Tag Archives: business

VAT: What are zero rated animal foodstuffs?

By   12 August 2019
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Modelled by Lola. (R) Collar: models’ own

Latest from the courts

The First Tier Tribunal (FTT) case of Westland Horticulture Limited highlights the complexities of; the VAT treatment of food, animal foodstuffs, seeds, crops and how these are all held out for sale. One only has to consider the myriad VAT liabilities of seemingly similar products sold at, say, a garden centre, to realise that this is can be a VAT minefield.

Examples

  • Food for a budgerigar is standard rated, but pigeon grit is zero rated.
  • Peanuts and sunflower seeds are zero rated, unless advertised as wild bird food when they are standard rated
  • Food for a Labrador is standard rated, unless the dog is used as a gun dog when it is zero rated
  • Lavender seeds are zero rated. Daffodil bulbs are standard rated.

This is a very small list of examples where the VAT treatment of precisely the same product may change depending on use, and/or where a slight difference of the type of goods can have a surprising tax outcome.

A full guide to garden centre liabilities here

The case

HMRC state in Public Notice 701/38 para 5.3

“Most grass seed is zero-rated because of the extensive use of grass as animal feed. This includes supplies to and by garden centres, local authorities and grass seed to be grown on set aside land.

But pre-germinated grass seed and turf are not used for the propagation of animal feed and are therefore standard-rated.”

Zero rating is available per VAT Act 1994, Schedule 8, Group 1, item 3: “…seeds or other means of propagation of plants comprised in animal feeding stuffs”

In Westland’s case, it sold a product called Aftercut Patch Fix, which, although was 90% grass seed, also contained sowing granules and an ingredient called Clinoptilolite which, apparently, neutralises the effects of excess salts and ammonia found in pet urine. The grass seed was of various varieties and is not in itself any different to “ordinary” grass seed sold without any additives.

Having a new puppy, I can verify the damage one small hound can do to lawns and this is a product I may will need to invest in. The product was held out (see below) to help fix damage to grass that, in my case, a small Lola (and larger Libby) can do.

Decision

Unsurprisingly, the judge ruled that the product was standard rated on the grounds (no pun intended) that it was clearly intended to be used on people’s gardens rather than to be planted to grow animal food. Therefore, the zero rating provided via PN 701/38 does not apply.

The Product was physically different to generic grass seed as it contained more than just seed. The product (as distinct from the seed within the product) is therefore not a similar product to generic grass seed for the purposes of fiscal neutrality.

Commentary

A discrete issue you may think. However, the tax in this single case amounted to over half a million pounds. It illustrates how much care must be taken in establishing the correct liability of; food, animal foodstuff, pet food and ornamental versus edible plants, seeds, bulbs, shrubs and trees.

One of the salient tests is how the goods are “held out for sale” (held out)

Held out means the:

  • way a product is labelled, packaged, displayed, invoiced, advertised or promoted
  • heading under which the product is listed in a catalogue, web page or price list

In this case, the packaging and description on the appellant’s website was a major factor in the decision.

Manufacturers and retailers may need to review how their products are described, what the contents are and how they are displayed in-store. Even the location of the goods, how they are displayed, and the signage used may affect the VAT treatment (it doesn’t matter if I buy zero rated working dog food and feed it to my two who are never going to do a day’s work in their life….).

VAT: Brexit – Retail Export Scheme benefits

By   2 August 2019
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VAT free shopping for all! Save 20% on anything you buy!

This seems very unlikely I hear you mutter, but, but…..

If you live in the UK after a No Deal Brexit, there is a simple way of never paying VAT on any retail purchases for your own use. From a piano to a gymnasium, from a teapot to a lawnmower – all may be purchased completely VAT free and legally. It does not appear that the Government has considered this, it certainly does not feature in the recent report on the “Alternative Arrangements”. This is especially relevant to the Northern Ireland/Republic of Ireland land border. It may be that if we believe hard enough in Brexit we can avoid UK residents not paying UK VAT…

So how will this fabulous shopping opportunity come into being?

There is an EU-wide system (set out at Article 131 of The Principle VAT Directive) which provides for the recovery of VAT incurred by individuals from outside the EU. Clearly, after a No-Deal Brexit, that will be anyone in the UK. This is called the Retail Export Scheme (RES). After a hard Brexit, any goods moving from an EU Member State into the UK will now be classed as exports (pre-Brexit there is free movement of goods within the EU, so there would be no exports when goods move cross-border within the EU).

How does RES work?

When an individual buys goods in an EU Member State and exports them for his/her personal use, the retailer will charge VAT at the rate applicable in that country. The shop will also issue a certain document. This document is stamped when the goods are physically exported buy the buyer and the customer returns the form to the retailer. It is a quite painless procedure. When this evidence that the goods have been exported is received by the retailer, it will refund the VAT paid – The result = VAT free shopping. Also, the scheme has no minimum sales value. 

And after Brexit?

The UK has said its 2017 Customs Bill that VAT will not be charged on personal imports. This is effectively inviting tax free cross-border shopping and consequently, logically, reducing retails sales in the UK. I am sure that that is not what the Government had in mind. It is likely that there could be wide scale use of RES. After all, what is a bit of paperwork and a short drive to save 20%?! This is even before one considers the abuse of the arrangements, which, with the obvious financial benefits, could be significant. A day trip to mainland Europe will be very inviting, and then, there is our land border…

Some politics…

The Irish border

Clearly, the most relevant issue is the Irish border. Regardless of the political noises, there will be a “difference” between EU and “third country” (which the UK will be after a No Deal Brexit) rules between the two countries. These differences facilitate the use of the RES. There is nothing in any proposals which will prevent cross-border shopping on the island of Ireland. I can imagine retailers in Dublin rubbing their hands together while those in Belfast gloomily survey empty shops. Perhaps new retailers will pop up on the Irish side of the EU/UK divide to make matters even more helpful for bargain hunting shoppers from the UK. Another issue which I doubt the UK has considered is that if there is no border (which we are told by the Government will happen even though a No-Deal Brexit will definitively and specifically not permit this) there will be nobody to stamp the forms. I won’t get into the politics of the Good Friday Agreement (GFA) and a No Deal Brexit, but it seems almost certain that there will have to be a deal with the EU to ensure there is no border, OR the UK must renege on the GFA which could bring terrifying consequences to peace in the area, amongst a lot of other issues. What a mess.

Importance of a border with the EU

No two countries outside of the EU have ever removed border checks between themselves. They try to streamline checks where possible, as everybody wants smooth trade, but always retain border checks. Why? Simply, for goods trade, a border post is the only place where you can guarantee to have the vehicle, the items definitely being transported, and all relevant paperwork in one place. You can and do make other checks, but the border is at the core. One of the reasons for the EU legal and regulatory framework is to be able to trust that goods trade between members can take place without border checks. This means common tariffs, common rules, and legal redress. Without being a part of the regulations, there can be no such trust and a hard border is necessary.

Unsurprisingly, there have been no studies on the cost to UK retailers, and apparently, no recognition whatsoever, that this could be a serious issue. Given the political issues with the Irish border, and the serious consequences of going against the GFA, this is another issue which has been either; overlooked, dismissed, politically ignored, or relegated to the bottom of a list of so many issues caused by an ill-considered No Deal Brexit.

What the government has continually, apparently deliberately, failed to recognise is that there is no fudge that provides both freedom from EU rules and frictionless trade with a No Deal Brexit. There is no current way to reconcile Northern Ireland remaining aligned with the UK, Ireland staying fully in the EU, pure Brexit, and no border checks. Tax is simply one area in the commercial world which has been ignored, for political reasons. VAT is just one area of tax, and the RES is just one area of VAT.

VAT – A beginner’s practical guide

By   2 August 2019
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I am often asked if there is a VAT beginner’s guide, I find HMRC guidance generally unhelpful for someone without a tax background, so, here is all the basic information you may need in one place.

 What is VAT?

Value Added Tax (VAT) is a tax charged on most business transactions made in the UK. It is charged on goods and services and is an ad valorem tax, which means it is proportionate to the value of the supply made.

All goods and services that are VAT rated (at any rate including zero) are called “taxable supplies”. VAT must be charged on taxable supplies from the date a business first needs to be registered. The value of these supplies is called the “taxable turnover”.

Exempt items

VAT does not apply to certain services because the law says these are exempt from VAT. These include some; financial services, property transactions, insurance education and healthcare. Supplies that are exempt from VAT do not form part of the taxable turnover.

The VAT rates

There are currently three rates of VAT in the UK:

  • 20% (standard rate) – Most items are standard rate unless they are specifically included in the lower rate categories.
  • 5% (reduced rate) – this applies to applies to certain items such as domestic fuel and power, installation of energy-saving materials, sanitary hygiene products and children’s car seats.
  • 0% (zero rate) – applies to specified items such as food, books and newspapers, children’s clothing, new houses and public transport.

VAT registration

A business is required to register for, and charge VAT, if:

  • the taxable turnover reaches or is likely to reach a set limit, known as the VAT registration threshold
  • a VAT registered business has been acquired as a going concern (TOGC)
  • potentially; goods or services have been purchased VAT free from non-UK countries (a self-supply)

Registration limit

The current VAT registration threshold is £85,000. If at the end of any month the value of taxable supplies made in the past twelve months is more than this figure a business MUST VAT register.  A business can opt to register for VAT if its taxable turnover is less than this. Please note that taxable turnover is the amount of income received by a business and not just profit. If a business does not register at the correct time it will be fined.

Additionally, if, at any time there are reasonable grounds to expect that the value of the taxable supplies will be more than the threshold in the next thirty days alone a business must register immediately.

What are the exceptions?

VAT is not chargeable on:

  • taxable supplies made by a business which is not, and is not required to be, registered for VAT
  • zero rated supplies
  • supplies deemed to be made outside the UK
  • exempt supplies

What if a business only makes exempt or zero-rated supplies?

Exempt

If a business only makes exempt supplies, it cannot be registered for VAT. If a business is registered for VAT and makes some exempt supplies, it may not be able to reclaim all of its input tax.

Zero rated

If a business only supplies goods or services which are zero-rated, it does not have to register for VAT, but, it may do so if it chooses.

What is input tax and output tax?

Input tax is the VAT a business pays to its suppliers for goods and services. It is VAT on goods or services coming into a business. In most cases, input tax is the VAT that registered businesses can reclaim (offset against output tax).

Output tax is the term used to describe the VAT charged on a business’ sales of goods or services. Output tax is the VAT a business collects from its customers on each sale it makes.

A full guide to VAT jargon here

Is there anything that will make VAT simpler for a small business?

There are a number of simplified arrangements to make VAT accounting easier for small businesses. These are:

  • Cash Accounting Scheme
  • Annual Accounting Scheme
  • Flat Rate Scheme
  • Margin schemes for second-hand goods
  • Global Accounting
  • VAT schemes for retailers
  • Tour Operators’ Margin Scheme
  • Bad Debt Relief

Details may be found here and here and here.

VAT calculation

  • A business adds VAT to the value of sales it makes to other businesses or customers
  • The VAT amount is reached by multiplying the sale amount by the VAT rate percentage, then adding that to the value of the sale.
  • The total of the VAT on sales for a VAT period is output tax
  • For a VAT period, a business will total all VAT it has been charged by suppliers (eg stock, repairs, rent, and general business expenses etc) – this is input tax.
  • On the VAT return for the period, the amount payable or reclaimable to HMRC is the output tax less input tax.

Records

A business must keep complete, up-to-date records that enable it to calculate the correct amount of VAT to declare on its returns. VAT records must be kept for at least six years, because a business will need to show them to HMRC when asked.

It is acceptable for ordinary business records to be the basis for VAT accounts. A business will need records of sales and purchases (and any adjustments such as credit notes) including details of how much VAT the business charged or paid. If trading internationally, records of imports and exports/dispatches and acquisitions with all overseas territories, including the EU must be recorded. VAT records must show details of any supplies a business has given away or taken for personal use.

VAT records must also include all invoices you have received and issued. Invoice requirements here

Records will also need to include a VAT account, showing how total input tax and output tax has been calculated to include in your VAT returns.

It is vital to ensure that the VAT records are accurate. Failure to do so can lead to significant tax penalties

MTD

For certain business, the new MTD rules apply and certain software must be used. Details here

Time of supply (tax point)

It is important to establish the time VAT is due. Full details here

VAT returns

A VAT registered business must submit returns on a regular basis (usually quarterly or monthly). A VAT return summarises a business’ sales and purchases and the VAT relating to them. All the information a business requires must be in its VAT records, specifically a VAT account.

Return requirements include:

  • sales total (excluding VAT)
  • output tax – this also includes VAT due on any other taxable transactions, eg; barters, non-monetary consideration, goods taken for personal use
  • value of purchases (excluding VAT)
  • input tax claimable
  • total of VAT payable/claimable
  • summary of trade with other EU Member States

Online VAT returns are due one month and seven days after the end of the VAT period. Payment of any VAT owed is due at the same time, although HMRC will collect direct debit payments three days later.

VAT: Land and property quiz – Answers

By   1 August 2019
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The “fun” quiz.

The important thing to consider is what the purchaser does, or intends to do, with the land once purchased. This will dictate the input tax recovery position. So, can the input tax be recovered? Answers to quiz questions in the 26 July 2019 post below

Answers 

On the purchased land the person constructs:

  1. a dwelling and supplies the house on a 25-year lease

Yes

The lease is 21 years or over, so it is zero rated. However, a lease under 21 years would be an exempt so no recovery. For more details

  1. an office and uses it for his own business supplying FS to a client in China

Yes

However, if the FS supply had been to the UK or another EU Member State, the supply would be exempt so no input tax recovery. This may change in the event of a No-Deal Brexit.

  1. a storage facility and a fully taxable company leases it to another company in the same partly exempt VAT group after opting to tax

No

Unlikely to be full input tax recovery as the VAT group is itself partly exempt. The Capital Goods Scheme (CGS) may apply.

  1. a block of ten flats with a gym and swimming pool which tenants are entitled to use. Grants 99 years leases on all flats

Yes

The supply is zero rated, notwithstanding there are additional (to usual residential dwellings) facilities.

  1. a dwelling but uses it for short term holiday lets of no more than a fortnight.

Yes

Holiday lets are standard rated, so the business would be taxable. The purchaser would need to VAT register, however.

  1. a warehouse which is sold on completion but without an option to tax being made before the sale

Yes

A ‘new” commercial building (one under three years old) is mandatorily standard rated, so no option to tax is required.

  1. the land is held with the intention of constructing dwellings at some time in the future, which could be over six years

Yes

As long as the intention remains, and can be evidenced, the input tax may be attributed to the future taxable, zero rated, supply.

  1. a factory which is not subjected to an option to tax but is leased to an US company

 No

The place of supply (POS) is the UK as this is where the immovable property is located, regardless of the status of the client. Consequently, this is an exempt supply with no right to input tax recovery.

  1. a block of three flats which are rented for six months before freehold sale

No, or maybe, or yes

The initial supply is exempt, so the input tax is, preliminarily, attributed to the short term lets. However, a simplified form of the partial exemption de minimis limits may be used and, depending on the scale of the development, it is possible that some, or all, of the input tax may be recovered despite the initial exempt supplies.

  1. a sport hall by a school Academy which is leased to sporting charities and also used for its own educational purposes. No option to tax

No

It would be unlikely that an Academy would be able to recover all the input tax. Because it would make (exempt) business supplies, this would fall outside the VAT Act 1994, Section 33 rules, so there would be no input tax recovery in respect of those activities. There would be an apportionment and only the input tax referable to own use would be recoverable as those supplies of education would be non-business. If the Academy opted to tax the facilities (and was VAT registered), the input tax would be recoverable in full. No input tax referable to business use would be possible if the Academy was using VAT126 claims. VAT and Academies

  1. a manufacturing plant which a company rents to a connected (non-VAT grouped) party which makes and sells toys. The option is taken

Yes

As the connected party is fully taxable the anti-avoidance rules do not apply. If the connected party was not able to recover the VAT charged to it (say it made exempt supplies) the anti-avoidance legislation would kick in and the option would be disapplied, meaning that the input tax in the hands of the developer would not be recoverable.

  1. a car showroom and offices which a company uses for its own business of selling cars, providing finance and brokering insurance

No

There would be mixed use; car sales are taxable, finance and insurance are exempt, so some of the input tax would probably not be recoverable (dependent upon the de minimis limits). The development would be an overhead of the business. It is likely that the property would be an item covered by the CGS.

  1. a care home for the elderly which a company uses for that purpose

No

This likely be an exempt supply, so no input tax recovery on supplies which are properly VATable. There may be reliefs on construction costs, however.

  1. a small cabin office and the remaining land is used for a forestry business which will have no sales for ten years (when the trees are grown)

Yes

Although the intended taxable supplies are some way off, as long as the intention can be evidenced, the input tax may be recovered when incurred as it will relate to those intended taxable transactions. If the intention changes, this may impact the initial recovery. More information

  1. a residential block which is immediately transferred to an associated company (an arm’s length transaction) on completion. No tenants are in situ.

Yes

The transfer of the freehold triggers the zero rating. The associated company may then, if it chooses, make exempt supplies without a VAT cost. This type of planning can be very helpful.

So there we have it. How did you get on?  I would say that any score over eight is very good.

VAT Glossary – Partial Exemption

By   9 July 2019
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The VAT world of partial exemption can be complex with some arcane language used in guidance. Here is your “cut out and keep” guide: 

A general guide to partial exemption here.

VAT Glossary

Partial Exemption
Term Explanation
Allocation Some special methods have different sectors where the recoverable element of residual input tax is different. Allocation is the means by which residual input tax is distributed to specific sectors within a method.
Annual adjustment At the end of the tax year the partial exemption calculation is recalculated using annual figures.
Apportionment Residual input tax must be apportioned to reflect the extent to which the purchases on which it is incurred are used in making onward taxable supplies. The partial exemption method carries out this function.
De minimis tests Tests designed to allow recovery of minimal amounts of exempt input tax.
Direct attribution The identification of input tax on supplies that are wholly used, or to be wholly used in making taxable supplies or are wholly used or to be wholly used in making exempt supplies.
Exempt input tax Input tax incurred on purchases which are used or to be used in making exempt supplies. It comprises input tax directly attributable to exempt supplies and, after the partial exemption method has been applied, the exempt element of residual input tax identified by the partial exemption method.
Exempt supplies Supplies made by a business, which are listed in Schedule 9 of the VAT Act 1994. VAT incurred in making exempt supplies is non-recoverable, unless they are ‘specified’ supplies, subject to the de minimis test.
Input tax VAT incurred by a VAT registered person on goods and services purchased for the purposes of a business.
Longer period This is usually the tax year for annual adjustment purposes but may in certain circumstances be shorter than a tax year. It may also be longer in the case of a mid-year stagger change.
Foreign supplies Supplies made by a business which are made outside the UK but which would be taxable if they were made in the UK.
Residual input tax Input tax which is used, or to be used, to make both taxable and exempt supplies. It is apportioned between taxable and exempt supplies by the partial exemption method. Residual input tax is commonly referred to as ‘non-attributable input tax’ or ‘the pot’.
Special method Any partial exemption method, other than the standard method, used to identify the taxable element of input tax incurred. Special methods require prior approval from HMRC.
Specified supplies Supplies specified by Treasury Order which are not taxable supplies, but which carry the right to recover input tax incurred in making them.
Standard method This is the default partial exemption method. It is specified in law and is suitable for most smaller businesses.
Taxable input tax Input tax incurred on purchases of goods and services which are used or to be used in making taxable supplies and other supplies which carry the ‘right to deduct’.
Taxable supplies Supplies made by a business, which are either standard, reduced or zero-rated. Input tax incurred in making taxable supplies is deductible.
Tax year Every VAT registered business has a tax year. This usually ends at the end of March, April or May each year, depending on the business’s VAT return periods.
VAT Groups Two or more corporate bodies accounting for VAT under a single VAT registration number. One acts as representative member and any supplies between the members of the group are disregarded for VAT purposes.

Any business which receives income from the following sources may be affected by partial exemption:

  • Property letting and sales – potentially all types of supply of land
  • Financial services
  • Insurance
  • Betting, gaming and lotteries
  • Education
  • Health and welfare
  • Sport, sports competitions and physical education
  • Cultural services

This list is not exhaustive.

If your, or your client’s business is partially exempt I always recommend a review.

VAT: Evidence to claim input tax

By   9 July 2019
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Latest from the courts

Hot on the heels of my recent article here, a First Tier Tribunal (FTT) case has considered what evidence may be accepted for a claim for input tax.

The Wasteaway case contemplated whether HMRC’s disallowance of the appellant’s claim, (via The VAT Act 1994, section 73) for input tax was correct, or whether they should have allowed the claim based on alternative evidence of receiving the relevant supplies in lieu of missing tax invoices.

It is well known that in order to claim input tax on expenditure a business is required to have a valid tax invoice to support it. But what if there is no VAT invoice? Can, or should HMRC accept any other evidence to support a claim?

Background 

It was stated that the invoices were lost during a time when the business was evicted from its premises. The judge formed the view that the appellant’s approach to record keeping was “slapdash”. Which isn’t a good starting point. HMRC issued an assessment because it was decided that the appellant had “not provided satisfactory evidence of the taxable supply to the business and its direct link to your onward taxable supply for discretion to be considered under Article 182 of the Principal VAT Directive. If no invoice, a pro forma invoice or a document stating ‘this is not a VAT invoice’ has been provided…” along with an offer to provide alternative evidence.

It was also discovered, during the inspection, that not only had output tax been underdeclared, but the appellant had a history of poor record keeping.

Decision

Despite the business providing; records of payments, in some cases weighbridge tickets, detailed bank statements, spreadsheets and Sage accounts information – which it was contended amounted to alternative documentary evidence, it was ruled that this was insufficient, so the assessment stood.

The lack of care in obtaining and retaining documents, poor accounting procedures such that output tax was understated and the past behaviour and history of the taxpayer meant that HMRC was not obliged to accept the proffered alternative evidence, The general unreliability of the records counted against the business and that HMRC acted in best judgement.

It was stated that HMRC were perfectly justified in requiring more detailed and convincing documentary evidence to replace the missing VAT invoices than the appellant provided. And the inspector could not be criticised for refusing to accept the extremely thin evidence supplied as an alternative to the missing VAT invoices.

Commentary

It is clear that every business must keep proper records and retain all documents, especially invoices. It was hardly surprising that failure to do that ensured that this appeal was dismissed. It also didn’t help that the appellant had a poor track record of accounting.

HMRC do have the discretion to accept alternative evidence, however, this is more likely if the relevant invoices have been genuinely misplaced, destroyed or not received. There is also the opportunity to go to the supplier and request a replacement invoice.

So, basically: Keep records properly or it will cost you!

 

I have to charge myself VAT?!

By   9 July 2019
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How comes?!

Well, normally, the supplier is the person who must account to the tax authorities for any VAT due on the supply. However, in certain situations, the position is reversed and it is the customer who must account for any VAT due. Don’t get caught out!

Here are just some of the situations when you have to charge yourself VAT:

Purchasing services from abroad

These will be obtained free of VAT from an overseas supplier. What is known as the ‘reverse charge’ procedure must be applied. Where the reverse charge procedure applies, the recipient of the services must act as both the supplier and the recipient of the services. On the same VAT return, the recipient must account for output tax, calculated on the full value of the supply received, and (subject to partial exemption and non-business rules) include the VAT charged as input tax. The effect of the provisions is that the reverse charge has no net cost to the recipient if he can attribute the input tax to taxable supplies and can therefore reclaim it in full. If he cannot, the effect is to put him in the same position as if had received the supply from a UK supplier rather than from one outside the UK. Thus creating a level playing field between purchasing from the UK and overseas.

Accounting for VAT and recovery of input tax.
Where the reverse charge procedure applies, the recipient of the services must act as both the supplier and the recipient of the services.  On the same VAT return, the recipient must
      1. account for output tax, calculated on the full value of the supply received, in Box 1;
      2. (subject to partial exemption and non-business rules) include the VAT stated in box 1 as input tax in Box 4; and;
      3. include the full value of the supply in both Boxes 6 and 7.
Value of supply: The value of the deemed supply is to be taken to be the consideration in money for which the services were in fact supplied or, where the consideration did not consist or not wholly consist of money, such amount in money as is equivalent to that consideration.  The consideration payable to the overseas supplier for the services excludes UK VAT but includes any taxes levied abroad.
Time of supply: The time of supply of such services is the date the supplies are paid for or, if the consideration is not in money, the last day of the VAT period in which the services are performed.

Purchasing goods from another EU Member States

Something similar to reverse charge; called acquisition tax, applies to goods purchased from other EC Member States. These are known as acquisitions (they are imports if the goods come from outside the EU and different rules apply). The full value of the goods is subject to output tax and the associated input tax may be recovered by the business acquiring if the goods are used for taxable purposes. If you are not already registered for VAT in the UK and acquire goods worth £85,000 or more in the UK from other EC countries, you will have to register for VAT in the UK on the strength of the value of the acquisition tax. A business will also have to complete an Intrastat Supplementary Declaration (SDs) if its acquisitions of goods from the EC exceed an annual amount – currently £1.5 million.

Intrastat_flow_diagramMore details on Intrastat Supplementary Declarations here

Deregistration

Any goods on hand at deregistration with a total value of over £1,000 on which input tax has been claimed are subject to a self supply. This is a similar mechanism to a reverse charge in that the goods are deemed to be supplied to the business by the business and output tax is due. However, in these circumstances it is not possible to recover any input tax on the self supply.

Flat Rate Scheme

There is a self supply of capital items on which input tax has been claimed when a business leaves the flat rate scheme (and remains VAT registered).

Mobile telephones

In order to counter missing trader intra-community fraud (‘MTIC’), supplies of mobile telephones and computer chips which are made by one VAT registered business to another and valued at £5,000 and over are subject to the reverse charge. This means that the purchaser rather than the seller is responsible for accounting for VAT due.

And not forgetting the new domestic reverse charge for building and construction here.

Land and buildings…. and motor cars

There are certain circumstances where land and buildings must be treated as a self supply… but that is a whole new subject in itself… as is supplies in the motor trade.

Even if the result of a self-supply or reverse charge is VAT neutral HMRC is within its rights to assess and levy penalties and interest in cases where the charge has not been applied; which always seems unfair.  However, more often than not simple accounting entries will deal with the matter…. if the circumstances are recognised and it is remembered to actually make the entries!

HMRC VAT Helpline failures

By   5 July 2019
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If any of you have had the unfortunate necessity to use the VAT Helpline you will know the frustration, unhelpfulness and general exasperation of trying to get a reasonable response from the department. Well, it isn’t just you.

In correspondence between the Chair of the Treasury Select Committee and the Chief Executive and Permanent Secretary of HMRC here the previously highlighted issue of the deterioration of the performance of the HMRC VAT Helpline is addressed.

The extremely poor performance is ascribed, by the Chartered Institute of Taxation (CIOT) to:

  • the lack of an adequate pilot for the roll-out of Making Tax Digital (MTD) – details here
  • the pressures of Brexit on HMRC resources.

And HMRC state that:

  • their telephony performance has been impacted by ongoing recruitment and staffing shortfalls
  • recruitment for a no deal EU exit was slower than expected
  • they had to divert resources from usual business to issues with a No-Deal Brexit
  • the target of five minutes waiting time for the VAT Helpline has not been met
  • they are developing a new way of measuring performance
  • there are issues with some MTD businesses experiencing problems with paying VAT by direct debit

An annex to the letter, providing VAT call data from January to May 2019, shows

  • helpline demand increased by over 40% between January and May but the number of calls answered fell over this period
  • in May, HMRC answered less than 42% of the calls which made it beyond their recorded messages, compared to 72% in January
  • average speed of answer for those calls which were answered rose from around seven minutes in January to more than 16 minutes in May (in addition to the time spent navigating the initial recorded messages)
  • of the calls answered, the proportion which were answered within ten minutes fell from 64% in January to just 9% in May

Commentary

It is appreciated that some of the excuses are “reasonable” (to use HMRC parlance) and matters are not within HMRC’s influence, however, the service provided is, frankly, unacceptable. Businesses need HMRC assistance for all sorts of reasons and if it is not forthcoming, errors may be made resulting in potential penalties and interest, loss of income, deals failing, accounting compromised and uncertainty and complexity, VAT becoming a cost, and customers lost.

It is not as though HMRC have not been warned about pushing MTD through without adequate testing of systems and software at a time when Brexit was always going to make huge demands of the department. The House of Lords Economic Affairs Committee published  a damning report last year here which recommended delaying the introduction of MTD. Also, the CIOT has consistently warned of the risks of implementing MTD for VAT at the same time as Brexit.

Support for business and tax agents is sadly very lacking and it appears that insufficient resources have been devoted to this. There has been an overall lack of planning, combined with a political will to push ahead with MTD regardless. It really is not good enough. And we are not even yet through the implementation of MTD for VAT with larger and more complex business yet to join the fray. That, added to the fact that many glitches have already been identified, does not give any reason to be optimistic about the future for either MTD or the VAT Helpline.

As CIOT say: while HMRC have the scale to move resources within its organisation, that is a luxury that most businesses do not enjoy.

VAT: Bad Debt Relief – The Total case

By   1 July 2019
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Latest from the courts

Bad Debt Relief (BDR) is often an area that creates disputes with HMRC. The legislation has changed over the years and the current rules are described here.

Background

Broadly speaking, under normal VAT rules, a supplier is required to account for output tax, even if the supply has not been paid for (however, the use of cash accounting or certain retail schemes removes the problem of VAT on bad debts from the supplier). BDR, as the names suggests, is intended to provide relief on the VAT element of a bad debt. Output tax previously claimed may be “reclaimed” by using the BDR mechanism.

The law which governs the claiming of bad debt relief is The VAT Act 1994, Section 36, and Section 26A which covers the repayment of input tax when a customer fails to pay for supplies received within six months of the relevant date, and The VAT Regulations 1995, Parts XIX, XIXA and XIXB.

Conditions for claiming bad debt relief

  • A business must have accounted for the VAT on the supplies and paid it to HMRC
  • It must have been written off the debt in its day to day VAT accounts and transferred it to a separate bad debt account
  • The value of the supply must not be more than the customary selling price
  • The debt must not have been paid, sold or factored under a valid legal assignment
  • The debt must have remained unpaid for a period of six months after the date of the supply

The case

In the First Tier Tribunal (FTT) case of Total Catering Equipment Ltd [2019] TC 07184, heard on 4 June 2019, the issue was whether payments from customers which were diverted by a dishonest employee should be recognised as a payment for a supply of goods (no BDR available as the money was received then stolen) or whether the fact that the business did not actually receive the payment meant that a BDR was appropriate. Total supplied goods to customers, some of whom paid by credit or debit cards. The member of staff responsible for these transactions, set up a separate (from the business) bank account and fraudulently diverted customers; payments into his own account. A BDR claim was made by the appellant when the crime was discovered. The claim was refused by HMRC on the grounds that the employee had received payment “on behalf” of Total before making payment into his own account.

Decision

The judge found for the appellant. The appeal was allowed – it was decided that Total had never actually received payment for the goods supplied, so BDR was available. A distinction was made between the diversion of monies in this case (where the supplier was deemed to never had received the money) and a theft by an employee from, eg; a till or subsequent withdrawals from the business’ bank account (where a business would have received payment before the money was stolen).

Commentary

I have written about VAT and illegal activities here. There can be a fine line between taxable illegal activities and non-taxable illegal activities, and subtleties around tax points (time of supply) misrepresentation and consideration. If you, or your clients have been in the unfortunate position of being on the receiving end of crime, it would be adding insult to injury to have to account for tax on money you do not have. I would always advise that any demands from HMRC, or refusals to refund VAT should be properly reviewed.

VAT: The transport of disabled persons

By   24 June 2019
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HMRC have released Revenue and Customs Brief 3 (2019) RCB3 2019 which sets out the treatment of certain transport services, specifically in relation to the Jigsaw Medical Services Upper Tribunal (UT) case. This case considered emergency ambulance services contrasted with patient transport services. It was accepted that they were exempt (“the supply of transport services for sick or injured persons in vehicles specially designed for that purpose” – VAT Act 1994, Schedule 9, Group 7, item 11) but could they “also” be treated as zero rated?

Technical

Zero rating takes precedence over exemption, so if these services qualify for both exemption and zero rating, they will be treated as zero rated. Although both treatments are VAT free, zero rating is beneficial as it provides the suppler the ability to recover input tax attributable to the supplies.

Summary

The Brief clarifies that zero rating applies if the supply of transport is in any vehicle with seating to carry ten or more passengers (including the driver) or if there would be 10 seats if wheelchair adaptations were removed. If the supply is not zero rated, say, because of the number of seats test is failed, the above exemption may apply if the service is the transport of sick or injured persons. If that exemption does not apply, then the default position applies, and the service is standard rated. RCB3 also provides information on how to apply the “ten seat rule” and on adapted vehicles.