Category Archives: VAT Planning

Repayment interest on VAT credits or overpayments – Update

By   6 February 2024
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HMRC has updated its guidance on when repayment interest is due.

If a business has claimed more input tax than it has declared output tax (a repayment return) HMRC will repay the difference by making a VAT repayment. HMRC will also repay any VAT that has been overpaid in error. Repayments are usually made within 30 days. The 30 days starts from the day HMRC receives the VAT Return and ends the day your repayment is approved (not the day it is received). HMRC does not count days taken to check the return is accurate and legitimate, and to correct any errors or omissions, as part of this 30-day period.

If HMRC is late in paying, a business may be entitled to repayment interest on any VAT that it is owed. For accounting periods starting on or after 1 January 2023, repayment interest replaces the repayment supplement.

A business, or its agent can track a VAT repayment online.

Update

Information on eligibility criteria for repayment interest on overpayments and start dates when VAT is not paid to HMRC has been amended. Information on repayment interest end dates when HMRC sets it off against your debts has also been updated.

Small businesses/start ups: Should I register for VAT voluntarily?

By   1 February 2024
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VAT Basics – voluntary registration

Why?

OK, so why would a business choose to VAT register when it need not? Let’s say its turnover is under the VAT registration limit of £90,000, isn’t it just best to avoid the VATman if at all possible?

Planning

This is not an article which considers whether a business MUST register, but rather it looks at whether it is a good idea to register on a voluntary basis if it is not compulsory. The first time a business would probably consider VAT planning.

Decision

As a general rule of thumb; if you sell to the public (B2C) then probably not. If you sell to other VAT registered businesses (B2B) then it is more likely to be beneficial.

If you sell B2B to customers overseas it is almost certain that VAT registration would be a good thing, as it would if you supply zero rated goods or services in the UK. This is because there is no output tax on sales, but full input tax recovery on costs; VAT nirvana! A distinction must be made between zero rated supplies and exempt supplies. If only exempt supplies are made, a business cannot register for VAT regardless of level of income.

Compliance

Apart from the economic considerations, we have found that small businesses are sometimes put off VAT registration by the added compliance costs (especially since MTD) and the potential penalties being in the VAT club can bring. Weighed against this, there is a certain kudos or prestige for a business and it does convey a degree of seriousness of a business undertaking. We also come across situations where a customer will only deal with suppliers who are VAT registered.

The main issue

The key to registration is that, once registered, a business may recover the VAT it incurs on its expenditure (called input tax). So let us look at some simple examples of existing businesses for comparison:

Examples

  • Example 1

A business sells office furniture to other VAT registered business (B2B)

It buys stock for 10,000 plus VAT of 2,000

It incurs VAT on overheads (rent, IT, telephones, light and heat etc) of 2,000 plus 400 VAT

It makes sales of 20,000

If not registered, its profit is 20,000 less 12,000 less 2400 = 5600

If VAT registered, the customer can recover any VAT charged, so VAT is not a disincentive to him

Sales 20,000 plus 4000 VAT (paid to HMRC)

Input tax claimed = 2400 (offset against payment to HMRC)

Result: the VAT is neutral and not a cost, so profit is 20,000 less 12,000 = 8000, a saving of 2400 as compared to the business not being registered.  The 2400 clearly equals the input tax recovered on expenditure.

  • Example 2

A “one-man band” consultant provides advice B2B and uses his home as his office. All of his clients are able to recover any VAT charged.

He has very few overheads that bear VAT as most of his expenditure is VAT free (staff, train fares, use of home) so his input tax amounts to 100.

He must weigh up the cost (time/admin etc) of VAT registration against reclaiming the 100 of input tax. In this case it would probably not be worthwhile VAT registering – although the Flat Rate Scheme may be attractive.

  • Example 3

A retailer sells adult clothes to the public from a shop. She pays VAT on the rent and on the purchase of stock as well as the usual overheads. The total amount she pays is 20,000 with VAT of 4000.

Her sales total 50,000

If not VAT registered her profit is 50,000 less 24,000 = 26,000

If VAT registered she will treat the value of sales as VAT inclusive, so of the 50,000 income 8333 represents VAT she must pay to HMRC. She is able to offset her input tax of 4000.

This means that her profit if VAT registered is 50,000 less the VAT of 8333 = 41,667 less the net costs of 20,000 = 21,667

Result: a loss of 4333 in profit.

As may be seen, if a business sells to the public it is nearly always disadvantageous to be voluntarily VAT registered. It may be possible to increase her prices by circa 20%, but for a lot of retailers, this is unrealistic.

Intending traders

If a business has not started trading, but is incurring input tax on costs, it is possible to VAT register even though it has not made any taxable supplies. This is known by HMRC as an intending trader registration. A business will need to provide evidence of the intention to trade and this is sometimes a stumbling block, especially in the area of land and property. Choosing to register before trading may avoid losing input tax due to the time limits (very generally a business can go back six months for services and four years for goods on hand to recover the VAT). Also cashflow will be improved if input tax is recovered as soon as possible.

Action

Careful consideration should be given to the VAT status of a small or start-up business. This may be particularly relevant to start-ups as they typically incur more costs as the business begins and the recovery of the VAT on these costs may be important. In most cases it is also possible to recover VAT incurred before the date of VAT registration.

This is a basic guide and there are many various situations that require further consideration of the benefits of voluntary VAT registration. We would, of course, be pleased to help.

VAT: Buildings and construction update

By   1 February 2024
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HMRC has amended Notice 708 which covers:

  • when building work can be zero-rated or reduced-rated at 5%
  • when building materials can be zero-rated or reduced-rated at 5%
  • when the sale, or long lease in a building is zero-rated
  • where you can find out more about the VAT domestic reverse charge for building and construction services
  • when developers are blocked from deducting input tax on goods that are not building materials
  • when a builder or developer needs to have a certificate from their customer, confirming that the building concerned is intended to be used for a purpose that attracts the zero or reduced rate
  • when a customer can issue that certificate to a builder or developer
  • what happens when a certificated building is no longer used for the purpose that attracted the zero rate, the use for that purpose decreases or the building is disposed of
  • the special time of supply rules for builders
  • when a business, on using its own labour to carry out building work on a building or civil engineering structure that it occupies or uses, must account for a self-supply charge

Sections 18.1 and 18.2 of the Notice and the certificates in those sections have been updated to show they have force of law under The VAT Act 1994, Schedule 8, Group 5, Note 12.

Extension of VAT energy-saving materials relief

By   22 January 2024
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HMRC have published a new Policy Paper on the extension of energy-saving materials (ESMs).

Installations of ESMs in residential accommodation currently benefit from a temporary VAT zero rate until 31 March 2027, after which they revert to the reduced rate of VAT at 5%.

This measure extends the relief to installations of ESMs in buildings used solely for relevant charitable purposes, such as village halls or similar recreational facilities for a local community.

It also expands the scope of the relief to the following technologies:

  • electrical batteries that store electricity generated by certain ESMs and from the National Grid
  • water-source heat pumps
  • diverters that enable excess electricity from certain ESMs to be used within a building in which it is generated rather than exported to the grid

It also adds certain preparatory groundworks that are necessary for the installation of ground- and water-source heat pumps.

The changes apply from 1 February 2024

The policy objective is to incentivise the installation of ESMs across the UK to improve energy efficiency and reduce carbon emissions.

The measures are implemented by The Value Added Tax (Installation of Energy-Saving Materials) Order 2024.

VAT: Fuel and power HMRC update

By   10 January 2024
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HMRC has updated its VAT Notice 701/19 from 5 January 2024.

Sections 2, 3 and 5 have been amended to include information about the VAT treatment of charging of electric vehicles (EVs) when using charging points.

A VAT Did you know?

By   18 December 2023
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Chestnuts roasting by an open fire…

Roasted nuts in shells are zero rated, but if the shell is removed they become standard rated.

Ho, ho ho… VAT and nuts in the same sentence. Merry Christmas everybody.

VAT: What is a proforma invoice and how can it be used?

By   11 December 2023
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VAT basics

Proforma invoices (proformas) are preliminary documents usually sent to buyers in advance of a delivery of goods/provision of services. Proformas will typically describe details of the purchase of goods/services and other important information, such as the terms of the transaction. Proformas are not “official” documents and represent an informal agreement. Usually, requesting a proforma represents a more serious interest on the part of a buyer than a quote – a buyer is generally committed to making a purchase but want to understand the details before proceeding with the approval process and making a binding agreement with the seller. They are therefore a useful business tool and use of them may result in a beneficial cashflow position for VAT (please see below).

Proforma translates from Latin as “for the sake of form”, and this provides an indication that the document is provisional or a step in a process.

It is also worth noting that the use of proformas is not mandatory.

The difference between an invoice and a proforma

Invoices (also called commercial invoices, VAT invoices or tax invoices) are distinct from proformas. They may contain similar information but serve different purposes. It is important to avoid confusing the two, since only invoices are legal documents; that is, they evidence a transaction and is the document on which VAT may be claimed. An invoice must contain certain information and there are specific legal obligations for providing them.

It is a matter of law whether an invoice is valid and when they must be issued. A proforma is not required to follow any set form, apart from the facts that they must not have an invoice number and must state that it is a proforma invoice. We also recommend that a proforma does not show the supplier’s VAT number for the avoidance of doubt.

Contents of a proforma

Proformas can be considered as “dummy invoices” and they are prepared by the seller usually to provide details of:

  • the issuing business’s name, address, and contact details
  • customer’s name and address
  • date of issue
  • length of time the pricing is valid
  • the goods/services requested, including quantities, type, and physical specifications
  • pricing, including individual costs as well as the total amount to be charged
  • terms of sale, including eg; shipping and delivery dates
  • payment terms
  • whether VAT is applicable

However, there are no set formats for proformas.

Use for buyer

The purpose of a proforma is to provide the buyer with an accurate and complete good faith estimate they can use to decide whether or not to go ahead with a transaction. It also avoids surprises when the actual tax invoice is issued.

VAT implications

The main distinctions are that, compared to a tax invoice, a proforma:

  • does not create a tax point
  • the recipient is unable to recover input tax on a proforma

Very broadly, the tax point (time of supply) this is the earliest of; invoice date, receipt of payment, goods transferred or services completed. The tax point fact is helpful in tax planning for suppliers. Broadly, using proformas, requests for payment, or similar documents rather than issuing an invoice, defers a tax point and consequently when VAT is payable to HMRC. This is especially relevant to businesses which provide ongoing services (known as continuous supplies of services).

Please contact us if you require more information on the commercial use of proformas.

 

VAT: Contact lens services – taxable or exempt? The Vision Direct case

By   8 December 2023
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Latest from the courts

In the First-Tier Tribunal (FTT) case of Vision Dispensing Limited the issue was whether services linked to the online sale of prescription contact lenses were covered by the exemption at The VAT Act 1994, Schedule 9, group 7, item 1 (b) – the provision of medical care.

Generally speaking, opticians provide two types of supply

  • exempt medical care; sight tests, measuring and fitting
  • the standard rated supply of goods; spectacles, contact lenses, accessories etc

Almost always a customer pays a single amount which covers the services as well as the goods, so an apportionment is required. HMRC updated guidance on apportionment here.

Background

The Appellant “VDL” supplies services in connection with the online sale of contact lenses and this appeal was concerned with the question whether those supplies are subject to VAT at the standard rate.

The legislation provides for exemption for medical care by a person registered or enrolled in either of the registers of Ophthalmic Opticians or the register of Dispensing Opticians kept under the Opticians Act 1989. The exemption is also extended to persons who are not registered/enrolled under the Act but are directly supervised by a person who is so registered or enrolled.

VDL is a UK incorporated company and a member of the Vision Direct corporate group. VDL has a sister group company called Vision Direct BV (“VDBV”) which is based in The Netherlands. VDL operates a warehouse facility in the UK. Goods (contact lenses and other optical products) belonging to VDBV were stored in the warehouse and dispatched to purchasers by VDL, using its own workforce. VDL also employed customer assistants, who deal with a range of enquiries from customers. VDBV operates the website visiondirect.co.uk through which prescription contact lenses and other optical goods are supplied to UK customers. Customers purchasing prescription contact lenses or other optical products online enter two contracts; one with VDBV for the supply of contact lenses and one with VDL for the supply of dispensing services. There is also a contract between VDL and VDBV. VDL is not paid a fee by VDBV, its income comprises by the fee paid by customers.

The arguments

HMRC contended that there is little evidence to support that there was advice being provided to customs by VDL and consequently, there were serious questions about whether healthcare services are being supplied. The supplies fall short of a number of regulatory requirements and that the supplies described as dispensing services cannot properly be described as professional clinical advice or therapeutic care. HMRC stated that VDL has never seen a single customer. Clinical advice cannot be delivered in an impersonal or generic way.

HMRC pointed out that:

  • the website makes it clear that VDL does not provide advice on which customers can depend. Consequently, it cannot rely on the website as evidence of medical care
  • there is no direct link between the use of the website and payments to VDL. For there to be a supply, there must be a direct link between the supplier and the recipient

VDL contended that its dispensing services are superior to those available on the High Street. Contrary to HMRC’s case, it is able to identify multiple examples of clinical advice and the purpose of its supplies is to assist in the treatment of defective eyesight. All services are directly supervised by those with the appropriate qualifications.

Deliberation

The FTT was required to determine whether VDL’s services constituted medical care and were those services wholly performed or directly supervised by appropriate persons?

It was agreed that the advice does not need to be complex or personalised to be covered by the exemption as long as it contributes to the efficacy of the overall therapeutic process. The material provided on the website was comprehensive and covered the entire process from an eye test, the diagnosis of an eye defect, and then the selection, measuring and fitting of spectacles or lenses to the supply of those spectacles or lenses.

It was concluded by the FTT that the provision of the website was by VDBV as in the T&Cs VDBV operates it and owns the intellectual property rights to its content. Consequently, the provision of the website could not be part of the supply by VDL. VDL supplied the material or reviewed its content for VDBV pursuant to a contract between the two companies.

Decision

The FTT concluded that:

  • the quality, quantity, and nature of the optical information on the website was such that its provision could amount to medical care, but;
  • the information on the website is not provided by VDL (but by VDBV)
  • even if it were provided by VDL, the terms on which it is made available mean that it is not part of any supply made by VDL to customers and must be left out of account when it comes to characterising the supplies VDL does make
  • what VDL does do is choose the correct lenses and dispatch them. There is no element of medical care in VDL’s supply
  • there was little evidence as to how the opticians monitored the performance of the staff so that they could satisfy themselves that their performance was of a suitable standard, so it could not be said that there was direct supervision.

As a result, VDL did not provide medical care and in any case, the services were not wholly performed or directly supervised by appropriately qualified individuals so exemption could not apply

The appeal was dismissed.

Commentary

Opticians have long produced VAT challenges since the cases of Leightons and Eye-Tech in the 1990s. Any businesses using a similar business model are advised to review the treatment of their supplies in light of this case.

VAT: The Partial Exemption Annual Adjustment

By   4 December 2023
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What is the annual adjustment? Why is it required?

An annual adjustment is a method used by a business to determine how much input tax it may reclaim.

Even though a partly exempt business must undertake a partial exemption calculation each quarter or month, once a year it will have to make an annual adjustment as well.

An annual adjustment is needed because each tax period can be affected by factors such as seasonal variations either in the value supplies made or in the amount of input tax incurred.

The adjustment has two purposes:

  • to reconsider the use of goods and services over the longer period; and
  • to re-evaluate exempt input tax under the de minimis rules.

An explanation of the Value Added Tax Partial Exemption rules is available here

Throughout the year

When a business makes exempt supplies it will be carrying out a partial exemption calculation at the end of each VAT period. Some periods it may be within the de minimis limits and, therefore, able to claim back all of its VAT and in others there may be some restriction in the amount of VAT that can be reclaimed. Once a year the business will also have to recalculate the figures to see if it has claimed back too much or too little VAT overall. This is known as the partial exemption annual adjustment. Legally, the quarterly/monthly partial exemption calculations are only provisional, and do not crystallise the final VAT liability. That is done via the annual adjustment.

The first stage in the process of recovering input tax is to directly attribute the costs associated with making taxable and exempt supplies as far as possible. The VAT associated with making taxable supplies can be recovered in the normal way while there is no automatic right of deduction for any VAT attributable to making exempt supplies.

The balance of the input tax cannot normally be directly attributed, and so will be the subject of the partial exemption calculation. This will include general overheads such as heating, lighting and telephone and also items such as building maintenance and refurbishments.

The calculation

Using the partial exemption standard method the calculation is based on the formula:

Total taxable supplies (excluding VAT) / Total taxable (excluding VAT) and exempt supplies x 100 = %

This gives the percentage of non-attributable input VAT that can be recovered. The figure calculated is always rounded up to the nearest whole percentage, so, for example, 49.1 becomes 50%. This percentage is then applied to the non-attributable input VAT to give the actual amount that can be recovered.

Once a year

Depending on a businesses’ VAT return quarters, its partial exemption year ends in either March, April, or May. The business has to recalculate the figures during the VAT period following the end of its partial exemption year and any adjustment goes on the return for that period. So, the adjustment will appear on the returns ending in either June, July, or August. If a business is newly registered for VAT its partial exemption “year” runs from when it is first registered to either March, April or May depending on its quarter ends.

Special methods

The majority of businesses use what is known as “the standard method”. However, use of the standard method is not mandatory and a business can use a “special method” that suits a business’ activities better. Any special method has to be “fair and reasonable” and it has to be agreed with HMRC in advance. When using a special method no rounding of the percentage is permitted and it has to be applied to two decimal places.

Commonly used special methods include those based on staff numbers, floor space, purchases or transaction counts, or a combination of these or other methods.

However, even if a business uses a special method it will still have to undertake an annual adjustment calculation once a year using its agreed special method.

De minimis limits

If a business incurs exempt input tax within certain limits it can be treated as fully taxable and all of its VAT can be recovered. If it exceeds these limits none of its exempt input tax can be recovered. The limits are:

  • £625 per month on average (£1,875 per quarter or £7,500 per annum) and;
  • 50% of the total input VAT (the VAT on purchases relating to taxable supplies should always be  greater than the VAT on exempt supplies to pass this test)

The partial exemption annual adjustments are not errors and so do not have to be disclosed under the voluntary disclosure procedure. They are just another entry for the VAT return to be made in the appropriate VAT period.

Conclusion

If a business fails to carry out its partial exemption annual adjustment it may be losing out on some input VAT that it could have claimed. Conversely, it may also show that it has over-claimed input tax. When an HMRC inspector comes to visit he will check that a business has completed the annual adjustment. If it hasn’t, and this has resulted in an over-claim of input VAT, (s)he will assess for the error, charge interest, and if appropriate, raise a penalty. It is fair to say that partly exempt businesses tend to receive more inspections than fully taxable businesses.