Category Archives: Technical

VAT: Bad Debt Relief – Increase due to coronavirus. A guide

By   17 April 2020
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The current coronavirus pandemic has thrown up unprecedented difficulties for society as a whole and significant difficulties for commerce. We have considered UK Government’s VAT assistance in previous articles, here here here and here and this is clearly welcomed.

What has become clear is that businesses and consumers will fall into default in increasing numbers as the economy worsens and it is anticipated that the ability to settle of debts on time will significantly decrease and it is apparent that many debts will never be settled. Consequently, it appears timely to look at the available relief.

The VAT position

VAT registered businesses usually account for tax on an accruals basis (but see CAS) and will therefore be required to account for output tax in the same VAT period as an invoice is issued to a customer. If that invoice is not paid and a bad debt arises this would mean that tax has been accounted for on a payment which has not been received.

Relief

Anything which can relieve the burden of VAT is to be welcomed, especially in such trying times. So VAT Bad Debt Relief (BDR) is a useful tool if a business is aware of it and understand when it may be claimed.

It is at the very least frustrating when a client does not pay, and in some cases this situation can lead to the end of a business. At least the VAT charged to the client should not become a cost to a supplier. The BDR mechanism goes some way to protect a business from payment defaulters.

There is a relief however, as normal with tax, there are specific conditions:

Conditions for claiming BDR

The supplier must have supplied goods or services for a consideration in money and must have accounted for and paid VAT on the supply. All or part of the consideration must have been written off as a bad debt by making the appropriate entry in the business’ records (this does not have to be a “formal” procedure and need not be notified to the customer). At least six months (but not more than four years and six months) must have elapsed since the later of the date of supply or the due date for payment.

Records required

Various records and evidence must be kept (for four years from the date of claim), in particular to identify:

  • the time and nature of the supply, the purchaser, and the consideration
  • the amount of VAT chargeable on the supply
  • the accounting period when this VAT was accounted for and paid to HMRC
  • any payment received for the supply
  • entries in the refund for bad debts account
  • the accounting period in which the claim is made

Procedure for claiming BDR

This part is straightforward: The claim is made by including the amount of the refund in Box 4 of the VAT Return for the period in which the debt becomes over six months old. The amount of BDR is either set-off against output tax due, or may create a refund position with HMRC.

Repayment of refund

Repayment of VAT refunded is required where payment is subsequently received or where the above conditions have not been complied with.

Adjustment of input tax for the debtor

Businesses are required to monitor the time they take to pay their suppliers and repay input tax claimed if they have not paid the supplier within six months. Subsequent payment of all or part of the debt will allow a corresponding reclaim of input tax. This is an easy assessment for HMRC to make at inspections, so businesses should make reviewing this matter this a regular exercise.

Finally, there is tax point planning available to defer a tax point until payment is received for providers of continuous supplies of services. Please see here

More on general VAT payment problems here.

VAT: Zero rated books? The Thorstein Gardarsson UT case

By   14 April 2020
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Latest from the courts

In The Thorstein Gardarsson T/A Action Day A Islandi Upper Tribunal (UT) case the issue was whether supplies of an “Action Day Planner” (ADP) were zero-rated as supplies of a book.

Legislation

The VAT Act 1994, Schedule 8, Group 3, item 1 zero rates – “Books, booklets, brochures, pamphlets and leaflets.”  The words in Group 3 are used in their ordinary, everyday sense.

Background

The Appellants (HMRC) appealed against a decision of the First Tier Tribunal (FTT) which determined that the ADP is a “book” with the result that supplies of it made by Thorstein Gardarsson (TG) were zero-rated for VAT purposes. TG belonged outside the EU but sold its products B2C via the Amazon platform to consumers in the UK.

HMRC argued that the ADP was properly to be considered a ‘diary’ and thereby stationery which is standard rated. Predictably, TG asserted that the ADP is not a diary and despite it having space in which the ‘student’ seeking to master skills of time management may enter information, doing so is merely part of the learning taught through the narrative sections of the book.

The FTT allowed TG’s earlier appeal and considered the judgment of the High Court in Colour Offset Ltd. [1995] BVC 31 to be binding. The FTT concluded that the main function of the ADP is to teach the user how to better or more effectively manage time. The writing space was no different from a student filling out answers to practice papers or someone completing a crossword puzzle. The ADP was therefore a book and zero rated.

Appeal

In this UT case HMRC appealed the FTT decision on the grounds that whilst Colour Offset was binding on the FTT, it failed to:

  • identify the correct test set out in Colour Offset
  • apply the test correctly to the facts it had found

The Product

The external appearance if the ADP is that of a black leather covered book. It had an elastic strap attached to the inside of the back cover that can be wrapped around the front to hold it closed. Inside it has 115 pages. The ADP is described as a time management tool developed to “help people to grow; to teach and instruct people time management skills”. The first 16 pages contain text setting out a narrative of the ethos articulated by the appellant for effective time management. The remainder of the ADP is taken up with 52 double page planners. At the back is a cardboard slip pocket.

Decision

The UT noted that the FTT had quoted from VAT Notice 701/10 and this had led the FTT into error. In the Notice ‘crossword books, exam study guides etc.’ are considered books although the statutory provisions do not mention these at all. The Notice only records HMRC’s practice in this regard and does not have force of law. However, the FTT concluded that because crossword books and exam study guides are referred to as books, it should follow that any item with the necessary physical characteristics ‘which has as its main function informing/educating or recreational enjoyment’ is also a book. The tests in Colour Offset do not refer at all to whether the main function of an item is to inform or educate; nor does it refer to recreational enjoyment.

The UT considered that the FTT approached its task by applying a test that was different from that articulated in Colour Offset and this had the ability to produce a different outcome from the correct test. In doing so, he FTT made an error of law. It also concluded that the ADP is not a book as its main function is to be written in (as distinct from being read or looked at) and that the comparison to crossword puzzles or revision guides is irrelevant. Therefore, ADPs were standard rated and output tax was due on the sale of them.

HMRC’s appeal was allowed, the FTT decision is set aside and directed the matter back to the FTT for reconsideration. It was directed that the FTT makes a decision predicated on the basis that the ADP is not a book.

Commentary

The zero rating of printed matter has long been a moot point in VAT and the amount of detail that the guidance goes into demonstrates this. It should be noted that HMRC guidance set out in Public Notice 701/10 is purely that, and does not have the force of law. This logic extends to all HMRC published guidance unless the narrative specifically states that it has the force of law. A lot of the guidance is based on case law, but certain definitions are unhelpful.

Even the FTT can get it wrong and apply the wrong tests, so if you or your clients have any doubts about the VAT liabilities of supplies made, it is worthwhile having these reviewed by a specialist.

VAT: Coronavirus latest – correction of errors

By   9 April 2020
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Correcting errors on your VAT Return

HMRC have announced that, due to coronavirus, it will no longer be accepting paper copies of VAT652s by post.

If an error is discovered on a past VAT return it is  necessary to report it to HMRC on form VAT652 if it is £10,000 (net of all errors) or more of VAT. More details here

email

A business must now email its VAT652 form to:

Telephone

A business can call to check HMRC has received its error correction notification if it has not had an acknowledgement after 21 days.

Errors cannot be corrected over the phone.

Telephone: 0300 200 3700

This is said to be a temporary measure, but I cannot see why HMRC would revert to a paper based system when the virus poses less of a threat.

Remember: stay in!

VAT: Crowdfunding – What is taxable?

By   9 April 2020
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What is crowdfunding?

Crowdfunding is the practice of funding a project or venture by raising many small amounts of money from a large number of people, typically via the internet on specifically designed platforms and is an alternative to traditional ways of raising finance. The model is usually based on three parties: the project initiator who proposes the idea or project to be funded, individuals or groups who support the idea, and a moderating organisation (the “platform”) that brings the parties together to launch the idea.

VAT Treatment

The VAT treatment of supplies that might potentially be made is no different to similar financing arrangements, for example; sponsorship, donations and investments made through more traditional routes. Whether a recipient of crowdfunding is liable to charge and pay VAT depends on the facts in each case.

Examples

Donations

  • where nothing is given in return for the funding, it will be treated as a donation and not liable to VAT – the position is the same where all that the funder receives is a bare acknowledgement, such as a mention in a programme or something similar

Goods and/or services

  • where the funder receives goods or services that have a real value associated with them, for example; clothing, tickets, DVDs, film viewings, output tax will be due

Combination

  • where the payment is for a combination of the two examples above, if it is clear that the donation element is optional then that part of the sponsorship can be treated as a non-taxable donation and the supply will be taxable. If a donation element cannot be carved out, it is likely that all of the payment will be considered as VATable

Investment

  • where the funding takes the form of an investment where the funder is entitled to a financial return such as; interest, dividends or profit share, any payment due to the funder is unlikely to be liable to output tax, The reason why most of these arrangements are outside the scope of VAT is that the provision of capital in a business venture is not seen as a supply for VAT purposes

Royalties

  • if the arrangement is that the funder receives royalties based on a supply of intellectual property or some other similar benefit the payment is likely to be consideration for a taxable supply and output tax will be due

VAT registration 

If income from the sources above which are deemed to be subject to VAT exceeds the VAT registration limit (currently £85,000 in any twelve-month period) the person, in whichever legal identity, such as; individual, company, partnership, Trust etc will be liable to register for VAT. If income is below this limit, it will be possible, but not mandatory to VAT register. The benefits of voluntary registration here.

Input tax recovery

If VAT registered, any input tax incurred on costs relating to crowdfunding is usually recoverable (see here for exceptions). However, if the costs relate to donations or some types of investment then input tax claims are specifically blocked as they would relate to non-business activities.

Commentary

There can be difficulties in establishing the tax liability of crowdfunding and in a broader sense “sponsorship” in general. However, experience insists that the biggest issue is initially identifying that there may be a VAT issue at all. If you, or your clients are involved in crowdfunding, or have sponsors, it would be prudent to review the VAT treatment of the activities.

VAT and Duty on exports and imports post Brexit – a guide

By   7 April 2020
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Exports and Imports – post Brexit

VAT and Duty on exports and imports

With Brexit soon to become a reality, it is important that UK business understand the importance of exporting and importing goods. As matters stand, the UK will become a “third country” and as such will need to go through all the processes that apply to non-EU countries when goods cross borders to sales and purchases to/from existing EU countries. This mainly means customs duties applying to goods that have, to date, been duty free as the EU is a single market.

Whether importing or exporting, there are important VAT and duty rules and procedures. A business must ensure that it charges and pays the right amount of VAT and duty. The first step for moving goods into, or out of, the UK will be to obtain an EORI number. Details here.

Responsibilities for importers

  • the importer is normally responsible for clearing the goods through UK customs and paying any taxes
  • the supplier needs to provide the documentation an importer needs to clear the goods through customs (and to make payment to the supplier)
  • now, if you are importing (even from EU countries) you are likely to have to pay import duty. This cannot be reclaimed from HMRC
  • a business’ responsibilities depend on what it has agreed in the contract. To minimise the risk of disputes, your contract should use one of the internationally recognised Incoterms. These are explained here
  • check what import duty applies – import duty is based on the type of goods you are importing, the country they originate from and their value
  • HMRC’s Integrated Tariff sets out the classification of goods and the rates of duty in detail. Your Trade Association or your import agent may be able to assist with classification. You can find reputable freight forwarders through the British International Freight Association here 
  • an importer may need proof of the origin of the goods to claim reduced import duty for goods from certain countries
  • a valuation document is also normally required for imports above a set value
  • complete an import declaration. This is normally done using the Single Administrative Document (SAD)
  • pay VAT and duty to get the goods released
  • the VAT applicable is the normal UK rate for the imported goods when sold in the UK
  • regular importers can defer payment of VAT and duty by opening a deferment account with HMRC. A security payment will need to be provided and payments must be via Direct Debit
  • From 1 January 2021 Postponed Accounting for import VAT to be introduced for all goods including those from the EU
  • account for VAT on returns
  • HMRC will send a C79 certificate showing the import VAT you have paid
  • VAT on imports (supported by C79 evidence) may be claimed in the same way as reclaims of input tax incurred on purchases in the UK
  • import duty cannot be reclaimed

Responsibilities for exporters

    • the exporter is normally responsible for clearing goods outwards through UK customs
    • the customer is normally responsible for overseas customs clearance and taxes (depending on the Incoterms). Further details on how other countries handle import duties and taxes are available from the Department for International Trade
    • the exporter will need to provide its customer with the documentation they need to clear goods into their country (and to pay you)
    • the exporter’s responsibilities depend on what it has agreed in the contract (see Incoterms above)
    • the exporter will need to provide its customer with the documents they need to import the goods into their country. These documents can also be part of the process of getting paid
    • as a minimum, the seller will need documents recording details of the:
    • exporter
    • customer
    • goods and their value
    • export destination
    • how the goods will be transported
    • route they will take
  • keep copies of all documents giving details of all the sales which have been made.
  • record the value of your exports on your VAT return
  • consider any responsibility you have for overseas customs clearance and taxes. Normally, as an exporter, you will have agreed that your customer handles this. However, take specialist advice, or use an expert agent, if you are responsible – this will depend on Incoterms

Tips

  • freight forwarders can handle customs clearance as well as transport
  • exporting can be simpler if you choose to sell to a single agent or distributor in an overseas country. However, this may not suit your export strategy
  • exports are usually zero-rated. However, exporters must keep proof that the goods have been physically exported along with normal commercial documentation
  • the exporter must declare the export. This is usually done by completing a Single Administrative Document (SAD), also known as form C88

Excise duty

  • check whether any goods being purchased are subject to excise duty
  • excise duty is payable on; fuel, alcohol and tobacco products
  • if goods are subject to excise duty, it is paid at the same time as payments for VAT and import duty are made
  • VAT is charged on the value of the goods plus excise duty

Customs warehouses

If you expect to store imports for a long time it will be worth considering using a Customs warehouse.

  • goods stored in a customs warehouse, will not be subject to import duty and VAT until they are removed from the warehouse
  • storage ‘in bond’ is often used for products subject to excise duty, such as wine and cigarettes, although it is not limited to these goods

Relief for re-exported goods

  • it may be possible to take advantage of Inward Processing Relief (IPR) rules so that no import duty and VAT is payable
  • IPR can apply to imports that you process before re-exporting them

If you import or export regularly, find out about alternative procedures

  • For example, businesses that import regularly and in large volumes can use processes such as Customs Freight Simplified Procedures.

Summary

If you are new to acquisitions, importing or exporting, it may be worthwhile talking to an expert. This article only scratches the surface of the subject. There can be significant savings made by accurately classifying goods, and applying the correct procedures and rates will avoid assessments and penalties being levied. Planning may also be available to defer when tax is paid on imports and acquisitions.

VAT treatment of coronavirus grants

By   6 April 2020
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HMRC has announced that it will be providing assistance for the self-employed affected by coronavirus by way of support grants.

Flat rate scheme (FRS) treatment

The FRS applies to all income received by a business (even exempt and zero rated) however, because the grant is not a supply for VAT purposes – because nothing is done in consideration for the payment, income from this source is not covered by the FRS. Consequently no output tax is due on the receipt of these payments and the value should not appear on VAT returns.

This is also the case for any businesses not operating the FRS.

Input tax

In either case, the receipt of a grant should not affect the businesses’ ability to recovery input tax.

VAT: MTD Phase 2 deferred due to coronavirus

By   1 April 2020
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HMRC has announced that the second phase of Making Tax Digital (MTD) for VAT, due to be introduced on 1 April 2020 has been postponed by one year until 1 April 2021.

Now, VAT registered businesses will need to be compliant from its first VAT return period starting on or after 1 April 2021.

What is MTD Phase 2?

These are key elements to Phase 2:

  • rigorous rules will be introduced to ensure the accurate application of digital records and the way in which businesses upload their returns (digital bookkeeping)
  • there must be a full end-to-end digital journey in place from the capturing of transactions to the submission of the VAT return. Transfer of data between functional compatible software, eg; invoice and accounting systems etc. must be done using digital links (digital journey). This is the end of the “cut and paste: concession allowed with the soft-landing of Phase 1
  • the most basic accounting software is unlikely to have the required features to provide a way to submit the financial records on transactions meaning they are likely to lose accreditation
  • penalties for non-compliance will be introduced (on a cumulative basis, based on the number up to 15% of VAT due)

The overall aim is to eliminate human intervention into systems, thus reducing, it is hoped, errors.

Deferral

HMRC have stated that as a consequence of the coronavirus it understands the difficulty businesses are experiencing and is committed to helping “in every way possible” those facing unprecedented challenges.

HMRC is therefore giving around 1.3 million UK VAT registered businesses more time to put in place digital links between all parts of their functional compatible software.

Comment

A welcome announcement, and one which will be appreciated, especially by the more complex, medium to larger businesses who are required to juggle with multiple accounting systems, group accounts and considerable consolidation. The deferral may also be as a result of HMRC’s staff being stretched at the current time.

VAT – Latest on the coronavirus position

By   23 March 2020
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Update

Clearly VAT is not high on people’s agendas at the moment, but it may be a concern if a business is struggling to pay it in these difficult times.

The government has announced that, along with other measures to reassure and assist business, an easement for paying VAT due. Taxpayers may now defer VAT payments.

Measures

The details:

  • the next quarter’s VAT has been deferred to the end of the tax year
  • no business will pay any from now until the end of June
  • all UK businesses are eligible
  • the deferral does not cover payments due under the VAT MOSS scheme
  • no penalties or interest will be due on the tax deferred under these measures
  • this represents a circa £30 billion cash boost for business
  • unlike some other countries, the deadline to submit returns has not been deferred – which is unfortunate given the virus’ effect on staff and administrative processes
  • additional resources have been allocated to deal with time to pay (TTP) applications
  • the regular inspection of businesses has been suspended until further notice
  • there has been no announcement on the temporary reduction of VAT rates – but this may happen in the near future
  • all proceedings in UK First Tier Tribunal (FTT) are stayed for 28 days

Access to the scheme

This is an automatic offer with no applications required. Businesses will not need to make a VAT payment during this period. Taxpayers will be given until the end of the 2020 to 2021 tax year to pay any liabilities that have accumulated during the deferral period. VAT refunds and reclaims will be paid by HMRC as normal.

Businesses who normally pay by direct debit should cancel their direct debit with their bank if they are unable to pay. This must be done in sufficient time so that HMRC do not attempt to automatically collect on receipt of a submitted VAT return.

Commentary

These are very welcome easements for business and the speed and clarity of the statements are very welcomed and should be commended.

VAT: Events cancelled due to coronavirus

By   18 March 2020
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Coronavirus measures

In these difficult times things aren’t as they usually are. While there have been no specific government announcements of any VAT reliefs, one issue has arisen.

Refunds

If a venue is required to cancel an event as a result of the government’s advice on coronavirus eg; live performances, seminars, weddings, festivals etc, and the venue suggests that ticket holders might like to donate the money previously paid to charity rather than receive a refund – we can confirm that no VAT is due on any of the transactions.

This is the case in situations where the;

  • event does not take place
  • customer is entitled to a full, unfettered refund
  • refund changes to a genuine voluntary donation

Adjustment

If output tax has been accounted for the next return may be adjusted to credit the tax previously paid. if a refund is made directly to the customer, again, no supply will have been made for VAT purposes and no output tax is due.

Commentary

In these difficult times we appreciate that tax is way down the list of people’s priorities. Many businesses will suffer and many will not survive. If we can help in any way possible, please let us know.

Also, we will report if there are any concessions on VAT payments or similar as soon as we are aware. We recommend that the HMRC guidance on coronavirus should be monitored for the latest news.

Good luck out there and stay safe.