Category Archives: VAT Registration

Splitting a business to avoid VAT registration: Disaggregation

By   11 January 2022
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Earlier this month, I wrote an article on VAT registration.  A query which commonly follows an initial registration query is: can I split my business into separate parts which are all under the VAT registration turnover limit to avoid registering? Prima facie, this seems a straightforward planning point. But is it possible?

You will not be surprised to learn that HMRC don’t like such schemes and there is legislation and case law for them to use to attack such planning known as “disaggregation”. This simply means artificially splitting a business.

What HMRC will consider to be artificial separation:

HMRC will be concerned with separations which are a contrived device set up to circumvent the normal VAT registration rules. Whether any particular separation will be considered artificial will, in most cases, depend upon the specific circumstances. Accordingly, it is not possible to provide an exhaustive list of all the types of separations that HMRC will view as artificial. However, the following are examples of when HMRC would at least make further enquiries:

Separate entities supply registered and unregistered customers

  • In this type of separation, the registered entity supplies any registered customers and the unregistered part supplies unregistered customers.

Same equipment/premises used by different entities on a regular basis

  • In this type of situation, a series of entities operates the same equipment and/or premises for a set period in any one-week or month. Generally, the premises and/or equipment is owned by one of the parties who charges rent to the others. This situation may occur in launderettes and take-aways such as fish and chip shops or mobile catering equipment.

Splitting up of what is usually a single supply

  • This type of separation is common in the bed and breakfast trade where one entity supplies the bed and another the breakfast. Another is in the livery trade where one entity supplies the stabling and another, the hay to feed the animals. There are more complex examples, but the similar tests are applied to them too.

Artificially separated businesses which maintain the appearance of a single business

  • A simple example of this type of separation is; pubs in which the bar and catering may be artificially separated. In most cases the customer will consider the food and the drinks as bought from the pub and not from two independent businesses. The relationship between the parties in such circumstances will be important here as truly franchised “shop within a shop” arrangements will not normally be considered artificial.

One person has a controlling influence in a number of entities which all make the same type of supply in diverse locations

  • In this type of separation, a number of outlets which make the same type of supplies are run by separate companies which are under the control of the same person. Although this is not as frequently encountered as some of the other situations, the resulting tax loss may be significant.

The meaning of financial, economic, and organisational links

Again, each case will depend on its specific circumstances. The following examples illustrate the types of factors indicative of the necessary links, although there will be many others:

Financial links

  • financial support given by one part to another part
  • one part would not be financially viable without support from another part
  • common financial interest in the proceeds of the business

Economic links

  • seeking to realise the same economic objective
  • the activities of one part benefit the other part
  • supplying the same circle of customers

Organisational links

  • common management
  • common employees
  • common premises
  • common equipment

HMRC often attack structures which were not designed simply to avoid VAT registration, so care should be taken when any entity VAT registers, or a conscious decision is made not to VAT register. Registration is a good time to have a business’ activities and structure reviewed by an adviser.

As with most aspects of VAT, there are significant and draconian penalties for getting registration wrong, especially if HMRC consider that it has been done deliberately to avoid paying VAT.

VAT Registration

By   4 January 2022
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VAT Basics

A business must register for VAT with HMRC if its VAT taxable turnover is more than £90,000 in a 12 month period.

Taxable Turnover

Taxable turnover means the total value of everything that a business sells that is not exempt or outside the scope of VAT.

Registration is mandatory if turnover exceeds the current registration threshold in a rolling 12-month period. This is not a fixed period like the tax year or the calendar year – at the end of every month a business is required to calculate income (not profit) over the past year.

A business may also register voluntarily, which may be beneficial if it wants to reclaim input tax it has incurred.

Catches

There are some transactions that must be included in the turnover calculation which can easily be missed:

  • goods a business hired or loaned to customers
  • business goods used for personal reasons
  • goods which were bartered, part-exchanged or given as gifts
  • services a business receives from suppliers in other countries which are subject to a reverse charge
  • zero-rated items (these are still taxable although no VAT is charged)

Timing

A business must register within 30 days of the end of the month when it exceeded the threshold. The effective date of registration (EDR) is the first day of the second month after a business goes over the threshold.

Future test

A business must mandatorily register for VAT if it expects its VAT taxable turnover to be more than £90,000 in the next 30-day period. This may be because of a new contract or a other known factors.

Registration exception

If a business has a one-off increase in income it can apply for a registration ‘exception’. If its taxable turnover goes over the threshold temporarily it can write to HMRC with evidence showing why the taxable turnover will not exceed the deregistration threshold (currently £88,000 in the next 12 months). HMRC will consider an exception and write confirming if a business will receive one. If not, HMRC will compulsory register the business for VAT.

Transfer of a going concern (TOGC)

If a VAT-registered ongoing business is purchased the buyer must register for VAT from the purchase date. It cannot wait until its turnover exceeds the threshold.

Businesses outside the UK

If a business belongs outside the UK, there is a zero threshold. It must register as soon as it supplies any goods and services to the UK (or if it expects to in the next 30 days).

Late registration

If a business registers late, it must pay the VAT due from when it should have registered (the EDR). Further, it will receive a penalty depending on how much it owes and how late the registration is. The rates based on the VAT due are:

  • up to 9 months late – 5%
  • between 9 and 18 months – 10%
  • over 18 months = 15%.

How to register

A business can register online. By doing this it will register for VAT and create a VAT online account via which it will submit VAT returns.

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 invoices showing the VAT.

Purchases made before registration

There are time limits for backdating claims for input tax incurred before registration. These are:

  • four years for goods still on hand at the EDR
  •  
  • six months for services

Once registered

A business’ VAT responsibilities. From the EDR a business must:

  • charge the right amount of VAT
  • pay any VAT due to HMRC
  • submit VAT Returns
  • keep appropriate VAT records and a VAT account
  • follow the rules for ‘Making Tax Digital for VAT’
  • keep business details up to date (there are penalties for failing to inform HMRC of changes)

VAT groups

VAT grouping is a facilitation measure by which two or more entities can be treated as a single taxable person (a single VAT registration). There are pros and cons of grouping set out here.

VAT stats 2020-21

By   20 December 2021
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HMRC has published UK VAT statistics for 2020 to 2021.

Headlines

The total VAT receipts in the tax year ending March 2021 decreased by 22% (£24.1 billion) from the previous year. There was a downward impact on receipts from the VAT deferral measure which took effect from 20 March 2020.

The Wholesale and Retail sector continued to be the largest contributor to net Home VAT liabilities.

Import VAT receipts was also lower: £4.2 billion (13%) for the year compared to the year ending March 2020. This was mainly due to postponed VAT accounting.

68% of total net home VAT declared was paid by traders with an annual turnover greater than £10 million.

VAT population – income

Incorporated companies accounted for the largest share of the VAT population and annual turnover. Companies accounted for 73% of taxpayers, and 92% of annual taxable turnover in the year ending March 2021. Sole proprietors were the second largest group in terms of VAT population; this group accounted for 16% of VAT traders.

Businesses with an annual turnover greater than £10 million declared £67 billion in net VAT, 68% of the total for the tax year. This group only accounted for 1% of businesses.

52% of businesses declared annual turnover below the VAT registration threshold of £85,000.

VAT population – trade sectors

The wholesale and retail sector was the largest in terms of contribution to VAT liabilities. Net VAT liabilities were £29 billion (30%) of the total for the tax year ending March 2021. The financial and insurance sector has replaced the arts, entertainment and recreation sector and accommodation and food services sector in the top ten trade sectors from the previous year.

The construction sector increased by £650 million (12%), the largest year-on-year change. The only other sectors to see increases were wholesale and retail sectors which increased by £30 million (2%) and professional, scientific, and technical activities which increased by £19 million (2%). Of the top VAT contributing sectors, the financial and insurance sector saw the largest decrease of £560 million (25%).

VAT registrations

New registrations increased from the tax year ending March 2013 to the tax year ending March 2017 where it decreased by 33,666 (8%). Since the tax year ending March 2018, there has been an upward trend in new registrations – 300,000 in the year to 2021.

Deregistrations were below 200,000 a year from the tax year ending March 2014 to the tax year ending March 2016, but increased above that level in the tax year ending March 2017, increasing further in the tax year ending March 2018. This increase in deregistrations was likely to be linked to policy changes in relation to the Flat Rate Scheme.

The freeze in the VAT registration and deregistration thresholds has increased the number of registrations and decreased the number of deregistrations progressively from the year ending March 2019.

VAT: Input tax recovery. The Mpala Mufwankolo case

By   15 November 2021
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Latest from the courts

In the First Tier Tribunal (FTT) case of Mr Mufwankolo the dispute was whether the appellant was able to recover VAT charged by the landlord of the property from which he ran his business – a licenced retail outlet on Tottenham High Road.  

Background

The landlord had opted to tax the commercial property and charged VAT on the rent. The appellant was a sole proprietor; however, the lease was in the name of Mr Mufwankolo’s wife, and the rent demands showed her name and not that of the sole proprietor. It was contended by the appellant, but not evidenced, that the lease had originally been in both his and his wife’s names, despite his wife being the sole signatory.

The issues

Could the appellant recover input tax?

  • Did the business receive the supply?
  • Was there appropriate evidence?

It was clear that the business operated from the relevant property and consequently, in normal circumstances, the rent would be a genuine cost component of the business.

The Decision

The FTT found that there was no entitlement to an input tax claim and the appeal was dismissed. The lease was solely in the wife’s name and the business was the applicant as a sole proprietor. (There was an obvious potential for a partnership and an argument that a partnership was originally intended was advanced. The status of registration was challenged in 2003, but, crucially, not pursued).

It was possible for the property to be sub-let by the wife to the husband, however, this did not affect the VAT treatment as matters stood. Additionally, there was no evidence that the appellant actually paid any of the rent, as this was done by the tenant. There were no VAT invoices addressed to the sole proprietor.

Given the facts, there was no supply to the appellant, so there was no input tax to claim, and the issue of acceptable evidence fell away.

It was a certainty that the appeal could not succeed.

Commentary

There were a number of ways that this VAT cost could have easily been avoided had a little thought been given to the VAT arrangements. An oversight that created an avoidable tax hit.

A helpful guide to input tax considerations here: Care with input tax claims.

Legislation

The VAT Act 1994 Section 3 – Taxable person

The VAT Act 1994 Section 4 – Taxable supply

The VAT Act 1994 Section 24 (1) – Input tax

The VAT Act 1994 Section 24 (6) – Input tax claim evidence

VAT: HMRC to end making payable orders to NETPs

By   9 November 2021
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HMRC will stop issuing payable orders to overseas non-established taxpayers (NETP – taxpayers who are registered for UK VAT but do not have a business address here). The system automatically issued a payable order if a NETP was due a repayment.

Background

HMRC has received notifications and complaints from taxpayers advising that they can no longer cash their payable orders in their country or their bank. The impact of Brexit and COVID19 has seen an increase in banks/countries no longer accepting payable orders. Consequently, HMRC were sending repayments to NETPs with the knowledge they may not be able to cash them.

New Gform

To address this issue HMRC has created a Gform that will enable NETPs to send their bank account information in order that the issue of a payable order can be avoided and a Clearing House Automated Payment System (CHAPS) payment made instead.

Access

HMRC systems do not currently have CHAPS functionality or the ability to store overseas bank information. However, once a NETP has completed the form, which is accessed via the Government Gateway HMRC will set a lock on the taxpayer’s record to prevent the payable order being automatically issued. NETPs will then receive their repayments directly into their bank account without the need to visit their bank to cash a payable order.

Information required

Information requested on the Gform will include:

  • VAT registration number
  • address
  • email address
  • bank account information
  • payable order information if necessary

VAT: HMRC OSS updates

By   5 October 2021
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HMRC has issued two new documents which provide practical guidance for users of the One Stop Shop (OSS).

They cover how to pay the VAT due on an OSS return and how to use the service to submit an OSS VAT return if a business is registered for the OSS Union Scheme. A link has been added to allow a business to submit a OSS return directly.

VAT Grouping – As you were

By   21 July 2021
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HMRC published a call for evidence last year in respect of the VAT group registration provisions, specifically:

  • the establishment provisions
  • compulsory VAT grouping
  • grouping eligibility criteria for businesses currently not in legislation, including limited partnerships

The call for evidence was used to gather information and views on the current UK rules, and on provisions that have been adopted by other countries.

Background

VAT grouping is a facilitation measure by which two or more eligible persons can be treated as a single taxable person for VAT purposes. Eligible persons are bodies corporate, individuals, partnerships and Scottish partnerships, provided that certain conditions are satisfied. Bodies corporate includes all types of companies and limited liability partnerships. From 1 November 2019, grouping is additionally available for all entities, including; partnerships, sole traders and Trusts in certain cases. We consider the pros and cons of VAT grouping here.

Outcome

HMRC state that it was clear from the responses how valuable UK VAT grouping is to businesses and it is appreciated that businesses require certainty following Brexit and the impact of Covid 19. The call for evidence prompted a substantial number of responses that were generally in favour of maintaining current practices. It also set out evidence on why changes to the provisions on VAT grouping would impact business growth and international competitiveness.

Consequently, HMRC has decided that there will be no changes to the VAT grouping rules.

*  a sigh of relief * 

With everything else going on in the VAT world, a little continuity is welcome.

VAT: The “business” of shooting – a tale

By   14 July 2021
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Sometimes one is involved in a dispute which goes to the core of the tax.  This is a case which highlights basic VAT principles, HMRC’s approach to an issue and the lengths to which a taxpayer has to go to defend his position.

Are you sitting comfortably?

A day out in the countryside; striding across beautiful landscape, amongst friends, enjoying each other’s’ company and a bit of sport – can this really be the subject of such intense debate with HMRC? Well, unfortunately this seems to be the case when it comes to the operation of a day’s shooting. In the eyes of the taxman, whether or not a profit or a surplus is achieved, shooting, conducted in the course of furtherance of a business is subject to VAT.

This is not usually an issue which shooting syndicates find themselves having to address; they are not concerned with the ins and outs of what constitutes a business for the purposes of the VAT legislation. However, HMRC was pursuing this issue in earnest and they have a team devoted solely to attacking shoots.

Who is HMRC targeting?

HMRC seem to be focusing on syndicate run shoots which are not registered for VAT but who HMRC believe are operating on business principles. If an organisation is operating as a business then it may be liable to register for VAT if certain income thresholds are exceeded. The shoot will then have to charge output VAT on the supplies it makes.  In my case there would have been a significant assessment plus penalties and interest which could double the past VAT bill.

How is HMRC attacking the issue?

HMRC is looking closely at the specific activities of syndicate shoots in order to build an argument demonstrating that the organisation of the shoot is run on “sound business principles”.  The reason that there is room for debate on this matter is that what constitutes a business is not explicitly defined anywhere in the VAT legislation either in UK or EC law. Rather, the issue has been defined in case law.

The defining case was Lord Fisher, which co-incidentally also concerned a shoot. This case is relied upon throughout the VAT world to give guidance on what constitutes a business – and not just in respect of shoots but for all types of activity.

Anyway, back to this syndicate…

I was involved in a battle lasting four years which concerned a local shoot run for over five decades by a group of friends and which was provided only for the benefit of the syndicate members. The shoot was not open to the common commercial market place or members of the public and the shoot did not advertise. HMRC spent a great deal of time trying to understand the finer details of the running of this shoot and concluded that it was a business

We advised The Shoot to appeal to the VAT Tribunal against HMRC’s decision to levy VAT on its activities.

They key to the syndicate’s defence was to demonstrate that no true business would operate commercially in the way that The Shoot does.  If it did, it would be completely unprofitable and would soon be out of business. To demonstrate this effectively, every aspect of the shoot was examined in detail and compared and contrasted with the way a commercial shoot operates. This involved everything from the lunch arrangements, CVs of the gamekeepers and how beautiful the land is, right through to whether chicks or poults are purchased and whether local deer were sold to the highest bidder. However, the most important factor was the demonstration that the syndicate does not have a profit built in to the cost structure and the amounts that the syndicate members contribute. The syndicate is run on a cost sharing basis and is not “an activity likely to be carried out by a private undertaking on a market, organised within a professional framework and generally performed in the interest of generating a profit.”

It all sounds so simple to those familiar with the industry but unfortunately from a VAT ‘business’ perspective it has been a long, stressful and costly argument for the appellant to make.  A few days before the case was to be heard at the Tribunal, HMRC withdrew their assessment and conceded the case.

HMRC had seen the many witness statements filed by the members of the syndicate waxing lyrical about how this was an age-old hobby run by a few friends and in no way could it be considered a commercial business. They had seen the expert witness report written by a specialist in the field. The distinctions made between commercial and syndicate shooting were made very clear. They had also seen the powerful argument which concluded that the shoot “cannot seriously be suggested to amount to a ‘business’ for the purpose of the VAT code”.

What this means?

Of course this victory over HMRC was a fantastic result for the members of The Shoot, but from a practical point of view quite frustrating in that the case was not heard; denying other entities the benefit of the predicted victory.  Alas, it was one case that HMRC could not afford to lose.

It is therefore likely that HMRC will continue to target other shoots where they think they can ‘win’ or at least not be challenged.

Have you been affected? – What should you do next?

If this makes for frighteningly familiar reading and you or your local syndicate shoot are, or have been, under HMRC investigation then it is vital that you should take professional advice.  As I orchestrated the defence for The Shoot we believe that we are the leading advisers in such matters.

 For completeness, the six tests derived from the Lord Fisher case (and others) are:
  1. Is the activity a serious undertaking earnestly pursued?
  2. Is the activity an occupation or function, which is actively pursued with reasonable or recognisable continuity?
  3. Does the activity have a certain measure of substance in terms of the quarterly or annual value of taxable supplies made?
  4. Is the activity conducted in a regular manner and on sound and recognised business principles?
  5. Is the activity predominantly concerned with the making of taxable supplies for a consideration?
  6. Are the taxable supplies that are being made of a kind which, subject to differences of detail, are commonly made by those who seek to profit from them?

The case of Lajvér Meliorációs Nonprofit Kft. and Lajvér Csapadékvízrendezési Nonprofit Kft is also helpful in looking at what a business is.

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

By   15 June 2021
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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   9 June 2021
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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”.