Crisps: VAT is due on potato snacks, but maize and corn-based snacks are VAT free. (But Pringles are standard rated even though they contain corn, wheat and non-potato flours and the potato content is less than 50%).
Category Archives: Technical
VAT: Construction of a dwelling – zero-rated? The CMJ (Aberdeen) case
Latest from the courts
The First-Tier tribunal (FTT) considered the case of CMJ (Aberdeen) Limited (CMJ) and whether the supply of building services in respect of the construction of a dwelling were correctly zero rated by the appellant. HMRC deemed that the construction services were standard rated on the basis that the works were not carried out in accordance with the terms of the relevant statutory planning consent.
Background
HMRC’s view was that, although planning consent was in place at the time the construction services were supplied by the appellant, that planning consent permitted only the alteration or enlargement of a dwelling and did not allow for the construction of a dwelling. HMRC accept that the property was constructed as a new building, but that this was not permitted by the planning consent and so the construction was not carried out in accordance with it.
CMJ contended that statutory planning consent had been obtained for the construction via a combination of the planning consent and a construction building warrant which it had obtained from the relevant authority, and which allowed for the construction of a new building.
Legislation
The zero rating for the construction of new dwellings is contained in The VAT Act 1994, Schedule 8, Group 5, item 2
“The supply in the course of the construction of
(a) a building designed as a dwelling…”
Note 2 to Group 5 of Schedule 8 to the VAT Act include the following:
“(2) A building is designed as a dwelling or a number of dwellings where in relation to each dwelling the following conditions are satisfied…
…(d) statutory planning consent has been granted in respect of that dwelling and its construction or conversion has been carried out in accordance with that consent.
Decision
The appeal was dismissed. It was judged that the building warrant did not comprise statutory planning consent for the purposes of note 2 (d) because:
- Planning consent and building warrants operate under different statutory regimes.
- Breach of planning consent is dealt with separately from a breach of the building warrant legislation, and each is dealt with by the specific statutory regime . If there is a breach of planning consent, it would not affect the validity of the building warrant, and vice versa.
- The Building Standards Handbook states that the purpose of the building standards system is setting out the standards to be met when building work takes place. This is different from planning consent which is consent to allow the authority to permit development on a piece of land. They are distinct and separate regimes aimed at distinct and separate issues. While planning permission is about how the house will look, a building warrant is about whether it meets building standards.
- Both planning permission and a building warrant is required. One is no substitute for the other.
- It is possible to obtain retrospective planning consent, the judge did not believe it is possible to get a retrospective building warrant.
It was not possible to carry out works of construction in accordance with a valid statutory consent, since no such consent had been given for construction at the time that the building works were carried out.
Commentary
The legislation covering building work is complex and there are many traps for the unwary. Even the seemingly straightforward matter of whether a new dwelling is constructed can produce difficulties, as in this case. We always counsel that proper VAT advice is sought in such circumstances.
New VAT rate for hospitality
A reminder that a new VAT rate of 12.5% comes into force on 1 October 2021.
This is the first time this rate has been used and affected businesses should ensure that they are prepared.
The government announced on 8 July 2020 that it intended to legislate to apply a temporary 5% reduced rate of VAT to certain supplies relating to certain hospitality, supplies.
The reduced rate was initially introduced to last for a temporary period between 15 July 2020 and 12 January 2021. This period was subsequently extended to 31 March 2021.
The government then announced at Budget 2021 that the temporary reduced rate will be extended for a further six-month period at 5% until 30 September 2021.
A new reduced rate of 12.5% will then be introduced which will end on 31 March 2022. The scope of the relief will remain unchanged.
From 1 April 2022 the usual 20% standard rate will apply, unless there are further government concessions.
The 12.5% applies to
- hospitality: supplies in the course of catering including supplies of hot and cold food and drink to be consumed on the premises and supplies of hot takeaway food and drink to be consumed off the premises
- accommodation: the provision of hotel and holiday accommodation, pitch fees for caravan parks and tents and related facilities
- attractions: admission to attractions not covered by the cultural exemption.
The VAT Fractions
This is used to calculate the VAT element of a VAT inclusive figure.
5% = 1/21
12.5% = 1/9
20% = 1/6
Deposits
If a deposit is received, output tax will be calculated on the VAT rate in place at the time the deposit is received.
Other Issues
If a business supplies hospitality services and goods, but also makes sales not covered by the new rate, eg; alcohol, it must be able to identify the values at the different rates.
Does your accounting package have a defined 12.5% tax rate? It may be necessary to add this new rate to your software package.
VAT: Fraudster ordered to pay £37 million
Latest from the courts
A high level fraudster who skipped his trial and fled to Dubai has been ordered to pay more than £37 million. Failure to do so will result in ten years in prison. He played a major role in this missing trader fraud (MTIC) which involves the theft of Value Added Tax from HMRC. He was part of a conspiracy to use a network of companies and a huge number of transactions to cover up the theft of VAT.
Adam Umerji, 43, was convicted in his absence of offences of conspiracy to cheat the government’s revenue and conspiracy to transfer criminal property, in a prosecution conducted by the CPS Specialist Fraud Division after a complex criminal investigation by HMRC.
Background
Missing trader fraud (also called missing trader intra-community fraud or MTIC fraud) involves the theft of VAT from a government by fraudsters who exploit VAT rules, most commonly the EU rules which provide that the movement of goods between Member States is VAT free. There are different variations of the fraud but they generally involve a trader charging VAT on the sale of goods and absconding with the VAT (instead of paying the VAT to the government’s taxation authority). The term “missing trader” is used because the fraudster has gone missing with the VAT.
A common form of missing trader fraud is carousel fraud. In carousel fraud, VAT and goods are passed around between companies and jurisdictions.
VAT: Land and property exemptions
Further to my article on VAT: Land and property simplification and HMRC’s call for evidence the ICAEW has reiterated its call for all VAT land and property exemptions to be abolished and recommends the removal of all VAT options.
ICAEW also concludes that following the UK’s departure from the EU the government is in the best position since the introduction of VAT to thoroughly review the structure of the tax.
ICAEW also suggests that all land and property transactions should subject to VAT at either the standard rate or reduced rate, other than those relating to domestic property which should remain zero rated. This approach would remove many of the complexities of the current regime, it concludes.
Commentary
This is one area of the tax that is crying out for simplification and the case put forward by ICAEW has its merits. In my view, the Government should go further and review many complexities of the tax. As one example, the rules in respect of the sale of food products is ridiculously complex and produces odd and unexpected outcomes. Also, other exemptions would benefit from reconsideration, particularly financial services and insurance, but I suspect that the current government has a lot on its plate, much of it of its own making.
A VAT Did you know?
Gingerbread men: No tax is due if the figure has two chocolate spots for its eyes, but any chocolate-based additions, such as buttons or a belt, mean VAT is payable.
VAT Grouping – As you were
HMRC published a call for evidence last year in respect of the VAT group registration provisions, specifically:
- the establishment provisions
- compulsory VAT grouping
- grouping eligibility criteria for businesses currently not in legislation, including limited partnerships
The call for evidence was used to gather information and views on the current UK rules, and on provisions that have been adopted by other countries.
Background
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 all types of companies and limited liability partnerships. From 1 November 2019, grouping is additionally available for all entities, including; partnerships, sole traders and Trusts in certain cases. We consider the pros and cons of VAT grouping here.
Outcome
HMRC state that it was clear from the responses how valuable UK VAT grouping is to businesses and it is appreciated that businesses require certainty following Brexit and the impact of Covid 19. The call for evidence prompted a substantial number of responses that were generally in favour of maintaining current practices. It also set out evidence on why changes to the provisions on VAT grouping would impact business growth and international competitiveness.
Consequently, HMRC has decided that there will be no changes to the VAT grouping rules.
* a sigh of relief *
With everything else going on in the VAT world, a little continuity is welcome.
VAT: Partial Exemption -What Is It? What do I need to know?
VAT Basics
As part of our guides to VAT basics, we take a brief look at partial exemption and how it affects a business.
The first point to make is that partial exemption is often complex and costly. In some cases it may be avoided by planning and in others it is a fact of life for a business which needs to be managed properly.
Background
The VAT a business incurs on its expenditure is called input tax. For most businesses this is reclaimed from HMRC on VAT returns if it relates to standard rated or zero rated sales (referred to as “taxable supplies”) that that business makes. Exempt supplies are not to be confused with non-business income which are dealt with under a different regime.
However, a business which makes exempt sales may not be in a position to recover all of the input tax which it incurred. A business in this position is called partly exempt. Generally, any input tax which directly relates to exempt supplies is irrecoverable. In addition, an element of that business’ general overheads, e.g.; light, heat, telephone, computers, professional fees, etc are deemed to be in part attributable to exempt supplies and a calculation must be performed to establish the element which falls to be irrecoverable.
Input tax which falls within the overheads category must be apportioned according to a so called; partial exemption method. The “Standard Method” requires a comparison between the value of taxable and exempt supplies made by the business. The calculation is; the percentage of taxable supplies of all supplies multiplied by the input tax to be apportioned which gives the element of VAT input tax which may be recovered. Other partial exemption methods (so called Special Methods) are available by specific agreement with HMRC. A flowchart which illustrates the Standard Method of apportionment is below.
Which businesses are affected?
Any business which receives income from the following sources may be affected by partial exemption:
- Property letting and sales – generally 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.
* Most businesses which do not routinely make exempt supplies usually encounter exemption in the area of land and property and it is an easy trap to fall into not to consider VAT when involved in property transactions. This is one area where VAT planning may be of assistance as it is possible in most situations to deliberately choose to add VAT to an exempt supply to avoid a loss of input tax. This is known as the option to tax, and it is considered in more detail here.
De Minimis relief
There is however relief available for a business in the form of de minimis limits. Broadly, if the total of the irrecoverable directly attributable (to exempt suppliers) and the element of overhead input tax which has been established using a partial exemption method falls to be de minimis, all of that input tax may be recovered in the normal way. The de minimis limit is currently £7,500 per annum of input tax and one half of all input tax for the year.
As a result, after using the partial exemption method, should the input tax fall below £7,500 (£625 per month) and 50% of all input tax for a year it is recoverable in full. This calculation is required every quarter (for businesses which render returns on a quarterly basis) with a review at the year end, called an annual adjustment carried out at the end of a business’ partial exemption year. The quarterly de minimis is consequently £1,875 of exempt input tax which represents spending of under £10,000 net; not a huge amount.
Should the de minimis limits be breached, all input tax relating to exempt supplies is irrecoverable.
The value for the de minimis limit has been in place for over 25 years (when it was increased by a huge £25 per month) and it is rather ridiculous that it has not been increased to reflect inflation. This, coupled with the fact that the VAT rate has increased significantly means that the relief which was once very useful for a business has withered away to such an extent that partial exemption catches even very small businesses which I am sure goes against the original purpose of the relief.
In summary – for a business exemption is a burden not a relief. It represents a real cost in terms of tax payable, time and other resources, in addition to uncertainty. We often find that this is an area which HMRC examine closely and one which benefits from proactive negotiation with HMRC.
VAT: Land and property – “simplification” ahead?
HMRC has issued a call for evidence in respect of land exemption. HMRC acknowledges the complexity of the existing VAT rules on land and property and would like to hear views from businesses on the application of the current rules, and whether these rules could be simplified.
The application of VAT on land and property transactions is complicated. A range of different rates and exemptions can apply depending on the facts and circumstances of individual situations and the precise treatment of a transaction or project is often open to interpretation.
Complexity
The paper identifies a number of reasons why this area is extremely complicated:
- over the years the amount of legislation has increased, and the land VAT exemption now contains fifteen exceptions and twenty-six sets of notes
- some businesses can be required to make several separate decisions before the VAT liability of their supply can be established. Eg; once a business has established that it is supplying land (not always straightforward) it then has to consider whether that supply falls within one of the exceptions to the exemption. If it does fall within one of the exceptions, it then has to consider a number of conditions to establish whether it is excluded from that exception
- businesses may spend a disproportionate amount of time and money to establish the correct liability of their land supplies. This can also cause additional burdens for HMRC to assure compliance of these businesses
- the development of new markets and services that did not exist when VAT was introduced
- the impact of precedent case law (both UK and EU)
- the uncertainty of establishing when an exempt supply of land becomes a taxable supply of facilities
The Option to Tax
The option to tax legislation enables a business to tax some supplies of land that would otherwise be treated as exempt from VAT. The usual rationale behind making such a choice is to be able to recover the VAT incurred on costs and overheads of a business, or to meet the conditions of a Transfer of a Going Concern (TOGC).
Suggestions
The document then suggests some ideas for simplification:
- removing the ability to opt and making all relevant transactions exempt
- removing the option to tax and making all land and property taxable at a reduced rate
- making all commercial land and property taxable at the standard rate with an option to exempt
The first suggestion would result in many businesses incurring irrecoverable input tax which would be a direct cost, so this appears very unattractive.
The second seems a better option, but would bring new housing into the VAT net and I doubt that this would play out very well with the public.
The final suggestion would certainly simplify matters but would add VAT costs to entities which cannot recover any/all input tax, eg; charities, financial service providers, insurance companies, education bodies, health and welfare organisations and cultural services.
The document states that “The Government wants UK businesses to operate in the best possible environment and remain both productive and competitive”.
It remains to be seen whether the suggestions above (or other proposals put forward) will achieve this, but removing choices for a business (regardless of whether simplification is actually realised) is rarely a good idea and I wonder if simplification could be reached in other ways. If you have an interest in this area, please respond to this call as input is valuable for all parties.
Responses should be sent by 3 August 2021 by email to landsimplification@hmrc.gov.uk.
VAT: The “business” of shooting – a tale
Sometimes one is involved in a dispute which goes to the core of the tax. This is a case which highlights basic VAT principles, HMRC’s approach to an issue and the lengths to which a taxpayer has to go to defend his position.
Are you sitting comfortably?
A day out in the countryside; striding across beautiful landscape, amongst friends, enjoying each other’s’ company and a bit of sport – can this really be the subject of such intense debate with HMRC? Well, unfortunately this seems to be the case when it comes to the operation of a day’s shooting. In the eyes of the taxman, whether or not a profit or a surplus is achieved, shooting, conducted in the course of furtherance of a business is subject to VAT.
This is not usually an issue which shooting syndicates find themselves having to address; they are not concerned with the ins and outs of what constitutes a business for the purposes of the VAT legislation. However, HMRC was pursuing this issue in earnest and they have a team devoted solely to attacking shoots.
Who is HMRC targeting?
HMRC seem to be focusing on syndicate run shoots which are not registered for VAT but who HMRC believe are operating on business principles. If an organisation is operating as a business then it may be liable to register for VAT if certain income thresholds are exceeded. The shoot will then have to charge output VAT on the supplies it makes. In my case there would have been a significant assessment plus penalties and interest which could double the past VAT bill.
How is HMRC attacking the issue?
HMRC is looking closely at the specific activities of syndicate shoots in order to build an argument demonstrating that the organisation of the shoot is run on “sound business principles”. The reason that there is room for debate on this matter is that what constitutes a business is not explicitly defined anywhere in the VAT legislation either in UK or EC law. Rather, the issue has been defined in case law.
The defining case was Lord Fisher, which co-incidentally also concerned a shoot. This case is relied upon throughout the VAT world to give guidance on what constitutes a business – and not just in respect of shoots but for all types of activity.
Anyway, back to this syndicate…
I was involved in a battle lasting four years which concerned a local shoot run for over five decades by a group of friends and which was provided only for the benefit of the syndicate members. The shoot was not open to the common commercial market place or members of the public and the shoot did not advertise. HMRC spent a great deal of time trying to understand the finer details of the running of this shoot and concluded that it was a business
We advised The Shoot to appeal to the VAT Tribunal against HMRC’s decision to levy VAT on its activities.
They key to the syndicate’s defence was to demonstrate that no true business would operate commercially in the way that The Shoot does. If it did, it would be completely unprofitable and would soon be out of business. To demonstrate this effectively, every aspect of the shoot was examined in detail and compared and contrasted with the way a commercial shoot operates. This involved everything from the lunch arrangements, CVs of the gamekeepers and how beautiful the land is, right through to whether chicks or poults are purchased and whether local deer were sold to the highest bidder. However, the most important factor was the demonstration that the syndicate does not have a profit built in to the cost structure and the amounts that the syndicate members contribute. The syndicate is run on a cost sharing basis and is not “an activity likely to be carried out by a private undertaking on a market, organised within a professional framework and generally performed in the interest of generating a profit.”
It all sounds so simple to those familiar with the industry but unfortunately from a VAT ‘business’ perspective it has been a long, stressful and costly argument for the appellant to make. A few days before the case was to be heard at the Tribunal, HMRC withdrew their assessment and conceded the case.
HMRC had seen the many witness statements filed by the members of the syndicate waxing lyrical about how this was an age-old hobby run by a few friends and in no way could it be considered a commercial business. They had seen the expert witness report written by a specialist in the field. The distinctions made between commercial and syndicate shooting were made very clear. They had also seen the powerful argument which concluded that the shoot “cannot seriously be suggested to amount to a ‘business’ for the purpose of the VAT code”.
What this means?
Of course this victory over HMRC was a fantastic result for the members of The Shoot, but from a practical point of view quite frustrating in that the case was not heard; denying other entities the benefit of the predicted victory. Alas, it was one case that HMRC could not afford to lose.
It is therefore likely that HMRC will continue to target other shoots where they think they can ‘win’ or at least not be challenged.
Have you been affected? – What should you do next?
If this makes for frighteningly familiar reading and you or your local syndicate shoot are, or have been, under HMRC investigation then it is vital that you should take professional advice. As I orchestrated the defence for The Shoot we believe that we are the leading advisers in such matters.
For completeness, the six tests derived from the Lord Fisher case (and others) are:
- Is the activity a serious undertaking earnestly pursued?
- Is the activity an occupation or function, which is actively pursued with reasonable or recognisable continuity?
- Does the activity have a certain measure of substance in terms of the quarterly or annual value of taxable supplies made?
- Is the activity conducted in a regular manner and on sound and recognised business principles?
- Is the activity predominantly concerned with the making of taxable supplies for a consideration?
- Are the taxable supplies that are being made of a kind which, subject to differences of detail, are commonly made by those who seek to profit from them?
The case of Lajvér Meliorációs Nonprofit Kft. and Lajvér Csapadékvízrendezési Nonprofit Kft is also helpful in looking at what a business is.