Did you know…?
The sale of a horse is standard rated. However, the sale of a dead one (for horse meat) is zero rated. I wouldn’t really want to dwell on the VAT planning aspects of this…
Category Archives: Technical
VAT: Brexit latest
The European Commission (EC) has published an updated Notice to Stakeholders which covers the UK leaving the EU.
The original document which was published in 2018 has been amended to reflect the latest developments which mainly include the official Brexit on 1 February 2020 and the current transition period, which, as matters stand, will end on 31 December 2020. Until that date, EU law in its entirety applies to the UK
The Notice includes:
- The legal position from 1 January 2021
- VAT rules for cross-border services
- The VAT General Rule
- MOSS
- Refunds of VAT
- Separation provisions of the Withdrawal Agreement
- The supply of other services
- Refund requests relating to VAT paid before the end of the transition period
The Notice states that; “…during the transition period, the EU and the UK will negotiate an agreement on a new partnership, providing notably for a free trade area. However, it is not certain whether such an agreement will be concluded and will enter into force at the end of the transition period”. I think that this is likely to be a charitable conclusion!
The EC advises businesses:
- when they are established in the EU, to familiarise themselves with the rules applicable to services supplied to and received from third countries (which the UK will become from 1 January 2021)
- when they are established in the UK, to examine whether new liability rules will apply to them with regard to their services supplied in the EU
- to take the necessary steps in respect of services covered by MOSS
- consider the changes in the VAT refund request procedures
The Notice does not cover the supply of goods nor digital services themself.
General
After the end of the transition period, the EU rules on VAT for services no longer apply to, and in, the UK. This has, particular consequences for the treatment of taxable transactions in services and VAT.
Businesses need to understand the probable changes and make preparations for a No-Deal Brexit.
VAT – Building your new home: How and what to claim
Building your own home is becoming increasingly popular. There are many things to think about, and budgeting is one of the most important.
The recovery of VAT on the project has a huge impact on the budget and care must be taken to ensure that a claim is made properly and within the time limits. You don’t have to be VAT registered to make a claim, this is done via a mechanism known as The DIY Housebuilders’ Scheme. It has specific rules which must be adhered to otherwise the claim will be rejected.
If you buy a new house from a property developer, you will not be charged VAT. This is because the sale of the house to you will be zero-rated. This allows the developer to reclaim the VAT paid on building materials from HMRC. However, if you build a house yourself, you will not be able to benefit from the zero-rating. The DIY Housebuilder’ Scheme puts you in a similar position to a person who buys a zero-rated house built by a property developer.
Who can make a claim?
You can apply for a VAT refund on building materials and services if you are:
- building a new home in which you will live
- converting a building into a home
- building a non-profit communal residence, eg; a hospice
- building a property for a charity
Eligibility
New homes
The house must:
- be separate and self-contained eg; not an extension
- be for you or your family to live or holiday in (not for sale when complete)
- not be for business purposes (although you can use one room as a work from home office)
- not be prevented from sale independently to another building by planning permission or similar eg; a granny annexe
A claim may also be made for garages built at the same time as the house and to be used with the house.
Contractors working on new residential buildings should zero rate their supplies to you, so you won’t pay any VAT on these.
Conversions
The building being converted must usually be a non-residential building eg; a barn conversion. Also, residential buildings qualify if they haven’t been lived in for at least 10 years.
You may claim a refund for builders’ work on a conversion of non-residential building into home. These supplies will be charged at the reduced rate of 5% for conversion works. If the standard rate of 20% s charged incorrectly, you will not be able to claim the standard rated amount. Care should be taken that the contractor understands the VAT rules for conversions as these can be complex.
Communal and charity buildings
You may get a VAT refund if the building is for one of the following purposes:
- non-business – you can’t charge a fee for the use of the building
- charitable, eg; a hospice
- residential, eg; a children’s home
What can you claim on?
Building materials – You may claim a VAT refund for building materials that are incorporated into the building and can’t be removed without tools or damaging the building.
What doesn’t qualify
You cannot claim for:
- building projects outside the UK
- materials or services that don’t have any VAT, eg; were zero-rated or exempt
- professional or supervisory fees, eg; architects and surveyors
- the hire of plant, tools and equipment, eg; generators, scaffolding and skips
- building materials that aren’t permanently attached to or part of the building itself
- some fitted furniture, electrical and gas appliances, carpets or garden ornaments
- supplies for which you do not have a VAT invoice
Examples of items you can, and cannot claim for are listed below.
How to claim
To claim a VAT refund, send form 431NB or 431C to HMRC
Local Compliance National DIY Team
SO987
Newcastle
NE98 1ZZ
What you need to know
You must claim within three months of the building work being completed.
You will usually get the refund in 30 working days of sending the claim.
You must include the following with your claim:
- bank details
- planning permission
- proof the building work is finished eg; a letter from your local authority
- a full set of building plans
- invoices – including tenders or estimations if the invoice isn’t itemised
- bills and any credit notes
VAT invoices must be valid and show the correct rate of VAT or they will not be accepted in the claim.
HMRC usually examine every claim closely and often query them, so it pays to ensure that the claim is as accurate as possible first time. We find a review by us before submission ensures the maximum amount is claimed and delays are avoided.
Payments made after completion of the house cannot be claimed, and only one claim can be made for the whole project, so cashflow may be an issue.
Examples of items that you can claim for
The items listed below are accepted as being ‘ordinarily’ incorporated in a building (or its site). This is not a complete list.
- air conditioning
- building materials that make up the fabric of the property eg; bricks, cement, tiles, timber, etc
- burglar and fire alarms
- curtain poles and rails
- fireplaces and surrounds
- fitted kitchen furniture, sinks, and work surfaces
- flooring materials (other than carpets and carpet tiles)
- some gas and electrical appliances when wired-in or plumbed-in
- heating and ventilation systems including solar panels
- light fittings – including chandeliers and outside lights
- plumbing materials, including electric showers, ‘in line’ water softeners and sanitary ware
- saunas
- turf, plants, trees (to the extent that they are detailed on scheme approved by a Planning Permission) and fencing permanently erected around the boundary of the dwelling
- TV aerials and satellite dishes
Examples of items that you cannot claim for
This is not a complete list.
- Aga/range cookers (unless they are solid fuel, oil-fired or designed to heat space or water)
- free-standing and integrated appliances such as: cookers, fridges, freezers, dishwashers, microwaves, washing machines, dryers, coffee machines
- audio equipment, built-in speakers, intelligent lighting systems, satellite boxes, Freeview boxes
- consumables eg; sandpaper, white spirit
- electrical components for garage doors and gates
- bedroom furniture (unless they are basic wardrobes) bathroom furniture eg; vanity units and free-standing units
- curtains and blinds
- carpets and rugs
- garden furniture and ornaments and sheds
Please contact us if you require assistance with a DIY Housebuild project.
VAT: Domestic Reverse Charge for construction services delayed until 1 March 2021
Further to my article on the Domestic Reverse Charge (DRC) for builders being deferred, HMRC has announced a further delay from 1 October 2020 until 1 March 2021 due to the impact of the coronavirus on the construction sector.
Revenue and Customs Brief 7 (2020 sets out the details.
Changes
HMRC announced that there will be an amendment to the original legislation, which was laid in April 2019, to make it a requirement that for businesses to be excluded from the reverse charge because they are end users or intermediary suppliers, they must inform their sub-contractors in writing that they are end users or intermediary suppliers. Details of the DRC here and here.
VAT: HMRC Toolkits updated
HMRC has updated the following online toolkits for June 2020:
Output tax and
The Toolkits
These toolkits can be a useful resource. Although designed for agents and advisers, they can equally be of assistance to businesses when completing VAT returns. The contents are based on HMRC’s view of how tax law should be applied, so they should not be used as a substitute for proper professional advice. These toolkits set out areas of risk, provide general checklists, details of record keeping and links to HMRC information. Many find that these toolkits are more user friendly than “traditional” HMRC guidance and they address many contentious areas.
Overview
For a helpful general guide to input tax and checklist please see here. And an introduction to partial exemption here.
VAT – Input tax claims. Latest from the courts
Latest from the courts
In the recent First Tier Tribunal (FTT) case of Aitmatov Academy an otherwise unremarkable case illustrates the care required when making input tax claims.
The quantum of the claim was low and the technical issues not particularly complex, however, it underlined some basic rules for making a VAT claim.
Background
A doctor organised a cultural event at the House of Lords for which no charge was made to attendees. The event organiser as shown on the event form was the doctor. Aitmatov Academy was shown as an organisation associated with the event. It was agreed that the attendees were not potential customers of Aitmatov Academy and that the overall purpose of the event was cultural and not advertising.
Issues
HMRC disallowed the claim. The issues were:
- HMRC contended that the expenses were not incurred by the taxpayer but by the doctor personally (the doctor was not VAT registered)
- that if the VAT was incurred by the Academy, it was not directly attributed to a taxable supply
- that if the VAT was directly attributed to a taxable supply, it was business entertaining, on which input tax is blocked
Decision
The FTT found that the Academy incurred the cost and consequently must have concluded that the Academy was the recipient of the supply, not the doctor.
However, the judge decided that the awards ceremony was not directly or indirectly linked to taxable supplies made or intended to be made by the Academy, and therefore that the referable input tax should not be allowed. Consequently, the court did not need to consider whether the event qualified as business entertainment.
On a separate point, the appellant contended that, as a similar claim had been paid by HMRC previously, she could not see the difference that caused input VAT in this case to be disallowed. The Tribunal explained that its role is to apply the law in this specific instance and as such it cannot look at what happened in an early case which is not the subject of an appeal.
Commentary
A helpful reminder of some of the tests that need to be passed in order for an input tax claim to be valid. I have written about some common issues with claims and provided a checklist. Broadly, in addition to the tests in this case, a business needs to consider:
- whether there was actually a supply
- is the documentation correct?
- time limits
- the VAT liability of the supply
- the place of supply
- partial exemption
- non-business activity – particularly charity and NFP bodies
- if the claim is specifically blocked (eg; cars, and certain schemes)
I have also looked at which input tax is specifically barred.
Finally, “entertainment” is a topic all of its own. I have considered what is claimable here in article which includes a useful flowchart.
As always, the message is; if a business is to avoid penalties and interest, if there is any doubt over the validity of a claim, seek advice!
The penalty regime……the dark side of VAT
VAT Penalties
I have made a lot of references to penalties in other articles over the years. So I thought it would be a good idea to have a closer look; what are they, when are they levied, rights of appeal, and importantly how much could they cost if a business gets it wrong?
Overview
Broadly, a penalty is levied if the incorrect amount of VAT is declared, either by understating output tax due, or overclaiming input tax, or accepting an assessment which is known to be too low.
Amount of penalty
HMRC detail three categories of inaccuracy. These are significant, as each has its own range of penalty percentages. If an error is found to fall within a lower band, then a lower penalty rate will apply. Where the taxpayer has taken ‘reasonable care,’ even though an error has been made, then no penalty will apply.
- An error, when reasonable care not taken: 30%;
- An error which is deliberate, but not concealed: 70%;
- An error, which is deliberate and concealed: 100%.
Reasonable care
There is no definition of ‘reasonable care’. However, HMRC have said that they would not expect the same level of knowledge or expertise from a self-employed person, as from a large multi-national.
HMRC expect that, where an issue is unclear, advice is sought, and a record maintained of that advice. They also expect that, where an error is made, it is adjusted, and HMRC notified promptly. They have specifically stated that merely to adjust a return will not constitute a full disclosure of an error. Therefore, a penalty may still be applicable.
Notification
What the penalty is based on
The amount of the penalty is calculated by applying the appropriate penalty rate (above) to the ‘Potential Lost Revenue’ or PLR. This is essentially the additional amount of VAT due or payable, as a result of the inaccuracy, or the failure to notify an under-assessment. Special rules apply where there are a number of errors, and they fall into different penalty bands.
Defending a penalty
The percentage penalty may be reduced by a range of ‘defences:’
– Telling; this includes admitting the document was inaccurate, or that there was an under-assessment, disclosing the inaccuracy in full, and explaining how and why the inaccuracies arose;
– Helping; this includes giving reasonable help in quantifying the inaccuracy, giving positive assistance rather than passive acceptance, actively engaging in work required to quantify the inaccuracy, and volunteering any relevant information;
– Giving Access; this includes providing documents, granting requests for information, allowing access to records and other documents.
Further, where there is an ‘unprompted disclosure’ of the error, HMRC have power to reduce the penalty further. This measure is designed to encourage businesses to review their own VAT returns.
A disclosure is unprompted if it is made at a time when a person had no reason to believe that HMRC have discovered or are about to discover the inaccuracy. The disclosure will be treated as unprompted even if at the time it is made, the full extent of the error is not known, as long as fuller details are provided within a reasonable time.
HMRC have included a provision whereby a penalty can be suspended for up to two years. This will occur for a careless inaccuracy, not a deliberate inaccuracy. HMRC will consider suspension of a penalty where, given the imposition of certain conditions, the business will improve its accuracy. The aim is to improve future compliance and encourage businesses which genuinely seek to fulfil their obligations.
Appealing a penalty
HMRC have an internal reconsideration procedure, where a business should apply to in the first instance. If the outcome is not satisfactory, the business can pursue an appeal to the First Tier Tribunal. A business can appeal on the grounds of; whether a penalty is applicable, the amount of the penalty, a decision not to suspend a penalty, and the conditions for suspension.
The normal time limit for penalties to four years. Additionally, where there is deliberate action to evade VAT, a 20 year limit applies. In particular, this applies to a loss of VAT which arises as a result of a deliberate inaccuracy in a document submitted by that person.
These are just the penalties for making “errors” on VAT returns. HMRC have plenty more for anything from late registration to issuing the wrong paperwork.
Even darker
There are even more severe penalties for deliberate acts, including significant terms of imprisonment. That is the subject of another article.
Assistance
My advice is always to check on all aspects of a penalty and seek assistance for grounds to challenge a decision to levy a penalty. We have a very high success rate in defending businesses against inappropriate penalties. It is always worth running a penalty past us.
VAT: Additional time for zero rating exported goods due to the coronavirus
COVID-19 Update
HMRC has published concessions in VEXP30310 relating to the conditions for the zero rating of exports.
Background
Most exports of goods from the UK are subject to zero rating. However, in order for VAT free treatment to apply, certain conditions must be met, otherwise 20% VAT applies to the sale. One of the conditions is that the goods must be exported within specified time limits.
Time limits
Generally, goods can be zero rated provided that:
- they are exported within 3 months of the time of supply, and;
- valid evidence of export is obtained within 3 months of the time of supply
COVID-19
During the pandemic, it may not be possible for businesses to export goods within the prescribed time. HMRC recognises that some intended exports have been delayed due to circumstances outside a business’ control. Therefore, the guidance sets out the circumstances in which HMRC may agree to additional time for the export before any tax is collected.
Additional time
The time limits for the export of goods from the UK are set out in legislation. However, HMRC has discretion to permit non-observance of the conditions and time limits for export of goods – VAT Act 1994, Section 30(10). HMRC has said that it will use its discretion to temporarily waive the prescribed time limits for export on a case by case basis. The goods must, however, have either already been exported or will be as soon as is reasonably practicable after the date a business is notified that HMRC is temporarily waiving the tax. An application for HMRC to waive the time limits must be made in writing.
Conditions
HMRC will permit a temporary waiver of time limits if the following conditions are met:
- it has not been possible to export goods within the prescribed time limit due to the COVID-19 emergency
Examples include:
- the UK or another Government has imposed restrictions on the movement of goods or people due to COVID-19 that prevent the goods being exported to the intended destination
- cancellation of the intended mode of transport for reasons directly related to COVID-19
- a participant in the export is ill due to COVID-19 and a substitute cannot be found
This list is not exhaustive.
2. the goods have been/will be exported or removed at the earliest opportunity
3. all other conditions for zero rating exports or removals are met – exporters’ responsibilities here
Expiry
Any waiver will expire
- one month after any government-imposed restrictions are lifted or
- one month after any COVID-19 impediment to the export or removal ceases, or
- there ceases to be an intention to export or remove the goods from the UK (Information on intention here)
whichever is the earlier.
If a business considers there are extenuating circumstances that mean additional time is needed to export goods beyond that permitted by the extension, it should contact HMRC setting out the details in full.
Evidence
A business must retain evidence that supports its case for the waiver (eg; cancellation notes demonstrating that the transport intended to use to take goods out of the UK did not take place, or screen shots of government rules preventing the export or removal of the goods).
Please contact us if you require any further advice or assistance.
VAT: Intention is crucial – The Sonaecom case
We cannot control the future…
The Sonaecom case
In the opinion* of the CJEU AG (C-42/19) the importance of a taxpayer’s intention was of utmost importance, regardless of whether that intention was achieved.
Background
Sonaecom intended to acquire a telecoms provider company. As is usual in such cases, input tax was incurred on consultancy received, from, amongst others; accountants and legal service providers. The intention post acquisition was for Sonaecom to make certain charges to the acquired co. These would have been taxable supplies.
Unfortunately, the intended purchase was aborted.
The issue
The issue before the AG was; as no taxable supplies took place as the deal fell through – to what should the input tax incurred on advice be attributed?
Opinion
In the AG’s view the fact that the acquisition was aborted was no reason for the claim for input tax to denied. This was based on the fact that:
- Sonaecom was not a “pure holding company”
- There was a genuine intention to make taxable supplies (to the acquired co)
- There was a direct and immediate link between the costs and the intended supplies
- Although the acquisition costs would exceed the proposed management charges, this was not a reason to invalidate the claim
- The above analysis was not affected by the fact that the transaction did not take place
Commentary
There are often issues in relation to intentions of a taxpayer. It is clear, and was emphasised in this case, that intention is all important. Of course, intentions can change over a period of time and commercial and political events may thwart or cause intentions to be re-evaluated. There is often an issue about evidencing an intention. HMRC usually require comprehensive documentary evidence to demonstrate an objective. Such evidence is sometime not available for various reasons. Consequently, it is prudent for businesses to record (board meeting minutes etc at the very least) the commercial reasons for taking a certain course of action. This issue quite often arises in transactions in land and property – which can create additional technical issues.
There is legislation in place to cover situations when intentions, or actual events change and which affect the original input tax position: The Capital Goods Scheme (CGS) and The Value Added Tax Regulations 1995, Regs 108 and 109.
Other areas of VAT which often to raise issues are management charges and holding companies. HMRC apparently continue to be eager to attack taxpayers in these areas and I have looked at the role of holding companies and the VAT treatment here, here and here.
I think it is useful to bear in mind a question which, in itself does not evidence an intention, but provides commercial coherence – Why were the costs incurred if there was no intention to make the acquisition? This does leave aside the future management charges position but goes some way to provide business logic.
It will be interesting to see how this case proceeds, but I would find it very surprising if the court diverges from this AG opinion.
* AG’s Opinion
The Court of Justice of the European Union (CJEU) consists of one judge from each Member State, assisted by eleven Advocates General whose role is to consider the written and oral submissions to the court in every case that raises a new point of law, and deliver an impartial opinion to the court on the legal solution.
VAT: Where do I belong?