Category Archives: VAT Basics

VAT: Change of registration details – update

By Marcus Ward 3 November 2022

If any of the following details of a business’ registration changes, HMRC must be notified on form VAT484:

name, or trading name
address of the business
accountant or agent who deals with a business’ VAT
members of a partnership, or the name or home address of any of the partners (a form VAT 2 is also required)

The relevant guidance has been updated to reflect the new requirement that such changes must be notified within 30 days of the change taking place. Failure to do so will result in penalties.

Other changes

Change of bank details

HMRC must be notified at least 14 days in advance if a business changes its bank details.

Taking over someone else’s VAT responsibilities

A person must tell HMRC within 21 days if they take over the VAT responsibilities of someone who has died or is ill and unable to manage their own affairs. Use form VAT484 and post it to the address on the form.

VAT group changes

If you join or leave a VAT group, you must first cancel your VAT registration. You will need to use the group’s VAT number once you’ve joined it. The VAT group should tell HMRC about the new member.

Change of business structure

You need to tell HMRC if the structure of the business changes, eg; incorporation or a Transfer Of a Going Concern.

VAT: What is unjust enrichment?

By Marcus Ward 2 November 2022

If a business has overdeclared output tax on past returns then it seems reasonable that this should be corrected, either by adjusting a current return or submitting a form VAT652 if the “error” is over £10,000 net.

If it is a genuine adjustment, surely HMRC must recognise the correction and either make a repayment or offset the overdeclaration against a current amount of VAT due.

The answer is yes, but… “unjust enrichment”…

Unjust enrichment

HMRC has a defence of unjust enrichment via The VAT Act 1994, sect 80(3)

“It shall be a defence, in relation to a claim under this section by virtue of subsection (1) or (1A) above, that the crediting of an amount would unjustly enrich the claimant.”

This means that HMRC can refuse to repay a claim if they can show that it would unjustly enrich the taxpayer.

It should always be borne in mind that if a claimant absorbed the burden of the wrongly charged VAT himself then unjust enrichment cannot be used as a defence against refusal to repay the claim. Loss or damage to a business due to overpaid VAT is considered in detail here.

Meaning

A refusal to repay a VAT claim using the unjust enrichment contention is to prevent a business becoming enriched at the expense of other entities who actually bore the cost of the incorrectly charged VAT. The authorities consider that a taxpayer should not be put into a better position by recovering the VAT than if VAT had not been charged at all. HMRC regard it as appropriate for unjust enrichment to be considered every time a claim is made.

The recipients of the corrected supply may be final consumers but can also be businesses, charities, etc, who were unable to deduct the overcharged VAT as input tax.

The salient point being whether the VAT was added to the price charged by the claimant or whether the claimant would have charged less had he known that his supplies were not liable to VAT.

HMRC consider that the process of establishing whether a claimant will be unjustly enriched by payment of his claim is two-stage procedure.

First stage

Whether the burden of the overdeclared VAT being claimed was passed on to the claimant’s customers, that is, whether the claimant charged the market rate* plus VAT. This is done on the basis of an economic analysis of the market in which the claimant is operating see; Berkshire Golf Club [2015] UKFTT 627 (TC).

If the customer deducted the wrongly invoiced output tax as input tax, HMRC is entitled to assume that the supplier passed the economic burden of the tax charge on to its customers. In this case, the VAT wrongly accounted for is a cost neither to the supplier nor to the customer.

Second stage

This stage occurs if the claimant accepts that he passed the burden of the tax charge on to his customers but argues that doing that caused loss or damage to his business, for example, by loss of customers or of profits, ie; has the taxpayer been economically damaged by having to bear the VAT cost?

The burden of proof of establishing that there is unjust enrichment falls upon HMRC. The standard of proof is the civil standard of proof; on a balance of probabilities.

HMRC will require the claimant to provide all of the relevant information on; pricing, policy and any other relevant documentation that establishes the pricing strategy**. It is to the taxpayer’s advantage to demonstrate that their margins have been depressed, as they have been required to charge VAT incorrectly.

Factors that HMRC consider:

who are the claimant’s competitors?
what is its market? (comparisons made with other competitors’ products)
how does the business set its prices?
what are the business’ overheads?
any other factors that may affect the prices

The reimbursement scheme

This is an undertaking to comply with certain reimbursement arrangements. The full text of the required undertaking is set out here.

This scheme applies where a business accepts, or HMRC prove, that by receiving a refund of sums incorrectly accounted for as output tax the business would be unjustly enriched at its customers’ expense and it wishes to refund the money they overpaid. If a customer was able to deduct all of the mistaken VAT charge as input tax HMRC will not regard them as having borne the burden of the charge.

In such cases HMRC will only make a refund of overpaid VAT if the taxpayer agrees to reimburse those customers in accordance with the terms of the scheme. More details Notice 700/45.

If HMRC repay a claim and the claimant is unable or unwilling to reimburse its customers (who bore the cost) with any amounts paid to him by HMRC then unjust enrichment will always apply. See The Deluxe High Court case.

Prices after a claim

It is worth bearing in mind that where a claimant has kept prices the same after he has found out that no VAT was due on the supplies in question, courts are likely to assume that that is because the business was charging the market rate. That assumption is made on the basis that, if the market rate were less, he would be compelled to reduce his prices. HMRC often check any post-claim price changes (or lack thereof).

Case law (summary)

The salient points from European Court of Justice case law may be summarised as:

a person who has wrongly accounted for VAT is entitled to recover it
HMRC is entitled to refuse to repay where it can show that the claimant did not bear the economic burden of the wrongly paid tax but passed it on to its customers
the invocation of the unjust enrichment defence is the restriction of a personal right derived from EU law, and so it is something that should be done only exceptionally
the unjust enrichment defence cannot be invoked simply on the grounds that the VAT was shown separately on an invoice
before HMRC can invoke the unjust enrichment defence it must carry out an economic analysis of the market in which the claimant is operating
the case law of both the European and the UK courts assumes that, in a free market economy, a trader required to account for a transaction-based tax will charge the market rate, not market rate plus tax

* The case law of the European Court of Justice and of the courts in the UK begin with the assumption that in a free market economy (and probably even in a managed economy) a business will charge the market rate and account for any VAT out of his profit margin.

** A pricing strategy is a business’s approach to determining the price at which it offers goods or services to the market. Pricing policies ensure businesses remain profitable and they give them the flexibility to price separate products differently.

Pricing policies refer to the processes and methodologies a businesses uses to set prices for their supplies. There are various pricing strategies that may be used, but some of the more common ones include:

value-based pricing
competitive pricing
price skimming
cost-plus pricing
penetration pricing
economy pricing
dynamic pricing

Further reading

A VAT Did you know?

By Marcus Ward 26 October 2022

In the Spearmint Rhino case it was ruled that there is no VAT on lap dances, however in Wilton Park Ltdthe decision was that VAT was due.

VAT: Face masks deemed to be clothing

By Marcus Ward 24 October 2022

Via Revenue & Customs Brief 11 (2022) HMRC now accepts that face masks should properly be considered to be items of clothing.

This means that face masks designed and marketed as suitable for young children (under the age of 14) qualify for zero rating.(VAT Act 1994 Schedule 8 Group 16).

VAT Notice 714 – Young children’s clothing and footwear has been updated.

Businesses which have been treating these sales as standard rated will be due a refund, subject to the unjust enrichment rules.

VAT: Partial exemption de minimis relief

By Marcus Ward 17 October 2022

VAT Basics

The VAT a business incurs on running costs is called input tax. For most businesses this is reclaimed on VAT returns from HMRC if it relates to standard rated, reduced rated, zero rated or certain outside the scope sales that a business makes.

However, a business which makes exempt sales may not be in a position to recover all of the input tax which it incurred. This is because input tax which relates to exempt supplies is generally irrecoverable.

This may affect any business which is involved in:

Property letting and sales – generally all types of supply of land
Financial services
Insurance
Betting, gaming and lotteries
Education
Health and welfare
Sport, sports competitions and physical education
Cultural services

(This list is not exhaustive)

A business in this position is called partly exempt. (If a business is fully exempt, it can neither VAT register nor recover any VAT at all). Input tax which directly relates to exempt supplies is irrecoverable. In addition, an element of that business’ general overheads, eg; light, heat, telephone, computers, professional fees, etc are deemed to be, in part, attributable to exempt supplies and a calculation must be performed to establish the element which falls to be irrecoverable. Such apportionment is called a partial exemption standard method. There are a number of alternative methods that may be used (so called “special methods”) but these must be agreed with HMRC.

De Minimis

There is, however, a relief available for a business in the form of de minimis limits. Broadly, if the total of the irrecoverable directly attributable (to exempt suppliers) and the element of overhead input tax which has been established using a partial exemption method falls below de minimis, all of that input tax may be recovered in the normal way.

The de minimis limit is currently £7,500 per annum of input tax. As a result, after carrying out the partial exemption method should the result fall below £7,500 and half of the total input tax for a year it is recoverable in full. This calculation is required on a quarterly basis (for businesses which render returns on a quarterly basis) with a review of the year, called an annual adjustment carried out at the end of a business’ partial exemption year. The quarterly

VAT: MTD reminder

By Marcus Ward 4 October 2022

HMRC have announced that the existing Making Tax Digital (MTD) online portal closes on 31 October 2022.

What businesses need to do now (or they could face a penalty)

If businesses haven not signed up to MTD and started using compatible software already, they must follow these steps now:

Step 1

Choose suitable MTD-compatible software they can find a list of software on GOV.‌‌‌UK.

Step 2

Check the permissions in their software – once they have allowed it to work with MTD, they can file their VAT returns easily. Go to GOV.‌‌‌UK and search ‘manage permissions for tax software’ for information on how businesses should do this.

Step 3

Keep digital records for their current and future VAT returns – a business can find out what records they need to keep on GOV.‌‌‌UK.

Step 4

Sign up for MTD and file their future VAT returns using MTD-compatible software – to find out how to do this, go to GOV.‌‌‌UK and search ‘record VAT’.

Businesses who file quarterly or monthly VAT returns must complete these steps in order to file their returns due after 1‌‌‌ ‌‌November.

Exemption from MTD for VAT

There are exemptions from MTD and they my be applied for here.

VAT: Fuel and Power Notice updated

By Marcus Ward 4 October 2022

HMRC Guidance: Fuel and power (VAT Notice 701/19)

This Notice has recently been updated. It now covers the VAT Reverse Charge measures for wholesale gas and electricity and construction services (Section 2) . There is more information about wholesale gas and electricity and using the VAT domestic Reverse Charge at section 3 of Notice 735: Domestic reverse charge procedure (VAT Notice 735).

Sections 4.1 and 4.3 now include more detail about hydrogen gas.

Brief overview

The reduced rate of VAT of 5% applies to supplies of fuel and power for qualifying use.

Qualifying use means:

fuel and power for domestic use
fuel and power for charity non-business use
fuel and power where the amount supplied does not exceed the small quantities, called the de minimis limits
fuel and power partly for qualifying use and partly for other purposes, where 60% or more of the supply is for qualifying use

Other supplies of fuel and power in the UK are standard rated.

A VAT Did you know?

By Marcus Ward 29 September 2022

Ferret food has recently been ruled to be subject to 20% tax when previously it was VAT free (from 1973).

Recovering VAT on Staff Expenses

By Marcus Ward 21 September 2022

VAT on Staff Expenses – what is claimable?

Although the VAT rules normally prevent a business reclaiming input tax on supplies that are not made directly to it, there are certain circumstances when the rules are relaxed. Although rather a dry and basic area, experience insists that it creates many issues at inspections and is “low hanging fruit” for which HMRC may levy penalties. Some business decide not to recover VAT on such costs to avoid problems, but certain claims are permissible and may be worth significant sums if they have a number of employees.

Subsistence Expenses

For instance, the VAT element of subsistence expenses paid to your employees may be treated as input tax. In order to qualify for this concession, employees must be reimbursed for their actual expenditure and not merely receive round sum allowances. These costs include hotels and meals.

VAT invoices (which may be made out to the employee) must also be obtained. The rule of thumb is that the employee must be more than five miles away from their place of employment and spend over five hours there (the so-called 5 mile/5 hour rule). A business cannot reclaim input tax if it pays an employees a flat rate for expenses.

Reimbursement for Road Fuel

The VAT legislation permits a business to treat as its own supply road fuel which is purchased by a non-taxable person whom it then pay for the actual cost of the fuel (usually through an expenses claim). This would therefore allow a business to recover input tax when it reimburses its employees for the cost of road fuel used in carrying out their employment duties.

A business is able to reclaim all the input tax on fuel if a vehicle is used only for business. There are three ways of claiming VAT if a business uses a vehicle for both business and private purposes.

reclaim all the VAT and pay the fuel scale charge – HMRC details here
only reclaim the VAT on fuel you use for business trips – this requires the retention of detailed mileage records
choose not to reclaim any VAT eg; if your business mileage is so low that the fuel scale charge would be higher than the VAT you can reclaim

If a business chooses not to reclaim VAT on fuel for one vehicle it cannot reclaim VAT on any fuel for vehicles used in the business.

Mileage Allowances

The legislation also enables you to reclaim the VAT element (or a reasonable approximation) of mileage allowances paid to employees.

Business entertainment

For details of this complex area please see here

Goods

Certain goods which are to be used in a business, eg; office supplies, the business may reclaim the input tax on purchases made by employees or directors. In all cases you’ll need a VAT invoice. Details required on a VAT invoice here

Mobile telephones

An element of mobile phone costs may be recovered. The VAT on the business use of the phone may be recovered, eg; if half of the mobile phone calls are private 50% of the VAT on the purchase price and the service plan can be recovered.

Work from home

If a person works from home an element of the costs may be recovered. As an example: if an office takes up 20% of the floor space in a house. A business may reclaim 20% of the VAT on utility bills.

Apportionment

A business must keep all records to support a claim and show how it arrived at the business proportion of a purchase of goods or services and it must also have valid VAT invoices.

VAT: Input tax attribution to business and non-business activities

By Marcus Ward 15 September 2022

HMRC has issued new guidance on the amount of input tax claimable when an element is attributable to non-business (NB) activities.

If an entity is involved in both business and NB activities, eg; a charity which provides free advice and also has a shop which sells donated goods, it is unable to recover all of the VAT it incurs. VAT attributable to NB activities is not input tax and cannot be reclaimed. Therefore it is necessary to calculate the quantum of VAT attributable to business and NB activities. That VAT which cannot be attributed is called overhead VAT and must be apportioned between business and NB activities. There are many varied ways of doing this as the VAT legislation does not specify any particular method. Therefore it is important to consider all of the available alternatives. Examples of these are; income, expenditure, time, floorspace, transaction count etc (similar to those methods available for partial exemption calculations).

The new guidance is mainly as a result of the Sveda ECJ case.

The definition of business and NB here.

Legislation: The VAT Act 1994 Section 24(5).

Further reading

The following articles consider case law and other relevant business/NB issues:

Lajvér Meliorációs Nonprofit Kft. and Lajvér Csapadékvízrendezési Nonprofit Kft

Healthwatch Hampshire CIC