Category Archives: VAT Planning

VAT: Education and Health & Welfare – new HMRC guidance

By   23 August 2022
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The subject of education often gives rise to complex VAT issues – as the number of Tribunal cases illustrates.

Background

A number of schools provide early or pre-school education (before compulsory education). All children aged four should be able to access an early education place and some early education and childcare services offer free part-time early or pre-school education to three year olds. This is paid for at the discretion of Local Authorities. Places for children under three in voluntary or private pre-school settings are paid for mainly by parents.

Update

In light of, inter alia, the Yarburgh Children’s Trust, Wakefield College , Longbridge and St Paul’s Community Project, HMRC has updated to reflect changes to it’s policy in respect of charities supplying; crèche, pre-school education, nursery, after-school clubs and playgroup facilities.

Business test

HMRC’s past position was that if a charity supplied nursery and crèche facilities for a consideration that was fixed at a level designed to only cover its costs, this was not a business activity for VAT purposes. Now the two-part test derived from the Wakefield College Court of Appeal case will be applied:

  • Test One

The activity results in a supply of goods or services for consideration. This requires a legal relationship between the supplier and the recipient. The initial question is whether the supply is made for a consideration. An activity that does not involve the making of supplies for consideration is not a business activity.

  • Test Two

The supply is made for the purpose of obtaining income therefrom (remuneration)

General

The provision of pre-school education (without charge) is non-business; breakfast clubs and after-school child-minding/homework clubs remain non-business in the Local Authority sector even when a charge is made. This is on condition that the school offers the service strictly to its own pupils and that the fee charged is designed to no more than cover overhead costs.

Law

VAT Act 1994, Schedule 9, Group 6 – Education

VAT Act 1994, Schedule 9, Group 7, Item 9 – Health and Welfare

VAT & Customs Duty: Goodbye CHIEF, hello CDS

By   23 August 2022
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Businesses who import into the UK currently use Customs Handling of Import and Export Freight (CHIEF) to declare goods.

There is also a separate scheme running concurrently, known as Customs Declaration Service (CDS).

From 1 October 2022 CHIEF will cease and importers must use CDS.

Exports

CHIEF is also currently used for exports and this will continue to a later date of: 31 March 2023.

Action

This change will significantly affect all businesses which import goods. Although it is likely that import agents will handle the majority of issues, an importer will be required to:

Failure to comply with these requirements will result in a business being unable to import goods.

VAT: Business or non-business? The Towards Zero Foundation case

By   16 August 2022
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Latest from the courts

In the The Towards Zero Foundation First Tier Tribunal case the issue was whether part of the appellant’s activities could be “stripped out”, classified as non-business, and therefore result in a loss of input tax.

This case follows a long succession of recent cases on the distinction between business (economic activity) and non-business. I have considered these in other articles:

Northumbria Healthcare

Wakefield College (referred to at this Tribunal)

Longbridge

Babylon Farm

A Shoot

Y4 Express

Lajvér Meliorációs Nonprofit Kft. and Lajvér Csapadékvízrendezési Nonprofit Kft

Healthwatch Hampshire CIC 

Pertempts Limited

and new HMRC guidance on the subject.

VAT attributable to non-business activities is not input tax and cannot be reclaimed. However, if the non-business activity is part of wider business activities then it may be recovered as input tax.

Background

The Appellant is a charity. Its primary objective is to achieve zero road traffic fatalities principally through the operation of New Car Assessment Programmes (NCAP) – testing car safety.

When it received money as consideration for carrying out the testing, it was agreed by all parties that that this represented economic activity.

As part of this activity, the charity purchased new cars (so called “mystery shopping” exercises) and carried out tests at its own expense. In this start-up phase for an NCAP it is necessary to test vehicles without manufacturer support as the independence of the testing programme is critical in order to establish consumer credibility.

The results of the tests (usually giving rise to substandard or unsatisfactory outcomes) are published and the Appellant generates publicity of the results through social media, news coverage, trade press etc. These results inform and influence customer buying behaviour which in turn drives manufacturers to improve the safety features.

As the market sophistication increases the NCAP star ratings for vehicles are used by the manufacturers in promotion of its vehicles.

The aim of the Appellant is for each jurisdictional NCAP to ultimately become self-funding through manufacturer testing fees.

Contentions

HMRC argued that when the appellant carried out tests on purchased vehicles this should be recognised as a specific activity which could not be a business as it generated no income – the tests should be considered in isolation. Consequently, the input tax which was recovered was blocked and an assessment was issued to disallow the claim.

The Foundation contended that it published the results of those tests, and this resulted in the commercial need for manufacturers to improve safety standards by way of commissions for further research. This research was funded by the car makers and was therefore economic activity. The “free” testing needed to be undertaken so as to create a market for manufacturer funded testing – the initial testing was just one element of the overall taxable supply. Consequently, all residual input tax incurred is attributed to its taxable business activities and fully recoverable.

Decision

The FTT found that it was clear that manufacturers would not proactively seek to have vehicles tested without an initial unfavourable baseline assessment. If the free testing had been a genuinely independent activity HMRC would be correct, but the evidence did not support this analysis. It found that the provision of free testing was an inherent and integral part of the appellant’s business activity.

This being the case there was no reason to attribute any VAT to non-business activities, and the input tax weas fully claimable.

Commentary

Another reminder, if one were needed, of the importance of correctly establishing whether the activities of a body (usually charities, but not exclusively) are business or non-business. The consequences will affect both the quantum of output tax and claiming VAT on expenditure. More on the topic here.

The decision was as anticipated, but this case illustrates HMRC’s willingness to challenge (often unsuccessfully) VAT treatment in similar situations.

VAT: No invoice – no claim. The Tower Bridge GP Ltd case

By   9 August 2022
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Latest from the courts

In the Court of Appeal (CoA) case of Tower Bridge GP Ltd the issue was whether the appellant could claim input tax in a situation where it did not (and does not) hold a valid tax invoice.

Background

Tower Bridge was the representative member of a VAT group which contained Cantor Fitzgerald Europe Ltd (CFE). CFE traded in carbon credits. These carbon credit transactions were connected to VAT fraud.

The First Tier Tribunal (FTT) found that CFE neither knew, nor should have known, that the transactions it entered into before 15 June 2009 were connected to VAT fraud but that it should have known that its transactions were connected to fraud from 15 June 2009. The appeal relates only to transactions entered into before that date.

CFE purchased carbon credits from Stratex Alliance Limited (“Stratex”) The carbon credits supplied to CFE were to be used by the business for the purpose of its own onward taxable transactions (in carbon credits). The total of VAT involved was £5,605,119.74.

The Stratex invoices were not valid VAT invoices. They did not show a VAT registration number for Stratex, nor did they name CFE as the customer. Although Stratex was a taxable person, it transpired that Stratex was not registered for VAT (and therefore could not include a valid VAT number on its invoices) and that it fraudulently defaulted on its obligation to account to HMRC for the sums charged as output tax on these invoices.

Subsequent investigations by HMRC resulted in Stratex not being able to be traced.

Contentions

The appellant contended that it is entitled to make the deduction either as of right, or because HMRC unlawfully refused to use its discretion to allow the claim by accepting alternative evidence.

HMRC denied Tower Bridge the recovery of the input tax on the Stratex invoices on the basis that the invoices did not meet the formal legal requirements to be valid VAT invoices. HMRC also refused to exercise their discretion to allow recovery of the input tax on the basis that:

  • Stratex was not registered for VAT
  • the transactions were connected to fraud
  • CFE failed to conduct reasonable due diligence in relation to the transactions

Decision

Dismissing this appeal, the CoA ruled that where an invoice does not contain the information required by legislation (The Value Added Tax Regulations 1995 No 2518 Part III, Regulation 14), or contains an error in that information, which is incapable of correction, the right to deduct cannot be exercised. The appellant did not have the ability to make a claim as of right.

The Court then considered whether HMRC ought to have permitted Tower Bridge to make a claim using alternative evidence. It found that the attack on HMRC’s exercise of discretion fails for the reasons contended by HMRC (above). These were perfectly legitimate matters for HMRC to take into account in deciding whether to exercise the first discretion in the taxable person’s favour.

CFE had failed to carry out “the most basic of checks on Stratex”.

So, the appeal was dismissed.

Commentary

This was hardly a surprising outcome considering that if an exception were to be made, there would be a loss to the public purse consisting of the input tax, with no corresponding gain to the public purse from the output tax that Stratex ought to have paid, but fraudulently did not.

This case demonstrates the importance of obtaining a proper tax invoice and to carry out checks on its validity. Additionally, there is a need to conduct accurate due diligence on the supply chain. I have summarised the importance of Care with input tax claims which includes a helpful list of checks which must be carried out.

VAT & Customs Duty – Valuation for import purposes

By   5 August 2022
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Methods of calculating import value

There are six methods for calculating the value of imported goods to assess the amount of Customs Duty and import VAT a business to pay. The same value is also used for trade statistics.

All six methods are outlined below and should be tried in order. If Method 1 does not apply, try Method 2. If that does not apply, try 3 and so on. However, Method 5 can be tried before 4.

Method 1

The transaction value – the price payable to the seller. This is the most common valuation and is used in most cases.

Try Method 2 if there has been no sale of goods.

Method 2

The customs value of identical goods, produced in the same country as the imports.

Try Method 3 if there are no identical goods.

Method 3

The customs value of similar goods, which must be:

  • produced in the same country
  • able to carry out the same tasks and be
  • commercially interchangeable

Try Method 4 if there are no similar goods.

Method 4

The selling price of the goods (or identical or similar goods) in the UK.

Try Method 5 if there are no UK sales of the goods.

Method 5

The production cost of the goods, including the cost of any materials, manufacturing and any other processing used in production.

Try Method 6 if this production cost information is unavailable.

Method 6

Reasonably adapting one of the previous methods to fit unusual circumstances.

Legislation

In the UK valuation is covered by the Taxation (Cross-border Trade) Act 2018 & The Customs (Import Duty) (EU Exit) Regulations 2018 and The VAT Act 1994, Section 19.

What to include in the Method 1 calculation

If they are not already included in the seller’s price, the importer must add the costs of:

  • delivery to the EU border
  • most commissions (except buying commission)
  • royalties and licence fees paid by you on the imported goods as a condition of sale
  • containers and packing
  • any proceeds of resale the seller will receive
  • goods and services you provide to the seller for free or at a reduced cost – eg components incorporated in the imported goods, or development and design work carried out outside the EU and necessary for the production of the imports

If you import goods from a processor – ie a business that assembles or otherwise works on one or more sets of existing products to create your new imported products – transaction values can be built up by adding to the processing costs the value of any materials or components you provided to the processor.

What to exclude from your calculation

Items to be left out of the customs value if certain conditions are met include:

  • delivery costs within the EU
  • EU duties or taxes
  • taxes paid in the country of origin or export
  • quantity and trade discounts and those relating to cash and early settlement, that are valid at the time the goods are valued
  • dividend payments to the seller
  • marketing activities related to the imports
  • buying commission
  • export quota and licence costs
  • interest charges
  • rights of reproduction
  • post-importation work, eg construction or assembly
  • management fees

Further details here.

VAT – Business Entertainment. What input tax may I recover?

By   4 August 2022
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VAT – Recovery of input tax incurred on entertainment – Flowchart

One of the most common questions asked on “day-to-day” VAT is whether input tax incurred on entertainment is claimable.  The answer to this seemingly straightforward question has become increasingly complex as a result of; HMRC policy, EU involvement and case law.

Different rules apply to entertaining; clients, contacts, staff, partners and directors depending on the circumstances.  It seems reasonable to treat entertaining costs as a valid business expense.  After all, a business, amongst other things, aims to increase sales and reduce costs as a result of these meetings.  However, HMRC sees things differently and there is a general block on business entertainment.  It seems like HMRC does not like watching people enjoying themselves at the government’s expense!

If, like me, you think in pictures, then a flowchart may be useful for deciding whether to claim entertainment VAT.  It covers all scenarios, but if you have a unique set of circumstances or require assistance with some of the definitions, please contact me.

VAT -Business Entertainment Flowchart

Download here: VAT Business Entertainment Input tax recovery flowchart

VAT: Disclosed and undisclosed agents

By   20 July 2022
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There has been substantial case law on whether a business acts as agent or principal, the most recent being:

All Answers Limited

Adecco

Lowcost Holidays Ltd

Hotels4U.com Limited 

In this brief article I consider the distinction between disclosed and undisclosed agents and the VAT position of each.

Agent

An agent is a person who has been legally empowered to act on behalf of another entity (a principal). An agent may be employed to represent a client in negotiations and other dealings with third parties under his direction. The agent may be given decision-making authority. The relationship between a principal and agent can be disclosed or undisclosed to a third party. A disclosed agent acts in the name of the principal, whereas an undisclosed agent acts in his own name. 

VAT Treatment

Disclosed Agents

A disclosed agent acts in the name of the principal and the client is aware that they are dealing with an agent of the principal. The relevant supply is made by the principal to the client. The agent does not make the supply to the client, but rather, to (usually) the principal in respect of commission for its services of acting as the “middle-man” in the transaction.

Output tax is due on the full selling price of the goods or services supplied by the principal. The value is not reduced by any amount paid to the agent. The agent will invoice the principal for his services and in most cases the principal will recover this as input tax (subject to the usual rules).

Undisclosed Agents 

The buyer of goods or services will not (usually) know the name of the principal and will deal with the agent in the agent’s own name. The legislation states that ‘where a taxable person acting in his own name but on behalf of another person takes part in a supply of services, he shall be deemed to have received and supplied those services himself’.  

This means that the supply of goods or services by an undisclosed agent is treated as a simultaneous supply to, and by, the agent. The agent is treated as both the purchaser (from the principal) and seller (to the client/customer).

The agent treats the goods as its own purchase – incurring VAT charged by the principal and then declares output tax on the onward sale to the client. The input tax charged by the principal is usually recoverable by the undisclosed agent. In some circumstances, the purchase and sale will have different VAT liabilities, eg; the sale of goods may be a VATable UK supply, but the onward sale could be a zero rated export. Generally, the principal is not put in a less advantageous position by operating through an agent.

Summary

It is sometimes difficult to establish whether an entity acts as agent or principal, and if agent, whether it is in a disclosed or undisclosed capacity. Not only is the VAT treatment different, but the distinction effects where goods or services are deemed to be supplied for VAT purposes. The place of supply rules dictates such matters as VAT registration (UK and overseas) whether (and where) VAT is chargeable and the compliance obligations of the principal and agent.

It is important to analyse the terms of the relevant contracts/agreements between the agent and principal to establish the nature of the relationship. However, it also necessary to consider the commercial reality of transactions between the parties as this may differ from the contract.

VAT treatment of deposits and advance payments

By   19 July 2022
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One query that constantly reappears is that of the VAT treatment of deposits.

This may be because there are different types of deposits with different VAT rules for each. I thought that it would be helpful for all the rules to be set out in one place, and some comments on how certain transactions are structured, so…

Broadly, we are looking at the tax point rules. The tax point is the time at which output tax is due and input tax recoverable. More on tax points here 

A business may have various commercial arrangements for payments such as:

  • receiving advance payments
  • being paid in instalments
  • credit sales
  • periodic payments for continuous supplies
  • security deposits for goods hired

I consider these below, as well as some specific arrangements:

Advance payments and deposits

An advance payment, or deposit, is a proportion of the total selling price that a customer pays a business before it supplies them with goods or services.

The tax point if an advance payment is made is whichever of the following happens first:

  • the date a VAT invoice for the advance payment is issued
  • the date you the advance payment is received

The VAT due on the value of the advance payment (only, not the full value of the overall supply) is included on the VAT return for the period when the tax point occurs.

If the customer pays the remaining balance before the goods are delivered or the services are performed, a further tax point is created when whichever of the following happens first:

  • the date a VAT invoice for the balance is issued
  • payment of the balance is received

So VAT is due on the balance on the return for when the further tax point occurs.

Returnable deposits

A business may ask its customers to pay a deposit when they hire goods. No VAT is due if the deposit is either:

  • refunded in full to the customer when they return the goods safely
  • kept by you to compensate you for loss or damage

Forfeit deposits

If a customer is asked for a deposit against goods or services but they then don’t buy them or use the services, it may be decided to retain the deposit. Usually the arrangement is that the customer is told/agrees in advance and it is part of the conditions for the sale. This arrangement is known as forfeit deposit. It often occurs when, for example, an hotel business makes a charge for reserving a room.

VAT should be declared on receipt of the deposit or when a VAT invoice is issued, whichever happens first.

HMRC has confirmed a new policy that output tax remains due on a deposit, even if the customer does not use the goods or services for which it was paid. This came into force with effect from 1 March 2019, cancelling HMRC’s previous rules which permitted non-refundable deposits to be treated as VAT free compensation.

Continuous supplies

If you supply services on a continuous basis and you receive regular or occasional payments, a tax point is created every time a VAT invoice is issued or a payment received, whichever happens first. An article on tax planning for continuous supplies here

If payments are due regularly a business may issue a VAT invoice at the beginning of any period of up to a year for all the payments due in that period (as long as there’s more than one payment due). If it is decided to issue an invoice at the start of a period, no VAT is declared on any payment until either the date the payment is due or the date it is received, whichever happens first.

Credit and conditional sales

This is where the rules can get rather more complex.

  • A credit sale means the sale of goods which immediately become the property of the customer but where the price is paid in instalments.
  • A conditional sale is where goods are supplied to a customer but the goods remain the seller’s property until they are paid for in full.

The tax point for a credit sale or a conditional sale is created at the time you supply the goods or services to your customer. This is the basic tax point and is when you should account for the VAT on the full value of the goods.

This basic tax point may be over-ridden and an actual tax point created if a business:

  • issues a VAT invoice or receives payment before supplying the goods or services
  • issues a VAT invoice up to 14 days after the basic tax point

Credit sales where finance is provided to the customer

If goods are offered on credit to a customer and a finance company is not involved, the supplier is financing the credit itself. If the credit charge is shown separately on an invoice issued to the customer, it will be exempt from VAT. Other fees relating to the credit charge such as; administration, documentation or acceptance fees will also be exempt. VAT is declared on the full value of the goods that have been supplied on the VAT Return for that period.

If goods or services are supplied on interest free credit by arranging with a customer for them to pay over a set period without charging them interest then VAT is declared on the full selling price when you make the supplies.

Credit sales involving a finance company

When a business makes credit sales involving a finance company, the finance company either:

  • becomes the owner of the goods, eg; when a purchase is financed by a hire-purchase agreement
  • does not become the owner of the goods, eg; when a purchase is financed by a loan agreement

Hire purchase agreements

If the finance company becomes the owner of goods, the business is supplying the goods to the finance company and not the customer. There is no charge for providing the credit, so the seller accounts for VAT on the value of the goods at the time they are supplied to the finance company. Any commission received from the finance company for introducing them to the customer is usually subject to VAT.

Loan agreements

If the finance company does not become owner of the goods, the supplier is selling the goods directly to its customer. The business is not supplying the goods to the finance company, even though the finance company may pay the seller direct.  VAT is due on the selling price to the customer, even if the seller receives a lower amount from the finance company. The contract between the customer and the finance company for credit is a completely separate transaction to the sale of the goods.

Specific areas 

The following are areas where the rules on the treatment may differ

Cash Accounting Scheme

If a business uses the cash accounting scheme here it accounts for output tax when it receives payment from its customers unless it is a returnable deposit

Property

Care should be taken with deposits in property transactions.  This is especially important if property is purchased at auction.

These comments only apply to the purchase of property on which VAT is due (commercial property less than three years old or subject to the option to tax).  If a deposit is paid into a stakeholder, solicitor’s or escrow account (usually on exchange) and the vendor has no access to this money before completion no tax point is created. Otherwise, any advance payment is treated as above and creates a tax point on which output tax is due to the extent of the deposit amount. Vendors at auction can fall foul of these rules. If no other tax point has been created, output tax is due on completion.

Tour Operators’ Margin Scheme (TOMS)

TOMS has distinct rules on deposits.  Under normal VAT rules, the tax point is usually when an invoice is issued or payment received (as above).  Under TOMS, the normal time of supply is the departure date of the holiday or the first occupation of accommodation. However, in some cases this is overridden.  If the tour operator receives more than one payment, it may have more than one tax point. Each time a payment is received exceeding 20% of the selling price, a tax point for that amount is created. A tax point is also created each time the payments received to date (and not already accounted for) exceed 20% when added together. There are options available for deposits received when operating TOMS, so specific advice should be sought.

VAT Registration

In calculating turnover for registration, deposits must be included which create a tax point in the “historic” test.  Care should also be taken that a large deposit does not trigger immediate VAT registration by virtue of the “future” test. This is; if it is foreseeable at any time that receipts in the next 30 days on their own would exceed the turnover limit, currently £85,000, then the registration date would be the beginning of that 30-day period.

Flat Rate Scheme

A business applies the appropriate flat rate percentage to the value of the deposit received (unless it is a returnable deposit).  In most cases the issue of an invoice may be ignored if the option to use a version of cash accounting in the Flat Rate Scheme is taken. More on the FRS here and here

Please contact us if you have any queries on this article or would like your treatment of deposits reviewed to:

  • Ensure treatment is correct to avoid penalties, and/or;
  • Establish whether planning is available to properly defer payments of output tax under the tax point rules.

VAT: Financial Services – Flowchart

By   30 June 2022
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FS Intermediary – flowchartDownload
Financial Services (FS) is a complex area of VAT and the legislation and case law add to that complexity. For ease, I have made a flowchart which I hope may help.

The supply of FS intermediary services may be exempt from VAT, but other types of supplies relating to FS are standard rated (advice, marketing, providing information etc).

With new technology advancing all the time, this adds more difficulties in establishing the correct VAT treatment.