Buying a coffin is standard-rated but hiring a hearse is VAT free.
Buying a coffin is standard-rated but hiring a hearse is VAT free.
HMRC has published UK VAT statistics for 2020 to 2021.
Headlines
The total VAT receipts in the tax year ending March 2021 decreased by 22% (£24.1 billion) from the previous year. There was a downward impact on receipts from the VAT deferral measure which took effect from 20 March 2020.
The Wholesale and Retail sector continued to be the largest contributor to net Home VAT liabilities.
Import VAT receipts was also lower: £4.2 billion (13%) for the year compared to the year ending March 2020. This was mainly due to postponed VAT accounting.
68% of total net home VAT declared was paid by traders with an annual turnover greater than £10 million.
VAT population – income
Incorporated companies accounted for the largest share of the VAT population and annual turnover. Companies accounted for 73% of taxpayers, and 92% of annual taxable turnover in the year ending March 2021. Sole proprietors were the second largest group in terms of VAT population; this group accounted for 16% of VAT traders.
Businesses with an annual turnover greater than £10 million declared £67 billion in net VAT, 68% of the total for the tax year. This group only accounted for 1% of businesses.
52% of businesses declared annual turnover below the VAT registration threshold of £85,000.
VAT population – trade sectors
The wholesale and retail sector was the largest in terms of contribution to VAT liabilities. Net VAT liabilities were £29 billion (30%) of the total for the tax year ending March 2021. The financial and insurance sector has replaced the arts, entertainment and recreation sector and accommodation and food services sector in the top ten trade sectors from the previous year.
The construction sector increased by £650 million (12%), the largest year-on-year change. The only other sectors to see increases were wholesale and retail sectors which increased by £30 million (2%) and professional, scientific, and technical activities which increased by £19 million (2%). Of the top VAT contributing sectors, the financial and insurance sector saw the largest decrease of £560 million (25%).
VAT registrations
New registrations increased from the tax year ending March 2013 to the tax year ending March 2017 where it decreased by 33,666 (8%). Since the tax year ending March 2018, there has been an upward trend in new registrations – 300,000 in the year to 2021.
Deregistrations were below 200,000 a year from the tax year ending March 2014 to the tax year ending March 2016, but increased above that level in the tax year ending March 2017, increasing further in the tax year ending March 2018. This increase in deregistrations was likely to be linked to policy changes in relation to the Flat Rate Scheme.
The freeze in the VAT registration and deregistration thresholds has increased the number of registrations and decreased the number of deregistrations progressively from the year ending March 2019.
Latest from the courts
Technical: I have considered the importance of the Place of Belonging (POB) here.
The issue
In the Upper Tribunal (UT) case of Mandarin Consulting Ltd the issue was the POB of the appellant’s clients, and the evidence to support that POB.
Background
Mandarin supplied career coaching and support services to students of Chinese origin. Those services would be outside the scope of VAT if supplied to persons whose usual residence was outside the EU. So, in order to treat its supplies as UK VAT free the appellant need to demonstrate where the recipients of its services lived.
First-Tier Tribunal (FTT) decision
The FTT decided that the services were outside the scope of VAT if the recipient had a permanent address, or usually resided, at that time, outside the EU. It was agreed that from July 2016 the supplies were made to the students’ parents who almost exclusively lived in China. The dispute was with pre-2016 services which were deemed to be made to the students. HMRC argued that, as the students lived in the UK for the duration of the courses, their “usual residence” was the UK, so VAT applied. Although the FTT dismissed this argument, the appeal failed because the proffered evidence did not establish that the usual place of residence of the students as required by Council Implementing Regulation 282/2011/82, Article 23 (reproduced below).
The UT decision
The UT considered the following issues:
Issue 1 – In deciding whether the requirements of Article 23 had been satisfied should the FTT have had regard to “informal evidence” as well as the documentary evidence provided? What evidence could the appellant rely upon to establish that students had a “permanent address” or “usual residence” outside the Community? Is Mandarin limited to such documentary evidence as it had in its possession prior to the time of supply, or can Mandarin in principle rely on all evidence available to it, whether obtained before or after the time of supply, including witness evidence given in connection with the FTT proceedings?
Issue 2 – Taking into account the answers to the above, had the evidence that Mandarin put forward established a prima facie case that its supplies were to persons with a “permanent address” or “usual residence” outside the Community? If so, was there an evidential burden on HMRC to rebut that prima facie case which HMRC had failed to discharge?
Issue 3 – To the extent that Mandarin had failed to satisfy the requirements of Article 23 of the Implementing Regulation, was that fatal to its claim to treat supplies made to students prior to July 2016 as outside the scope of VAT?
Unfortunately, the appellant obtained “relatively patchy” information in respect of the usual residence of individual students.
The UT found that a business retained the right to argue the place of supply (POS) was outside the EU even if the requirements of Article 23 were not met. Also, that while the POS had to be determined by the relevant circumstances existing at the time of supply, Mandarin was not precluded from relying on information discovered later. Finally, it was decided that Article 23 was not the only means available to demonstrate the appellant’s clients had a usual residence outside the EU.
However, the FTT had failed to consider the informal evidence provided concerning the business and customer base. The UT did consider this but still found that the evidence still did not succeed in demonstrating the POB of clients sufficiently. Consequently, the UT was not satisfied that the POB of the students was outside the EU so the supplies were subject to UK VAT and the appeal was dismissed.
Commentary
Another case demonstrating the importance of obtaining and retaining information on the location of customers. Superficially, it appears that the appellant’s supplies may have been UK VAT free, but a failure to evidence this was its downfall. It would not have taken very much to be covered by Article 23, but…
Legislation
Article 23
“… 23. Where, in accordance with Articles 58 and 59 of the PVD, a supply of services is taxable at the place where the customer is established, or, in the absence of an establishment, where he has his permanent address or usually resides, the supplier shall establish that place based on factual information provided by the customer, and verify that information by normal commercial security measures such as those relating to identity or payment checks.”
Frozen foods are zero-rated, but ice cream, frozen yoghurt, ice lollies and sorbets are subject to standard rate VAT (although they are frozen).
Latest from the courts
In the First Tier Tribunal (FTT) case of Mr Mufwankolo the dispute was whether the appellant was able to recover VAT charged by the landlord of the property from which he ran his business – a licenced retail outlet on Tottenham High Road.
Background
The landlord had opted to tax the commercial property and charged VAT on the rent. The appellant was a sole proprietor; however, the lease was in the name of Mr Mufwankolo’s wife, and the rent demands showed her name and not that of the sole proprietor. It was contended by the appellant, but not evidenced, that the lease had originally been in both his and his wife’s names, despite his wife being the sole signatory.
The issues
Could the appellant recover input tax?
It was clear that the business operated from the relevant property and consequently, in normal circumstances, the rent would be a genuine cost component of the business.
The Decision
The FTT found that there was no entitlement to an input tax claim and the appeal was dismissed. The lease was solely in the wife’s name and the business was the applicant as a sole proprietor. (There was an obvious potential for a partnership and an argument that a partnership was originally intended was advanced. The status of registration was challenged in 2003, but, crucially, not pursued).
It was possible for the property to be sub-let by the wife to the husband, however, this did not affect the VAT treatment as matters stood. Additionally, there was no evidence that the appellant actually paid any of the rent, as this was done by the tenant. There were no VAT invoices addressed to the sole proprietor.
Given the facts, there was no supply to the appellant, so there was no input tax to claim, and the issue of acceptable evidence fell away.
It was a certainty that the appeal could not succeed.
Commentary
There were a number of ways that this VAT cost could have easily been avoided had a little thought been given to the VAT arrangements. An oversight that created an avoidable tax hit.
A helpful guide to input tax considerations here: Care with input tax claims.
Legislation
The VAT Act 1994 Section 3 – Taxable person
The VAT Act 1994 Section 4 – Taxable supply
The VAT Act 1994 Section 24 (1) – Input tax
The VAT Act 1994 Section 24 (6) – Input tax claim evidence
Further to my article on apportionment valuation and case review here and Transfer Pricing valuation I thought it useful to consider HMRC’s internal guidance on its approach to valuation.
Sometimes a single monetary consideration may represent payment for two or more supplies at different VAT rates. In such cases, a business is required to allocate a “fair proportion” of the total payment to each of the supplies. This requirement is set out at in The VAT Act 1994, Section 19(4).
“Where a supply of any goods or services is not the only matter to which a consideration in money relates, the supply shall be deemed to be for such part of the consideration as is properly attributable to it.”
Although this section requires an apportionment of the consideration to be performed, it does not prescribe the methods by which this is to be achieved. The most common methods are based upon the costs incurred in making the supplies or the usual selling prices of the supplies.
Examples of methods that have been found to be of general application are contained in VAT Notice 700 para 8. A business is not obliged to adopt any of these suggested methods, and HMRC may accept alternative proposals provided that they achieve a fair and reasonable result that can be supported by valid calculation.
Some sectors have special methods called margin schemes to determine apportionment of the monetary consideration. Details of these found in their notices and guidance. The schemes include:
Basics
Before it is possible to perform an apportionment calculation, there are four basic questions that need to be addressed to determine whether an apportionment is appropriate and if so, what supplies it relates to.
The issue of whether there is a single or multiple supply has created problems from the outset of the tax. The volume of case law illustrates that each decision is based on the facts of each case and there cannot be a one-size fits all approach to this issue. The most important and recent cases are here:
Metropolitan International Schools
General Healthcare Group Limited
HMRC will stop issuing payable orders to overseas non-established taxpayers (NETP – taxpayers who are registered for UK VAT but do not have a business address here). The system automatically issued a payable order if a NETP was due a repayment.
Background
HMRC has received notifications and complaints from taxpayers advising that they can no longer cash their payable orders in their country or their bank. The impact of Brexit and COVID19 has seen an increase in banks/countries no longer accepting payable orders. Consequently, HMRC were sending repayments to NETPs with the knowledge they may not be able to cash them.
New Gform
To address this issue HMRC has created a Gform that will enable NETPs to send their bank account information in order that the issue of a payable order can be avoided and a Clearing House Automated Payment System (CHAPS) payment made instead.
Access
HMRC systems do not currently have CHAPS functionality or the ability to store overseas bank information. However, once a NETP has completed the form, which is accessed via the Government Gateway HMRC will set a lock on the taxpayer’s record to prevent the payable order being automatically issued. NETPs will then receive their repayments directly into their bank account without the need to visit their bank to cash a payable order.
Information required
Information requested on the Gform will include:
NB: Not all countries listed are part of the European Union (EU).
Country | VAT rates |
Albania | 20% |
Andorra | 4.5% |
Austria | 20% Reduced rates 19%, 10%, 13% |
Belarus | 20% |
Belgium | 21% Reduced rates of 12%, 6% |
Bosnia & Herzegovina | 17% |
Bulgaria | 25% Reduced rates 13%, 5% |
Croatia | 25% Reduced rates 13%, 5% |
Cyprus | 19% Reduced rates 9%, 5% |
Czech Republic | 21% Reduced rates 15%, 10% |
Denmark | 25% Reduced rate 0% |
Estonia | 20% Reduced rate 9% |
Finland | 24% Reduced rates 14%, 10% |
France | 20% Reduced rates 10%, 5.5% |
Germany | 19% Reduced rate 7% |
Georgia | 18% |
Greece | 24% Reduced rates 13%, 6% |
Hungary | 27% Reduced rates 18%, 5% |
Iceland | 24% Reduced rate 12% |
Ireland | 23% Reduced rates 13.5%, 9% |
Italy | 22% Reduced rates 10%, 5% |
Latvia | 21% Reduced rates 12%, 5% |
Liechtenstein | 7.7% Reduced rate 2.5% |
Lithuania | 21% Reduced rates 9%, 5% |
Luxembourg | 17% Reduced rates 14%, 8% |
North Macedonia | 18% |
Malta | 18% Reduced rates 7%, 5% |
Monaco | 20% Reduced rates 10%, 5.5%, 2.1% |
Montenegro | 21% |
Netherlands | 21% Reduced rates 9% |
Norway | 25% Reduced rates 12%, 6% |
Poland | 23% Reduced rates of 8%, 5% |
Portugal | 23% Reduced rates 13%, 6% |
Romania | 19% Reduced rates of 9%, 5% |
Russia | 20% |
Serbia | 20% Reduced rate 10% |
Slovakia | 20% Reduced rate 10% |
Slovenia | 22% Reduced rates 9.5%, 5% |
Spain | 21% Reduced rates 10% |
Sweden | 25% Reduced rates 12%, 6% |
Switzerland | 7.7% Reduced rates 3.7%, 2.5% |
Ukraine | 20% |
United Kingdom | 20% Reduced rates 12.5%, 5% 0% |
I am often asked what the most frequent VAT errors made by a business are. I usually reply along the lines of “a general poor understanding of VAT, considering the tax too late or just plain missing a VAT issue”. While this is unquestionably true, a little further thought results in this top ten list of VAT horrors:
So, you may ask: “How do I make sure that I avoid these VAT pitfalls?” – And you would be right to ask.
Of course, I would recommend that you engage a VAT specialist to help reduce the exposure to VAT costs!
HMRC have updated VAT Notice 701/38 Seeds and plants that can be zero-rated. This Notice explains how to zero rate supplies of of seeds and plants which are used to grow food for human consumption. The supply of most basic foodstuffs for human or animal consumption is zero-rated. Plants and seeds used for the production of foodstuffs are also zero-rated depending on how they are held out for sale. The Notice explains when the following items can be zero-rated:
The main amendments have been made to paragraph 3.5 – Trees and fruit bearing shrubs.
Any businesses supplying such goods (garden centres, nurseries etc) should ensure that the available zero rating is applied as widely as possible within these rules.