VAT: How long do I have to keep records?

By Marcus Ward 24 May 2018

Time limits for keeping records

Record keeping is a rather dry subject, but it is important not to destroy records which HMRC may later insist on seeing!

I have looked at what VAT records a business is required to keep here, but how long must they be kept for?

This is seemingly a straightforward question, but as is usual with VAT there are some ifs and buts.

The basic starting point

The usual answer is that VAT records must be kept for six years. However, there are circumstances where that limit is extended and also times when it may be reduced. Although the basic limit is six years, unless fraud is suspected, HMRC can only go back four years to issue assessments, penalties and interest.

Variations to the six year rule

Mini One Stop Shop (MOSS)

If a business is required to use the MOSS then its records must be retained for ten years (and they should be able to be sent to HMRC electronically if asked).

Capital Goods Scheme (CGS)

If a business has assets covered by the CGS, eg; certain property, computers, aircraft and ships then adjustments will be required up to a ten year period. Consequently, records will have to be retained for at least ten years in order to demonstrate that the scheme has been applied correctly.

Land and buildings

In the case of land and buildings you might need to keep documents for 20 years. We advise that records are kept this long in any event as land and buildings tend to be high value and complex from a VAT perspective, However, it is necessary in connection with the option to tax as it is possible to revoke an option after 20 years.

Transfer Of a Going Concern (TOGC)

This is more of a ‘who” rather than a what or a how long. When a business is sold as a going concern, in most circumstances the seller of the business will retain the business records. When this happens, the seller must make available to the buyer any information the buyer needs to comply with his VAT obligations. However, in cases where the buyer takes on the seller’s VAT registration number, the seller must transfer all of the VAT the records to the buyer unless there is an agreement with HMRC for the seller to retain the records. If necessary, HMRC may disclose to the buyer information it holds on the transferred business. HMRC do this to allow the buyer to meet his legal obligations. But HMRC will always consult the seller first, to ensure that it does not disclose confidential information.

How can a business cut the time limits for record keeping?

It is possible to write to HMRC and request a concession to the usual time limits. HMRC generally treat such a request sympathetically, but will not grant a concession automatically. If a concession is granted there is still a minimum allowance period of preservation which is in line with a business’ commercial practice. Examples of the recommended minimum periods of preservation for certain types of manual records are:

	Type of record	Minimum period of preservation
	Sales or service dockets (mainly used by large organisations especially those involved mainly in retail trading e.g. mail order houses).	No restriction
	Copies of orders, delivery notes, dispatch notes, goods returned notes, invoices for expenses incurred by employees.	1 year
	Production records, stock records (except those for second hand schemes), job cards, appointment books, diaries, business letters.	1 year
	Import, export and delivery from warehouse documents.	3 years
	Daybooks, ledgers, cashbooks, second hand scheme stock books.	3 years
	Purchase invoices, copy sales invoices, credit notes, debit notes, authenticated receipts.	4 years
	Daily gross takings records, records related to retail scheme calculations, catering estimates.	4 years
	Bank statements and paying in books, management accounts, annual accounts.	5 years
	Electronic Cash Registers (ECR) and Electronic Point of Sale (EPOS) equipment	4 years
	Any record containing the VAT account	No concession

Computer produced records

Records produced by a computer system do not necessarily conform to the patterns of manual systems. However, HMRC usually applies the time periods in the table above. This is as long as an inspector is able to determine the documentation necessary to provide a satisfactory audit trail. Where records are stored in an electronic form, a business must be able to ensure the records’ integrity, eg; that the data has not changed, and the legibility throughout the required storage period. If the integrity and legibility of the stored electronic records depends on a specific technology, then the original technology or an equivalent that provides backwards compatibility for the whole of the required storage period must also be retained.

How to keep records

HMRC state that VAT records may be kept on paper, electronically or as part of a software program (eg; bookkeeping software). All records must be accurate, complete and readable.

Other taxes

This article considers the record keeping deadline rules for VAT. Many records kept for VAT purposes will overlap with records for other taxes, and the detailed rules as well as the retention periods may differ.

Information on the record keeping requirements for other taxes is available in the following publications:

a Guide to Corporation Tax Self Assessment for Tax Practitioners and Inland Revenue staff
a general guide to Corporation Tax Self Assessment CTSA/BK4
a general guide to keeping records for your tax return

These are available on the HMRC website

Penalties

If a business’ records are inadequate it may have to pay a record-keeping penalty. If at an inspection HMRC find that records have deliberately been destroyed your they will apply a penalty of £3,000 (this may be reduced to £1,500 if only some of your records are destroyed). In addition, there will be questions about why they have been destroyed.

Finally, it should be remembered for wrongdoing, there is no limitation period on debts to the Crown. You can always be pursued for tax and VAT with no time limit.

Please contact us if you have any queries, or if retaining aged records creates a problem.

The ABC of VAT

By Marcus Ward 12 February 2018

VAT Basics

Jargon Buster

Unfortunately, VAT is littered with phrases, acronyms and jargon which can be impenetrable to people that have to deal with the tax. I have explained the main terms used below and tried to demystify the gobbledygook!

Accounting period

This is the period of time reported in your VAT Return, usually three months.

Acquisitions

Goods brought into the UK from other EC countries (different from goods brought into the UK from outside of the EC; which are known as imports).

Capital Goods Scheme (CGS)

A mechanism for spreading the input tax incurred on certain goods exceeding £50,000 or property exceeding £250,000 of standard-rated cost.

Consideration

Something that is done or given in exchange for something else. Consideration can be in monetary or non-monetary form. If there is no consideration there is no supply.

Corporate body

An incorporated body, eg; a limited company, limited liability partnership, friendly, industrial or provident society.

Distance sales

When a business in one EC country sells and ships goods directly to consumers in another EC country, eg; internet sales.

Exempt supply

A supply that is exempt from VAT by law eg; rent, insurance and financial services. It is not a taxable supply and generally does not allow the recovery of VAT incurred on associated expenditure.

Exports

Goods sent to countries outside of the EC.

Dispatches

Goods sent to another EC country.

Imports

Goods brought into the EC from countries outside of the EC.

Input tax

Refers to the VAT you pay on your purchases – goods or services you use when running your business.

Invoice

Document provided by a taxable person to customer/client. It must contain certain information.

New building

A commercial building less than three years old where a freehold disposal is compulsorily standard-rated.

Non-residential

A building not used as a dwelling.

Option to tax

Changes the supply of a commercial property from exempt to standard rated. This is done solely to recover or avoid input tax attributable.

Output tax

Refers to the VAT you charge on your sales which your clients/customers pay you.

Outside the scope of VAT

Goods and services that are completely outside the scope of VAT altogether, eg; taxes, supplies in other countries, TOGCs and wages paid to employees.

Partial exemption

A business which incurs input tax relating to both taxable and exempt activities is partially exempt and will probably not be able to recover all of its input tax.

Place of supply

The country where a supply of goods or services is deemed to be made for VAT purposes. This is the country in which VAT must be accounted for.

Reduced rate

The rate applied to essential goods and services, such as gas and electricity for residential purposes. Currently at 5%.

Registration

Being VAT registered – accounting for output tax on sales and recovering input tax. A business needs to VAT register when its turnover exceeds certain limits.

Self-billing

Where a customer raises a self-billing document and sends a copy to its supplier with its payment – rather than the supplier issuing an invoice.

Standard rate

A taxable supply subject to UK VAT at the current standard rate of 20%.

Supply

Providing goods or services in return for consideration, normally monetary.

Supply of goods

When exclusive ownership of goods passes from one person to another.

Supply of services

Supply, for consideration, of something provided which is not goods.

Tax period

(Also known as accounting period) The period of time covered by your VAT return. Usually quarterly or monthly.

Taxable person

Any business which supplies goods or services and is required to be registered for VAT. This includes; individuals, partnerships, companies, clubs, associations and charities etc.

Taxable supplies

Goods and services supplied by a taxable person which are liable to VAT at the standard, reduced or zero rate. They usually permit the recovery of VAT incurred on the costs incurred in making them.

Taxable turnover

Taxable turnover is the total value, net of VAT, of the taxable supplies you make in the UK within one year. It is used to establish whether registration is necessary.

Tax point (Time of supply)

The date when a business must account for VAT on supplies and when input tax may be reclaimed. This dictates on what VAT return the transaction is accounted for.

Transfer Of A Going Concern (TOGC)

A sale of a business which continues after transfer. This is a VAT free transaction if certain tests are met.

Zero-rated

Is a taxable supply but subject to UK VAT at a rate of 0%.

VAT – What records must be kept by a business?

By Marcus Ward 9 January 2018

Requirements for VAT records by taxable persons

I thought that it may be useful to round-up all the record-keeping requirements in one place and focus on what HMRC want to see. It is a good time to review record-keeping requirements as Making Tax Digital (MTD) is on the horizon. More on MTD in a later article.

General requirements

Every taxable person must keep such records as HMRC may require. Specifically, every taxable person must, for the purposes of accounting for VAT, keep the following records:

business and accounting records
VAT account
copies of all VAT invoices issued
VAT invoices received
certificates issued under provisions relating to fiscal or other warehouse regimes
documentation relating to acquisitions of any goods from other EC countries
copy documentation issued, and documentation received, relating to the transfer, dispatch or transport of goods by him to other EU countries
documentation relating to imports and exports
credit notes, debit notes and other documents which evidence an increase or decrease in consideration that are received, and copies of such documents issued
copy of any self-billing agreement to which the business is a party
where the business is the customer party to a self-billing agreement, the name, address and VAT registration number of each supplier with whom the business has entered into a self-billing agreement

Additionally

HMRC may supplement the above provisions by a Notice published by them for that purpose. They supplement the statutory requirements and have legal force.

Business records include, in addition to specific items listed above, orders and delivery notes, relevant business correspondence, purchases and sales books, cash books and other account books, records of daily takings such as till rolls, annual accounts, including trading and profit and loss accounts and bank statements and paying-in slips.

Unless the business mainly involves the supply of goods and services direct to the public and less detailed VAT invoices are issued, all VAT invoices must also be retained. Cash and carry wholesalers must keep all till rolls and product code lists.

Records must be kept of all taxable goods and services received or supplied in the course of business (standard and zero-rated), together with any exempt supplies, gifts or loans of goods, taxable self-supplies and any goods acquired or produced in the course of business which are put to private or other non-business use.

All records must be kept up to date and be in sufficient detail to allow calculation of VAT. They do not have to be kept in any set way but must be in a form which will enable HMRC officers to check easily the figures on the VAT return. Records must be readily available to HMRC officers on request. If a taxable person has more than one place of business, a list of all branches must be kept at the principal place of business.

Comprehensive records

In addition, we always advise businesses to retain full information of certain calculations such as; partial exemption, the Capital Goods Scheme, margin schemes, TOMS, business/non-business, mileage and subsistence claims, promotional schemes, vouchers, discounts, location of overseas customers, MOSS, and distance selling amongst other records. The aim is to ensure that any inspector is satisfied with the records and that any information required is readily available. This avoids delays, misunderstandings and unnecessary enquiries which may lead to assessments and penalties.

If you have any doubts that your business records are sufficient, please contact us.

Deregistration – When a business leaves the VAT club

By Marcus Ward 11 December 2017

This article considers when and how to deregister from VAT and the consequences of doing so.

General points

Deregistration may be mandatory or voluntary depending on circumstances. Although it may be attractive for certain businesses too deregister if possible, this is not always the case. The main reason to remain registered is to recover input tax on purchases made by a business. This is particularly relevant if that business’ sales are:

to other VAT registered businesses which can recover any VAT charged
supplies are UK VAT free (eg; zero rated)
made to recipients outside the UK and in some cases the EU

Businesses which make sales to the public (B2C) are usually better off leaving the VAT club even if this means not being able to recover input tax incurred.

A business applies for deregistration online through its VAT account, or it can also complete a form VAT7 to deregister by post.

NB: These rules apply to businesses belonging in the UK. There are different rules for overseas business which are outside the scope of this article.

The Rules

Compulsory deregistration

A business must deregister if it ceases to make taxable supplies. This is usually when a business has been sold, but there may be other circumstances, eg; if a business starts to make only exempt supplies, or a charity stops making business supplies and continues with only non-business activities or when an independent body corporate joins a VAT group. In such circumstances there is a requirement to notify HMRC within 30 days of ceasing to make taxable supplies.

We have seen, on a number of occasions, HMRC attempting to compulsorily deregister a business because either; it has not made any taxable supplies (although it has the intention of doing so) or it is only making a small amount of taxable supplies. In the first example, as long as the business can demonstrate that it intends to make taxable supplies in the future it is entitled to remain VAT registered. This is often the position with; speculative property developers, business models where there is a long lead in period, or business such as exploration/exploitation of earth resources.

Voluntary deregistration

A business may apply for deregistration if it expects its taxable turnover in the next twelve to be below the deregistration threshold. This is currently £83,000 which was unchanged in this month’s Budget. It must be able to satisfy HMRC that this is the case. Such an application may be made at any time and the actual date of leaving the club is agreed with HMRC. It should be noted that when calculating taxable income, certain supplies are excluded. These are usually exempt supplies but depending on the facts, other income may also be ignored.

Consequences of deregistration

Final return

A deregistered business is required to submit a final VAT return for the period up to and including the deregistration date. This is called a Period 99/99 return.

Output tax

From the date of deregistration a business must stop charging VAT and is required to keep its VAT records for a minimum of six years. It is an offence to show VAT on invoices when a business is not VAT registered.

Input tax

Once deregistered a business can no longer recover input tax. The sole exception being when purchases relate to the time the business was VAT registered. This tends to be VAT on invoices not received until after deregistration, but were part of the business’ expenses prior to deregistration. Such a claim is made on a form VAT427

Self-supply (Deemed supply)

An often overlooked VAT charge is the self-supply of assets on hand at the date of deregistration. A business must account for VAT on any stock and other assets it has on this date if:

It could reclaim VAT when it bought them (regardless of whether such a claim was made)
the total VAT due on these assets is over £1,000

These assets will include items such as; certain land and property (usually commercial property which is subject to an option to tax or is less than three year old), un-sold stock, plant, furniture, commercial vehicles, computers, equipment, materials, etc, but does not include intangible assets such as patents, copyrights and goodwill. The business accounts for VAT on the market value of these assets but cannot treat this as input tax, thus creating a VAT cost.

We usually advise that, if commercially possible, assets are sold prior to deregistration. This avoids the self-supply hit and if the purchaser is able to recover the VAT charged the position is VAT neutral to all parties, including HMRC. It is worth remembering that the self-supply only applies to assets on which VAT was charged on purchase and that there is a de minimis limit. We counsel that care is taken to ensure planning is in place prior to deregistration as it is not possible to plan retrospectively and once deregistered the position is crystallised.

Re-registration

HMRC will automatically re-register a business if it realises it should not have cancelled (eg; the anticipated turnover exceeds the deregistration threshold). It will be required to account for any VAT it should have paid in the meantime.

Option To Tax

An option to tax remains valid after a registration has been cancelled. A business must monitor its income from an opted property to see whether it exceeds the registration threshold and needs to register again.

Capital Goods Scheme (CGS)

If a business owns any capital items when it cancels its registration, it may, because of the rules about deemed supplies (see self-supply above) have to make a final adjustment in respect of any items which are still within the adjustment period. This adjustment is made on the final return.

Cash Accounting

A business will have two months to submit its final return after it deregisters. On this return the business must account for all outstanding VAT on supplies made and received prior to deregistration. This applies even if it has not been paid. However, it can also reclaim any VAT provided that you have the VAT invoices. If some of the outstanding VAT relates to bad debts a business may claim relief.

Partial exemption

If a business is partly exempt its final adjustment period will run from the day following its last full tax year to the date of deregistration. If a business has not incurred any exempt input tax in its previous tax year, the final adjustment period will run from the first day of the accounting period in the final tax year in which it first incurred exempt input tax to the date of deregistration.

Flat Rate Scheme

If a business deregisters it leaves this scheme the day before its deregistration date. It must, therefore, account for output tax on its final VAT return for sales made on the last day of registration (which must be accounted for outside of the scheme).

Self-Billing

If your customers issue VAT invoices on your behalf under self-billing arrangements (or prepare authenticated receipts for you to issue) a deregistering business must tell them immediately that it is no longer registered. They must not charge VAT on any further supplies you make. There are financial penalties if a business issues a VAT invoice or a VAT-inclusive authenticated receipt for supplies it makes after its registration has been cancelled.

Bad Debt Relief (BDR)

A business can claim relief on bad debts it identifies after it has deregistered, provided it:

has previously accounted for VAT on the supplies
can meet the usual BDR conditions

No claim may be made more than four years from the date when the relief became claimable.

Summary

As may be seen, there is a lot to consider before applying for voluntary deregistration, not all of it good news. Of course, apart from not having to charge output tax, a degree of administration is avoided when leaving the club, so the pros and cons should be weighed up. Planning at an early stage can assist in avoiding in nasty VAT surprises and we would always counsel consulting an adviser before an irrevocable action is taken. As usual in VAT, if a business gets it wrong there may be an unexpected tax bill as well as penalties and interest.

VAT Simplification (We can but hope)

By Marcus Ward 13 November 2017

This month The Office Of Tax Simplification has published a document called “Value added tax: routes to simplification”. This includes 23 recommendations on how VAT may be simplified in the UK. This is the first Office of Tax Simplification review to focus specifically on VAT and it takes a high level look at areas where simplification of either law or administration would be worthwhile.

The report specifically covers the following areas:

VAT registration threshold
VAT administration
Multiple rates
Partial exemption
Capital Goods Scheme
The option to tax
Special accounting schemes

The dominant issue that came out of the report is the level of turnover above which a business is required to pay VAT, known as the VAT threshold. At £85,000, the UK has the highest VAT threshold in the EU. The report considered a range of options for reform, in particular setting out the impact of either raising or lowering the threshold to avoid the current “cliff edge” position (many business restrict growth in order to avoid VAT registration, creating a “bunching” effect. For example, lowering the threshold may create less drag on economic growth but would bring a larger number of businesses into the VAT system. Alternatively, a higher threshold could also result in less distortion but it would clearly raise less tax.

Legislation

It was noted that since the introduction of VAT in the UK, the relevant legislation has grown so that it is now spread across 42 Acts of Parliament and 132 statutory instruments while still retaining some of the complexities of the pre-1973 UK purchase tax system.

Brexit

The report notes that: unlike income taxes, the VAT system is largely prescribed by European Union rules, so Brexit may present an opportunity to consider areas which could be clarified, simplified, or just made easier. It is not clear at present how Brexit will unfold so this review does not embrace aspects of the VAT system which are part of the Brexit negotiations, such as financial services, or focus specifically on cross-border trade.

Recomendations

The summary of the 23 recommendations are reproduced here:

The government should examine the current approach to the level and design of the VAT registration threshold, with a view to setting out a future direction of travel for the threshold, including consideration of the potential benefits of a smoothing mechanism.
HMRC should maintain a programme for further improving the clarity of its guidance and its responsiveness to requests for rulings in areas of uncertainty.
HMRC should consider ways of reducing the uncertainty and administrative costs for business relating to potential penalties when inaccuracies are voluntarily disclosed.
HM Treasury and HMRC should undertake a comprehensive review of the reduced rate, zero-rate and exemption schedules, working with the support of the OTS.
The government should consider increasing the partial exemption de minimis limits in line with inflation, and explore alternative ways of removing the need for businesses incurring insignificant amounts of input tax to carry out partial exemption calculations.
HMRC should consider further ways to simplify partial exemption calculations and to improve the process of making and agreeing special method applications.
The government should consider whether capital goods scheme categories other than for land and property are needed, and review the land and property threshold.
HMRC should review the current requirements for record keeping and the audit trail for options to tax, and the extent to which this might be handled on-line.
HMRC should establish a target to update guidance within a short, defined, period after a legal change or new policy takes effect.
HMRC should explore ways to improve online guidance, making all current information accessible, and to gauge how often queries are answered by online guidance.
HMRC should review options to reduce the uncertainty caused by the suspended penalty rules.
HMRC should draw greater attention to the facility for extending statutory review and appeal time limits to enable local discussions to take place where appropriate.
HMRC should consider ways in which statutory review teams can deepen engagement with business and adviser groups to increase confidence in the process, and for providing greater clarity about the availability and costs of alternative dispute resolution.
HMRC should consider introducing electronic C79 import certificates.
HMRC should consider options to streamline communications with businesses, including the process for making payments to non-established taxable persons.
HMRC should looks at ways of enhancing its support to other parts of government (for example, in guidance) on VAT issues affecting their operations.
HMRC should review its process for engaging with business and VAT practitioner groups to see if representation and effectiveness can be enhanced.
HMRC should explore the possibility of listing zero-rated and reduced rate goods by reference to their customs code, drawing on the experience of other countries.
HMRC should consider ways of ensuring partial exemption special methods are kept up to date, such as giving them a limited lifespan.
The government should consider introducing a de minimis level for capital goods scheme adjustments to minimise administrative burdens.
The government should consider the potential for increasing the TOMS de minimis limit and removing MICE businesses from TOMS.
HMRC should consider updating the DIY House builder scheme to include clearer and more accessible guidance, increased time limits and recovery of VAT on professional services.
HMRC should consider digitising the process for the recovery of VAT by overseas businesses not registered in the UK.

Next Steps

The Chancellor of the Exchequer must now respond to the advice given.

Commentary

A lot of the areas identified have long been crying out for changes and the recommendations appear eminently sensible and long overdue. As an example, the partial exemption de minimis limit has been fixed at £7500 pa for 23 years and consequently the value of purchases it covers has reduced significantly with inflation. A complete read of the report with prove rewarding as it confirms a lot of beliefs that advisers have long suspected and highlights areas the certainly do require simplification. I am particularly pleased that the complexities of both partial exemption and TOMS have been addressed. Fingers crossed that these recommendations are taken seriously by the government and the Chancellor takes this advice on-board. I am however, not holding my breath. It is anticipated that the early indications of the government’s thinking may be set out in the next Budget.

VAT: Latest from the courts – partial exemption attribution

By Marcus Ward 4 October 2017

In court about courts…

In the First Tier tribunal (FTT) case of The Queen’s Club Limited the issue was whether certain input tax was attributable to the company’s taxable activities or, as HMRC contended; to both its taxable and exempt income (so that it was residual). If HMRC were correct an element of the input tax would fall to be irrecoverable via the appellants’ partial exemption calculation. A brief guide to partial exemption here

Background

The Queen’s Club (The Club) is a well-known members’ tennis club in West London. The Club’s tennis facilities are world-class and each year the Lawn Tennis Association hires the Club’s courts to put on the Aegon Championship which is a precursor to the Wimbledon tournament and attracts many of the world’s leading players. It makes exempt supplies of sporting services to its members and also makes taxable supplies of food and drink in its bars and restaurants. It incurred VAT on the costs of refurbishing the bars, restaurant and café facilities on its premises. The Club considers that it is entitled to a full credit for input tax on those expenses as they were wholly attributable to the taxable supply of catering.

The Club’s revenue comes primarily from the membership fees that it charges. For the year 2012-13 the annual membership fee was £1820. By becoming a member of the Club, a person obtains the right to use both its sporting and non-sporting (catering) facilities. It was decided by the FTT that the Club had a discretion, but not an obligation, to provide the café etc to its members, however it was accepted that most members do not use the social facilities. It was agreed that the membership fee was consideration for an exempt supply of services closely linked with sport for the purposes of Value Added Tax Act 1994, Schedule 9, item 10. The Club also receives five main sources of taxable income:

Fees from the LTA to use its courts for the Aegon Championship
Sales of food and drink from restaurant and bars
Sales of sporting and other goods
Provision of the use of the restaurant and bars, usually with catering
Rental income for certain other rooms

The decision

There was no dispute that there was a direct and immediate link between the refurbishment of the restaurant and bars and taxable supplies made from them. The question that divided the parties was whether there was also a direct and immediate link between the refurbishment the exempt membership supplies.

The judge decided that “In short, viewed objectively, what members obtain when they join the Club is a right of access to world-class sporting facilities together with such additional facilities as the Club decides, in its discretion, to offer. The focus is on the sporting facilities…” and that, viewed objectively, the renovated bars and restaurant are a means by which members are able enjoy the Club’s sporting offering. The overall conclusion was that there was no direct and immediate link between the renovation goods and services and exempt supplies that the Club made.

The decision was that the Club was entitled to credit for the full amount of input tax that it incurred.

Commentary

This case demonstrates that care is always required when costs are attributed to a business’ activities. This is especially important when the costs are significant; particularly when they are incurred on land and property. There tends to be a lot of “debate” with HMRC on such matters and slight nuances can affect attribution. These type of costs are often covered by the Capital Goods Scheme, so care must be taken over a ten year period which adds to the complexity. As always, when considering land and property transactions it pays to obtain professional advice as mistakes are costly. A brief guide to land and property issues here

Office of Tax Simplification reports on VAT

By Marcus Ward 6 March 2017

The Office of Tax Simplification has recently published its interim report on VAT simplification.

Full details here

The main areas covered are:

The UK’s high VAT registration threshold
Incidental exempt supplies
Complexity of multiple rates
Option to Tax and Capital Goods Scheme
Treatment of VAT overpayments
Alternative Dispute Resolution (details of ADR here)
Non-Statutory clearances by HMRC
Special schemes eg; Flat rate Scheme and TOMS
Penalties

Please contact us should you have any queries on any of the issues covered by the report.

Oops! – Top Ten VAT howlers

By Marcus Ward 16 December 2016

I am often asked what the most frequent VAT errors made by a business are. I usually reply along the lines of “a general poor understanding of VAT, considering the tax too late or just plain missing a VAT issue”. While this is unquestionably true, a little further thought results in this top ten list of VAT horrors:

Not considering that HMRC may be wrong. There is a general assumption that HMRC know what they are doing. While this is true in most cases, the complexity and fast moving nature of the tax can often catch an inspector out. Added to this is the fact that in most cases inspectors refer to HMRC guidance (which is HMRC’s interpretation of the law) rather to the legislation itself. Reference to the legislation isn’t always straightforward either, as often EC rather than UK domestic legislation is cited to support an analysis. The moral to the story is that tax is complicated for the regulator as well, and no business should feel fearful or reticent about challenging a HMRC decision.
Missing a VAT issue altogether. A lot of errors are as a result of VAT not being considered at all. This is usually in relation to unusual or one-off transactions (particularly land and property or sales of businesses). Not recognising a VAT “triggerpoint” can result in an unexpected VAT bill, penalties and interest, plus a possible reduction of income of 20% or an added 20% in costs. Of course, one of the basic howlers is not registering at the correct time. Beware the late registration penalty, plus even more stringent penalties if HMRC consider that not registering has been done deliberately.
Not considering alternative structures. If VAT is looked at early enough, there is very often ways to avoid VAT representing a cost. Even if this is not possible, there may be ways of mitigating a VAT hit.
Assuming that all transactions with overseas customers are VAT free. There is no “one size fits all” treatment for cross border transactions. There are different rules for goods and services and a vast array of different rules for different services. The increase in trading via the internet has only added to the complexity in this area, and with new technology only likely to increase the rate of new types of supply it is crucial to consider the implications of tax; in the UK and elsewhere.
Leaving VAT planning to the last minute. VAT is time sensitive and it is not usually possible to plan retrospectively. Once an event has occurred it is normally too late to amend any transactions or structures. VAT shouldn’t wag the commercial dog, but failure to deal with it at the right time may be either a deal-breaker or a costly mistake.
Getting the option to tax wrong. Opting to tax is one area of VAT where a taxpayer has a choice. This affords the possibility of making the wrong choice, for whatever reasons. Not opting to tax when beneficial, or opting when it is detrimental can hugely impact on the profitability of a project. Not many businesses can carry the cost of, say, not being able to recover VAT on the purchase of a property, or not being able to recover input tax on a big refurbishment. Additionally, seeing expected income being reduced by 20% will usually wipe out any profit in a transaction.
Not realising a business is partly exempt. For a business, exemption is a VAT cost, not a relief. Apart from the complexity of partial exemption, a partly exempt business will not be permitted to reclaim all of the input tax it incurs and this represents an actual cost. In fact, a business which only makes exempt supplies will not be able to VAT register, so all input tax will be lost. There is a lot of planning that may be employed for partly exempt businesses and not taking advantage of this often creates additional VAT costs.
Relying on the partial exemption standard method to the business’ disadvantage. A partly exempt business has the opportunity to consider many methods to calculate irrecoverable input tax. The default method, the “standard method” often provides an unfair and costly result. I recommend that any partly exempt business obtains a review of its activities from a specialist. I have been able to save significant amounts for clients simply by agreeing an alternative partial exemption method with HMRC.
Not taking advantage of the available reliefs. There are a range of reliefs available, if one knows where to look. From Bad Debt Relief, Zero Rating (VAT nirvana!) and certain de minimis limits to charity reliefs and the Flat Rate Scheme, there are a number of easements and simplifications which could save a business money and reduce administrative and time costs.
Forgetting the impact of the Capital Goods Scheme. The range of costs covered by this scheme has been expanded recently. Broadly, VAT incurred on certain expenditure is required to be adjusted over a five or ten year period. Failure to recognise this could either result in assessments and penalties, or a position whereby input tax has been under-claimed. The CGS also “passes on” when a TOGC occurs, so extra caution is necessary in these cases.

So, you may ask: “How do I make sure that I avoid these VAT pitfalls?” – And you would be right to ask.

Of course, I would recommend that you engage a VAT specialist to help reduce the exposure to VAT costs!

Oops! – Top Ten VAT howlers

By Marcus Ward 6 January 2015

Not considering that HMRC may be wrong. There is a general assumption that HMRC know what they are doing. While this is true in most cases, the complexity and fast moving nature of the tax can often catch an inspector out. Added to this is the fact that in most cases inspectors refer to HMRC guidance (which is HMRC’s interpretation of the law) rather to the legislation itself. Reference to the legislation isn’t always straightforward either, as often EC rather than UK domestic legislation is cited to support an analysis. The moral to the story is that tax is complicated for the regulator as well, and no business should feel fearful or reticent about challenging a HMRC decision.
Missing a VAT issue altogether. A lot of errors are as a result of VAT not being considered at all. This is usually in relation to unusual or one-off transactions (particularly land and property or sales of businesses). Not recognising a VAT “triggerpoint” can result in an unexpected VAT bill, penalties and interest, plus a possible reduction of income of 20% or an added 20% in costs. Of course, one of the basic howlers is not registering at the correct time. Beware the late registration penalty, plus even more stringent penalties if HMRC consider that not registering has been done deliberately.
Not considering alternative structures. If VAT is looked at early enough, there is very often ways to avoid VAT representing a cost. Even if this is not possible, there may be ways of mitigating a VAT hit.
Assuming that all transactions with overseas customers are VAT free. There is no “one size fits all” treatment for cross border transactions. There are different rules for goods and services and a vast array of different rules for different services. The increase in trading via the internet has only added to the complexity in this area, and with new technology only likely to increase the rate of new types of supply it is crucial to consider the implications of tax; in the UK and elsewhere.
Leaving VAT planning to the last minute. VAT is time sensitive and it is not usually possible to plan retrospectively. Once an event has occurred it is normally too late to amend any transactions or structures. VAT shouldn’t wag the commercial dog, but failure to deal with it at the right time may be either a deal-breaker or a costly mistake.
Getting the option to tax wrong. Opting to tax is one area of VAT where a taxpayer has a choice. This affords the possibility of making the wrong choice, for whatever reasons. Not opting to tax when beneficial, or opting when it is detrimental can hugely impact on the profitability of a project. Not many businesses can carry the cost of, say, not being able to recover VAT on the purchase of a property, or not being able to recover input tax on a big refurbishment. Additionally, seeing expected income being reduced by 20% will usually wipe out any profit in a transaction.
Not realising a business is partly exempt. For a business, exemption is a VAT cost, not a relief. Apart from the complexity of partial exemption, a partly exempt business will not be permitted to reclaim all of the input tax it incurs and this represents an actual cost. In fact, a business which only makes exempt supplies will not be able to VAT register, so all input tax will be lost. There is a lot of planning that may be employed for partly exempt businesses and not taking advantage of this often creates additional VAT costs.
Relying on the partial exemption standard method to the business’ disadvantage. A partly exempt business has the opportunity to consider many methods to calculate irrecoverable input tax. The default method, the “standard method” often provides an unfair and costly result. I recommend that any partly exempt business obtains a review of its activities from a specialist. I have been able to save significant amounts for clients simply by agreeing an alternative partial exemption method with HMRC.
Not taking advantage of the available reliefs. There are a range of reliefs available, if one knows where to look. From Bad Debt Relief, Zero Rating (VAT nirvana!) and certain de minimis limits to charity reliefs and the Flat Rate Scheme, there are a number of easements and simplifications which could save a business money and reduce administrative and time costs.
Forgetting the impact of the Capital Goods Scheme. The range of costs covered by this scheme has been expanded recently. Broadly, VAT incurred on certain expenditure is required to be adjusted over a five or ten year period. Failure to recognise this could either result in assessments and penalties, or a position whereby input tax has been under-claimed. The CGS also “passes on” when a TOGC occurs, so extra caution is necessary in these cases.

So, you may ask: “How do I make sure that I avoid these VAT pitfalls?” – And you would be right to ask.

Of course, I would recommend that you engage a VAT specialist to help reduce the exposure to VAT costs!

VAT – Medical practices and property

By Marcus Ward 18 November 2014

This article is specific to medical practices (or any other professional practice which makes predominantly exempt supplies) which wants to buy or improve property.

Registration when purchasing practice property – what you need to know:

The majority of the services provided by medical practices are exempt from VAT. Good news one would think; there is no need to charge VAT on most goods and services supplied, and no need to deal with VAT returns, records and inspections. Additionally, there is no exposure to the increasingly widely applied and swingeing penalty regime. However, there is one often repeated question from practices; “How can we reclaim the VAT we are charged?” This is an even more pressing question when the VAT incurred (input tax) is on significant expenditure such as purchasing a property of undertaking a major refurbishment. This article looks at the basic VAT rules applying to practices and what opportunities are available. The first point to make is that if a practice only makes exempt supplies (of medical services) it is not permitted to register for VAT and consequently cannot recover any input tax. Therefore we must look at the types of supplies that a practice may make that are taxable (at the standard or zero rate). If any of these supplies are made it is possible to VAT register regardless of the value of them. This is called a voluntary registration and provides the practice with the ability to reclaim, at least some, input tax. Of course, if taxable supplies are made, the value of which exceeds the current turnover limit of £81,000 pa, registration is mandatory. Examples of services and goods which may be taxable are;

Drugs, medicines or appliances that are dispensed by doctors to patients for self-administration
dispensing drugs against an NHS prescription is zero-rated.
drugs dispensed against private prescriptions is standard-rated.
Signing passport applications.
Medico legal services that are predominately legal rather than medical – for example; negotiating on behalf of a client or appearing in court in the capacity of an advocate.
Clinical trials or market research services for drug companies that do not involve the care or assessment of a patient.
Paternity testing.
Certain rental of rooms
Providing professional witness evidence
Any services which are not in respect of; the protection, maintenance or restoration of health of a patient.

So what does VAT registration mean?

Once you join the “VAT Club” you will be required to file a VAT return on a monthly or quarterly basis. You will have to issue certain documentation to patients/organisations to whom you make VATable supplies. You may need to charge VAT at 20% on some services and the range of services which may become VATable in the future is likely to grow. You will be able to reclaim VAT charged to you on purchases and other expenditure subject to partial exemption rules (see below). You will have to keep records in a certain way and your accounting system needs to be able to process specific information.

Specific considerations

Because doctors usually provide services which attract varying VAT treatment, a practice will be required to attribute VAT incurred on expenditure (input tax) to each of these categories. Generally speaking, only VAT incurred in respect of zero-rated and standard-rated services may be recovered. In addition, there will always be input tax which is not attributable to any specific service and is “overhead” eg; property costs, professional fees, telephones etc. There is a set way in which the recoverable portion of this VAT is calculated. VAT registered entities which make both taxable and exempt supplies are deemed “partly exempt” and must carry out calculations on every VAT return.

Partial Exemption

Once the calculations described above have been carried out, the resultant amount of input tax which relates to exempt supplies is compared to the de-minimis limits (broadly; £625 per month VAT and not more than 50% of all input tax). If the figure is below these limits, all VAT incurred is recoverable regardless of what activities the practice is involved in. Therefore, any accounting system must be capable of attributing input tax to the following headings; taxable (at 20% or zero) exempt and overhead (attributable to both taxable and exempt).

VAT registration in summary

Benefits:

Recovery of input tax; the cost of which is not claimable in any other way.
Potentially, recovery of VAT on items such as property, refurbishment and other expenditure that would have been unavailable prior to VAT registration.
Only a small amount of VAT is likely to be chargeable by a practice.
May provide opportunities for pre-registration VAT claims.

Drawbacks

Increased administration and staff time.
Exposure to VAT penalties and interest.
May require VAT to be added to some services provided which were hitherto VAT free.
Likely that only an element of input tax is recoverable as a result of partial exemption.
Uncertainty on the VAT position of certain services due to current EC cases.
Potential increased costs to the practice in respect of professional fees.

How to register

Practices will need to consider how they should be registered, for example individually as sole proprietors or jointly as partnerships. The legal entity chosen should reflect actual working arrangements, so if several doctors work together in a practice, they would normally be registered together as a partnership. VAT registration will cover all the supplies made by the doctors involved in the registered legal entity. For example, where a doctor is registered as a sole proprietor all the income he or she receives, for both medical and non-medical purposes, is subject to the VAT rules relating to such supplies. It may also be possible to VAT register as a company or an LLP depending on the structure of a practice and associated entities. Registration may be applied for using a form VAT1 on-line.

Specific VAT issues for property transactions

Purchase

If possible, it would obviously be preferable to purchase a property without VAT. These properties are likely to be older buildings as new commercial properties (under three years old) will be mandatorily standard rated. If the property being purchased is residential, then it will be VAT free. It is also possible for a vendor to “opt to tax” a commercial property, meaning that a unilateral choice has been made to add VAT to the sale price. If the property is subject to VAT on the sale or long lease then we must consider the ability to recover this. If there is VAT on a property, it may be used as a lever to reduce the agreed sale price. Assuming a VAT registration is in place for a practice the VAT on the purchase will be an “overhead” for partial exemption purposes so the input tax will feed into the partial exemption calculation and some of it will be recoverable. If the property is >£250,000 then something known as the Capital Goods Scheme (details Capital Goods Scheme – Guide) will apply and the amount of input tax claimed will need to be adjusted annually over a ten year period. If part of the property is to be sub-let to a third party, it is possible for the practice to opt to tax the rent. This will improve the practice’s ability to recover input tax on the purchase. Alternatively, a third party entity (eg; a company, an LLP or an individual doctor – the entity must not be “connected” to the entity occupying the premises) may purchase the property, VAT register, opt to tax the building itself, and charge rent to the practice which uses the property. This means that the purchasing party may immediately recover 100% of the VAT incurred on the purchase, but will need to add VAT to the rent to the practice. Care should be taken with a structure such as this and professional help should be sought.

Sale

The sale of a property will be VATable if it has been subject to the option to tax and exempt if there is no option and the property is over three years old. If the property was purchased by a third party (as above) it may be possible to treat the sale of the building as a VAT free “transfer of a going concern”.

Summary

As may be seen; VAT is not straightforward for doctors’ practices but it is worthwhile looking to see if it is possible to reduce or mitigate the actual cost that VAT represents to practices