Category Archives: Uncategorized

VAT: Top 10 Tips for small businesses and start-ups

By Marcus Ward 11 March 2024

At some point it is likely that a small business or start-up will need to consider VAT. Here are a few pointers:

Should you be registered for VAT?

If your income is above £90,000 pa of taxable supplies, you have no choice. But you can voluntarily register if below this threshold. There are significant penalties for failure to register at the correct time.

Advantages of VAT registration: VAT recovery on expenses plus, perhaps; gravitas for a business
Disadvantages: administration costs plus a potential additional cost to customers if they are unable to recover VAT charged to them (eg; they are private individuals) which could affect your competitiveness Potential for penalties and interest for getting it wrong.

Happy Anniversary!

By Marcus Ward 2 June 2023

The Consultancy is 10 (TEN) years old! A huge thanks to our fabulous clients, wonderful colleagues and our network of the really best people.

Thank You. Let the celebrations begin! 🍾

VAT treatment of deposits and advance payments

By Marcus Ward 19 July 2022

One query that constantly reappears is that of the VAT treatment of deposits.

This may be because there are different types of deposits with different VAT rules for each. I thought that it would be helpful for all the rules to be set out in one place, and some comments on how certain transactions are structured, so…

Broadly, we are looking at the tax point rules. The tax point is the time at which output tax is due and input tax recoverable. More on tax points here

A business may have various commercial arrangements for payments such as:

receiving advance payments
being paid in instalments
credit sales
periodic payments for continuous supplies
security deposits for goods hired

I consider these below, as well as some specific arrangements:

Advance payments and deposits

An advance payment, or deposit, is a proportion of the total selling price that a customer pays a business before it supplies them with goods or services.

The tax point if an advance payment is made is whichever of the following happens first:

the date a VAT invoice for the advance payment is issued
the date you the advance payment is received

The VAT due on the value of the advance payment (only, not the full value of the overall supply) is included on the VAT return for the period when the tax point occurs.

If the customer pays the remaining balance before the goods are delivered or the services are performed, a further tax point is created when whichever of the following happens first:

the date a VAT invoice for the balance is issued
payment of the balance is received

So VAT is due on the balance on the return for when the further tax point occurs.

Returnable deposits

A business may ask its customers to pay a deposit when they hire goods. No VAT is due if the deposit is either:

refunded in full to the customer when they return the goods safely
kept by you to compensate you for loss or damage

Forfeit deposits

If a customer is asked for a deposit against goods or services but they then don’t buy them or use the services, it may be decided to retain the deposit. Usually the arrangement is that the customer is told/agrees in advance and it is part of the conditions for the sale. This arrangement is known as forfeit deposit. It often occurs when, for example, an hotel business makes a charge for reserving a room.

VAT should be declared on receipt of the deposit or when a VAT invoice is issued, whichever happens first.

HMRC has confirmed a new policy that output tax remains due on a deposit, even if the customer does not use the goods or services for which it was paid. This came into force with effect from 1 March 2019, cancelling HMRC’s previous rules which permitted non-refundable deposits to be treated as VAT free compensation.

Continuous supplies

If you supply services on a continuous basis and you receive regular or occasional payments, a tax point is created every time a VAT invoice is issued or a payment received, whichever happens first. An article on tax planning for continuous supplies here

If payments are due regularly a business may issue a VAT invoice at the beginning of any period of up to a year for all the payments due in that period (as long as there’s more than one payment due). If it is decided to issue an invoice at the start of a period, no VAT is declared on any payment until either the date the payment is due or the date it is received, whichever happens first.

Credit and conditional sales

This is where the rules can get rather more complex.

A credit sale means the sale of goods which immediately become the property of the customer but where the price is paid in instalments.
A conditional sale is where goods are supplied to a customer but the goods remain the seller’s property until they are paid for in full.

The tax point for a credit sale or a conditional sale is created at the time you supply the goods or services to your customer. This is the basic tax point and is when you should account for the VAT on the full value of the goods.

This basic tax point may be over-ridden and an actual tax point created if a business:

issues a VAT invoice or receives payment before supplying the goods or services
issues a VAT invoice up to 14 days after the basic tax point

Credit sales where finance is provided to the customer

If goods are offered on credit to a customer and a finance company is not involved, the supplier is financing the credit itself. If the credit charge is shown separately on an invoice issued to the customer, it will be exempt from VAT. Other fees relating to the credit charge such as; administration, documentation or acceptance fees will also be exempt. VAT is declared on the full value of the goods that have been supplied on the VAT Return for that period.

If goods or services are supplied on interest free credit by arranging with a customer for them to pay over a set period without charging them interest then VAT is declared on the full selling price when you make the supplies.

Credit sales involving a finance company

When a business makes credit sales involving a finance company, the finance company either:

becomes the owner of the goods, eg; when a purchase is financed by a hire-purchase agreement
does not become the owner of the goods, eg; when a purchase is financed by a loan agreement

Hire purchase agreements

If the finance company becomes the owner of goods, the business is supplying the goods to the finance company and not the customer. There is no charge for providing the credit, so the seller accounts for VAT on the value of the goods at the time they are supplied to the finance company. Any commission received from the finance company for introducing them to the customer is usually subject to VAT.

Loan agreements

If the finance company does not become owner of the goods, the supplier is selling the goods directly to its customer. The business is not supplying the goods to the finance company, even though the finance company may pay the seller direct. VAT is due on the selling price to the customer, even if the seller receives a lower amount from the finance company. The contract between the customer and the finance company for credit is a completely separate transaction to the sale of the goods.

Specific areas

The following are areas where the rules on the treatment may differ

Cash Accounting Scheme

If a business uses the cash accounting scheme here it accounts for output tax when it receives payment from its customers unless it is a returnable deposit

Property

Care should be taken with deposits in property transactions. This is especially important if property is purchased at auction.

These comments only apply to the purchase of property on which VAT is due (commercial property less than three years old or subject to the option to tax). If a deposit is paid into a stakeholder, solicitor’s or escrow account (usually on exchange) and the vendor has no access to this money before completion no tax point is created. Otherwise, any advance payment is treated as above and creates a tax point on which output tax is due to the extent of the deposit amount. Vendors at auction can fall foul of these rules. If no other tax point has been created, output tax is due on completion.

Tour Operators’ Margin Scheme (TOMS)

TOMS has distinct rules on deposits. Under normal VAT rules, the tax point is usually when an invoice is issued or payment received (as above). Under TOMS, the normal time of supply is the departure date of the holiday or the first occupation of accommodation. However, in some cases this is overridden. If the tour operator receives more than one payment, it may have more than one tax point. Each time a payment is received exceeding 20% of the selling price, a tax point for that amount is created. A tax point is also created each time the payments received to date (and not already accounted for) exceed 20% when added together. There are options available for deposits received when operating TOMS, so specific advice should be sought.

VAT Registration

In calculating turnover for registration, deposits must be included which create a tax point in the “historic” test. Care should also be taken that a large deposit does not trigger immediate VAT registration by virtue of the “future” test. This is; if it is foreseeable at any time that receipts in the next 30 days on their own would exceed the turnover limit, currently £85,000, then the registration date would be the beginning of that 30-day period.

Flat Rate Scheme

A business applies the appropriate flat rate percentage to the value of the deposit received (unless it is a returnable deposit). In most cases the issue of an invoice may be ignored if the option to use a version of cash accounting in the Flat Rate Scheme is taken. More on the FRS here and here

Please contact us if you have any queries on this article or would like your treatment of deposits reviewed to:

Ensure treatment is correct to avoid penalties, and/or;
Establish whether planning is available to properly defer payments of output tax under the tax point rules.

VAT – A Christmas Tale

By Marcus Ward 21 December 2020

Well, it is Christmas…. and at Christmas tradition dictates that you repeat the same nonsense every year….

Dear Marcus

My business, if that is what it is, has become large enough for me to fear that HMRC might take an interest in my activities. May I explain what I do and then you can write to me with your advice? If you think a face to face meeting would be better, I can be found in most decent sized department stores from mid-September to 24 December.

First of all, I am based in Greenland, but I do bring a stock of goods, mainly toys, to the UK and I distribute them. Am I making supplies in the UK?

If I do this for philanthropic reasons, am I a charity, and if so, does that mean I do not pay VAT?

The toys are of course mainly for children and I wonder if zero rating might apply? I have heard that small T shirts are zero rated so what about a train set – it is small and intended for children. Does it matter if adults play with it? My friend Rudolph has told me that there is a peculiar rule about gifts. He says that if I give them away regularly and they cost more than £150 I might have to account for VAT. Is that right?

My next question concerns barter transactions. Dads often leave me a food item such as a mince pie and a drink and there is an unwritten rule that I should then leave something in return. If I’m given Tesco’s own brand sherry, I will leave polyester underpants but if I’m left a glass of Glenfiddich I will be more generous and leave best woollen socks. Have I made a supply and what is the value please? My feeling is that the food items are not solicited so VAT might not be due and, in any event; isn’t food zero-rated, or is it catering? Oh, and what if the food is hot?

Transport is a big worry for me. Lots of children ask me for a ride on my airborne transport. I suppose I could manage to fit twelve passengers in. Does that mean my services are zero-rated? If I do this free of charge will I need to charge air passenger duty? Does it matter if I stay within the UK, or the EU? My transport is the equivalent of six horsepower and if I refuel with fodder in the UK will I be liable for fuel scale charges? After dropping the passengers off I suppose I will be accused of using fuel for the private journey back home. Somebody has told me that if I buy hay labelled as animal food I can avoid VAT but if I buy the much cheaper bedding hay I will need to pay VAT. Please comment.

May I also ask about VAT registration? I know the limit is £85,000 per annum but do blips count? If I do make supplies at all, I do nothing for 364 days and then, in one day (well night really) I blast through the limit and then drop back to nil turnover. May I be excused from registration? If I do need to register should I use AnNOEL Accounting? At least I can get only one penalty per annum if I get the sums wrong.

I would like to make a claim for input tax on clothing. I feel that my red clothing not only protects me from the extreme cold, but it is akin to a uniform and should be allowable. These are not clothes that I would choose to wear except for my fairly unusual job. If lady barristers can claim for black skirts, I think I should be able to claim for red dress. And what about my annual haircut? That costs a fortune. I only let my hair grow that long because it is expected of me.

Insurance worries me too. You know that I carry some very expensive goods on my transport. Play Stations, Mountain Bikes, i-pads and Accrington Stanley replica shirts for example. My parent company in Greenland takes out insurance there and they make a charge to me. If I am required to register for VAT in England will I need to apply the Reverse Charge? This seems to be a daft idea if I understand it correctly. Does it mean I have to charge myself VAT on something that is not VATable and then claim it back again?

And what about Brexit? I know the UK has already left the EU, but des this affect me? What about distance selling? How do I account for supplies to and from the EU? Do I have to queue at Dover?

Next, you’ll be telling me that Father Christmas isn’t real……….

HAPPY CHRISTMAS EVERYBODY!

VAT Rates in all EU Member States

By Marcus Ward 27 November 2020

The European Commission has published the various VAT rates applied to different types of supply in all Member States (and the UK!) here.

This is a helpful and detailed document that also shows historic VAT rates.

VAT: Changes to services post Brexit

By Marcus Ward 18 November 2020

As we know, the UK will leave the EU on 1 January 2021. A lot of articles have, understandably, focussed on the movement of goods between the UK and the EU, however, there will be significant changes for suppliers and consumers of services. Some of these will be beneficial, and some, charitably, will be a royal pain.

In this article I have tried to summarise the most important changes. Compared to supplies of goods, the changes to services are more certain, so businesses can make preparations with more confidence.

The changes to services

Currently, B2B supplies of services to EU recipients are generally UK VAT free (the customer accounts for VAT via a reverse charge). However, currently, for most B2C supplies UK VAT is chargeable. From next year, there is no need to distinguish between B2B and B2C supplies of services to EU recipients – all will be UK VAT free. Also, there will no longer be the need to differentiate EU and outside the EU customers. A UK business making such supplies will no longer be required to obtain its customer’s VAT number and quote this on the relevant invoice. All that is required is that there is evidence that the recipient belongs outside the UK. I understand that HMRC has announced that VATA 1994, Sch4A para 16 will be amended to bring the EU in line with the rest of the world (well, in VAT terms!)

There will be no significant change to, inter alia; land, admission to events, digital and telecoms services which have special rules and fall outside the general VAT rule. Digital services (MOSS) changes slightly and are considered here.

NB: UK businesses will still be required to apply the reverse charge to services received from the EU as these will be VAT free when purchased.

Reclaiming VAT incurred in the EU. Currently, a singe claim is submitted to HMRC for all VAT incurred in other Member States. This way of claiming will change post Brexit. A business will be required to submit a claim to each individual EU country in which it has suffered VAT. Broadly, this will be what is known as an EU Thirteenth Directive claim. These need to be done in the language of the relevant country and on specific forms. There will, inevitably be different rules for; deadlines, amounts claimable, methods of claim, information required and procedures. Experience insists that there will be a lot more red tape, rejections and hassle. Good luck!

For various reasons, it is likely that more UK businesses will be required to VAT register in the EU. This may be via legal requirements, or commercial planning. As an example, a UK business supplying, say, telecoms services, may be required to register in a country where the supply is consumed (the so-called use and enjoyment rules). Each country has its own rules and some may apply the reverse charge procedure, but businesses supplying:
- telecommunications services
- broadcasting services
- electronically supplied services (for business customers)
- hired goods
- hired means of transport
- insurance repair services

will need to check the requirements of each Member State to which it makes supplies. Also, businesses in the EU making such supplies in the UK are likely to be required to register here.

UK businesses suppling financial services (FS) to customers in the EU will benefit from the post Brexit changes. Currently FS providers to recipients outside the EU are able to recover attributable input tax. Similar services received in the UK and the rest of the EU are deemed to be exempt and there is no input tax recovery (for partial exemption see here), From 1 January 2021 as the UK will be a third country (third country refers to any country outside the EU, and in this case outside its economic structures – the single market and the customs union) so any FS supplied to EU recipients will qualify as “specified supplies” such that attributable input tax will be reclaimable. The legislation here: Value Added Tax (Input Tax) (Specified Supplies) (EU Exit) (No. 2) Regulations 2019. So, some rare good news. Full details of FS input recovery here and HMRC guidance here.

It is likely that a UK business which is required or chooses to VAT register in an EU Member State will need to appoint either a formal agent or a fiscal representative. This requirement varies between EU countries, so a business will need to check the rules in each country. This will add complexity and costs. A fiscal representative is jointly liable for any VAT debts and penalties, so most entities acting as representatives will require a bank guarantee or similar to cover its exposure.

EU businesses supplying certain services in the UK. There may be an increased requirement for overseas businesses to VAT register in the UK, regardless of whether they have a place of belonging here. Any EU businesses in this position requiring advice please contact me.

TOMS. The Tour Operators’ Margin Scheme (details here) is an EU-wide arrangement which, broadly, simplifies VAT for tour operators. This is an area which remains uncertain. It is possible that the UK will negotiate a Brexit which does not disturb TOMS (increasingly unlikely I would say). But in a no-deal Brexit the government has announced that UK tour operators can continue to apply TOMS to UK holidays. However, supplies of holidays outside the UK will not be subject to VAT. This will put UK tour operators at an apparent advantage compared to EU competitors. However, it is likely that they will soon be required to VAT register in every EU country in which it sells holidays. Watch this space.

Commentary

A mixed bag of changes to businesses supplying services. It is crucial for all suppliers of services to the EU to review their position and put plans in action sooner rather than later. If you, or your clients, are unsure about these changes, or would like specific advice, please contact me. I can also offer a review of a business to advise on what planning is required, or beneficial. It is important to get this right as there could be significant penalties, back tax and other unwanted outcomes.

A VAT Did you know?

By Marcus Ward 27 August 2020

If your shop is burgled, it’s best to let the robbers take your stock. Goods lost to theft are not subject to VAT, but if cash (which customers have paid for goods) is taken from the till a VATable supply has still been made and output tax is due on it.

VAT: New government guide to imports and exports from/to the EU post Brexit

By Marcus Ward 20 July 2020

On 13 July 2020 the Government published new guidance which sets out procedures for businesses moving goods between GB and the EU from 1 January 2021. These do not cover the movement of goods between GB and Northern Ireland which are covered by different rules.

On 1 January 2021 the transition period with the EU will end, and the UK will become a “third country” and as such, it will be required to operate a full, external border, in a manner similar to the UK’s current position with the Rest of World (ROW). This means that controls will be placed on the movement of goods between GB and the EU for the first time in decades.

The principles of the so-called “Core Model” will apply to all goods movements between GB and the EU, regardless of the mode of transport of the movement.

HMRC has stated that, to afford industry extra time to make necessary arrangements, it has taken the decision to introduce the new border controls in three stages up until 1 July 2021.

The guidance covers the core process of;

customs declarations
customs duty
import VAT
safety and security declarations (imports and exports)

It sets out actions that businesses should take now (especially in light of the coronavirus position), as they will be required regardless of the outcome of continuing negotiations (which, let’s face it, are likely to amount to nothing).

Some other changes will affect only specific goods movements, eg; foodstuffs which will include the need for special certifications, entering the country via specific locations, and undergoing
additional checks at the border.

If not already in place, businesses need to:

apply for a GB eori number
apply for a duty deferment Account
prepare to pay or account for VAT on imported goods
ensure drivers have correct International Driving Permits
consider commercial arrangements
consider incoterms
obtain the Commodity Code of goods
establish the customs value of goods
consider how customs declarations to HMRC systems will be made and the use of an Customs intermediary

The EC has published a new version of the Guidance on Customs on 14 July 2020.

This a comprehensive guide is absolutely essential reading for any business which imports or exports goods cross border (transactions known as acquisitions and dispatches from/to the EU pre-Brexit). The publication demonstrates that there will be considerably more red tape and delays which will not reduce in the future. The marketability of GB goods in the EU is unlikely to increase and, if there is no alternative to importing goods from the EU, the cost and time taken to purchase will grow.

Good luck everybody!

#VAT #Value-Added-Tax #marcus-ward #Marcus-ward-vat #VAT-business #VAT-place-of-supply #VAT-POS #business #VAT-supply #penalty #VAT-penalty #VAT-penalties #VATable #HMRC #EC #EU #European-Union #VAT-Law #VAT-legislation #tax #GST #SME #start-up #new-business #newbiz #VAT-registration #tax-law #VAT-invoice #VAT-return #VAT-declaration #VAT-return #VAT-reporting #VAT-rules #EC-sales-list #VAT-cross-border #VAT-services #VAT-goods #VAT-international #International-tax #export #import #customs-duty #excise-duty #VAT-guide #indirect-tax #VAT-planning #tax-planning #VAT-compliance #tax-legislation #VAT-agent #VAT-principal #VAT-agent-principal #VAT-input-tax #VAT-output-tax #VAT-underdeclaration #VAT-overclaim #VAT-online #VAT-digital #VAT-distance-selling #VAT-HMRC #Brexit #covid19 #coronavirus

The penalty regime……the dark side of VAT

By Marcus Ward 22 May 2020

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.

Budget announced

By Marcus Ward 16 January 2020

The Chancellor of the Exchequer- Sajid Javid has confirmed that the next Budget will be held on Wednesday 11 March 2020.

He said that the budget:

will set out ambitious plans to unleash Britain’s potential, level up across the UK and usher in a decade of renewal
will start a new chapter for the economy, seizing the opportunities that come from getting Brexit done

As many will know, I am not a supporter of Brexit so it will be “interesting” to see what these opportunities are.

The launch of the Budget process means that individuals, interest groups and representative bodies can now submit a Budget representation to HM Treasury to comment on government policy and/or suggest new policy for inclusion in the Budget.

For completeness, the Scottish Budget date has also been announced: 6 February 2020.