Category Archives: VAT Planning

VAT: New One Stop Shop (OSS) rules from 1 July 2021

By Marcus Ward 15 June 2021

All you need to know about the new One Stop Shop (OSS)

New VAT rules will be introduced on 1 July 2021, and it is important that businesses and advisers are aware of the impact on transactions from this date. These changes have been introduced to increase the control of tax revenues as it is an area where a significant amount of tax is lost – creating an unfairness for businesses that correctly pay tax. They also aim to provide simplification for suppliers and consumers.

Who will be affected?

The new rules will impact all businesses that sell products online to consumers (B2C) in the EU, known as: distance sales. It will also affect suppliers of certain designated services and electronic interfaces.

UK online sellers not established anywhere in the EU can use the “Non-Union” version of OSS.

How OSS works

The current position

The current EU VAT rules state that cross-border sales of goods are subject to VAT in the EU Member State (MS) of dispatch. However, there are thresholds; once these sales reach a threshold in the MS of sale, a business is required to VAT register in that MS and ensure compliance and payment of VAT there.

The new rules

All sales will be subject to VAT in the MS of arrival of the goods. The existing thresholds for distance sales of goods (where the supplier is responsible for the transport of the products) within the EU will be replaced by a new EU threshold of €10,000*. To avoid a business having to VAT register in every EU MS into which it supplies goods, online sellers will be able to use the OSS electronic portal. This will enable the seller to account for, and pay, VAT in all EU MS on a single electronic quarterly return in one EU MS.

* As, since Brexit, the UK is no longer an EU MS, one the main differences is that the €10,000 annual turnover threshold for small business does not apply, so an EU VAT registration will be required for any distance sales to the EU. The business will need to nominate any single EU MS to register, submit returns, and make payments. Additionally. As a non-union OSS, depending on the chosen MS’s domestic regulations, a business may be required to appoint a fiscal representative.

Note: Even if a UK business has a turnover below the VAT registration threshold (currently £85,000 pa) so that it need not register here, it will be subject to OSS rules and need to register in an EU MS, this is compulsory.

Supplies covered by OSS

distance sales of goods within the EU by suppliers not belonging in that MS
supplies of certain B2C services (below) made by a supplier which take place in a MS in which it is not established

Services covered by Non-Union OSS

Examples of supplies of services to customers (a non-exhaustive list) that could be reported under the non-Union scheme are:

accommodation services
admission to cultural, artistic, sporting, scientific, educational, entertainment or similar events; such as fairs and exhibitions
transport services, plus ancillary activities such as; loading, unloading, handling or similar
valuation and work on movable tangible property
services connected to immovable property
hiring of means of transport
restaurant and catering services for consumption on board ships, aircraft or trains etc

Electronic interfaces

From 1 July 2021, if an electronic interface, eg; marketplace, platform, etc facilitates distance sales of goods by a non-EU established seller to a buyer in the EU, the electronic interface is considered to be the seller (“deemed supplier” rather than agent) and is liable for the payment of VAT via the OSS.

IOSS

In addition to the OSS, a new scheme covering the import of goods subject to a distance sales transaction and in consignments not exceeding €150 is being introduced to simplify accounting for VAT. This is called the Import One-Stop Shop (IOSS). If the value of the consignment exceeds €150, it will usually be the end customer who will be the importer and will have to pay VAT, and any, customs clearance etc costs.

Note: The VAT exemption at import of small consignments of a value up to €22 will be removed. This means all goods imported in the EU will now be subject to VAT.

VAT rates

Businesses will need to apply the VAT rate of the MS where the goods are dispatched to or where the services are supplied. Information on the VAT rates in the EU is available on the European Commission website.

How to register for the OSS

Each EU MS will have an online OSS portal where businesses can register from 1 April 2021 and can use for transactions made on or after 1 July 2021. The single registration will be valid for all eligible supplies made by online sellers (including electronic interfaces) or supplies facilitated by electronic interfaces.

OSS Requirements

A business that uses the OSS will be required to:

apply the VAT rate of the MS to which the goods are shipped
collect VAT from the buyer
submit a quarterly electronic VAT return
make quarterly VAT payments
keep records of all OSS supplies for ten years

Summary

The OSS is not compulsory, however, as the alternative is to VAT register in every EU MS where goods are received, it is a simplification in that respect – the previous distance selling rules were cumbersome and antiquated.

Further information

Full details of the OSS and IOSS from the EC here

VAT: Input tax recovery – whether a taxable supply. The Door Specialist case

By Marcus Ward 9 June 2021

Latest from the courts

In the First Tier Tribunal case of The Door Specialist Limited (TDSL) the issue was whether an HMRC assessment for overclaimed input tax was correct.

Background

The appellant recovered input tax on the import of goods (doors). The company did not sell the doors, but simply gave the goods (no consideration provided) to a separate company called Just Doors (JD). It was JD who made the sales of the doors to third party customers. TDSL and JD were under common ownership but no VAT group in place at the relevant time. TDSL was VAT registered as it made separate, unrelated taxable supplies of property rental

Arguments

HMRC contended that as there was no onward taxable supply of the doors by TDSL, no input tax was recoverable per The VAT Act 1994 section 24 (1). TDSL relied on HMRC’s published guidance (Notices 700 and 700/7) in relation to gifts and proposed that it would be proper to assess for output tax on the “supply” to JD rather than denying the input tax claim.

Issues

The issues may therefore be summarised as whether;

the relevant goods were used for the purpose of any economic activity by TDSL
the doors could be treated as business gifts as contended by the applicant such that the input tax was recoverable.

Further cases on economic activity/business here, here and here

Decision

It was decided that as there was no direct and immediate link between the purchase of the goods and any onward taxable supply in the course of business or economic activity by TDSL (as required by the outcome of the cases of BAA Ltd JDI International Leasing Ltd) the disallowance of the input tax was appropriate. The advancement of the business gifts contention did not assist the taxpayer as this was not an economic activity in itself. The appeal was therefore dismissed.

Commentary

A clear example of not considering the VAT implications when carrying out transactions. This tax cost could have easily been avoided if TDSL had sold the doors to JD. As both parties were fully taxable, there would have been no VAT hit. Business gifts and promotional activities are also often a complex area of VAT and as one former colleague once remarked “If you have a marketing department you have a VAT issue”.

VAT due on the charging of electric vehicles

By Marcus Ward 1 June 2021

As a result of enquiries from businesses and trade representatives, HMRC has announced that output tax is due on electric vehicle (EV) charging.

The use of EV charging points is becoming more common in public places. HMRC has clarified the rules in specific cases, and confirm:

Output tax

Supplies of EV charging through charging points in public places are charged at the standard rate of VAT. There is no exemption or relief .

NB: There is a reduced rate of VAT for supplies of small quantities of electricity, known as ‘de minimis’. However, the de minimis provision only applies if the supply of electricity is all of the following:

ongoing
to a person’s house or building
less than 1,000 kilowatt hours a month

Consequently, the de minimis provision does not apply to supplies of EV charging as this is done at charging points in public places, eg; car parks, petrol stations and on-street parking, and not to a person’s house or building.

Input tax

A business may recover the input tax incurred in charging its EVs if all of the following apply:

it is a sole proprietor
you charge your EV vehicle at home
the EV is used for business purposes (an apportionment must be made between business and private use)

If an employee charges an EV (which is used for business) at home (s)he cannot recover the input tax as the supply is made to the employee and not to the business.

If an employee charges an employer’s EV (for both business and private use) at the employer’s premises the employee will need to record the business and private mileage. Recovery of the full amount of VAT for the supply of electricity used to charge the EV is permitted (including the electricity for private use). However, output tax will be due on the charge on the amount for private use. Alternatively, a business may recover VAT on only the business element.

VAT Schemes Guide – Alternative ways of accounting for tax

By Marcus Ward 17 May 2021

There are a number of VAT Schemes which are designed to simplify accounting for the tax. They may save a business money, reduce complexity, avoid the need for certain documentation and reduce the time needed to deal with VAT. Some schemes may be used in combination with others, although I recommend that checks should be made first.

It is important to compare the use of each scheme to standard VAT accounting to establish whether a business will benefit. Some schemes are compulsory and there are particular pitfalls for certain businesses using certain schemes.

I thought that it would be useful to consider the schemes all in one place and look at their features and pros and cons.

These schemes reviewed here are:

Cash Accounting Scheme
Annual Accounting Scheme
Flat Rate Scheme
Margin schemes for second-hand goods
Global Accounting
VAT schemes for retailers

Cash Accounting Scheme

Normally, VAT returns are based on the tax point (usually the VAT invoice date) for sales and purchases. This may mean a business having to pay HMRC the VAT due on sales that its customers have not yet paid for.

The VAT cash accounting scheme instead bases reporting on payment dates, both for purchases and sales. A business will need to ensure its records include payment dates.

A business is only eligible for the Cash Accounting Scheme if its estimated taxable turnover is no more than £1.35m, and can then remain in the scheme as long as it remains below £1.6m.

Advantages

Usually beneficial for cash flow especially if its customers are slow paying
Output tax is not payable at all if a business has a bad debt

Disadvantages

Is generally not beneficial for a repayment business (one which reclaims more VAT than it pays, eg; an exporter or supplier of zero rated goods or services)
Not usually beneficial if a business purchases significant amounts of goods or services on credit

Annual Accounting Scheme

The Annual Accounting Scheme allows a business to pay VAT on account, in either nine monthly or three quarterly payments. These instalments are based on VAT paid in the previous year. It is then required to complete a single, annual VAT return which is used to calculate any balance owed by the business or due from HMRC.

A business is eligible for the scheme if its estimated taxable turnover is no more than £1.35m and is permitted to remain in the scheme as long as it remains below £1.6m.

Advantages

Reduces paperwork as only the need to complete one return instead of four (Although it does not remove the requirement to keep all the normal VAT records and accounts)
Improves management of cash flow

Disadvantages

Not suitable for repayment businesses as they would only receive one repayment at the end of the year
If turnover decreases, the interim payments may be higher than under standard accounting

Flat Rate Scheme

The Flat Rate Scheme is designed to assist smaller businesses reduce the amount of time and complexity required for VAT accounting. The Flat Rate Scheme removes the need to calculate the VAT on every transaction. Instead, a business pays a flat rate percentage of its VAT inclusive turnover. The percentage paid is less than the standard VAT rate because it recognises the fact that no input tax can be claimed on purchases. The flat rate percentage used is dependent on a business’ trade sector.

A business is eligible for this scheme if its estimated taxable turnover in the next year will not exceed £150,000. Once using the scheme, a business is permitted to continue using it until its income exceeds £230,000.

If eligible, a business may combine the Flat Rate Scheme with the Annual Accounting Schemes, additionally, there is an option to effectively use a cash basis so there is no need to use the Cash Accounting Scheme. New rules regarding ” limited cost traders” mean that the scheme has become less attractive.

Advantages

Depending on trade sector and circumstances may result in a real VAT saving
Simplified record keeping; no requirement to separate out gross, VAT and net in accounts
Fewer rules; no issues with input tax a business can and cannot recover on purchases
Certainty of knowing how much of income is payable to HMRC

Disadvantages

No reclaim of input tax incurred on purchases
Limited cost traders impact
If a business buys a significant amount from VAT registered businesses, it is likely to result in more VAT due
Likely to be unattractive for businesses making zero-rated or exempt sales because output tax would also apply to this hitherto VAT free income
Low turnover limit

Margin Scheme for Second Hand Goods

A business normally accounts for output tax on the full value of its taxable supplies and reclaims input tax on its purchases. However, if a business deals in second-hand goods, works of art, antiques or collectibles it may use a Margin Scheme. This scheme enables a business to account for VAT only on the difference between the purchase and selling price of an item; the margin. It is not possible to reclaim input tax on the purchase of an item and there will be no output tax if no profit is achieved. There is a special margin schemes for auctioneers. A variation of the Margin Scheme is considered below.

Advantages

Usually beneficial if buying from (non-VAT registered) members of the public
Purchaser will not see a VAT charge
Although no input tax claimable on purchases of scheme items, VAT may be claimed in the usual way on overheads and other fees etc

Disadvantages

Record keeping requirements are demanding and closely checked, eg; stock records and invoices which are required for both purchases and sales
Cannot be used for items purchased on a VAT invoice
Can be complex and create a cost if goods exported
Although no VAT due on sales if a loss is made, there is no set-off of the loss

Global Accounting

The problem with the Second Hand Goods Scheme is that full details of each individual item purchased and sold has to be recorded. Global Accounting is an optional, simplified variation of the Second Hand Margin Scheme. It differs from the standard Margin Scheme in that rather than accounting for the margin achieved on the sale of each individual item, output tax is calculated on the margin achieved between the total purchases and total sales in a particular accounting period.

Advantages

Simplified version of the Margin Scheme
Record keeping requirements reduced
Losses made on sales reduce VAT payable
Beneficial for businesses which buy and sell bulk volume, low value eligible goods

Disadvantages

Cannot be used for; aircraft, boats, caravans, horses or motor vehicles
Similar to Margin Scheme disadvantages apart from loss set off

VAT Schemes for Retailers

It is usually difficult for retailers to issue an invoice for each sale made, so various retail schemes have been designed to simplify VAT. The appropriate scheme for a business depends on whether its retail turnover (excluding VAT) is; below £1m, between £1m and £130m and higher.

Smaller businesses may be able to use a retail scheme with Cash Accounting and Annual Accounting but it cannot combine a Retail Scheme with the Flat Rate Scheme. However, retailers may choose to use the Flat Rate Scheme instead of a Retail Scheme.

Using standard VAT accounting, a VAT registered business must record the VAT on each sale. However, via a Retail Scheme, it calculates the value of its total VAT taxable sales for a period, eg; a day, and the proportions of that total that are taxable at different rates of VAT; standard, reduced and zero.

According to the scheme a business uses it then applies the appropriate VAT fraction to that sales figure to calculate the output tax due. A business may only use the Retail Scheme for retail sales and must use the standard accounting procedures for other supplies. It must still issue a VAT invoice to any VAT registered customer who requests one. It is a requirement of any scheme choice that HMRC must consider it fair and reasonable.

Examples of Retail Schemes

Apportionment
Direct calculation
The point of sale scheme

There are special arrangements for caterers, retail pharmacists and florists.

Advantages

No requirement to issue an invoice for each sale
Most schemes are relatively simple to administer once set up. Technology assists in a helpful way with EPOS systems
Simplifies record keeping

Disadvantages

It is usual for each line sold to need to be coded correctly for VAT liability
Smaller businesses without state of the art technology may be at a disadvantage
Time and resources required to set up and maintain systems
In some cases the calculation depends on staff “pressing the right button”
Often complex calculations and record keeping
Very precise and complicated rules
Lack of understanding by a number of inspectors
Complexity increases the risk of misdeclaration

Overall

As may be seen, there are a lot of choices for a business to consider, especially a start-up. Choosing a scheme which is inappropriate may result in VAT overpayment and a lot of unneeded record keeping and administration. There are real savings to be made by using a beneficial scheme, both in terms of VAT payable and staff time.

We are happy to review a business’ circumstances and calculate what schemes would produce the best outcome.

Please contact us if you require further information.

VAT Single and Multiple Supplies

By Marcus Ward 11 May 2021

Accounting for VAT can be problematic when the supply of goods and services consist of multiple components. In such cases it is necessary to consider whether each component of the supply should be assessed independently or whether the components should be dealt with as one.

Precise treatment is not specifically addressed in UK or European Law and instead a decision is made based upon a review of the essential features of the transaction. For instance, a meal on an airplane is a normal feature of the zero rated travel provided and is not considered a separate standard rated supply to the travel itself. Conversely a meal on a river cruise is a separate supply to that of the zero rated cruise itself and as such is a separate standard rated supply.

A single price is not therefore a decisive indicator of a single supply. Instead what needs to be considered is whether there is just one principal supply or several distinct independent supplies that are provided.

Through the development of case law and HMRC guidance the following situations have been clarified. I have written about the most important, recent cases here, here, here, here and here.

The 50% rule

If a distinct supply represents 50% or more of the overall cost it can not be considered ancillary to the principal supply. In such cases an apportionment will usually be required.

Postal charges

VAT on postage follows the treatment of VAT on the main supply. For example, for mail order items the postage on book is zero rated, whereas the postage on a printer is standard rated.

There are however situations where postage is treated as a separate supply to the goods if, for example, the postage is not expected and is an additional request by the customer.

Subscriptions

If there is one particular reason for the subscription then the fee is considered to be one single supply. If there are separate reasons for the subscription then the fee should be proportioned accordingly and the appropriate VAT treatment should be applied to each element of the supply.

Printed matter

Usually books, newspapers, magazines and music are zero rated whilst items seen as stationery such as membership cards and notebooks are standard rated. For materials supplied with items that can be used independently then there are two supplies, for example a film supplied with a magazine.

A package test can also be applied, where if there are more zero rated items then standard rated items the entire package becomes zero rated, or vice versa.

Two part tariffs

If there are two payments relating to a single supply, the two payments are treated as one and the VAT treatment follows that of the one supply.

Supplies involving land

Services provided on land tend to be viewed as one complete supply. The land aspect is not usually a separate service that the customer receives and instead allows the main service to be provided.

One instance where this may not apply is service charges, which may need to be apportioned if they contain independent supplies such as rent and cleaning. Independent supplies are made if the customer can choose which of the services they would like.

Summary

Card Protection Plan Ltd has become a landmark case in determining the VAT treatment for single and multiple supplies. In this case the ECJ ruled that standard rated handling charges were not distinct from the supply of exempt insurance. It was noted that ‘a supply that comprises a single service from an economic point of view should not be artificially split’. Notably many subsequent court decisions have since followed this outcome thereby suggesting a general lean towards viewing cases as single supplies where there are reasonable grounds to do so.

VAT: What is open market value? The Jupiter case

By Marcus Ward 11 May 2021

Latest from the courts

In the First Tier tribunal (FTT) case of Jupiter Asset Management Group Ltd the issue was the value of management services to an associated third party VAT group.

Background

The value is important because if HMRC believe that a supply between two connected parties (as defined by The Income and Corporation Taxes Act 1988 Section 839) is undervalue and the recipient cannot recover the relevant input tax in full, it is permitted via The VAT Act 1994, Schedule 6, PART 2, para 1 (1) to substitute open market value (OMV) by way of a Notice.

This paragraph is specifically intended to counter tax avoidance. If a supply between connected persons is made below open market value for a legitimate reason that the trader can substantiate, and which is unconnected with avoidance HMRC has the discretion not to issue a Notice. In Jupiter, HMRC directed that OMV be used to calculate the charge as it considered that value was too low and issued an assessment for underdeclared output tax.

Decision

In the absence of comparable supplies, OMV was to be determined by reference to:

the full cost of making the supplies;
the full cost included the costs incurred on goods and services used in making the supplies and general overhead costs the input tax in respect of which had been recovered
the remuneration paid to the executive directors to the extent that that remuneration related to activities performed by the executive directors in making the supplies of the management services

Consequently, the appeal against the output tax assessment was dismissed.

Commentary

An expected outcome, but ne which emphasises that care should be taken with transactions between connected parties, management charges and inter-company charges in general. This is even more relevant since the decision in the Norseman Gold plc case

VAT: New Road Fuel Scale Charges

By Marcus Ward 7 May 2021

HMRC has updated the valuation table: Road Fuel Scale Charges (RFSC) from 1 May 2021 to 30 April 2022 here.

RFSC

If a business reclaims VAT incurred on road fuel, it will be required recognise the private use element of the fuel.

The RFSC simplifies accounting for VAT on the private use of fuel by motorists. The RFSC is calculated according to a car’s CO2 emissions and the fixed charge is added to output VAT, on the VAT return (in effect, the business supplies to fuel to the individual). The use of this charge is optional, the alternative is to keep detailed mileage records.

A quick RFSC calculator/ready-reckoner is here.

New rules of origin for goods

By Marcus Ward 27 April 2021

Brexit update

HMRC has published updated, detailed guidance for the rules of origin for goods moving between the UK and EU.

It is important to understand the impact of the rules and how they impact a business. Specifically, to ensure advantage is taken of zero tariffs when dealing with cross-border goods. The rules apply to both imports and exports and clearly, incurring unnecessary tariffs is to be avoided if possible.

Background

The UK moved to trading based on a new Free Trade Agreement (FTA) – the Trade and Cooperation Agreement (TCA) between the UK and the EU post-Brexit.

To export tariff-free under the TCA, goods must meet the UK-EU preferential rules of origin. This means that there must be a qualifying level of processing in the country of export to access zero tariffs. This applies to EU origin goods imported and moving through the UK from a Member State to another EU Member State, as well as goods imported from the Rest of World.

These rules are set out in the TCA and determine the origin of goods based on where the products or materials (or inputs) used in their production come from. Their purpose is to ensure that preferential tariffs are only given to goods that originate in the UK or EU and not from third countries.

VAT: Is a car wash a car park? The RK Fuels Ltd case

By Marcus Ward 26 April 2021

Latest from the courts

VAT: Postponed Accounting available for Section 33 bodies

By Marcus Ward 13 April 2021

HMRC has announced that bodies covered by The VAT Act 1994, Section 33 such as; Local Authorities, Academies, Transport Authorities and the Police can use Postponed Accounting for imports.

Normally, a body cannot account for import VAT on its VAT return if it import goods that it knows will be used solely for non-business purposes. However, this no longer applies to a body that is eligible to reclaim import VAT through a VAT refund scheme (Section 33). Section 33 entities when completing its customs declaration, should select the “making an immediate payment or using a duty deferment account” option.

Section 33 bodies

These entities have special VAT treatment which is effectively the opposite of normal VAT rules. To avoid a cost to the taxpayer, these entities are permitted to specifically recover input tax that relates to non-business activities. Nobody said that VAT was straightforward and in these cases, the VAT rules are inverted!

We act for many Local Authorities and Academies. Please contact us should you, or your clients, have any queries on this matter.