In the current election the Liberal Democrats’ manifesto stated that they would apply zero-rating to children’s toothbrushes and toothpaste. Whether this impacts the money left by the tooth fairy remains to be seen…
Category Archives: VAT Basics
VAT: What is an exempt supply, and what does it mean?
VAT Basics
Exemption generally
Some services are exempt from VAT. If all the services a business provides are exempt, it will not be able to register for VAT, which means it cannot reclaim any input tax incurred on its purchases or expenses.
If a business is VAT registered it may make both taxable and exempt supplies (it will need to make at least some taxable supplies to be registered). Such a business is classed as partly exempt and it may be able to recover some input tax, but usually not all (Please see de minimis below).
Types of supply which may be exempt
Examples are:
- Betting, gaming, dutiable machine games and lotteries
- Burial and cremation
- Cultural services
- Museums, galleries and zoos
- Live performances
- Education
- Education
- Vocational training
- Examination services
- Individual tuition
- Finance
- The issue, transfer or receipt of money, or any security for money
- Granting credit
- intermediary services
- Dealing in shares, stocks, bonds, notes debentures and similar
- Dealings in currency
- Banking
- Management of some investments
- Fund raising events by charities and other qualifying bodies
- Health and welfare
- Medical care
- Dentistry
- Pharmacy services
- Opticians
- Welfare services
- Insurance
- Generally; insurance and reinsurance transactions and intermediary services
- Investment gold
- Land*
- Generally; selling or letting land or property
- Postal services
- Sport, sports competitions and physical education
- Competition entries
- Sporting facilities
The above list is not exhaustive.
* Most businesses which do not routinely make exempt supplies usually encounter exemption in the area of land and property and it is an easy trap to fall into not to consider VAT when involved in property transactions. This is one area where VAT planning may be of assistance as it is possible in most situations to deliberately choose to add VAT to an exempt supply to avoid a loss of input tax. This is known as the option to tax, and it is considered in more detail here.
The legislation covering exemption is found at The VAT Act 1994, Schedule 9.
What does exemption mean?
An entity only making exempt supplies cannot register for VAT and consequently has no VAT responsibilities or obligations. While this may seem attractive, exemption is often a burden rather than a relief. This is because any VAT it incurs on any expenditure is irrecoverable and represents an additional cost. This often affects charities, although there are some limited reliefs.
Exempt supplies are completely different to non-business activities, although the VAT outcome is often similar.
Partial exemption de-minimis
A partly exempt business cannot usually recover all of the input tax it incurs. However, there is a relief called de minimis. Broadly, if VAT bearing expenditure is below certain limits in may be recovered in full. These are provisional calculations and are subject to a Partial Exemption Annual Adjustment.
Further information on terms used in partial exemption here.
VAT: Education – what, precisely, is exempt?
The legislation covering education is VAT Act 1994, Schedule 9, Group 6.
What does the term education mean?
It means a course, class or lesson of instruction or study in a subject. This includes:
- lectures
- educational seminars
- conferences and symposia
- recreational and sporting courses
- distance teaching and associated materials
Schools etc
The first type of education exemption is relatively clear: It is the provision of education by an eligible body. An eligible body is, broadly; a school, college, or university (supplies by Local Authority schools, city technology colleges, sixth form colleges, academies and free schools – where education is provided for no charge, are non-business activities rather than exempt, and have their own set of rules). More on academies here
It is also worth noting that any ‘closely related” goods or services provided with exempt education are themselves exempt. This may cover items such as; certain stationery, accommodation, transport and catering.
There is usually very little disagreement about the VAT treatment of these entities.
Charities/ non-profit making organisations
If a charity/NFP entity is an eligible body supplies of education and vocational training (see below) by it are exempt. Such an organisation is likely to be an eligible body, where it’s a charity, professional body or company which:
- cannot and does not distribute any profit it makes, and
- any profit that does arise from its supplies of education is used solely for the continuation or improvement of such supplies.
There can be disputes over the term “does not distribute any profit” so care should be taken in this respect and advice sought if there is any doubt.
Tuition
Exemption applies to the supply of “private tuition, in a subject ordinarily taught in a school or university, by an individual teacher acting independently of an employer” – VAT Act 1994 Schedule 9, Group 6, item 2.
Taking each of these tests in turn:
- What is “private tuition?
In order to qualify, the provider of tuition must act independently and not be an employee. Practically, this means that the person providing the tuition must either be a sole proprietor, a partner in a partnership, or a member of a Limited Liability partnership (LLP). Consequently, exemption does not apply if the teaching is carried out by a company or an employee. This is a matter of fact, however, it is possible to structure matters such that the exemption applies if it does not currently (and the restructure is possible commercially).
- What does “ordinarily taught” in schools/universities mean?
This is often a moot issue and the significant amount of case law highlights this. Most of the mainstream subjects are covered of course, but what about subjects like; golf, horse riding and dance? Would they be ordinarily taught in schools? (The answer according to case law is; yes). However, there are many other subjects which are debatable and HMRC usually take an uncompromising line on this area, especially around sporting activities. If there is any doubt, we recommend seeking advice.
- What does tuition mean?
Clearly, if a person teaches or coaches a subject to an individual or group, then this qualifies as tuition. However, a distinction must be made between this and a recreational type of activity which may be called a “class”, but no actual tuition is provided. Exemption does not apply, for example, for the simple provision of gymnasium or swimming pool facilities, or a yoga class where no coaching takes place (however, it is possible that these may be exempt under different parts of the legislation, but that is not the subject of this article).
Vocational training
Vocational training means training or re-training and work experience for paid employment or voluntary employment in areas beneficial to the community.
If vocational training is provided for a charge the VAT consequences are either:
- for an eligible body (see above) vocational training is exempt
- for a non-eligible body vocational training is still exempt to the extent that it is funded under an approved government funding scheme. Otherwise the supply is taxable.
English as a Foreign Language (EFL)
If a commercial entity makes supplies of tuition of EFL they will qualify for exemption. In these cases, tuition includes all elements that are integral to the course, held out for sale as such, and are the means by which it is intended to promote fluency in the use of the English language.
General
In respect of all of the above, if exemption does not apply the supply of education falls to be taxable as a default.
For completeness, exemption may also apply to; research, examination services, youth clubs, day nurseries, crèches and playgroups but these activities are outside the scope of this article.
Summary
There are many traps for the unwary here. Planning is always advisable and I recommend that any entity which provides education is conscious of the VAT implications and seeks advice where/when necessary.
Overseas businesses claiming VAT incurred in the UK
Update
The HMRC form for overseas businesses claiming VAT incurred in the UK has been updated.
The form VAT65A to reclaim VAT paid in the UK if a business is not registered in the UK has been amended to include information about corresponding with HMRC by email.
Claims in the UK
A non-UK based business may make a claim for recovery of VAT incurred in the UK. Typically, these are costs such as; employee travel and subsistence, service charges, exhibition costs, tooling, imports of goods, training, purchases of goods in the UK, and clinical trials etc.
Who can claim?
The scheme is available for any businesses that are:
- not VAT registered in the UK
- have no place of business or other residence in the UK
- do not make any supplies in the UK
What cannot be claimed?
The usual rules that apply to UK business claiming input tax also apply to claims from overseas. Consequently, the likes of; business entertainment, car purchase, non-business use and supplies used for exempt activities are usually barred.
Amount
There is no maximum claim amount, but for most periods of less than twelve months a minimum of £130 of VAT must be claimed. For annual claims or for periods less than three months ending on 30 June, the VAT must be at least £16.
Process
The business must obtain a Certificate Of Status (CoS) from its local tax or government department to accompany a claim.
The CoS must be the original and contain the:
- name, address and official stamp of the authorising body
- claimants name and address
- nature of the claimant’s business
- claimant’s business registration number
The CoS is only valid for twelve months. Once it has expired you will need to submit a new CoS.
HMRC has previously announced (RCB 12 – 2018) that it is taken a firmer stance on what constitutes an acceptable CoS.
Claim form
The application form is a VAT65A and is available here Original invoices which show the VAT charged must be submitted with the claim form and CoS. Applications without a certificate, or certificates and claim forms received after the deadline are not accepted by HMRC. It is possible for a business to appoint an agent to register to enable them to make refund applications on behalf of that business.
Deadline
Claim periods run annually up to 30 June and must be submitted by 31 December of the same year. With the usual Christmas rush and distractions, it may be easy to overlook this deadline and some claims may be significant. Unfortunately, this is not a rapid process and even if claims are accurate and the supporting documents are in all in order the claim often takes some time to be repaid. Although the deadline is the end of the year HMRC say that it will allow an additional three months for submission of a CoS (only).
Payment
Refunds are made within six months of a “satisfactory application”.
VAT Registration: Extension of time limit
HMRC has extended the time limit for taxpayers to receive a reply after applying for VAT registration.
The previous 30-day response deadline is now 40-days.
Notices (VAT Notice 700/11) – Cancelling your VAT registration and (VAT Notice 700/2) – Group and divisional registration have been updated.
A VAT: Did you know?
Banana and strawberry flavoured Nesquik drinks are standard rated, but chocolate flavoured Nesquik is zero rated.
Managing a Customs Warehouse. Updated HMRC guidance
The new guidance explains how to manage a Customs Warehouse, handle goods, and process, repair and move goods.
Customs Warehouse
A Customs Warehouse is a warehouse that is under Customs control. Goods stored in a customs warehouse are not in free circulation. No duties or taxes have to be paid until that time when you ship the goods to their next destination.
There are two types of Customs Warehouse where goods may be stored.
- Public warehouse
This is a warehouse operated by a business whose purpose is to store other people’s goods. They are the warehousekeeper and you’re the depositor.
- Private warehouse
This is a warehouse operated by you to store your own goods. You are the warehousekeeper and the depositor.
You do not need to be authorised by HMRC to be a depositor in a public or private customs warehouse but, if you operate a private customs warehouse, you’ll need to be authorised as the warehousekeeper.
The warehousekeeper is responsible for coordinating general warehouse operations and activities including shipping and receiving deliveries, conducting stock checks, documenting warehouse transactions and records, and storage of inventory.
To be approved as a warehousekeeper, a person will need to:
- be established in the UK
- have an EORI number
- be financially solvent
- have a good compliance record in dealing with customs
- prove you have a business need for the warehouse
- be able or prepared to make declarations, or employ an agent who is
- be able to keep inventory records and run the warehouse to health and safety standards
- provide a guarantee if needed for Customs Duty and VAT unless you’re an Authorised Economic Operator or can meet Authorised Economic Operator conditions
Guidance Amendments
Updates include information for warehousekeepers who use a duty management system and guidance on when someone else uses your warehouse.
VAT tertiary legislation – HMRC’s new guidance
HMRC has published new a guide to all information about VAT that has ‘force of law’.
The manual contains all the tertiary legislation for VAT which HMRC has published – all in one place. Primary and secondary legislation is published on Legislation.gov.uk.
What is tertiary legislation?
Within primary and secondary legislation, government departments are sometimes granted the power to publish additional legally binding conditions or directions on a given topic. This information is known as ‘tertiary legislation’.
Tertiary legislation carries ‘force of law’. This means it has the same legal status as primary and secondary legislation. HMRC has an obligation to publish this information in accordance with the law.
The guidance covers:
(with links to the relevant legislation)
- Cash Accounting Scheme
- Flat rate schemes
- Gold imports and exports
- Land, building and construction
- Margin schemes
- Northern Ireland
- One Stop Shop (OSS) and Import One Stop Shop (IOSS)
- Refunds
- Registration
- Reliefs
- Retail Schemes
- Transfer as a going concern (TOGC)
- Transport
- Warehousing
- Valuation
VAT DIY Housebuilders’ Scheme Top 10 Tips
An in-depth article on the DIY Housebuilders’ Scheme here
It is also possible to claim VAT on the construction of a new charity building, for a charitable or relevant residential purpose.
The following are bullet points to bear in mind if you are building your own house, or advising someone who is:
- Understand HMRC definitions early in your planning
Budgeting plays an important part in any building project. Whether VAT you incur may be reclaimed is an important element. In order to establish this, it is essential that your plans meet the definitions for ‘new residential dwelling’ or ‘qualifying conversion’. This will help ensure that your planning application provides the best position for a successful claim. One point to bear in mind, is the requirement for the development to be capable of separate (from an existing property) disposal.
- Do I have to live in the property when complete?
You are permitted to build the property for another relative to live in. The key point is that it will become someone’s home and not sold or rented to a third party. Therefore, you can complete the build and obtain invoices in your name, even if the property is for your elderly mother to live in. However, it is not possible to claim on a granny annexe built in your garden (as above, they are usually not capable of being disposed of independently to the house).
- Contractors
Despite the name of the scheme, you are able to use contractors to undertake the work for you. The only difference here will be the VAT rate on their services will vary depending on the nature of the works and materials provided.
- What can you claim?
A valid claim can be made on any building materials you purchase and use on the build project. Also, services of conversion charged at the reduced rate can be recovered. However, input tax on professional services such as architect’s fees cannot be reclaimed.
- Get the VAT rate right
It is crucial to receive goods and services at the correct rate of VAT. Services provided on a new construction of a new dwelling will qualify for the zero rate, whereas the reduced rate of 5% will apply for qualifying conversions. If your contractor has charged you 20% where the reduced rate should have been applied, HMRC refuse to refund the VAT and will advise you go back to your supplier to get the error corrected. This is sometimes a problem if your contractor has gone ‘bust’ in the meantime or becomes belligerent. Best to agree the correct VAT treatment up front.
- Aid your cash flow
If you wish to purchase goods yourself, it will be beneficial to ask your contractor to buy the goods and combine the value of these with his services of construction. In this way, standard rated goods become zero rated in a new build. If you incur the VAT on goods, you will have to wait until the end of the project to claim it from HMRC.
- Claim on time
The claim form must be submitted within six months of completion of the build, usually this is when the certificate of practical completion is issued, or the building is inhabited. although it can be earlier if the certificate is delayed. More details of when a building is complete here. Recent changes to the scheme here.
- Use the right form
HMRC publish the forms on their website.
Using the correct forms will help avoid delays and errors. Claims can now be made online.
- Send everything Recorded Delivery
You are required to send original invoices with the claim. Therefore, take copies of all documents and send the claim by recorded delivery. Unfortunately, experience insists that documents are lost…
- Seek Advice
If you are in any doubt, please contact me. Mistakes can be costly, and you only get one chance to make the claim. Oh, and don’t forget that this is VAT, so any errors in a claim may be liable to penalties.
More on the DIY Housebuilders’ Scheme here, here, here, and here and Tribunal cases on claims here, here, and here
VAT – Charity Fundraising Exemption
Avoid adding VAT to fundraising income
There are very few VAT reliefs for charities (and it may be argued that an exemption is more than a burden than a relief) but there is an exemption for a charity which qualifies as undertaking a one-off fundraising event. The criteria are quite restrictive, and it is important that the correct treatment is applied. Furthermore, it may be in a charity’s interest to avoid the exemption if there is a lot of input tax attributable to the event, say; venue hire, entertainment, catering etc.
A qualifying event means that a charity (or its trading subsidiary) does not charge VAT on money paid for admittance to that event.
What is covered?
In order to be exempt, the event must be a one-off fundraising event which is “any event organised and promoted primarily to raise funds (monetary or otherwise) for a charity”. Consequently, we always advise clients to make it clear on tickets and advertising material (including online) that the event is for raiding funds and to use a statement; “all profits will be used to support the charitable aims of XYZ” or similar.
HMRC say that an event is an incident with an outcome or a result. This means that activities of a semi-regular or continuous nature, such as the operation of a shop or bar, cannot therefore be an event.
The following are examples of the kind of event which qualify:
- ball, dinner dance, disco or barn dance
- performance – concert, stage production and any other event which has a paying audience
- showing of a film
- fete, fair or festival
- horticultural show
- exhibition: art, history or science
- bazaar, jumble sale, car boot sale, or good-as-new sale
- sporting participation (including spectators): sponsored walk or swim
- sporting performance
- game of skill, contest or a quiz
- participation in an endurance event
- fireworks display
- dinner, lunch or barbecue
- an auction of bought in goods
Tip
Often there may be an auction of donated goods at a fundraising event. There is a specific and helpful relief for such sales. The sale of donated goods is zero rated which means any attributable input tax is recoverable. Consequently, if both exempt and zero rated supplies are made it is possible to apportion input tax to a charity’s benefit. Zero rating may also apply to sales such as: food (not catering) printed matter and children’s clothing
Limit to the number of events held
Eligible events are restricted to 15 events of the same kind in a charity’s financial year at any one location. The restriction prevents distortion of competition with other suppliers of similar events which do not benefit from the exemption. If a charity holds 16 or more events of the same kind at the same location during its financial year none of the events will qualify for exemption. However, the 15-event limit does not apply to fundraising events where the gross takings from all similar events, such as coffee mornings, are no more than £1,000 per week.
Clearly, the number of events needs to be monitored and planning will therefore be available should exemption be desired (or avoided as the relevant figures dictate).
What is a charity?
This seems to be a straightforward question in most cases, but can cause difficulties, so it is worthwhile looking at the VAT rules here.
Bodies have charitable status when they are:
- registered, excepted or exempted from registration with the Charity Commission in England and Wales
- registered by the Office of the Scottish Charity Regulator (OSCR) in Scotland
- invited to register by The Charity Commission for Northern Ireland which are treated by HMRC as charitable.
Not all non-profit making organisations are charities. The term ‘charity’ has no precise definition in any law. Its scope has been determined by case law. It is therefore necessary to establish whether an organisation is a charity using the following guidelines:
- charities are non-profit distributing bodies established to advance education, advance religion, relieve poverty, sickness or infirmity or carry out certain other activities beneficial to the community
- in England and Wales charities must normally register with Charity Commission- some very small charities don’t need to register with Charity Commission, there are also some other special cases where particular bodies do not need to register, if there is uncertainty regarding a position see the Charity Commission website
- in Scotland all charities must be registered with the OSCR – HMRC decides whether bodies in Northern Ireland are eligible.
Trading arm
It is worth noting that HMRC also accept that a body corporate which is wholly owned by a charity and whose profits are payable to a charity, will qualify and may therefore may apply the VAT exemption to fundraising events. This means that a charity’s own trading company can hold exempt fundraising events on behalf of the charity.
Further/alternative planning
If sales are not exempt as a fundraising event, there is a way to avoid VAT being chargeable on all income received. It is open to a charity to set a basic minimum charge which will be standard rated, and to invite those attending the event to supplement this with a voluntary donation.
The extra contributions will be outside the scope of VAT (not exempt) if all the following conditions are met:
- it is clearly stated on all publicity material, including tickets, that anyone paying only the minimum charge will be admitted without further payment
- the extra payment does not give any particular benefit (for example, admission to a better position in the stadium or auditorium)
- the extent of further contributions is ultimately left to ticket holders to decide, even if the organiser indicates a desired level of donation
- for film or theatre performances, concerts, sporting fixtures etc, the minimum charge is not less than the usual price of the particular seats at a normal commercial event of the same type
- for dances, and similar functions, the minimum total sum upon which the organisers are liable to account for VAT is not less than their total costs incurred in arranging the event
It should be noted that any other donations collected at an event are also outside the scope of VAT.
Partial exemption
A charity must recognise the impact of making exempt supplies (as well as carrying out non-business activity). These undertakings will have an impact on the amount of input tax a charity is able to recover. Details here
Summary
We find that charities are often confused about the rules and consequently fail to take advantage of the VAT position. This also extends to school academies which are all charities. It is usually worthwhile for charities to carry out a VAT review of its activities as quite often VAT savings can be identified.