Tag Archives: exempt

VAT – Care with input tax claims

By Marcus Ward 13 December 2019

Claim checklist

You have a purchase invoice showing VAT. You are VAT registered, and you will use the goods or services purchased for your business… can you claim it?

Assuming a business is not partly exempt or not subject to a restriction of recovery of input tax due to non-business activities (and the claim is not for a motor car or business entertainment) the answer is usually yes.

However, HMRC is now, more than ever before, concerned with irregular, dishonest and inaccurate claims. It is an unfortunate fact that some people see making fraudulent claims as an “easy” way to illegally obtain money and, as is often the case, honest taxpayers are affected as a result of the (understandable) concerns of the authorities. Missing Trader Intra-Community (MTIC) or “carousel” fraud has received a lot of publicity over recent years with an estimate of £Billions of Treasury money being obtained by fraudsters. While this has been generally addressed, HMRC consider that there is still significant leakage of VAT as a consequence of dishonest claims. HMRC’s interest also extends to “innocent errors” which result in input tax being overclaimed.

In order to avoid unwanted attention from HMRC, what should a business be watching for when claiming credit for input tax? Broadly, I would counsel making “reasonable enquiries”. This means making basic checks in order to demonstrate to HMRC that a business has taken care to ensure that a claim is appropriate. This is more important in some transactions than others and most regular and straightforward transactions will not be in issue. Here are some pointers that I feel are important to a business:

Was there a supply?

This seems an obvious question, but even if a business holds apparently authentic documentation; if no supply was made, no claim is possible. Perhaps different parts of a business deal with checking the receipt of goods or services and processing documents. Perhaps a business has been the subject of fraud by a supplier. Perhaps the supply was to an individual rather than to the business. Perhaps a transaction was aborted after the documentation was issued. There may be many reasons for a supply not being made, especially when a third party is involved. For example, Co A contracts with Co B to supply goods directly to Co C. Invoices are issued by Co B to Co A and by Co A to Co C. It may not be clear to Co A whether the goods have been delivered, or it may be difficult to check. A lot of fraud depends on “correct” paperwork existing without any goods or services changing hands.

Is the documentation correct?

The VAT regulations set out a long list of details that a VAT invoice must show. Full details on invoicing here If any one of these required items is missing HMRC will disallow a claim. Beware of “suspicious” looking documents including manually amended invoices, unconvincing quality, unexpected names or addresses of a supplier, lack of narrative, “copied” logos or “clip-art” additions etc. One of the details required is obviously the VAT number of the supplier. VAT numbers can be checked for validity here

Additionally, imports of goods require different documentation to support a claim and this is a more complex procedure (which extends to checking whether supplies of goods have been made and physical access to them). A lot of fraud includes a cross border element so extra care should be taken in checking the validity of both the import and the documentation.

Ultimately, it is easy to create a convincing invoice and HMRC is aware of this.

Timing

It is important to claim input tax in the correct period. Even if a claim is a day out it may be disallowed and penalties levied. details of time of supply here

Is there VAT on a supply?

If a supplier charges VAT when they shouldn’t, eg; if a supply is zero rated or exempt or subject to the Transfer of A Going Concern rules (TOGC), it is not possible to reclaim this VAT even if the recipient holds an apparently “valid” invoice. HMRC will disallow such a claim and will look to levy penalties and interest. When in doubt; challenge the supplier’s treatment.

Place of supply

Only UK VAT may be claimed on a UK return, so it is important to check whether UK VAT is actually applicable to a supply. The place of supply (POS) rules are notoriously complex, especially for services, if UK VAT is shown on an invoice incorrectly, and is claimed by the recipient, HMRC will disallow the claim and look to levy a penalty, so enquiries should be made if there is any uncertainty. VAT incurred overseas can, in most cases be recovered, but this is via a different mechanism to a UK VAT return. Details on claiming VAT in other EC Member States here. (As with many things, this may change after Brexit).

One-off, unusual or new transactions

This is the time when most care should be taken, especially if the transaction is of high value. Perhaps it is a new supplier, or perhaps it is a property transaction – if a purchase is out of the ordinary for a business it creates additional exposure to mis-claiming VAT.

To whom is the supply made?

It is only the recipient of goods or services who may make a claim; regardless of; who pays or who invoices are issued to. Care is required with groups of companies and multiple VAT registrations eg; an individual may be registered as a sole proprietor as well as a part of a partnership or director of a limited company, As an illustration, a common error is in a situation where a report is provided to a bank (for example for financing requirements) and the business pays the reporting third party. Although it may be argued that the business pays for the report, and obtains a business benefit from it, the supply is to the bank in contractual terms and the business cannot recover the VAT on the services, in fact, in these circumstances, nobody is able to recover the VAT. Other areas of uncertainty are; restructuring, refinancing or acquisitions, especially where significant professional costs are involved.

e-invoicing

There are additional rules for electronically issued invoices. Details here

A business may issue invoices electronically where the authenticity of the origin, integrity of invoice data, and legibility of invoice content can all be ensured, and the customer agrees to receive invoices electronically.

‘Authenticity of the origin’ means the assurance of the identity of the supplier or issuer of the invoice
‘Integrity of content’ means that the invoice content has not been altered
‘Legibility’ of an invoice means that the invoice can be easily read.

A business is free to choose a method of ensuring authenticity, integrity, and legibility which suits its method of operation. e-invoicing provides additional opportunities for fraudsters, so a business needs to ensure that its processes are bulletproof.

HMRC’s approach

If a claim is significant, or unusual for the business’ trading pattern, it is likely that HMRC will carry out a “pre-credibility” inspection where they check to see if the claim is valid before they release the money. Another regular check is for HMRC to establish whether the supplier has declared the relevant output tax on the other side of the transaction (a so-called “reference”). Not unsurprisingly, they are not keen on making a repayment if, for whatever reason, the supplier has not paid over the output tax.

What should a business do?

In summary, it is prudent for a business to “protect itself” and raise queries if there is any doubt at all over making a claim. It also needs a robust procedure for processing invoices. If enquiries have been made, ensure that these are properly documented for inspection by HMRC as this is evidence which may be used to mitigate any potential penalties, even if a claim is an honest mistake. A review of procedures often flushes out errors and can lead to increased claims being made.

As always, we are happy to assist.

VAT: The extent of exempt childcare. The RSR Sports case

By Marcus Ward 3 December 2019

Latest from the courts

In the RSR Sports Limited First Tier Tribunal (FTT) case the issue was whether the provision of holiday camps for children was exempt healthcare via VAT Act 1994, Schedule 9, Group 7, item 9 – “services… closely linked to the protection of children and young persons” and supplies of “welfare services”

Background

The Appellant traded under the name of Get Active Sports. It provided various services including the provision of school holiday camps which were the subject of the appeal.

The holiday camps were Ofsted registered and “pupils will be safe and receiving the best possible childcare”. The appellant worked with children aged 4-16 and had specially designed programmes from multi-sports and games to themed arts and crafts. The staff that provided the holiday camp services were not required to have any teaching or coaching qualifications (but needed to be DBS checked). They were just required to ensure that the children were kept busy with a variety of activities and were kept safe.

The appellant considered that these supplies constituted supplies of “ services…closely linked to the protection of children and young persons” – within the meaning of Article 132(1)(h) of Council Directive 2006/112/EEC and supplies of “welfare services” under UK legislation as above. HMRC submitted that the predominant element of that single composite supply was the provision of activities because, weighing up objectively, from the position of the parents whose children attended the holiday camps, the importance to those parents of the childcare aspects of the holiday camps in comparison to the importance to them of the various activities which were made available at the holiday camps, the latter outweighed the former. The supplies did not fall within the exemption and should have therefore properly been treated as standard-rated as the primary aim of the appellant in running the camps was to offer sports and activities to the attendees and that the childcare was simply a by-product of the activity-based courses.

Decision

It was decided that the holiday camp services involved the provision of activities in the course of caring for children during the school holidays. In other words, the holiday camp services included both an activities element and a childcare element.

Although the judge commented that; it was fair to say that this case was finely-balanced, the services provided by RSR amounted to a single composite supply of which the predominant element was childcare (as opposed to the provision of activities) and therefore they fell within the scope of the above provisions and qualified for the exemption

The FTT agreed with HMRC that one element of the holiday camp services was the provision of activities, but it did not agree with the proposition that just because the provision of activities was an element of the services, that inevitably means that the provision of those activities, as opposed to the provision of childcare, was the predominant element of its supply.

Commentary

It looks like another close call, but the Tribunal appears to have got it right. An interesting aspect was RSR considering it strange that by offering activities to the children, as opposed to sitting them down in front of a television, the appellant was to deprive itself of the ability to bring the its services within the scope of the exemption. The mere fact that the appellant was encouraging parents to choose active childcare arrangements over more passive ones should not cause the relevant services to fall outside the exemption. So a “bit” of sport was OK, but not too much…

VAT: Input tax claim – business or personal? The Taylor Pearson (Construction) Ltd case

By Marcus Ward 3 December 2019

Latest from the courts

In the Taylor Pearson (Construction) Ltd (TPCL) First Tier Tribunal (FFT) case the issue was whether input tax incurred on professional fees in respect of tax planning and the issue of new (E Class) shares to directors was for business purposes or for the benefit of the directors in their personal capacity.

Background

The overall issue in this appeal was whether the company was entitled to deduct input VAT in relation to services provided by tax advisers as to how the company might reduce its tax and NIC liabilities in rewarding its directors and reduce the income tax liabilities of the directors. There are two specific issues:

Whether the services supplied were used for the purpose of the company’s business within the meaning of VATA 1994, section 24.
Whether the services supplied do not have a direct and immediate link with taxable output supplies because they have a direct and immediate link with exempt supplies, being the issue of share capital in the company.

HMRC argued that this appeal is similar to Customs and Excise Commissioners v Rosner [1994] STC 228 and Finanzamt Köln-Nord v Becker (Case C-104/12) in which input VAT incurred in defending the sole trader or individual employees personally, in criminal proceedings entirely unconnected to the business, was held not to be deductible.

Another issue, which was dealt with fairly perfunctory, was whether the issue of new shares was a supply for VAT purposes to which an element of the input tax could be attributed. As per the Kretztechnik ECJ case and subsequent HMRC guidance – the issue of shares was not a supply and the company was entitled to recover the associated input tax to the extent that its business activities generated taxable supplies (business of making supplies of construction goods and services in TPCL’s case).

Decision

In respect of whether the expenditure was for the benefit of the business, the judge stated that “...The advice in question was provided to the company and although the directors were significant beneficiaries of the arrangements that was entirely in their capacity as directors and employees of the company and not in any personal capacity.”

Further:

“…HMRC argued that the incentivisation of employees did not have a direct and immediate link with the purposes of the business I do not consider that this argument has any merit whatsoever and do not understand why HMRC put it forward. This concerns me.”

It is no wonder that the judge commented on this. This appeal was completely on all fours with the FTT case of Doran Bros (London) which HMRC did not appeal.

Consequently, it was decided that:

the services were used for the purposes of the company’s business, and
they did not have a direct and immediate connection with the issue of share capital.

The appeal was therefore allowed.

Commentary

It was a surprising decision by HMRC to take this to FTT. Case law in respect of Kretztechnik is well established and the purpose to which the funds created by a new share issue were put appears irrelevant. I also find it difficult to see how HMRC could ignore Doran Bros which was very clear and on all fours with this case, while referencing cases in which companies defended its directors against accusations of wrongdoings. In this case, the business purpose was to reward and incentivise TPCL’s directors.

This can be a difficult area of the tax and HMRC’s approach in this case demonstrates that it is prepared take these cases as far as possible. It is nearly always the case that VAT incurred on expenditure which is designed to increase staff morale and performance is a business expense.

Charities and VAT

By Marcus Ward 6 November 2019

Surely charities don’t have to pay taxes?

This is a common myth, and while charities and NFPs do enjoy some VAT reliefs, they are also liable for a number of VAT charges.

Charities have a very hard time of it in terms of VAT, since not only do they have to contend with complex legislation and accounting (which other businesses, no matter how large or complicated do not) but VAT represents a real and significant cost.

By their very nature, charities carry out “non-business” activities which means that VAT is not recoverable on the expenses of carrying out these activities. Additionally, many charities are involved in exempt supplies, eg; fundraising events, property letting, and certain welfare and educational services, which also means a restriction on the ability to recover VAT on attributable costs.

These two elements are distinct and require separate calculations which are often very convoluted. The result of this is that charities bear an unfair burden of VAT, especially so since the sector carries out important work in respect of; health and welfare, poverty, education and housing etc. Although there are some specific reliefs available to charities, these are very limited and do not, by any means, compensate for the overall VAT cost charities bear.

Another issue is legal uncertainty over what constitutes “business income” for charities, especially the VAT status of grants. It is worth bearing in mind here the helpful comment in the EC case of Tolsma translated as: “…the question is whether services carried on by [a person] were carried on for the payment or simply with the payment”.

Many charities depend on donations which, due to the economic climate have fallen in value at a time when there is a greater demand on charities from struggling individuals and organisations.

What can be done?

Ensure any applicable reliefs are taken advantage of.
If significant expenditure is planned, ensure that professional advice is sought to mitigate any tax loss.
Review the VAT position to ensure that the most appropriate partial exemption methods and non-business apportionment is in place.
Review any land and property transactions. These are high value and some reliefs are available. Additionally it is possible to carry out planning to improve the VAT position of a property owning charity.
Review VAT procedures to ensure that VAT is declared correctly. Penalties for even innocent errors have increased recently and are incredibly swingeing.
Consider a VAT “healthcheck” which often identifies problems and planning opportunities.

We have considerable expertise in the not for profit sector and would be pleased to discuss any areas of concern, or advise on ways of reducing the impact of VAT on a charity.

More detail on VAT and Charities for guidance

Business activities

It is important not to confuse the term ‘trading’ as frequently used by a charity to describe its non-charitable commercial fund-raising activities (usually carried out by a trading subsidiary) with ‘business’ as used for VAT purposes. Although trading activities will invariably be business activities, ‘business’ for VAT purposes can have a much wider application and include some or all of the charity’s primary or charitable activities.

Registration and basic principles

Any business (including a charity and NFP entity or its trading subsidiary) that makes taxable supplies in excess of the VAT registration threshold must register for VAT. Taxable supplies are business transactions that are liable to VAT at the standard rate, reduced rate or zero rate.

If a charity’s income from taxable supplies is below the VAT registration threshold it can voluntarily register for VAT but a charity that makes no taxable supplies (either because it has no business activities or because its supplies or income are exempt from VAT) cannot register.

Charging VAT

Where a VAT-registered charity makes supplies of goods and services in the course of its business activities, the VAT liability of those supplies is, in general, determined in the normal way as for any other business. Even if VAT-registered, a charity should not charge VAT on any non-business supplies or income.

Reclaiming VAT

This is usually a two stage process (a combined calculation is possible but it must have written approval from HMRC – Notice 706 para 7) . The first stage in determining the amount of VAT which a VAT-registered charity can reclaim is to eliminate all the VAT incurred that relates to its non-business activities. It cannot reclaim any VAT it is charged on purchases that directly relate to non-business activities. It will also not be able to reclaim a proportion of the VAT on its general expenses (eg; telephone, IT and electricity) that relate to those non-business activities.

Once this has been done, the remaining VAT relating to the charity’s business activities is input tax.

The second stage: It can reclaim all the input tax it has been charged on purchases which directly relate to standard-rated, reduced-rated or zero-rated goods or services it supplies.

It cannot reclaim any of the input tax it has been charged on purchases that relate directly to exempt supplies.

It also cannot claim a proportion of input tax on general expenses (after adjustment for non-business activities) that relates to exempt activities unless this amount, together with the input tax relating directly to exempt supplies, is below the minimis limit.

Business and non-business activities

An organisation such as a charity that is run on a non-profit-making basis may still be regarded as carrying on a business activity for VAT purposes. This is unaffected by the fact that the activity is performed for the benefit of the community. It is therefore important for a charity to determine whether any particular transactions are ‘business’ or ‘non-business’ activities. This applies both when considering registration (if there is no business activity a charity cannot be registered and therefore cannot recover any input tax) and after registration. If registered, a charity must account for VAT on taxable supplies it makes by way of business. Income from any non-business activities is not subject to VAT and affects the amount of VAT reclaimable as input tax.

‘Business’ has a wide meaning for VAT purposes based upon Directive 2006/112/EC (which uses the term ‘economic activity’ rather than ‘business’), UK VAT legislation and decisions by the Courts and VAT Tribunals. An activity may still be business if the amount charged does no more than cover the cost to the charity of making the supply or where the charge made is less than cost. If the charity makes no charge at all the activity is unlikely to be considered business.

An area of particular difficulty for charities when considering whether their activities are in the course of business is receipt of grant funding.

Partial Exemption

The VAT a business incurs on running costs is called input tax. For most businesses this is reclaimed on VAT returns from HMRC if it relates to standard rated or zero rated sales that that business makes. However, a business which makes exempt sales may not be in a position to recover all of the input tax which it incurred. A business in this position is called partly exempt. Generally, any input tax which directly relates to exempt supplies is irrecoverable. In addition, an element of that business’ general overheads are deemed to be in part attributable to exempt supplies and a calculation must be performed to establish the element which falls to be irrecoverable.

Input tax which falls within the overheads category must be apportioned according to a so called; partial exemption method. The “Standard Method” requires a comparison between the value of taxable and exempt supplies made by the business. The calculation is; the percentage of taxable supplies of all supplies multiplied by the input tax to be apportioned which gives the element of VAT input tax which may be recovered. Other partial exemption methods (so called Special Methods) are available by specific agreement with HMRC.

My flowchart may be of use: partial exemption flowchart

De Minimis

There is however relief available for a business in the form of de minimis limits. Broadly, if the total of the irrecoverable directly attributable (to exempt suppliers) and the element of overhead input tax which has been established using a partial exemption method falls to be de minimis, all of that input tax may be recovered in the normal way. The de minimis limit is currently £7,500 per annum of input tax and one half of all input tax for the year. As a result, after using the partial exemption method, should the input tax fall below £7,500 and 50% of all input tax for a year it is recoverable in full. This calculation is required every quarter (for businesses which render returns on a quarterly basis) with a review at the year end, called an annual adjustment carried out at the end of a business’ partial exemption year. The quarterly de minimis is consequently £1,875 of exempt input tax.

Should the de minimis limits be breached, all input tax relating to exempt supplies is irrecoverable.

Summary

One may see that this is a complex area for charities and not for profit entities to deal with. Certainly a review is almost always beneficial, as are discussions regarding partial exemption methods.

Please click here for more information on our services for charities.

New VAT Group rules

By Marcus Ward 6 November 2019

Changes to VAT Group rules – an increased opportunity

From 1 November 2019 the rules for VAT grouping have changed.

What is a VAT group?

A VAT group allows two or more entities to account for VAT under a single registration number with one of the corporate bodies in the group acting as the representative member.

The group is registered in the name of that representative member, who is responsible, on behalf of all of the other members of the group, for completing VAT returns and paying and reclaiming VAT.

All supplies of goods and services made by any member of the group to a third party outside the group are treated as having been made by the representative member. Similarly, any supply of goods or services made by a third party outside the group to any member of the group is treated as having been made to the representative member.

Supplies of goods or services between group members are not subject to VAT and a single VAT return will be completed each period for the entire group, as opposed to separate businesses submitting individual returns.

The changes

Prior to 1 November, only bodies corporate were able to form a VAT group (mainly companies and LLPs). From the beginning of this month, VAT grouping is additionally available for all entities, including; partnerships, sole traders and trusts in certain cases.

Eligibility

Via existing legislation, grouping is permitted if the control tests are passed. Bodies corporate can form a VAT group if:

each is established or has a fixed establishment in the UK
they are under common control

(There are additional tests for certain ‘specified bodies’ set out in Notice 700/2 para 3.2)

‘Control’ has a specific meaning based on the definition of holding company and subsidiary in section 1159 of and Schedule 6 to the Companies Act 2006.

New changes to eligibility

Non-corporate entities such as individuals and partnerships can now join a VAT group if they meet all of the following conditions:

they are established, or have a fixed establishment in the UK
they can demonstrate that they control all of its body corporate subsidiaries in the group. The test will apply assuming the non-corporate entity would pass the test if it was a corporate body, eg; usually meaning 51% or more of share capital in the relevant company/companies
they can demonstrate that they are entitled to VAT register independently of any other business (the distinction here is that a body corporate may be included in a VAT group if it is not trading, nor intends to trade)

The current eligibility to group is set out at VAT Act 1994, Section 43A and has been updated with a new section 43AZA which includes the new changes.

VAT Group pros and cons

So, would it be beneficial to VAT group entities? I set out here the pros and cons for businesses.

Pros

only one VAT return per quarter – less administration
no VAT on supplies between VAT group members.
no need to invoice etc or recognise supplies on VAT returns
likely to improve partial exemption position if exempt supplies are made between group companies.
likely to improve input tax recovery if taxable supplies are made to partly exempt group companies
may provide useful planning opportunities/convenience at a later date.

Cons

all members of the group are jointly and severally liable for any VAT due
only one partial exemption de-minimis limit for group
obtaining all relevant data to complete one return may take time thus increasing the potential for missing filing deadlines
a new VAT number is issued
assessments can be issued to the representative member relating to earlier periods when it was not the representative member and even when it was not a member of the group at that time
the limit for voluntary disclosures of errors on past returns applies to the group as a whole (rather than each company having its own limit)
payments on account limits apply to the group as a whole. This applies to a business whose VAT liability is more than £2million pa. Please see HMRC Reference: Notice 700/60 details here
may detrimentally affect partial exemption position if a partly exempt company makes taxable supplies to a fully taxable group company

Planning

If you think that there is a potential advantage for you, or your clients’ business, in VAT grouping, please contact us to discuss the VAT position.

VAT: Extent of welfare exemption – The Lilias Graham Trust case

By Marcus Ward 3 October 2019

Latest from the courts

Certain welfare services are exempt from VAT via VAT Act 1994, Schedule 9, Group 7, Item 9 – services which are directly connected with the care or protection of children. In the The Lilias Graham Trust (LGT) First Tier Tribunal case, the scope of the exemption was considered.

Background

LGT, which has charitable status, operated residential assessment centres, which supported parents (many of whom had mental health issues) in learning how to care for their children.

It was common ground that LGT’s services were as summarised in a letter from Glasgow City Council (where relevant):

LGT is an assessment centre providing assessment services on the parenting capacity of those referred to the service
The assessment services cover families where there is an uncertainty about whether the parent(s) can safely look after their children
LGT is simply acting as an observer watching the parent’s care for their own children and providing information in the form of advice
LGT is not providing any treatment in the form of medical care for any illness or injury
LGT’s recommendation following the assessment provides a recommendation to social workers around whether the parent(s) has sufficient capacity to keep their child safe and healthy
GCC viewed the residential accommodation as a fundamental part of the provision of the assessment services on the parenting capacity of those families which were referred to LGT.

Although the major part of LGT’s income came from the Local Authority fees, it is also subsidised to a degree by grants and donations.

Technical

In this case the odd position was that HMRC was arguing for exemption because, in learning how to care for their children, the services were “closely linked” to welfare services or “directly connected” to them as provided for by the Principal VAT Directive and the VAT Act in turn.

LGT contended that their supplies to a Local Authority (which could recover any VAT charged) were taxable as they did not fall within the welfare definition. LGT admitted that there was a causal relationship between the services provided and the care and protection of children, but the connection was too remote to be deemed to be a direct connection – There were several intervening factors and intermediaries between the service provided and the care and protection of children.

At issue was net input tax of circa £400,000 which would be recoverable by LGT if its supplies were taxable, but not if they were exempt. Guide to partial exemption here.

Decision

The court found that the essential purpose of the supplies made by LGT was to ensure that the child was better cared for and had optimal protection. That is precisely why the Local Authority employed LGT. Its supplies are both closely linked and directly connected with the protection of children as also to their care. Accordingly, the appellant made supplies of welfare services which are exempt from VAT. The fact that LGT provided its services to the Local Authority rather than the parents did not mean that its services should be taxable. Therefore, there was no output tax chargeable to the Local Authority and no input tax recovery by LGT on expenditure attributable to those exempt supplies.

Commentary

In this case, HMRC originally ruled that the services were taxable and LGT were required to VAT register, it even issued a late registration penalty. HMRC clearly subsequently changed its view which put input tax which LGT had recovered at risk. There are often disputes on the extent of the exemption, and sometimes debates on whether a service is supplied, or simply staff providing their services. It is important to understand these sometimes subtle differences as getting it wrong can be costly, as LGT found out.

VAT DIY Housebuilders’ Scheme – useful information

By Marcus Ward 9 September 2019

The DIY Housebuilders’ Scheme is a tax refund scheme for people who build, or arrange to have built, a house they intend to live in. It also applies to converting commercial property into a house(s). Details here.

However, there are often uncertainties and disputes over precisely what tax may be claimed on various expenditure. To this end, HMRC has published a comprehensive list of items, sorted alphabetically, which should avoid a lot of potential disagreements on claims.

It should be noted that a claim for services can only be made for conversions (at the reduced rate of 5%) as any services in respect of a new build property should be zero rated.

What else can a housebuilder not claim for?

There is no claim available for:

building projects outside the UK
materials or services that are not subject to VAT, eg; are zero-rated or exempt or provided by a non VAT-registered supplier
professional or supervisory fees, eg; architects and surveyors
the hire of plant, tools and equipment, eg; generators, scaffolding and skips
building materials that aren’t permanently attached to or, part of, the building itself
some fitted furniture, electrical and gas appliances, carpets or garden ornaments
supplies for which you do not have a VAT invoice.

If you would like assistance with making a claim, please contact us.

VAT: Exempt medical treatment – The Skin Rich case

By Marcus Ward 9 September 2019

Latest from the courts

In the Skin Rich Ltd [2019] TC 07310 First Tier Tribunal (FTT) case, the issue was whether Botox and nail treatments could be exempt as health and welfare services: “The supply of services consisting in the provision of medical care” by a “registered person” (principally, doctors, opticians, osteopaths, chiropractors and nurses).

Background

Skin Rich Ltd operated a skin culture and aesthetics clinic offering a range of specialist skin treatments including, but not limited to, Botox and dermal filler treatments or ‘Injectables’ and fungal nail treatments it contended were exempt from VAT.

The appellant employed several medical professionals to administer the injectables arguing it was a medical procedure and exempt under VATA 1994, Sch. 9, Grp. 7, items 1 and 2. It was not enough, however, that the services were provided by persons registered as appropriate, they had to be providing “medical care” in order to meet the terms of the exemption. Their principal purpose had to be the protection, including the maintenance or restoration of health. Whilst it was conceded a cosmetic benefit would not preclude a treatment having a primary purpose to protect, restore or maintain the health of an individual.

Decision

The FTT dismissed the appeal that Botox services and fungal nail treatment supplied by them were exempt under VATA 1994, Sch. 9, Grp. 7, items 1 and 2, or alternatively item 4. Consequently, output tax was due on the full value of these supplies. The FTT was not persuaded the services were principally to protect, restore or maintain the health of an individual. They did not, therefore, meet the definition of medical care established by the relevant case law. Furthermore, they did not consider the taxpayer to be “state regulated” as required by item 4.

Commentary

This can be a difficult area of the tax. I have dealt with a number of cases where apparent cosmetic surgery (breast augmentation and liposuction etc) were argued to have beneficial mental health outcomes. Case law on this matter is sometimes conflicting. Care should be taken when determining the VAT liability of certain procedures. The tests are more than something being “sort of medical”.

This was not an unexpected outcome, but presumably the appellant thought that, for the tax involved, it was worth going to court.

VAT: What is an economic activity? The Pertemps’ case

By Marcus Ward 12 August 2019

Latest from the courts

In the Upper Tribunal (UT) case of Pertemps Limited the issue was whether the operation of the respondent’s salary sacrifice scheme to provide travel and subsistence payments to employees was a supply for VAT purposes and, indeed, whether it was an economic activity at all.

I have considered what is an economic activity (business) many times, examples here, here, here and here. It is a perennial VAT issue and goes to the very heart of the tax. EU legislation talks of economic activity, which is taken to be “business activity” in the UK. There is no legal definition of either economic or business activity so case law on this point is very important.

Background

Employees of the respondent were offered the option of;

being paid a salary, from which they would have to meet any travel and subsistence expenses, or
participating in Pertemps’ scheme where they would be paid their travel and subsistence expenses but receive a reduced salary.

The amount of the reduction was equal to the amount of the expense payment plus a fixed amount to defray the costs of running the scheme. The issue was whether the charge for using the scheme was taxable.

HMRC’s appeal against the FTT decision [2018] UKFTT 369 (TC) was based on the view that the scheme involved a taxable supply of services by Pertemps to its participating employees such that output tax was due of the fixed payments. The FTT concluded that Pertemps did supply services to the employees. but the supply was not within the scope of VAT because the operation of the scheme was not an economic activity. It allowed Pertemps’ appeal. The FTT also held that, if there had been a supply, it would have been exempt.

Decision

The UT decided that, although the FTT erred in law when it concluded that Pertemps made a supply of services to the employees who participated in the scheme, it was correct when it concluded that Pertemps was not carrying on any economic activity when it provided the scheme for employees. The charge only arose in the context of the employment relationship, and it could not be compared to an open market supply of accountancy services.

Therefore, HMRC’s appeal was dismissed.

Commentary

Care should always be taken with salary sacrifice schemes. Some, but not all, sacrifices are subject to output tax. HMRC internal guidance on the subject here. This case is a helpful clarification on the matter of certain charges to staff. It also adds another layer to the age-old issue of what constitutes a business activity. VAT is only due on business supplies, and it is crucial to appreciate what is, and isn’t an economic activity. This is especially important in respect of charities and NFP bodies.

VAT – A beginner’s practical guide

By Marcus Ward 2 August 2019

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.