Rabbits are zero-rated, even if sold as pets. Sales of pets are standard rated.
Category Archives: Technical
Is room hire subject to VAT? – The Errol Willy Salons case
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In the First Tier Tribunal (FTT) case of Errol Willy Salons Ltd (2022) TC 08370 the issue was whether the rent of two rooms were an exempt right over land, or the standard rated supply of facilities.
Background
Room hire is usually exempt from VAT unless it is subject to an option to tax. However, it can be subsumed into a different rated another supply if something more than a “bare” room is provided. In such cases, it would follow the VAT treatment of the composite supply.
The Issue
In the Errol Willy Salons case, HMRC formed the view that what was being supplied was facilities (the room occupation being a minor part of the supply) and therefore subject to VAT. In its opinion the economic and social reality was that the beauticians were provided with a licence to trade from the premises. The appellant occupied the ground floor – operating a hairdressing business. The rooms over the saloon were rented to third party beauticians. The occupants furnished the rooms themselves, provided their own equipment, set their own pricing and opening hours. They did have use of certain services and facilities; a receptionist and toilets, but it was understood that the services were rarely used. Unsurprisingly, the appellant disagreed and contended that the other services were incidental or subsidiary to the exempt supply of the room rental.
The decision
The Tribunal allowed the appeal against the assessment. It found that “non-rent” services provided to the beauticians were limited in nature and not essential to the beauticians’ businesses Consequently, the arrangements amounted to a supply of property (a licence to occupy the rooms) rather than a supply of taxable facilities and was therefore exempt.
Commentary
This is the latest in a long line of issues on composite/separate supplies and room hire/facilities disputes, especially in relation to weddings. It is important to establish precisely what is being provided to establish the correct VAT treatment and advice should be ought if there is any doubt about the VAT liability.
The CIOT has long advocated that it is not the case that every package of supplies involving room hire and other things must be a composite supply of something other than an exempt letting of land.
NB: This case is different to hairdresser chair rentals which remain standard rated.
Splitting a business to avoid VAT registration: Disaggregation
Earlier this month, I wrote an article on VAT registration. A query which commonly follows an initial registration query is: can I split my business into separate parts which are all under the VAT registration turnover limit to avoid registering? Prima facie, this seems a straightforward planning point. But is it possible?
You will not be surprised to learn that HMRC don’t like such schemes and there is legislation and case law for them to use to attack such planning known as “disaggregation”. This simply means artificially splitting a business.
What HMRC will consider to be artificial separation:
HMRC will be concerned with separations which are a contrived device set up to circumvent the normal VAT registration rules. Whether any particular separation will be considered artificial will, in most cases, depend upon the specific circumstances. Accordingly, it is not possible to provide an exhaustive list of all the types of separations that HMRC will view as artificial. However, the following are examples of when HMRC would at least make further enquiries:
Separate entities supply registered and unregistered customers
- In this type of separation, the registered entity supplies any registered customers and the unregistered part supplies unregistered customers.
Same equipment/premises used by different entities on a regular basis
- In this type of situation, a series of entities operates the same equipment and/or premises for a set period in any one-week or month. Generally, the premises and/or equipment is owned by one of the parties who charges rent to the others. This situation may occur in launderettes and take-aways such as fish and chip shops or mobile catering equipment.
Splitting up of what is usually a single supply
- This type of separation is common in the bed and breakfast trade where one entity supplies the bed and another the breakfast. Another is in the livery trade where one entity supplies the stabling and another, the hay to feed the animals. There are more complex examples, but the similar tests are applied to them too.
Artificially separated businesses which maintain the appearance of a single business
- A simple example of this type of separation is; pubs in which the bar and catering may be artificially separated. In most cases the customer will consider the food and the drinks as bought from the pub and not from two independent businesses. The relationship between the parties in such circumstances will be important here as truly franchised “shop within a shop” arrangements will not normally be considered artificial.
One person has a controlling influence in a number of entities which all make the same type of supply in diverse locations
- In this type of separation, a number of outlets which make the same type of supplies are run by separate companies which are under the control of the same person. Although this is not as frequently encountered as some of the other situations, the resulting tax loss may be significant.
The meaning of financial, economic, and organisational links
Again, each case will depend on its specific circumstances. The following examples illustrate the types of factors indicative of the necessary links, although there will be many others:
Financial links
- financial support given by one part to another part
- one part would not be financially viable without support from another part
- common financial interest in the proceeds of the business
Economic links
- seeking to realise the same economic objective
- the activities of one part benefit the other part
- supplying the same circle of customers
Organisational links
- common management
- common employees
- common premises
- common equipment
HMRC often attack structures which were not designed simply to avoid VAT registration, so care should be taken when any entity VAT registers, or a conscious decision is made not to VAT register. Registration is a good time to have a business’ activities and structure reviewed by an adviser.
As with most aspects of VAT, there are significant and draconian penalties for getting registration wrong, especially if HMRC consider that it has been done deliberately to avoid paying VAT.
VAT Registration
VAT Basics
A business must register for VAT with HMRC if its VAT taxable turnover is more than £90,000 in a 12 month period.
Taxable Turnover
Taxable turnover means the total value of everything that a business sells that is not exempt or outside the scope of VAT.
Registration is mandatory if turnover exceeds the current registration threshold in a rolling 12-month period. This is not a fixed period like the tax year or the calendar year – at the end of every month a business is required to calculate income (not profit) over the past year.
A business may also register voluntarily, which may be beneficial if it wants to reclaim input tax it has incurred.
Catches
There are some transactions that must be included in the turnover calculation which can easily be missed:
- goods a business hired or loaned to customers
- business goods used for personal reasons
- goods which were bartered, part-exchanged or given as gifts
- services a business receives from suppliers in other countries which are subject to a reverse charge
- building work over £100,000 a business did for itself
- zero-rated items (these are still taxable although no VAT is charged)
Timing
A business must register within 30 days of the end of the month when it exceeded the threshold. The effective date of registration (EDR) is the first day of the second month after a business goes over the threshold.
Future test
A business must mandatorily register for VAT if it expects its VAT taxable turnover to be more than £90,000 in the next 30-day period. This may be because of a new contract or a other known factors.
Registration exception
If a business has a one-off increase in income it can apply for a registration ‘exception’. If its taxable turnover goes over the threshold temporarily it can write to HMRC with evidence showing why the taxable turnover will not exceed the deregistration threshold (currently £88,000 in the next 12 months). HMRC will consider an exception and write confirming if a business will receive one. If not, HMRC will compulsory register the business for VAT.
Transfer of a going concern (TOGC)
If a VAT-registered ongoing business is purchased the buyer must register for VAT from the purchase date. It cannot wait until its turnover exceeds the threshold.
Businesses outside the UK
If a business belongs outside the UK, there is a zero threshold. It must register as soon as it supplies any goods and services to the UK (or if it expects to in the next 30 days).
Late registration
If a business registers late, it must pay the VAT due from when it should have registered (the EDR). Further, it will receive a penalty depending on how much it owes and how late the registration is. The rates based on the VAT due are:
- up to 9 months late – 5%
- between 9 and 18 months – 10%
- over 18 months = 15%.
How to register
A business can register online. By doing this it will register for VAT and create a VAT online account via which it will submit VAT returns.
Between application and receiving a VAT number
During the wait, a business cannot charge or show VAT on its invoices until it receives a VAT number. However, it will still be required to pay the VAT to HMRC for this period. Usually, a business will increase its prices to allow for this and tell its customers why. Once a VAT number is received, the business can then reissue the invoices showing the VAT.
Purchases made before registration
There are time limits for backdating claims for input tax incurred before registration. These are:
- four years for goods still on hand at the EDR
- six months for services
Once registered
A business’ VAT responsibilities. From the EDR a business must:
- charge the right amount of VAT
- pay any VAT due to HMRC
- submit VAT Returns
- keep appropriate VAT records and a VAT account
- follow the rules for ‘Making Tax Digital for VAT’
- keep business details up to date (there are penalties for failing to inform HMRC of changes)
VAT groups
VAT grouping is a facilitation measure by which two or more entities can be treated as a single taxable person (a single VAT registration). There are pros and cons of grouping set out here.
A VAT Did you know?
Buying a coffin is standard-rated but hiring a hearse is VAT free.
VAT: Trading with the EU from 1 January 2022
Further to my article on the new changes from next year, HMRC has published information on the rules of origin for trade between the UK and EU.
The Bulletin covers the rules of origin and the forthcoming changes to the requirement for supplier declarations to support proof of origin.
Uber to charge VAT
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Further to my article on the Supreme Court case, Uber went to the High Court seeking to challenge this decision, but the High Court has now upheld it.
This means it is very likely that Uber will be required to charge VAT on its supplies as the court found that taxi firms make contracts directly with their customers because Uber drivers should be treated as workers not contractors. This means that Uber make to supply of taxi services to the fare and not the individual drivers.
The High Court agreed with the Supreme Court and stated that: “… in order to operate lawfully under the Private Hire Vehicles (London) Act 1998 a licensed operator who accepts a booking from a passenger is required to enter as principal into a contractual obligation with the passenger to provide the journey which is the subject of the booking.”
A spokesperson for Uber said: “Every private hire operator in London will be impacted by this decision, and should comply with the verdict in full.”
Although not a VAT case itself, this decision is the latest in a long list of VAT agent/principal cases, the most important being:
It is crucial that businesses review their position if there is any doubt at all whether agent status applies to their business model.
VAT: HMRC – Customs changes from 1 January and 1 July 2022
Further to my article on new procedures, HMRC has issued a reminder of customs changes that come into effect on 1 January 2022.
It is now less than a month until full controls are introduced.
The Changes
- Customs declarations
Businesses will no longer be able to delay making import customs declarations under the Staged Customs Controls Most importers will have to make declarations and pay relevant tariffs at the point of import.
- Border controls
Ports and other border locations will be required to control goods moving Great Britain and the EU. This means that unless goods have a valid declaration and have received customs clearance, they will not be able to be released into circulation, and in most cases will not be able to leave the port. From 1 January 2022, goods may be directed to an Inland Border Facility for documentary or physical checks if these checks cannot be done at the border.
- Rules of origin for imports and exports
The UK’s deal called the Trade and Cooperation Agreement (TCA), means that the goods imported or exported may benefit from a reduced rate of Customs Duty (tariff preference). To use this a business will need proof that goods which are:
. imported from the EU originate there
. exported to the EU originate in the UK
- Commodity codes
Commodity codes are used worldwide to classify goods that are imported and exported. They are standardised up to six digits and reviewed by the World Customs Organisation every five years. Following the end of the latest review, the UK codes will be changing on 1 January 2022. HMRC guidance is available on finding commodity codes for imports into or exports out of the UK which includes information on using the ‘Trade Tariff Tool’ to find the correct commodity codes.
- Postponed VAT Accounting
A VAT registered importer is able to continue to use Postponed VAT Accounting (PVA) on all customs declarations that are liable to import VAT (including supplementary declarations).
Further changes from 1 July 2022
The following changes will be introduced from July 2022:
- requirements for full safety and security declarations for all imports
- new requirements for Export Health Certificates
- requirements for Phytosanitary Certificates
- physical checks on sanitary and phytosanitary goods at Border Control Posts
Businesses must be prepared for these changes and I recommend that an experienced representative is used.
VAT: Roof panels are not insulation. The Greenspace case
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In the Upper Tribunal (UT) case of Greenspace Limited the issue was whether insulated roof panels were “energy-saving materials” per VAT Act 1994, sect 29A, Schedule 7A, group 2, items 1 and 2 and thus liable at the reduced rate of 5%. Or rather at the standard rate of 20% on the basis that they were a supply of a roof itself.
Background
The appellant supplied and installed roof panels for conservatories which comprised a layer of close-cell extruded polystyrene foam (Styrofoam) around 71mm thick. The Styrofoam was covered with a thin aluminium layer and a protective powder coating which are together around 2mm thick. The supplies were made to residential customers and the panels were fitted onto their pre-existing conservatory roofs. The Panels were slotted into place on the existing roof structure and Greenspace did not replace its customers’ existing roof framework when doing this; the struts and glazing bars that supported the previous glass or polycarbonate panels were left in place. Consequently, the Panels were not self-supporting and could only be used if the customer already had an existing conservatory roof structure.
The decision
The First-tier Tribunal (FTT) decided in 2020 that the panels were not “insulation for a roof” but were a new roof in their own right, and that the appellant’s supplies did not therefore qualify for the reduced rate of VAT (unlike insulation that could be separately attached to a roof, the panels actually formed the roof).
The UT dismissed the new appeal and found that the FTT had not been obliged to compare the roof after Greenspace had installed its panels to the original roof. The frame that was retained could not itself be described as a roof, and the provision of the Thermotec panels which made the conservatory weatherproof as well as insulating it could properly be categorised as the provision of a new roof.
One of Greenspace’s grounds of appeal was that the FTT decision was vitiated by the assumption that because the panels took the form of roof coverings, they were necessarily incapable of constituting “insulation for … roofs”. The appellant argued that as this was a flawed assumption (that Greenspace’s supplies “must” be treated as something more than insulation) the decision should be set aside. This contention was rejected by the UT judge.
Commentary
A fine distinction is often required to be made to establish the correct VAT treatment of a supply. In this case a degree of semantics was required to determine whether the panels were energy-saving materials (even when they certainly saved energy). On such small things turned the assessment of £2.6 million here. It always pays to double check VAT treatments rather than making assumptions.
VAT: The importance of “belonging”. The Mandarin Consulting case
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Technical: I have considered the importance of the Place of Belonging (POB) here.
The issue
In the Upper Tribunal (UT) case of Mandarin Consulting Ltd the issue was the POB of the appellant’s clients, and the evidence to support that POB.
Background
Mandarin supplied career coaching and support services to students of Chinese origin. Those services would be outside the scope of VAT if supplied to persons whose usual residence was outside the EU. So, in order to treat its supplies as UK VAT free the appellant need to demonstrate where the recipients of its services lived.
First-Tier Tribunal (FTT) decision
The FTT decided that the services were outside the scope of VAT if the recipient had a permanent address, or usually resided, at that time, outside the EU. It was agreed that from July 2016 the supplies were made to the students’ parents who almost exclusively lived in China. The dispute was with pre-2016 services which were deemed to be made to the students. HMRC argued that, as the students lived in the UK for the duration of the courses, their “usual residence” was the UK, so VAT applied. Although the FTT dismissed this argument, the appeal failed because the proffered evidence did not establish that the usual place of residence of the students as required by Council Implementing Regulation 282/2011/82, Article 23 (reproduced below).
The UT decision
The UT considered the following issues:
Issue 1 – In deciding whether the requirements of Article 23 had been satisfied should the FTT have had regard to “informal evidence” as well as the documentary evidence provided? What evidence could the appellant rely upon to establish that students had a “permanent address” or “usual residence” outside the Community? Is Mandarin limited to such documentary evidence as it had in its possession prior to the time of supply, or can Mandarin in principle rely on all evidence available to it, whether obtained before or after the time of supply, including witness evidence given in connection with the FTT proceedings?
Issue 2 – Taking into account the answers to the above, had the evidence that Mandarin put forward established a prima facie case that its supplies were to persons with a “permanent address” or “usual residence” outside the Community? If so, was there an evidential burden on HMRC to rebut that prima facie case which HMRC had failed to discharge?
Issue 3 – To the extent that Mandarin had failed to satisfy the requirements of Article 23 of the Implementing Regulation, was that fatal to its claim to treat supplies made to students prior to July 2016 as outside the scope of VAT?
Unfortunately, the appellant obtained “relatively patchy” information in respect of the usual residence of individual students.
The UT found that a business retained the right to argue the place of supply (POS) was outside the EU even if the requirements of Article 23 were not met. Also, that while the POS had to be determined by the relevant circumstances existing at the time of supply, Mandarin was not precluded from relying on information discovered later. Finally, it was decided that Article 23 was not the only means available to demonstrate the appellant’s clients had a usual residence outside the EU.
However, the FTT had failed to consider the informal evidence provided concerning the business and customer base. The UT did consider this but still found that the evidence still did not succeed in demonstrating the POB of clients sufficiently. Consequently, the UT was not satisfied that the POB of the students was outside the EU so the supplies were subject to UK VAT and the appeal was dismissed.
Commentary
Another case demonstrating the importance of obtaining and retaining information on the location of customers. Superficially, it appears that the appellant’s supplies may have been UK VAT free, but a failure to evidence this was its downfall. It would not have taken very much to be covered by Article 23, but…
Legislation
Article 23
“… 23. Where, in accordance with Articles 58 and 59 of the PVD, a supply of services is taxable at the place where the customer is established, or, in the absence of an establishment, where he has his permanent address or usually resides, the supplier shall establish that place based on factual information provided by the customer, and verify that information by normal commercial security measures such as those relating to identity or payment checks.”