In or out?
If a biscuit is covered, even partially, in chocolate the VAT is 20%, but if the chocolate is inside, say a choc chip cookie or a bourbon, it is VAT free.
Category Archives: VAT Basics
VAT on private school fees – new webinar
HMRC have released a recorded webinar about VAT on private school fees — what you need to do, and when and how to register.
It covers:
- if you should register for VAT as an education provider
- when you should register for VAT
- how to register for VAT
- what you need to charge VAT on
- how and what to reclaim VAT on
VAT: New support for small businesses from HMRC
HMRC has launched new online guidance and interactive tools aimed at helping small business owners and those considering self-employment understand their tax responsibilities. It is aimed at supporting new and existing ‘sole traders’ and helping them to understand their responsibilities. The new interactive tool explains the records they need to keep, taxes that may apply to their business, and includes other useful information.
The resources include a step-by-step guide for registering as a sole trader and a newly developed VAT registration estimator tool to help businesses assess their VAT registration needs based on turnover.
The guidance and interactive tools are free and available directly from GOV.UK. They have been launched for information purposes only, and users will not be registered for any taxes as a result of using them. HMRC will not collect or store any information about the user.
VAT: Personal Liability Notices
A Personal Liability Notice (PLN) can be issued by HMRC to a company’s director(s) to transfer the liability to pay VAT or a VAT penalty from the company to an individual. A PLN can also be issued to a member of an LLP.
When a PLN is issued
An officer or officers of a company may be personally liable to pay all or part of the company penalty where:
- a company is liable to a penalty for a deliberate wrongdoing and
- the wrongdoing is attributable to the deliberate action of an officer or officers of the company
Additionally, one of the two circumstances below must also apply
- the officer gained or attempted to gain personally from the wrongdoing, or
- the company is insolvent or likely to become insolvent
Any grounds for suspicion that the company may become insolvent should to be supported by evidence, for example, where there are cash flow problems, insufficient assets to cover liabilities, or evidence of phoenixism.
An officer’s liability to pay a penalty also applies to inaccuracy penalties.
Liable persons
The company officers are known in HMRC guidance as “liable officers”. These include:
- elected officers
- managers
- directors
- company secretary
- any other person managing or purporting to manage any of the company’s affairs.
LLP officers are members.
A PLN’s power gives HMRC the right to recover all or part of the penalty from the liable officer rather than the company/LLP itself.
Where there is more than one deliberate wrongdoing, each deliberate wrongdoing must be considered separately for the purpose of establishing whether it should be attributed to an officer or officers.
Wrongdoings
There are four types of wrongdoings:
- the issue of an invoice showing VAT by an unauthorised person
- misuse of a product so that it attracts a higher rate of excise duty
- the handling of goods on which payment of excise duty is outstanding
- knowingly disposing of, or causing or permitting the disposal of, material at an unauthorised waste site
The wrongdoing must arise from the deliberate action of an officer of the company.
Personal gain
Once HMRC has attributed the deliberate wrongdoing to one or more company officers it must consider whether any of the officers, by fact or implication, have gained or attempted to gain personally from the wrongdoing. It is sufficient to show that each officer has gained or attempted to gain. It will not however always be possible to establish the full extent to which each officer has gained or attempted to gain, in which case HMRC would issue the PLN based on best judgment of the amount they attempted to gain personally, eg:
- the officer may accept that there was an actual or attempted personal gain from a deliberate wrongdoing that can be attributed to them, or
- it may be clear from business records or the officer’s lifestyle that they gained or attempted to gain personally from the results of the deliberate wrongdoing
Appeals
A liable officer can appeal against
- a decision to pursue them for all or part of the penalty assessed on the company, as set out in the PLN, including whether the penalty is attributable to them, and
- the amount of the penalty HMRC has allocated to them
- They cannot however appeal against a decision that they have gained or attempted to gain personally from the deliberate wrongdoing, or that the company is likely to go into liquidation
PLNs are subject to the same procedures as company penalties.
Legislation
Finance Act 2008, Schedule 41: Penalties: failure to notify and certain VAT and Excise wrongdoing.
A VAT did you know?
Children’s clothes are zero-rated. These include; hats, caps, braces, belts, garters and scarves, but not earmuffs – which are standard rated even if they are for children.
VAT late payment interest rates reduced
HMRC has announced that late payment interest rates to be reduced after the Bank of England lowered the base rate.
The Bank of England base rate will be reduced to 4.75% from 5.0%.
The changes will come into effect on:
- 18 November 2024 for quarterly instalment payments
- 26 November 2024 for non-quarterly instalments payment
The press release is available here.
VAT: New HMRC Tax Agents Handbook
On 1 November 2024 HMRC published a new handbook for agents acting on behalf of their clients in tax matters.
The handbook contains information to help tax agents and advisers; find guidance, use HMRC’s services and contact HMRC.
HMRC is trialling this manual as an alternative to the collection of linked guidance on the tax agents and advisers: detailed information page. It covers:
- About agents and HMRC – An overview
- Appeals and penalties – How appeals, tribunals and penalties work.
- Compliance checks – Information about processes, factsheets and guidelines for compliance.
- Contacting HMRC – How to check service levels, forums, contact HMRC and raise complaints or issues.
- Guidance help – Tips for navigating guidance and using search, email alerts, feedback and archives.
- News and support – How you can keep up-to-date with latest news and information from HMRC.
- Services and registering – Links to services, how to register and what to do if your agent business changes
Tax agents have the right to represent their clients in appeals and penalty proceedings, ensuring that their clients’ interests are effectively advocated.
VAT Schemes Guide – Alternative ways of accounting for tax
It is important to compare the use of each scheme to standard VAT accounting to establish whether a business will benefit. Some schemes are compulsory and there are particular pitfalls for businesses using certain schemes.
I thought that it would be useful to consider the schemes all in one place and look at their features and pros and cons.
These schemes reviewed here are:
- Cash Accounting Scheme
- Annual Accounting Scheme
- Flat Rate Scheme
- Margin schemes for second-hand goods
- Global Accounting
- VAT schemes for retailers
Cash Accounting Scheme
Normally, VAT returns are based on the tax point (usually the VAT invoice date) for sales and purchases. This may mean a business having to pay HMRC the VAT on sales which customers have not yet paid for.
The VAT cash accounting scheme (CAS) instead bases reporting on payment dates, both for purchases and sales. A business will need to ensure its records include payment dates.
A business is only eligible for CAS if its estimated taxable turnover is no more than £1.35m, and can then remain in the scheme as long as it remains below £1.6m.
Advantages
- usually beneficial for cash flow especially if its customers are slow to pay
- output tax is not payable at all if a business has a bad debt (other bad debt relief here)
Disadvantages
- it is generally not beneficial for a repayment business (one which reclaims more VAT than it pays, eg; an exporter or supplier of zero rated goods or services)
- it is not usually beneficial if a business purchases significant amounts of goods or services on credit
Annual Accounting Scheme
The Annual Accounting Scheme allows a business to pay VAT on account, in either nine monthly or three quarterly payments. These instalments are based on VAT paid in the previous year. It is then required to complete a single, annual VAT return which is used to calculate any balance owed by the business or due from HMRC.
A business is eligible for the scheme if its estimated taxable turnover is no more than £1.35m and is permitted to remain in the scheme as long as it remains below £1.6m.
Advantages
- reduces paperwork as only the need to complete one return instead of four (although it does not remove the requirement to keep all the normal VAT records and accounts)
- improves management of cash flow
Disadvantages
- not suitable for repayment businesses as they would only receive one repayment at the end of the year
- if turnover decreases, the interim payments may be higher than under standard accounting
Flat Rate Scheme
The Flat Rate Scheme (FRS) is designed to assist smaller businesses reduce the amount of time and complexity required for VAT accounting. The FRS removes the need to calculate the VAT on every transaction. Instead, a business pays a flat rate percentage of its VAT inclusive turnover. The percentage paid is less than the standard VAT rate because it recognises the fact that no input tax can be claimed on purchases. The flat rate percentage used is dependent on a business’ trade sector.
A business is eligible for this scheme if its estimated taxable turnover in the next year will not exceed £150,000. Once using the scheme, a business is permitted to continue using it until its income exceeds £230,000.
If eligible, a business may combine the FRS with the Annual Accounting Scheme, additionally, there is an option to effectively use a cash basis so there is no need to use CAS. Unfortunately, changes to the scheme rules regarding ” limited cost traders” mean that the scheme has become less attractive.
Advantages
- depending on trade sector and circumstances, may result in a real VAT saving
- simplified record keeping; no requirement to separate gross, VAT and net in accounts
- fewer rules; no issues with input tax a business can and cannot recover on purchases
- certainty of knowing how much of income is payable to HMRC
Disadvantages
- no reclaim of input tax incurred on purchases
- limited cost traders impact
- if a business buys a significant amount from VAT registered businesses, it is likely to result in more VAT due
- likely to be unattractive for businesses making zero-rated or exempt sales because output tax would also apply to this hitherto VAT free income
- low turnover limit
Margin Scheme for Second Hand Goods
A business normally accounts for output tax on the full value of its taxable supplies and reclaims input tax on its purchases. However, if a business deals in second-hand goods, works of art, antiques or collectibles it may use a Margin Scheme. This scheme enables a business to account for VAT only on the difference between the purchase and selling price of an item; the margin. It is not possible to reclaim input tax on the purchase of an item and there will be no output tax if no profit is achieved (however, if an item is sold for less than the purchase price, a business cannot offset losses against the profits of other items to reduce the overall VAT liability).
There is a special margin schemes for auctioneers and a variation of the Margin Scheme (Global Accounting) is considered below.
Advantages
- usually beneficial if buying from (non-VAT registered) members of the public
- purchaser will not see a VAT charge
- although no input tax claimable on purchases of scheme items, VAT may be claimed in the usual way on overheads and other fees etc
Disadvantages
- record keeping requirements are demanding and closely checked, eg; stock records and invoices which are required for both purchases and sales
- cannot be used for items purchased on a VAT invoice
- can be complex and create a cost if goods exported
- although no VAT due on sales if a loss is made, there is no set-off of the loss
Global Accounting
The problem with the Second Hand Goods Scheme is that full details of each individual item purchased and sold has to be recorded. Global Accounting is an optional, simplified variation of the Second Hand Margin Scheme. It differs from the standard Margin Scheme in that rather than accounting for the margin achieved on the sale of each individual item, output tax is calculated on the margin achieved between the total purchases and total sales in a particular accounting period.
Advantages
- simplified version of the Margin Scheme
- record keeping requirements reduced
- losses made on sales reduce VAT payable
- beneficial for businesses which buy and sell bulk volume, low value eligible goods
Disadvantages
- cannot be used for; aircraft, boats, caravans, horses or motor vehicles
- similar to Margin Scheme disadvantages apart from loss set off
VAT Schemes for Retailers
It is usually difficult for retailers to issue an invoice for each sale made, so various retail schemes have been designed to simplify VAT. The appropriate scheme for a business depends on whether its retail turnover (excluding VAT) is; below £1m, between £1m and £130m and higher.
Smaller businesses may be able to use a retail scheme with CAS and Annual Accounting but it cannot combine a Retail Scheme with the FRS. However, retailers may choose to use the FRS instead of a Retail Scheme.
Using standard VAT accounting, a VAT registered business must record the VAT on each sale. However, via a Retail Scheme, it calculates the value of its total VAT taxable sales for a period, eg; a day, and the proportions of that total that are taxable at different rates of VAT; standard, reduced and zero.
According to the scheme a business uses it then applies the appropriate VAT fraction to that sales figure to calculate the output tax due. A business may only use the Retail Scheme for retail sales and must use the standard accounting procedures for other supplies. A business must still issue a VAT invoice to any customer who requests one. It is a requirement of any scheme choice that HMRC must consider it fair and reasonable.
A business can join a retail scheme at the beginning of any VAT period and HMRC does not need to be notified.
Examples of Retail Schemes
- Apportionment
- Direct calculation
- The point of sale scheme
The required calculations vary for each scheme.
NB: There are special arrangements for caterers, retail pharmacists and florists.
Advantages
- no requirement to issue an invoice for each sale
- most schemes are relatively simple to administer once set up. Technology assists in a helpful way with EPOS systems
- simplifies record keeping
Disadvantages
- it is usual for each line sold to need to be coded correctly for VAT liability
- smaller businesses without state of the art technology may be at a disadvantage
- time and resources required to set up and maintain systems
- in some cases the calculation depends on staff “pressing the right button”
- often complex calculations and record keeping
- very precise and complicated rules
- lack of understanding by a number of inspectors
- complexity increases the risk of misdeclaration
Overall
As may be seen, there are a lot of choices for a business to consider, especially a start-up. Choosing a scheme which is inappropriate may result in VAT overpayment and a lot of unneeded record keeping and administration. There are real savings to be made by using a beneficial scheme, both in terms of VAT payable and staff time. There are also some schemes which are compulsory, like the Tour Operators’ Margin Scheme (TOMS).
We are happy to review a business’ circumstances and calculate what schemes would produce the best outcome.
Please contact us if you require further information.
VAT Groups – updated guidance on penalties
VAT penalties for late submissions
HMRC has updated its Internal Guidance VGROUPS01530 on penalties for late submissions,
Penalties for late submissions are calculated on the basis of points.
For VAT groups the representative member has a single liability for these points covering the whole group. If the representative member changes, the existing liability is transferred to the new representative member. A new member joining the group will not affect the points total of the group, even if the member joining had points before. If a business leaves the group and registers for VAT separately they will start with zero points, even if the group that they left had a penalty point balance.
For divisions, each one is liable for its own separate points and penalties. Each division will have its own maximum points total.
VAT: Deductions from, and sacrifice of; salary
This has been a difficult area historically, but as a result of the CJEU Astra Zeneca case, there is more certainty, although it was not beneficial for businesses. We look at the distinction between deductions from salary and salary sacrifice below, along with the VAT treatment of specific examples.
Current position
Generally, if deductions are made from salary for goods or services provided by an employer to their employees, these are liable to VAT. The remuneration an employee forgoes is consideration for the taxable benefits provided and output VAT will be due from, and input VAT recoverable, by the employer. Please see below for some specific circumstances.
Historical position
- Deduction from salary – where an amount is deducted from an employee’s pay in return for a supply of goods or services by the employer. Output tax is due on the amount deducted from the employee’s salary and is input tax recoverable.
- Salary sacrifice – for VAT purposes “salary sacrifice” describes an arrangement where an employee opts to receive optional benefits provided by the employer and forgoes part of their salary in return. Employees who choose to take a benefit have their employment contracts amended to reflect the new arrangements. No output tax was due as it was not deemed to be a taxable supply.
We have come across businesses who erroneously still apply the past rules – which changed on 1 January 2012.
Valuation
In most cases the value of the benefit for VAT purposes will be the same as the salary deducted or foregone. Where the true value is not reflected, for example where benefits are supplied below what it cost to acquire them, the value should be based on the cost to the employer.
Specific staff benefits
Cycle to work scheme
Under this scheme employers purchase bicycles and safety equipment and provide them to employees. Where this is under a salary sacrifice arrangement employers must account for output tax based on the value of the salary foregone by the employee in exchange for the hire or loan of a bicycle.
Childcare and childcare vouchers
Businesses that put arrangements in place whereby their employees forego part of their salary and allocate that salary to pay for childcare provided by a third party are not making a supply of childcare. Any related costs incurred by the business, such as payroll and administration, are general overheads of the business.
Face Value Vouchers
Where vouchers, such as those available from high street retailers, are provided under a salary sacrifice arrangement, input tax may be claimed and output tax is due on the consideration paid by the employee.
Food and catering provided by employers
Employers may provide their staff with free or subsidised meals, snacks, or drinks. Where employees pay for the meal the normal VAT treatment will apply. If employees make no payment, VAT is not due, provided the benefit is available to all staff. Where employees pay for meals under a salary sacrifice arrangement, employers must account for VAT on the value of the supplies unless they are zero-rated. An employer may claim the input tax incurred on related purchases, subject to the normal rules.
Cars
Most businesses are prevented from recovering VAT in full on the purchase and leasing of company cars. The input tax block on cars, generally: 100% on purchases, and 50% on leasing, means that employers do not account for output tax when cars are made available to employees. Where an employer suffers no input tax restriction, output tax is due.
More on motoring costs generally.
Benefits available to all employees for no charge
Where no charge is made no VAT is due. For example, the provision of a workplace gym available to all employees for no payment. Businesses can recover VAT incurred on providing such facilities as a business overhead.