If you buy a flapjack* from a vending machine in the corridor at work it is VAT free. However, if you buy the same product from a machine in the staff canteen it will be standard rated.
* Of course, zero rating only applies to a “traditional” flapjack and not cereal or energy/sports nutrition bars…
HMRC’s manual VAT Assessments and Error Correction was updated on 15 October 2024.
This internal guidance is for HMRC inspectors (but is equally useful for advisers) covers assessments and error correction. The amendments apply mainly to General assessment procedures: Importance of avoiding delay.
The manual covers:
It also refers to for the most up-to-date guidance on reasonable excuse CH160000.as a defence against penalties and interest.
More on:
Disclosure of Avoidance Schemes – new rules
New HMRC guidance on error reporting
New online service for error correction
Error Disclosure under £10,000 – Draft Letter To HMRC
The recent announcement of an e-invoicing consultation means that businesses should consider the impacts of the intended introduction now.
When this is published (potentially in the Budget on 30 October) it is be anticipated it will cover the intended effective date, how it will affect types of taxpayer, eg; B2B and B2C, how it will be implemented, and its range.
This raises further questions “down the line”, so here we look a step further and consider “split payments” as there has been a lot of conversation and media coverage on this subject.
What are split payments (sometimes known as “real-time extraction”)?
Split payments use card payment technology to collect VAT on online sales and transfer it directly to HMRC rather than the seller collecting it from the buyer along with the payment for the supply, and then declaring it to HMRC on a return in the usual way.
Clearly, HMRC is very keen to introduce such a system, but there are significant hurdles, the biggest being the complexity for online sellers, payment processors, input tax systems, agents, advisers and HMRC itself.
Where are we on split payments?
HMRC has previously published a Prior Information Notice (PIN) and associated Request for Information (RFI), seeking views on the outline requirements and proposed procurement process split payments. This should, inter alia, assist HMRC in:
This builds on previous information gathering/consultations/discussions carried out some years ago.
Background
The expansion of the online shopping market has brought unprecedented levels of transactions. The results of digitalisation have also brought challenges for tax systems. Jurisdictions all over the world are currently grappling with the question of how to prevent large VAT losses, which can arise from cross-border online sales. This happens when consumers buy goods from outside their jurisdiction from sellers who, through fraud or ignorance, do not comply with their tax obligations. It is costing the UK tax authorities an estimated £1 billion to £1.5 billion (figures for 2015-16) a year. The UK government believes that intercepting VAT through intermediaries in the payment cycle, split payment potentially offers a powerful means of enforcing VAT compliance on sellers who are outside the UK’s jurisdiction.
Fraud
The fraud carried out by online sellers is not particularly sophisticated but is difficult to combat. Simply, sellers either use a fake VAT number to collect VAT without declaring it, or even more basically, collect the VAT and disappear.
Proposed spilt payment methods
The way in which payments are split represent difficult technical VAT issues, particularly when sales are at different VAT rates. The three proposals are:
There may be more proposals forthcoming, but none of the above proposals appear reasonable and the complexity they would bring would seem to rule them out as matters stand – although this has not previously stopped HMRC introducing certain measures and the obvious benefits to the authorities cannot be ignored.
Overall
The technology for split payments currently exists and is being used in some Latin American countries (and Poland). The concept is part of a larger movement towards real-time taxation and MTD. Our view is that split payments are coming, but we do not know in which form or when.
HMRC internal guidance manual has been updated on 9 October 2024.
This is likely to affect; charities and similar bodies, NFP, clubs, associations, philanthropic organisations, galleries and museums, “hobby” activities, amongst other persons.
Business or Non-Business (N-B) is very important in VAT as it determines, inter alia, whether a supplier is
The definition of business and N-B here.
Legislation: The I Act 1994 Section 24(5).
Further reading
I have written about this issue many times, as it is a fundamental issue in the tax.
The following articles consider case law and other relevant business/N-B issues:
Lajvér Meliorációs Nonprofit Kft. And Lajvér Csapadékvízrendezési Nonprofit Kft
What the Guidance Manual covers:
This is the main reference material for HMRC inspectors and other employees, so it is very helpful for advisers to understand HMRC’s likely approach to a potential VAT issue.
This article looks at the period of activity before a business VAT registers: How to deal with sales and what input tax may be recovered.
VAT Registration
The obligation to VAT register here and the pros and cons of voluntary registration here.
Sales
Between application and receiving a VAT number:
During the wait, a business cannot charge or show VAT on its invoices until it receives a VAT number. However, it will still be required to pay the VAT to HMRC for this period. Usually, a business will increase its prices to allow for this and tell its customers why. Once a VAT number is received, the business can then reissue the relevant invoices showing VAT.
Purchases
Purchases made before registration:
Only the legal entity which actually purchased the goods or services and has applied to VAT register is entitled to input tax recovery.
There are time limits for backdating claims for input tax incurred before registration. These are:
Input tax can only be reclaimed if the pre-registration expenditure related to the taxable supplies made, or to be made, by the newly VAT registered business (whether these supplies are subject to subsequent output tax or whether they were made pre-registration but would have been taxable if the business was VAT registered).
The only VAT return on which such input tax is recoverable is the first.
Tip
When a business applies for registration, there is an opportunity to backdate the EDR. The provision for taxpayers to negotiate an earlier date is contained in The VAT Act 1994, Schedule 1, 9. This option should be considered if there is additional VAT that would become recoverable. This will mean that the first return will be longer than the normal quarterly or monthly returns.
The limit for backdating EDR is four years.
Irrecoverable VAT
Input tax cannot be reclaimed on:
NB: Businesses are not required to reduce the VAT deducted in respect of pre-registration use of fixed assets. Eg; input tax incurred on a van purchased three years before registration and used before and after registration would be recoverable in full.
The “usual” rules for input tax also apply to pre-registration claims; that is, some VAT is never reclaimable, see here.
Specific circumstances
There are special rules for partially exempt businesses and for businesses that have non-business income and for the purchase of certain items (see below) covered by the Capital Goods Scheme (CGS).
Included in the CGS are:
NB: The partial exemption de minimis limit does not apply to input tax incurred pre-registration.
Pre-incorporation
A limited company cannot register for VAT until it is formally incorporated. Goods or services may have been supplied to the directors or employees setting up the company before then.
A company can claim input tax on those goods and services if the it relates directly to the taxable business to be carried on by it following incorporation and registration for VAT. The six-month (services) four-year (goods) limits also apply to pre-incorporation claims.
Documentation
Any claim must be supported by a valid VAT invoice for each item. If this documentation is not available, there is a possibility that HMRC will accept alternative evidence.
Legislation
The right to deduct input tax as above is covered by The VAT general Regulations 1995, reg 111.
The future for e-invoicing
E-invoicing is a long-accepted form of commercial data exchange and is becoming important for regulatory authorities.
HMRC will initiate a consultation process to gather feedback on fostering investment in e-invoicing. The consultation date has not yet been specified, but we recommend that businesses should prepare for potential mandatory e-invoicing. This consultation will seek input from businesses on how HMRC can support investment in and uptake of e-invoicing.
The initiative reflects global trend towards e-invoicing and HMRC’s focus on digital transformation.
Further information on, and a glossary for, e-invoicing here.
A newly published (18 September 2024) set of guidelines: Guidelines for Compliance GfC8 are aimed at helping businesses with VAT compliance controls and set out what HMRC considers good practice for accounting and compliance processes.
HMRC says that these Guidelines for Compliance (GfC) set out its recommended approach and are designed to help businesses understand HMRC expectations as they plan, carry out, and review the accounting and compliance processes that ensure VAT is accurately declared by a business.
The guide covers:
General approach to VAT compliance controls
VAT reporting – manual adjustments
Next steps — correcting errors and guidance
The guidelines are aimed at those responsible for the governance, controls, processing and submitting of the VAT return. Such roles may include:
HMRC internal manual – VAT Supply and Consideration has been updated.
The manual provides guidance on determining the liability of the supply of goods or services effected for a consideration including:
The amendments are in respect of payments that are not consideration: Carbon offsetting which adds two new pages giving examples of outside the scope activities and commentary on other ecosystem services.
The subject of invoices is often misunderstood and can create serious issues if mistakes are made. VAT is a transaction tax, so primary evidence of the transaction is of utmost importance. Also, a claim for input tax is usually not valid unless it is supported by an original valid invoice. HMRC can, and often do, reject input claims because of an inaccurate invoice. There are a lot of misconceptions about invoices, so, although a rather dry subject, it is very important and I thought it would be useful to have all the information in one place, so here is my guide:
Obligation to provide a VAT invoice
With certain exceptions, a VAT registered person must provide the customer with an invoice showing specified particulars when there is a supply of goods or services in the UK (other than an exempt supply) to a taxable person.
Exceptions
The above does not apply to the following supplies.
• Zero-rated supplies
• Supplies where the VAT charged is excluded from credit under VATA 1994, s 25(7) eg; business entertaining and certain motor cars although a VAT invoice may be issued in such cases.
• Supplies on which VAT is charged but which are not made for a consideration. This includes gifts and private use of goods.
• Sales of second-hand goods under one of the special schemes – any invoices for such sales must not show any VAT.
• Supplies that fall within the Tour Operators’ Margin Scheme (TOMS). VAT invoices must not be issued for such supplies.
• Supplies where the customer operates a self-billing arrangement.
• Supplies by retailers unless the customer requests a VAT invoice.
• Supplies by one member to another in the same VAT group.
• Transactions between one division and another of a company registered in the names of its divisions.
• Supplies where the taxable person is entitled to issue, and does issue, invoices relating to services performed in fiscal and other warehousing regimes.
Documents treated as VAT invoices
Although not strictly VAT invoices, certain documents listed below are treated as VAT invoices either under the legislation or by HMRC.
(1) Self-billing invoices
Self-billing is an arrangement between a supplier and a customer in which the customer prepares the supplier’s invoice and forwards it to him, normally with the payment.
(2) Sales by auctioneer, bailiff, etc.
Where goods (including land) forming part of the assets of a business carried on by a taxable person are, under any power exercisable by another person, sold by that person in or towards satisfaction of a debt owed by the taxable person, the goods are deemed to be supplied by the taxable person in the course or furtherance of his business.
The particulars of the VAT chargeable on the supply must be provided on a sale by auction by the auctioneer and where the sale is otherwise than by auction by the person selling the goods. The document issued to the buyer is treated as a VAT invoice.
(3) Authenticated receipts in the construction industry.
(4) Business gifts
Where a business makes a gift of goods on which VAT is due, and the recipient uses the goods for business purposes, that person can recover the VAT as input tax (subject to the normal rules). The donor cannot issue a VAT invoice (because there is no consideration) but instead may provide the recipient with a ‘tax certificate’ which can be used as evidence to support a deduction of input tax. The tax certificate may be on normal invoicing documentation overwritten with the statement:
“Tax certificate – No payment is necessary for these goods. Output tax has been accounted for on the supply.”
Full details of the goods must be shown on the documentation and the amount of VAT shown must be the amount of output tax accounted for to HMRC.
Invoicing requirements and particulars
A VAT invoice must contain certain basic information and show the following particulars:
(a) A sequential number based on one or more series which uniquely identifies the document.
The ‘invoice number’ can be numerical, or it can be a combination of numbers and letters, as long as it forms part of a unique and sequential series.
(b) The time of the supply, ie tax point.
(c) The date of issue of the document.
(d) The name, address and registration number of the supplier.
(e) The name and address of the person to whom the goods or services are supplied.
(f) A description sufficient to identify the goods or services supplied.
(g) For each description, the quantity of the goods or extent of the services, the rate of VAT and amount payable, excluding VAT, expressed in any currency.
(h) The unit price.
This applies to ‘countable’ goods and services. For services, the countable element might be, for example, an hourly rate or a price paid for standard services. If the supply cannot be broken down into countable elements, the total VAT-exclusive price is the unit price.
(i) The gross amount payable, excluding VAT, expressed in any currency.
(j) The rate of any cash discount offered.
(k) The total amount of VAT chargeable expressed in sterling.
(l) Where the margin scheme for second-hand goods or TOMS is applied, either a reference to the appropriate provision of The VAT Act 1994 or any indication that the margin scheme has been applied.
The way in which margin scheme treatment is referenced on an invoice is a matter for the business and but we recommend:
• “This is a second-hand margin scheme supply.”
• “This supply falls under the Value Added Tax (Tour Operators) Order 1987.”
The requirement only applies to TOMS invoices in business to business transactions.
(m) Where a VAT invoice relates in whole or in part to a supply where the person supplied is liable to pay the VAT, a reference to the appropriate provision of The VAT Act 1994 or any indication that the supply is one where the customer is liable to pay the VAT.
This covers UK supplies where the customer accounts for the VAT (eg under the gold scheme or any reverse charge requirement under the missing trader intra-community rules). The way in which margin scheme treatment is referenced on an invoice is a matter for the business and we recommend: “This supply is subject to the reverse charge”.
Exempt or zero-rated supplies
Invoices do not have to be raised for exempt or zero-rated transactions when supplied in the UK. But if such supplies are included on invoices with taxable supplies, the exempt and zero-rated supplies must be totalled separately and the invoice must show clearly that there is no VAT payable on them.
Leasing of motor cars
Where an invoice relates wholly or partly to the letting on hire of a motor car other than for self-drive, the invoice must state whether the car is a qualifying vehicle
Alternative evidence to support a claim for input tax
In certain situations HMRC can use its discretion and allow an input tax with documentary evidence other than an invoice. Guidance here.
Electronic invoices
Full information on electronic invoicing here.
Retailers
Retailers may issue a “less detailed tax invoice” if a customer requests one. the supply must be for £250 or less (including VAT) and must show:
Summary
As may be seen, it is a matter of law whether an invoice is valid and when they must be issued. Therefore it is important for a business to understand the position and for its system to be able to produce a valid tax invoice and to recognise what is required to claim input tax. As always with VAT, there are penalties for getting documentation wrong.
Latest from the courts
In the First-Tier Tribunal (FTT) case of Go City Ltd the issue was the VAT treatment of passes (“sightseeing packages”) sold by the appellant. Should they be outside the scope of VAT as multi-purpose vouchers (MPVs) or whether “functioning as a ticket”? The difference being the time of supply (tax point).
The issues
The appellant sells passes which enables the buyer to enter London attractions and travel on certain types of transport. The passes were sold at a price lower than the usual admittance price at the attractions. HMRC originally accepted that the supplies were of “face value vouchers” (MPV – see below) via The VAT Act, Schedule 10A, and latterly Schedule 10B, but later changed its view. It raised assessments for the deemed underdeclarations.
Tax point
The difference in VAT treatment is, essentially:
Moreover, the above means that for single purpose vouchers, VAT is due whether the voucher is actually redeemed or not – there is no way to reduce output tax previously accounted for if the voucher is not used. Whereas for MPVs VAT is only due when they are redeemed. More background on vouchers below.
Contentions
Go City Ltd argued that what was being sold was MPV and output tax was only due when the voucher was redeemed.
HMRC contended that the sale was of a “ticket” (effectively a single purpose voucher) and that output tax was due “up-front”.
Decision
The appeal allowed. The Tribunal concluded that he passes were MPVs and their sale was consequently outside the scope of VAT. No output tax was due at the time they were sold.
The passes were not only outside the scope of VAT because they are MPVs, but also because the supplies take place when the customer uses the pass, and not when it is purchased. The position is essentially the same as in Findmypast and MacDonald Resorts .
Furthermore, the FTT considered the validity of a number of the assessments HMRC issued. These were raised “to protect HMRC’s position” in respect of the alleged underdeclaration of output tax. The court ruled that these assessments were invalid because, at the time they were raised, HMRC did not have a view that the appellant’s returns were incorrect, as a final decision had yet to be made.
Commentary
The correct decision I feel. A long read, but well worth it for interested parties.
Technical background
Face value vouchers
Recent changes, radically alter the UK rules for face value vouchers (FVV). FVVs are vouchers, tokens, stamps (physical or electronic) which entitle the holder to certain goods or services up to the value on the face of the vouchers from the supplier of those goods or services. Examples of FVVs would include vouchers sold by popular group discount websites, vouchers sold by high street retailers, book tokens, stamps and various high street vouchers.
Single or multi-purpose
The most important distinction for FFVs is whether a voucher is a single purpose voucher or multi-purpose voucher. If it is a multi-purpose voucher, then little has changed. If it is a single purpose voucher, however, HMRC will now require output tax to be accounted for at the date it is issued. Single purpose vouchers are vouchers which carry the right to receive only one type of goods or services which are all subject to a single rate of VAT. Multi-purpose vouchers are anything else. The differences can be quite subtle.
For example: