-business rules) include the VAT stated in box 1 as input tax in Box 4; and;
  3. include the full value of the supply in both Boxes 6 and 7.

Value of supply: The value of the deemed supply is to be taken to be the consideration in money for which the services were in fact supplied or, where the consideration did not consist or not wholly consist of money, such amount in money as is equivalent to that consideration. The consideration payable to the overseas supplier for the services excludes UK VAT but includes any taxes levied abroad.

Time of supply: The time of supply of such services is the date the supplies are paid for or, if the consideration is not in money, the last day of the VAT period in which the services are performed.

Purchasing goods from another EU Member States

Something similar to reverse charge; called acquisition tax, applies to goods purchased from other EC Member States. These are known as acquisitions (they are imports if the goods come from outside the EU and different rules apply). The full value of the goods is subject to output tax and the associated input tax may be recovered by the business acquiring if the goods are used for taxable purposes. If you are not already registered for VAT in the UK and acquire goods worth £85,000 or more in the UK from other EC countries, you will have to register for VAT in the UK on the strength of the value of the acquisition tax. A business will also have to complete an Intrastat Supplementary Declaration (SDs) if its acquisitions of goods from the EC exceed an annual amount – currently £1.5 million.

More details on Intrastat Supplementary Declarations here

Deregistration

Any goods on hand at deregistration with a total value of over £1,000 on which input tax has been claimed are subject to a self supply. This is a similar mechanism to a reverse charge in that the goods are deemed to be supplied to the business by the business and output tax is due. However, in these circumstances it is not possible to recover any input tax on the self supply.

Flat Rate Scheme

There is a self supply of capital items on which input tax has been claimed when a business leaves the flat rate scheme (and remains VAT registered).

Mobile telephones

In order to counter missing trader intra-community fraud (‘MTIC’), supplies of mobile telephones and computer chips which are made by one VAT registered business to another and valued at £5,000 and over are subject to the reverse charge. This means that the purchaser rather than the seller is responsible for accounting for VAT due.

And not forgetting the new domestic reverse charge for building and construction here.

Land and buildings…. and motor cars

There are certain circumstances where land and buildings must be treated as a self supply… but that is a whole new subject in itself… as is supplies in the motor trade.

Even if the result of a self-supply or reverse charge is VAT neutral HMRC is within its rights to assess and levy penalties and interest in cases where the charge has not been applied; which always seems unfair. However, more often than not simple accounting entries will deal with the matter…. if the circumstances are recognised and it is remembered to actually make the entries!

HMRC VAT Helpline failures

By Marcus Ward 5 July 2019

If any of you have had the unfortunate necessity to use the VAT Helpline you will know the frustration, unhelpfulness and general exasperation of trying to get a reasonable response from the department. Well, it isn’t just you.

In correspondence between the Chair of the Treasury Select Committee and the Chief Executive and Permanent Secretary of HMRC here the previously highlighted issue of the deterioration of the performance of the HMRC VAT Helpline is addressed.

The extremely poor performance is ascribed, by the Chartered Institute of Taxation (CIOT) to:

the lack of an adequate pilot for the roll-out of Making Tax Digital (MTD) – details here
the pressures of Brexit on HMRC resources.

And HMRC state that:

their telephony performance has been impacted by ongoing recruitment and staffing shortfalls
recruitment for a no deal EU exit was slower than expected
they had to divert resources from usual business to issues with a No-Deal Brexit
the target of five minutes waiting time for the VAT Helpline has not been met
they are developing a new way of measuring performance
there are issues with some MTD businesses experiencing problems with paying VAT by direct debit

An annex to the letter, providing VAT call data from January to May 2019, shows

helpline demand increased by over 40% between January and May but the number of calls answered fell over this period
in May, HMRC answered less than 42% of the calls which made it beyond their recorded messages, compared to 72% in January
average speed of answer for those calls which were answered rose from around seven minutes in January to more than 16 minutes in May (in addition to the time spent navigating the initial recorded messages)
of the calls answered, the proportion which were answered within ten minutes fell from 64% in January to just 9% in May

Commentary

It is appreciated that some of the excuses are “reasonable” (to use HMRC parlance) and matters are not within HMRC’s influence, however, the service provided is, frankly, unacceptable. Businesses need HMRC assistance for all sorts of reasons and if it is not forthcoming, errors may be made resulting in potential penalties and interest, loss of income, deals failing, accounting compromised and uncertainty and complexity, VAT becoming a cost, and customers lost.

It is not as though HMRC have not been warned about pushing MTD through without adequate testing of systems and software at a time when Brexit was always going to make huge demands of the department. The House of Lords Economic Affairs Committee published a damning report last year here which recommended delaying the introduction of MTD. Also, the CIOT has consistently warned of the risks of implementing MTD for VAT at the same time as Brexit.

Support for business and tax agents is sadly very lacking and it appears that insufficient resources have been devoted to this. There has been an overall lack of planning, combined with a political will to push ahead with MTD regardless. It really is not good enough. And we are not even yet through the implementation of MTD for VAT with larger and more complex business yet to join the fray. That, added to the fact that many glitches have already been identified, does not give any reason to be optimistic about the future for either MTD or the VAT Helpline.

As CIOT say: while HMRC have the scale to move resources within its organisation, that is a luxury that most businesses do not enjoy.

VAT: Bad Debt Relief – The Total case

By Marcus Ward 1 July 2019

Latest from the courts

Bad Debt Relief (BDR) is often an area that creates disputes with HMRC. The legislation has changed over the years and the current rules are described here.

Background

Broadly speaking, under normal VAT rules, a supplier is required to account for output tax, even if the supply has not been paid for (however, the use of cash accounting or certain retail schemes removes the problem of VAT on bad debts from the supplier). BDR, as the names suggests, is intended to provide relief on the VAT element of a bad debt. Output tax previously claimed may be “reclaimed” by using the BDR mechanism.

The law which governs the claiming of bad debt relief is The VAT Act 1994, Section 36, and Section 26A which covers the repayment of input tax when a customer fails to pay for supplies received within six months of the relevant date, and The VAT Regulations 1995, Parts XIX, XIXA and XIXB.

Conditions for claiming bad debt relief

A business must have accounted for the VAT on the supplies and paid it to HMRC
It must have been written off the debt in its day to day VAT accounts and transferred it to a separate bad debt account
The value of the supply must not be more than the customary selling price
The debt must not have been paid, sold or factored under a valid legal assignment
The debt must have remained unpaid for a period of six months after the date of the supply

The case

In the First Tier Tribunal (FTT) case of Total Catering Equipment Ltd [2019] TC 07184, heard on 4 June 2019, the issue was whether payments from customers which were diverted by a dishonest employee should be recognised as a payment for a supply of goods (no BDR available as the money was received then stolen) or whether the fact that the business did not actually receive the payment meant that a BDR was appropriate. Total supplied goods to customers, some of whom paid by credit or debit cards. The member of staff responsible for these transactions, set up a separate (from the business) bank account and fraudulently diverted customers; payments into his own account. A BDR claim was made by the appellant when the crime was discovered. The claim was refused by HMRC on the grounds that the employee had received payment “on behalf” of Total before making payment into his own account.

Decision

The judge found for the appellant. The appeal was allowed – it was decided that Total had never actually received payment for the goods supplied, so BDR was available. A distinction was made between the diversion of monies in this case (where the supplier was deemed to never had received the money) and a theft by an employee from, eg; a till or subsequent withdrawals from the business’ bank account (where a business would have received payment before the money was stolen).

Commentary

I have written about VAT and illegal activities here. There can be a fine line between taxable illegal activities and non-taxable illegal activities, and subtleties around tax points (time of supply) misrepresentation and consideration. If you, or your clients have been in the unfortunate position of being on the receiving end of crime, it would be adding insult to injury to have to account for tax on money you do not have. I would always advise that any demands from HMRC, or refusals to refund VAT should be properly reviewed.

VAT: The transport of disabled persons

By Marcus Ward 24 June 2019

HMRC have released Revenue and Customs Brief 3 (2019) RCB3 2019 which sets out the treatment of certain transport services, specifically in relation to the Jigsaw Medical Services Upper Tribunal (UT) case. This case considered emergency ambulance services contrasted with patient transport services. It was accepted that they were exempt (“the supply of transport services for sick or injured persons in vehicles specially designed for that purpose” – VAT Act 1994, Schedule 9, Group 7, item 11) but could they “also” be treated as zero rated?

Technical

Zero rating takes precedence over exemption, so if these services qualify for both exemption and zero rating, they will be treated as zero rated. Although both treatments are VAT free, zero rating is beneficial as it provides the suppler the ability to recover input tax attributable to the supplies.

Summary

The Brief clarifies that zero rating applies if the supply of transport is in any vehicle with seating to carry ten or more passengers (including the driver) or if there would be 10 seats if wheelchair adaptations were removed. If the supply is not zero rated, say, because of the number of seats test is failed, the above exemption may apply if the service is the transport of sick or injured persons. If that exemption does not apply, then the default position applies, and the service is standard rated. RCB3 also provides information on how to apply the “ten seat rule” and on adapted vehicles.

VAT: Brexit – Intending Trader registration for overseas businesses

By Marcus Ward 14 June 2019

With the continuing uncertainty over a No-Deal Brexit, which appears to be a more likely prospect given recent political events, HMRC has made a statement on the process of registering non-UK EU businesses as intending traders in the UK.

Background

What is an intending trader?

An intending trader is a person who, on the date of the registration request:

is carrying on a business
has not started making taxable supplies
has an intention to make taxable supplies in the future

If the business satisfies HMRC of its intention, HMRC must VAT register it. VAT Act 1994, Schedule 1, 9 (b). It is, in some cases, difficult to convince that there is a genuine intention to make taxable supplies. This often comes down to documentary evidence.

Why do overseas businesses need to register as intending traders?

In the event of a No-deal Brexit, it is assumed that the EU VAT simplification that relieves the current obligation to be registered in the UK will no longer available. As a consequence, the EU supplier will itself become responsible for accounting for VAT on sales deemed to be made in the UK. In order to do this, the business will require a UK VAT registration. As the simplification is in place until Brexit, the registration will be required the very day after the UK leaves the EU – currently 1 November 2019.

Therefore, many EU businesses have applied for UK VAT registration as intending traders. That is, they do not currently make supplies, but intend to in the future (from 1 November 2109).

The issue

The Chartered Institute of Taxation has reported that businesses applying for intending trader registrations are experiencing difficulties with the process.

In response, HMRC have stated:

“Businesses in the position you have described can register for VAT using the Advanced Notification facility, by registering online requesting a voluntary registration from an advanced date of 1 November 2019. In the ‘business activity’ section they should enter trade class/SIC code 99000 European Community. In the free text box they should describe accurately what the business does and ensure there is a positive amount entered in the ‘taxable turnover in the next 12 months’ box. If this is not done the application will be rejected. This information will enable the VAT Registration Team (VRT) to identify and actively manage any registration that is conditional on the UK leaving the EU without a deal.

If there is a change to the date of withdrawal from the EU, the VRT will amend the Advanced Notification date to match this new date. If the UK enters a transitional period or agrees a deal with the EU that allows current arrangements to continue then the registration will be cancelled. The approval of an Advanced Notification registration in these circumstances is only made as a contingency for the UK leaving the EU without a deal and the VAT number may not be used unless that happens. The business will receive an automated notification of an Advanced Notification VAT Registration and the VRT may follow this up with a manual letter to further explain the conditions and both.

With the UK having agreed an extension to the date of withdrawal from the EU, we would not expect businesses to use this facility until closer to the 1st November.”

It is clearly prudent for overseas businesses which make certain supplies in the UK to properly prepare for a No-Deal Brexit. However, experience insists that many have not identified or made provisions for this outcome.

We are able to assist and advise other EU Member State businesses on this process.

VAT: Holiday Lets – don’t get caught out

By Marcus Ward 14 June 2019

Further to the usual complexity with VAT and property, I have been increasingly asked about the VAT position of holiday lets, so this is a timely piece on the subject.

All residential letting is exempt… except holiday lets, which are standard rated at 20%. So, what is the difference? A house is a house, but the VAT treatment depends on how the property is advertised or “held out”.

If a property is held out for holiday accommodation, then the rental income is taxable.

What is holiday accommodation?

Holiday accommodation includes, but is not restricted to; any house, flat, chalet, villa, beach hut, tent, caravan or houseboat. Accommodation advertised or held out as suitable for holiday or leisure use is always treated as holiday accommodation. Also, increasingly, it is common for farms and estates to have cottages and converted barns within their grounds, which are exploited as furnished holiday lets so this use must be recognised for VAT purposes. Residential accommodation that just happens to be situated at a holiday resort is not necessarily holiday accommodation.

This treats holiday lets the same way as; hotels, inns and B&B were VAT applies, which is fair.

Off-season lettings

If holiday accommodation is let during off-season, it should be treated as exempt from VAT provided it is let as residential accommodation for more than 28 days and holiday trade in the area is clearly seasonal.

What does this mean?

If the letting business exceeds the VAT registration threshold, currently £85,000, it must register for VAT. This usually means that either the business would lose a sixth of its income to HMRC or its letting fees would increase by 20% – which is not usually an option in a particularly price sensitive market. The only upside to registration is that VAT incurred on costs relating to the letting (input tax) would be recoverable. This may be on expenditure such as; agents’ fees, maintenance, refurbishments, laundry, websites and advertising etc.

Agents

If a property owner provides a property to a holiday letting agent and the agent itself provides the letting directly to the end users, this does not avoid the standard rating, even if the agent pays a guaranteed rent to the freeholder. This can catch some property owners out.

Sale of the property

When the owner sells the property, although it may have been used for standard rated purposes, the sale is usually treated as exempt. However, zero rating may be available for the first sale or long lease if it is a new dwelling with no occupancy restrictions. The sale of a “pure” holiday property is likely to be standard rated if it is less than three years old. To add to the complexity, it is also possible that the sale may qualify as a VAT free Transfer Of A Going Concern (TOGC). These are important distinctions because they determine, not only if VAT is chargeable, but, if the sale is exempt, there is usually a clawback of input tax previously claimed, potentially visa the Capital Goods Scheme (CGS).

Overseas properties

A final point: please do not forget overseas property lets. My article here sets out the tax risks.

Summary

There are a lot of VAT pitfalls for a business providing holiday lettings. But for a single site business, unless the property is large or very high end, it is likely that the income will below £85,000 and VAT can be ignored. However, it is important to monitor income and costs to establish whether:

registration is required
registration is beneficial (usually, but not exclusively, for major refurbishment projects).

As always, please contact me if you, or your clients, have any queries.

VAT: Domestic reverse charge for building services – Latest

By Marcus Ward 12 June 2019

The new domestic reverse charge for building and construction services will be introduced on 1 October 2019. Details here

HMRC have now published comprehensive guidance which appears to cover all scenarios (but almost certainly there will be transactions which will produce disputes).

Brief Overview

The domestic reverse charge is a major change to the way VAT is collected in the building and construction industry.

It means the customer receiving the service will have to pay VAT to HMRC instead of paying the supplier.

It will only apply to individuals or businesses registered for VAT in the UK.

This will affect a business if it supplies specified services reported under the Construction Industry Scheme (CIS). A business will need to prepare for the change by:

checking whether the reverse charge affects either sales, purchases or both
informing regular clients or suppliers
ensuring a business’ accounting systems and software are updated to deal with the reverse charge
considering whether the change will have an impact on cashflow

The reverse charge does not apply if the service is zero rated or if the customer is not registered for VAT in the UK. It also does not apply to services which are supplied to end users or intermediaries connected with end users. More details here.

Please contact us if you have any queries.

Accounting for VAT and recovery of input tax.

Where the reverse charge procedure applies, the recipient of the services must act as both the supplier and the recipient of the services. On the same VAT return, the recipient must

account for output tax, calculated on the full value of the supply received, in Box 1;

(subject to partial exemption and non-business rules) include the VAT stated in box 1 as input tax in Box 4; and;

include the full value of the supply in both Boxes 6 and 7.

Time of supply: The time of supply of such services is the date the supplies are paid for or, if the consideration is not in money, the last day of the VAT period in which the services are performed.