Protein drinks are standard rated (they are not “food”) although they “deliver nutrition” to consumers and are derived from milk, which is itself zero rated.
Category Archives: VAT Basics
VAT: Late payment and repayment interest rates
The current late payment and repayment interest rates applied to the main taxes and duties that HMRC currently charges and pays interest on are:
- Late payment interest rate — 3.0% from 21 February 2022
- Repayment interest rate — 0.5% from 29 September 2009
Interest rates for all other taxes here.
Details of default surcharge here.
VAT: Fulfilment House Due Diligence Scheme registered businesses list
HMRC has issued updated guidance for businesses which need to check whether an entity which stores goods in the UK on its behalf is registered with the Fulfilment House Due Diligence Scheme (FHDDS).
The published list is alphabetical order by company name.
The list should be used if you are a business that is not established in the EU to see if the business that stores your goods in the UK is registered with the FHDDS.
If your business is outsourcing or considering outsourcing its fulfilment operations, then the fulfilment house you are using or intending to use of must be legally accredited by HMRC to do so.
Businesses that must be registered
Businesses are required to be registered if it stores any goods where all of the following apply:
- the goods were imported from a country outside the EU
- the goods are owned by, or stored on behalf of, someone established outside the EU
- the goods are being offered for sale and have not been sold in the UK before
It is illegal to operate outside of the scheme and any fulfilment company found doing so will be prevented operating a fulfilment business and may be subject to a £10,000 penalty and a criminal conviction.
VAT: Bad Debt Relief. The Regency Factors case
Latest from the courts
In the Regency Factors plc Court Of Appeal (CoA) case the issue was the validity of the appellant’s claim for Bad Debt Relief (BDR) on amounts it had not received after the issue of an invoice.
Technical
BDR is a mechanism which goes some way to protect a business from payment defaulters. Under the normal rules of VAT, a supplier is required to account for output tax, even if the supply has not been paid for (however, the use of cash accounting or certain retail schemes removes the problem of VAT on bad debts from the supplier). The specific relief for unpaid VAT is via the BDR scheme.
A guide to BDR here.
Commentary on the Upper Tribunal (UT) hearing in this case here.
Background
In the CoA case the issue was whether the appellant met the conditions in The VAT General Regulations 1995, Reg 168 for claiming BDR via The VAT Act 1994, section 36.
Regency provided a factoring service to its clients for which it is paid a fee. VAT invoices for those fees were issued to clients when the invoices which are being factored are assigned to Regency for collection.
Regency appealed against a decision of the Upper Tribunal (UT) which dismissed Regency’s appeal against VAT assessments made by HMRC to withdraw BDR which Regency had claimed in its VAT returns.
The UT held that the BDR claim was not valid because
- there was no bad debt; and
- Regency had failed to comply with the procedural requirements for the making of a claim.
Regency appealed against the decision of the UT on the second point.
Decision
The CoA decided that as Regency’s record keeping was insufficient to support a BDR claim. Specifically, although it did keep the records required by Regulation 168 (2), it did not keep a single VAT BDR account which is required by Regulation 168 (3). The ruling commented that this requirement was a legitimate feature of the scheme as it enables an inspector to check the claim easily. It is not acceptable for a claimant to simply have a pile of unsorted documents which may, or may not, evidence a valid claim.
The court also said that it was possible for HMRC to allow a discretionary claim (clearly, they did not use that discretion in this case) and that the legal requirement was not a barrier to Regency making a proper BDR claim. The appeal was dismissed.
“In short, Regency had the opportunity to prove its claim for bad debt relief in the FTT… but it failed to do so. It is not entitled to a second opportunity”.
Commentary
As always with VAT, accurate record-keeping is essential. As the tax is transaction based, it is vital to keep comprehensive evidence of those transactions and associated payments. Failure to do so may result in:
- assessments and penalties
- give HMRC the opportunity to refuse otherwise legitimate input tax recovery
- refuse other VAT claims (in this case BDR).
- confusion and uncertainty which often creates costs in time and other resources, and extended relations with HMRC, which is in no business’ interest.
If Regency had taken “one step further” with its record keeping, BDR would have been paid by HMRC.
A VAT Did you know?
Rabbits are zero-rated, even if sold as pets. Sales of pets are standard rated.
Is room hire subject to VAT? – The Errol Willy Salons case
Latest from the courts
In the First Tier Tribunal (FTT) case of Errol Willy Salons Ltd (2022) TC 08370 the issue was whether the rent of two rooms were an exempt right over land, or the standard rated supply of facilities.
Background
Room hire is usually exempt from VAT unless it is subject to an option to tax. However, it can be subsumed into a different rated another supply if something more than a “bare” room is provided. In such cases, it would follow the VAT treatment of the composite supply.
The Issue
In the Errol Willy Salons case, HMRC formed the view that what was being supplied was facilities (the room occupation being a minor part of the supply) and therefore subject to VAT. In its opinion the economic and social reality was that the beauticians were provided with a licence to trade from the premises. The appellant occupied the ground floor – operating a hairdressing business. The rooms over the saloon were rented to third party beauticians. The occupants furnished the rooms themselves, provided their own equipment, set their own pricing and opening hours. They did have use of certain services and facilities; a receptionist and toilets, but it was understood that the services were rarely used. Unsurprisingly, the appellant disagreed and contended that the other services were incidental or subsidiary to the exempt supply of the room rental.
The decision
The Tribunal allowed the appeal against the assessment. It found that “non-rent” services provided to the beauticians were limited in nature and not essential to the beauticians’ businesses Consequently, the arrangements amounted to a supply of property (a licence to occupy the rooms) rather than a supply of taxable facilities and was therefore exempt.
Commentary
This is the latest in a long line of issues on composite/separate supplies and room hire/facilities disputes, especially in relation to weddings. It is important to establish precisely what is being provided to establish the correct VAT treatment and advice should be ought if there is any doubt about the VAT liability.
The CIOT has long advocated that it is not the case that every package of supplies involving room hire and other things must be a composite supply of something other than an exempt letting of land.
NB: This case is different to hairdresser chair rentals which remain standard rated.
VAT: New penalty regime delayed
The new system for the way penalties and interest is charged due to be introduced on 1 April this year has been deferred to 1 January 2023.
The new points-based regime has been delayed to allow HMRC to implement the necessary IT changes.
I wonder if that represents a reasonable excuse for HMRC being late…
Splitting a business to avoid VAT registration: Disaggregation
Earlier this month, I wrote an article on VAT registration. A query which commonly follows an initial registration query is: can I split my business into separate parts which are all under the VAT registration turnover limit to avoid registering? Prima facie, this seems a straightforward planning point. But is it possible?
You will not be surprised to learn that HMRC don’t like such schemes and there is legislation and case law for them to use to attack such planning known as “disaggregation”. This simply means artificially splitting a business.
What HMRC will consider to be artificial separation:
HMRC will be concerned with separations which are a contrived device set up to circumvent the normal VAT registration rules. Whether any particular separation will be considered artificial will, in most cases, depend upon the specific circumstances. Accordingly, it is not possible to provide an exhaustive list of all the types of separations that HMRC will view as artificial. However, the following are examples of when HMRC would at least make further enquiries:
Separate entities supply registered and unregistered customers
- In this type of separation, the registered entity supplies any registered customers and the unregistered part supplies unregistered customers.
Same equipment/premises used by different entities on a regular basis
- In this type of situation, a series of entities operates the same equipment and/or premises for a set period in any one-week or month. Generally, the premises and/or equipment is owned by one of the parties who charges rent to the others. This situation may occur in launderettes and take-aways such as fish and chip shops or mobile catering equipment.
Splitting up of what is usually a single supply
- This type of separation is common in the bed and breakfast trade where one entity supplies the bed and another the breakfast. Another is in the livery trade where one entity supplies the stabling and another, the hay to feed the animals. There are more complex examples, but the similar tests are applied to them too.
Artificially separated businesses which maintain the appearance of a single business
- A simple example of this type of separation is; pubs in which the bar and catering may be artificially separated. In most cases the customer will consider the food and the drinks as bought from the pub and not from two independent businesses. The relationship between the parties in such circumstances will be important here as truly franchised “shop within a shop” arrangements will not normally be considered artificial.
One person has a controlling influence in a number of entities which all make the same type of supply in diverse locations
- In this type of separation, a number of outlets which make the same type of supplies are run by separate companies which are under the control of the same person. Although this is not as frequently encountered as some of the other situations, the resulting tax loss may be significant.
The meaning of financial, economic, and organisational links
Again, each case will depend on its specific circumstances. The following examples illustrate the types of factors indicative of the necessary links, although there will be many others:
Financial links
- financial support given by one part to another part
- one part would not be financially viable without support from another part
- common financial interest in the proceeds of the business
Economic links
- seeking to realise the same economic objective
- the activities of one part benefit the other part
- supplying the same circle of customers
Organisational links
- common management
- common employees
- common premises
- common equipment
HMRC often attack structures which were not designed simply to avoid VAT registration, so care should be taken when any entity VAT registers, or a conscious decision is made not to VAT register. Registration is a good time to have a business’ activities and structure reviewed by an adviser.
As with most aspects of VAT, there are significant and draconian penalties for getting registration wrong, especially if HMRC consider that it has been done deliberately to avoid paying VAT.
VAT Inspections …and how to survive them
VAT Inspections
The first point to make is that inspections are usually quite standard and routine and generally there is nothing to worry about. They are hardly enjoyable occasions, but with planning they can be made to go as smoothly as possible. As an inspector in my previous life, I am in a good position to look at the process from “both sides”. If you are concerned that the inspection is not routine (for any reason) please contact us immediately.
Background
Typically, the initial meeting will begin with an interview with the business owner (and/or adviser) to go through the basic facts. The inspector will seek to understand the business and how it operates and will usually assess the answers with specific tests (further tests will be applied to the records). After the interview the inspector(s) will examine the records and will usually have further queries on these. More often than not they will carry out; bank reconciliations, cash reconciliations, mark-up exercises, and often “references” which are the testing of transactions using information obtained from suppliers and customers. There are many other exercises that may be carried out depending on the type of business. Larger businesses have more regular inspections where one part of the business is looked at each meeting. The largest businesses have more or less perpetual inspections (as one would expect). The length of the inspection usually depends on:
- Size of the business
- Complexity of the business
- Type of business (HMRC often target; cash businesses, the construction industry, property investment, partially exempt businesses, charities and NFP entities, cross-border transactions and financial services providers amongst others)
- Compliance history
- Associated/past businesses
- Intelligence received
- Errors found
- Credibility of the business owner and records
The above measurements will also dictate how often a business is inspected.
More details on certain inspections/investigations here
The initial inspection may be followed by subsequent meetings if required, although HMRC state that they aim is to conclude matters at the time of the first meeting.
The inspection – how to prepare
- Ensure that both the person who completes the VAT returns and the person who signs the VAT returns will be available for all of the day(s) selected
- Arrange with your adviser, to be available to you and the inspector on the days of the inspection
- Thoroughly review your VAT declarations and have ready, if relevant, any disclosures or other declarations you consider you need to make to HMRC at the start of the inspection (this should avoid penalties)
- Have available all VAT returns and working papers for the last four years or the period since you were registered for VAT including:
- Annual accounts
- The VAT account and all related working papers
- All books and accounts, cashbook, petty cashbook, sales and purchases day books
- Sales and purchase invoices
- All supporting documentation, eg; contracts, correspondence, etc.
- Bank statements
- VAT certificate and certificate of registration
- Any other documentation relating to “taxable supplies”
- Have available the full VAT correspondence files ensuring that they are fully up-to-date
- Ensure you have full information on any; one-off, unusual or particularly high value transactions
The inspection – during the visit
- Ask the inspector(s) to identify themselves by name on arrival (they carry identity cards)
- Be polite, friendly and hospitable as far as possible
- Make a desk or space available for them to work near to you – in this way you can oversee/overlook what they do
- Only allow access to the files that form part of your “VAT Records”
- Enable the VAT inspector, if they ask, to inspect your business premises (and have someone accompany them)
- Be cautious with your answers to seemingly “innocent” questions and comments. If in doubt ask for time to check, or that the question be put in writing (never guess or provide an answer which you think HMRC want)
- If something inconsistent is found (or suggested) ask for full details and take note of all of the documentation to which the query relates – this will enable you to provide necessary information to your adviser
The inspection – at the end of the visit
The inspector should:
- Explain the main work they have done. For example which VAT accounting periods they reviewed
- Explain any areas of concern they have, discuss them and seek to agree any future action that needs to be taken; and
- Illustrate as fully as possible the size and reason for any adjustment to the VAT payable, and describe how the adjustment will be made
You should:
- Obtain a summary of the inspection from HMRC (not always an easy task)
- Ask the inspector to put all of HMRC’s concerns about your business to you in writing
- Confirm with the inspector all time limits for providing additional information to HMRC
After the inspection
HMRC will write to you confirming:
- Any issues identified
- Further information required
- Improvements required to record keeping
- Any corrections required
- Whether VAT has been over or under paid
- Any penalties and interest which will be levied
- Deadlines for payment.
On a final point: Never simply assume that the inspector is correct in his/her decision. It always pays to seek advice and challenge the decision where possible. Even if it is clear that an error has been made, mitigation may be possible.
We can provide a pre-inspection review as well as attending inspections if required. It is quite often the case that many HMRC enquiries may be nipped in the bud at the time of the inspection rather than becoming long drawn out sagas. We can also act as negotiator with HMRC and handle disputes on your behalf.
VAT Registration
VAT Basics
A business must register for VAT with HMRC if its VAT taxable turnover is more than £90,000 in a 12 month period.
Taxable Turnover
Taxable turnover means the total value of everything that a business sells that is not exempt or outside the scope of VAT.
Registration is mandatory if turnover exceeds the current registration threshold in a rolling 12-month period. This is not a fixed period like the tax year or the calendar year – at the end of every month a business is required to calculate income (not profit) over the past year.
A business may also register voluntarily, which may be beneficial if it wants to reclaim input tax it has incurred.
Catches
There are some transactions that must be included in the turnover calculation which can easily be missed:
- goods a business hired or loaned to customers
- business goods used for personal reasons
- goods which were bartered, part-exchanged or given as gifts
- services a business receives from suppliers in other countries which are subject to a reverse charge
- building work over £100,000 a business did for itself
- zero-rated items (these are still taxable although no VAT is charged)
Timing
A business must register within 30 days of the end of the month when it exceeded the threshold. The effective date of registration (EDR) is the first day of the second month after a business goes over the threshold.
Future test
A business must mandatorily register for VAT if it expects its VAT taxable turnover to be more than £90,000 in the next 30-day period. This may be because of a new contract or a other known factors.
Registration exception
If a business has a one-off increase in income it can apply for a registration ‘exception’. If its taxable turnover goes over the threshold temporarily it can write to HMRC with evidence showing why the taxable turnover will not exceed the deregistration threshold (currently £88,000 in the next 12 months). HMRC will consider an exception and write confirming if a business will receive one. If not, HMRC will compulsory register the business for VAT.
Transfer of a going concern (TOGC)
If a VAT-registered ongoing business is purchased the buyer must register for VAT from the purchase date. It cannot wait until its turnover exceeds the threshold.
Businesses outside the UK
If a business belongs outside the UK, there is a zero threshold. It must register as soon as it supplies any goods and services to the UK (or if it expects to in the next 30 days).
Late registration
If a business registers late, it must pay the VAT due from when it should have registered (the EDR). Further, it will receive a penalty depending on how much it owes and how late the registration is. The rates based on the VAT due are:
- up to 9 months late – 5%
- between 9 and 18 months – 10%
- over 18 months = 15%.
How to register
A business can register online. By doing this it will register for VAT and create a VAT online account via which it will submit VAT returns.
Between application and receiving a VAT number
During the wait, a business cannot charge or show VAT on its invoices until it receives a VAT number. However, it will still be required to pay the VAT to HMRC for this period. Usually, a business will increase its prices to allow for this and tell its customers why. Once a VAT number is received, the business can then reissue the invoices showing the VAT.
Purchases made before registration
There are time limits for backdating claims for input tax incurred before registration. These are:
- four years for goods still on hand at the EDR
- six months for services
Once registered
A business’ VAT responsibilities. From the EDR a business must:
- charge the right amount of VAT
- pay any VAT due to HMRC
- submit VAT Returns
- keep appropriate VAT records and a VAT account
- follow the rules for ‘Making Tax Digital for VAT’
- keep business details up to date (there are penalties for failing to inform HMRC of changes)
VAT groups
VAT grouping is a facilitation measure by which two or more entities can be treated as a single taxable person (a single VAT registration). There are pros and cons of grouping set out here.