Tag Archives: exempt

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: 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.

VAT: Holiday Lets – don’t get caught out

By   14 June 2019
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Further to the usual complexity with VAT and property, I have been increasingly asked about the VAT position of holiday lets, so this is a timely piece on the subject.

All residential letting is exempt… except holiday lets, which are standard rated at 20%. So, what is the difference? A house is a house, but the VAT treatment depends on how the property is advertised or “held out”.

If a property is held out for holiday accommodation, then the rental income is taxable.

What is holiday accommodation?

Holiday accommodation includes, but is not restricted to; any house, flat, chalet, villa, beach hut, tent, caravan or houseboat. Accommodation advertised or held out as suitable for holiday or leisure use is always treated as holiday accommodation. Also, increasingly, it is common for farms and estates to have cottages and converted barns within their grounds, which are exploited as furnished holiday lets so this use must be recognised for VAT purposes. Residential accommodation that just happens to be situated at a holiday resort is not necessarily holiday accommodation.

This treats holiday lets the same way as; hotels, inns and B&B were VAT applies, which is fair.

Off-season lettings

If holiday accommodation is let during off-season, it should be treated as exempt from VAT provided it is let as residential accommodation for more than 28 days and holiday trade in the area is clearly seasonal.

What does this mean?

If the letting business exceeds the VAT registration threshold, currently £85,000, it must register for VAT. This usually means that either the business would lose a sixth of its income to HMRC or its letting fees would increase by 20% – which is not usually an option in a particularly price sensitive market. The only upside to registration is that VAT incurred on costs relating to the letting (input tax) would be recoverable. This may be on expenditure such as; agents’ fees, maintenance, refurbishments, laundry, websites and advertising etc.

Agents

If a property owner provides a property to a holiday letting agent and the agent itself provides the letting directly to the end users, this does not avoid the standard rating, even if the agent pays a guaranteed rent to the freeholder. This can catch some property owners out.

Sale of the property

When the owner sells the property, although it may have been used for standard rated purposes, the sale is usually treated as exempt. However, zero rating may be available for the first sale or long lease if it is a new dwelling with no occupancy restrictions. The sale of a “pure” holiday property is likely to be standard rated if it is less than three years old. To add to the complexity, it is also possible that the sale may qualify as a VAT free Transfer Of A Going Concern (TOGC).  These are important distinctions because they determine, not only if VAT is chargeable, but, if the sale is exempt, there is usually a clawback of input tax previously claimed, potentially visa the Capital Goods Scheme (CGS).

Overseas properties

A final point: please do not forget overseas property lets. My article here sets out the tax risks.

Summary

There are a lot of VAT pitfalls for a business providing holiday lettings. But for a single site business, unless the property is large or very high end, it is likely that the income will below £85,000 and VAT can be ignored. However, it is important to monitor income and costs to establish whether:

  • registration is required
  • registration is beneficial (usually, but not exclusively, for major refurbishment projects).

As always, please contact me if you, or your clients, have any queries.

VAT: What is a TOGC? Why is it important?

By   6 June 2019
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What is a Transfer of a Going Concern (TOGC)?

Normally the sale of the assets of a VAT registered business will be subject to VAT at the appropriate rate. A TOGC, however is the sale of a business including assets which must be treated as a matter of law, as “neither a supply of goods nor a supply of services” by virtue of meeting certain conditions. It is always the seller who is responsible for applying the correct VAT treatment and will be required to support their decision.

Where the sale meets the conditions, the supply is outside the scope of VAT and therefore VAT is not chargeable.

The word ‘business’ has the meaning set out in The VAT Act 1994, section 94 and ‘going concern’ has the meaning that at the point in time to which the description applies, the business is live or operating and has all parts and features necessary to keep it in operation, as distinct from its being only an inert aggregation of assets.

TOGC Conditions

The conditions for VAT free treatment of a TOGC:

  • The assets must be sold as a business, or part of a business, as a going concern
  • The assets must be used by the transferee in carrying on the same kind of business, whether or not as part of any existing business, as that carried on by the transferor in relation to that part (HMRC guidance uses the words “intend to use…” which, in some cases may provide additional comfort)
  • There must be no break in trading
  • Where the seller is a taxable person (VAT registered) the purchaser must be a taxable person already or immediately become, as a result of the transfer, a taxable person
  • Where only part of a business is sold it must be capable of separate operation
  • There must not be a series of immediately consecutive transfers
  • Where the transfer includes property which is standard-rated, either because the seller has opted to tax it or because it is a ‘new’ or uncompleted commercial building the purchaser must opt to tax the property and notify this to HMRC no later than the date of the supply. This may be the date of completion or, if earlier, the date of receipt of payment or part payment (eg; a deposit). There are additional anti-avoidance requirements regarding the buyer’s option to tax

Please note that the above list has been compiled for this article from; the legislation, HMRC guidance and case law. Specific advice must be sought.

Property transfer

The sale of a property may qualify for TOGC if the above tests are met. Usually, but not exclusively, a TOGC sale is the sale of a tenanted building when the sale is with the benefit of the existing lease(s) – (the sale of a property rental business rather than of the property itself). Another example of a property TOGC is where a property under construction is sold (a development business). As may be seen, timing with a property TOGC is of utmost importance. For example, an option to tax one day late will invalidate TOGC treatment. A guide to land and property.

What purpose do the TOGC rules serve?

The TOGC provisions are intended to simplify accounting for VAT when a business changes hands. The main purposes are to:

  • relieve the buyer from the burden of funding VAT on the purchase, helping businesses by improving their cash flow and avoiding the need to separately value assets which may be liable at different rates or are exempt and which have been sold as a whole
  • protect government revenue by removing a charge to tax and entitlement to input tax where the output tax may not be paid to HMRC, for example, where a business charges tax, which is claimed by the new business but not paid by the selling business

What if it goes wrong?

TOGC treatment is not optional. A sale is either a TOGC or it isn’t. It is a rare situation in that the VAT treatment depends on; what the purchaser’s intentions are, what the seller is told, and what the purchaser actually does. All this being outside the seller’s control.

Add VAT when TOGC treatment applies:

Often, the TOGC point can be missed, especially in complex property transactions.

The addition of VAT is sometimes considered a “safe” VAT position. However, output tax will have been charged incorrectly, which means that when the buyer claims VAT shown on the relevant invoice, this will be disallowed. This can lead to;

  • potential penalties and interest from HMRC
  • the buyer having to recover the VAT payment (often the seller, having sold a business can be difficult to track down and then obtain payment from)
  • significant cash flow issues (HMRC will need to be repaid the input tax claim immediately)
  • if a property sale, SDLT is likely to be overpaid

Sale treated as a TOGC when it is a taxable supply:

When VAT free TOGC treatment is applied to a taxable supply (possibly as one, or more of the TOGC conditions are not met) then there is a tax underdeclaration. The seller will be assessed by HMRC and penalties and interest are likely to be levied. There is then the seller’s requirement to attempt to obtain the VAT payment from the buyer. Similarly to above, this is not always straightforward or possible and it may be that the contract prohibits additional payment. There is likely to be unexpected funding issues for the buyer if (s)he does decide to make the payment.

Considering the usually high value of sales of businesses, the VAT cost of getting it wrong can be significant.

Summary

This is a complex area of the tax and an easy issue to miss when there are a considerable number of other factors to consider when a business is sold. Extensive case law (example here and changes to HMRC policy here ) insists that there is often a dichotomy between a commercial interpretation of a going concern and HMRC’s view. I sometimes find that the buyer’s intentions change such that the TOGC initially applied becomes invalid when the change in the use of assets (from what was notified to the seller) actually takes place.  HMRC is not always sympathetic in these situations. One of the questions I am often asked is: “How long does the buyer have to operate the business after purchase so that TOGC treatment applies?” Unsurprisingly, there is no set answer to this and HMRC do not set a specific period. My view, and it is just my view, is that an absolute minimum time is one VAT quarter.

Contracts are important in most TOGC cases, so it really pays to review them from a VAT perspective.

I very strongly advise that specialist advice is obtained in cases where a business, or property is sold. Yes, I know I would say that!

VAT: Land & Property – Option To Tax Update

By   3 June 2019
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Who opts to tax?

HMRC have published an updated Public Notice 742A The changes are in connection with authorised signatories, in particular; corporate bodies, overseas entities and powers of attorney. It is important to establish who can sign an option to tax (OTT) form VAT1614A as getting it wrong may invalidate an OTT with potentially very expensive consequences.

A guide to the OTT here.

It seems an appropriate time to look at who can sign an OTT form. HMRC guidance states:

“The person responsible for making the decision and notifying the option to tax depends on the type of legal entity holding (or intending to hold) the interest in the land or building, and who within that entity has the authority to make decisions concerning VAT. In most cases it will be the sole proprietor, one or more partners (or trustees), a director or an authorised administrator. If you have appointed a third party to notify an option to tax on your behalf, HMRC requires written confirmation that the third party is authorised to do so.”

Some specific situations:

Beneficial owners

In cases where there is both a beneficial owner and a legal owner of land or buildings for VAT purposes it is the beneficial owner who is making the supply of the land or building. It is therefore the beneficial owner who should OTT. This may not be the case where the beneficiaries are numerous, such as unit trusts and pension funds. In these cases, the person deemed to be making the supply is the trustee who holds the legal interest and receives the immediate benefit of the consideration.

Joint owners

Joint ownership is where two entities purchase land or buildings together, or one party sells a share in property to another party. Usually, a supply may only be made by both entities together. The two entities should OTT together as a single option and register for VAT account for output tax as a single entity (usually a partnership even if it is not a partnership for any other purpose.).

Limited partnerships

Under the Limited Partnership Act 1907 every limited partnership must be registered with Companies House. A limited partnership is made up of one or more general partners, who have unlimited liability, and one or more ‘limited’ partners, who are not liable for debts and obligations of the firm. A limited partner is unable to take part in the management.

If there is only one general partner and one or more limited partners, the general partner is treated as a sole proprietor for VAT registration purposes. If there are two or more general partners and one or more limited partners, the general partners are treated as a partnership. It is the general partners who should OTT.

Limited liability partnerships (LLPs)

An LLP has separate legal status from its members and is able to enter into contracts in its own right. An LLP is a body corporate and is may register for VAT. If the partnership decides to OTT, one or more members, as the authorised signatory must sign the notification.

Authorised persons for particular legal entities 

In order for an OTT to be notified effectively, it must be signed and dated by an authorised person who possesses the legal capacity to notify a decision.

List of authorised signatories

Legal entity Authorised persons
Sole trader (proprietor) Owner of the business
Trust Trustee (or partner if VAT2 is completed)
Partnership (UK) Any partner (on VAT2)
Partnership (Scotland) Any partner
Limited partnership (UK) General partner
Limited partnership (Scotland) General partner
Limited Liability Partnership Designated member or member
Unincorporated Association Chairperson, treasurer, trustee or company secretary
Limited company Company director or company secretary
Community Interest Company (CIC) Company director or company secretary
Charitable Incorporated Organisation Director, chairperson, treasurer, trustee, or company secretary
Community Benefit Society Chairperson, treasurer, trustee or company secretary
Local Authority Section 151 officer (or Section 95 officer in Scotland), town clerk, head of finance, or treasurer
VAT group Director or company secretary of the group member that owns the property
Government department Nominated VAT liaison officer or finance manager (or a person senior to either)
Corporate body acting as a director, trustee or company secretary Any office holder or employee authorised by the corporate body (as long as the corporate body itself has authorisation from the owner the property)
Overseas entity Director or manager
Power of attorney Anyone granted a power of attorney to administer or manage the tax affairs of the owner of a property

Commentary

An invalid OTT may result in, among other things:

  • Input tax recovery being barred
  • A potential Transfer of a Going Concern (TOGC) becoming subject to VAT
  • VAT registration being denied
  • Unwanted complexity in transactions with the potential for a deal to be aborted
  • Costs in unwinding the VAT position (if firefighting is possible)
  • Uncertainty
  • Delays in transactions
  • A dispute between two sides to a transaction
  • Past input tax being the subject of clawback
  • The Capital Goods Scheme (CGS) being triggered resulting in VAT costs and complexity
  • HMRC levying penalties and interest

It is important to get the, seemingly simple, process of OTT right, and right first time!

The ABC of VAT – property

By   28 May 2019
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A glossary

Anyone who has had even the slightest brush with VAT will know that it is a very complex tax. Now, multiply that complexity by the intricacy and occasionally arcane nature of property law and one may see that the outcome will be less than straightforward. I have produced a general guide and an article on residential property VAT Triggerpoints

I hope the following glossary will help with steering through some of the difficulties.

  • Annex– a building which is joined to or is next to a larger main building usually an extension or addition to a building
  • Assign – to transfer the right or interest in a property from one party to another
  • Break clause – a clause allowing either landlord or tenant to give written notice after a particular date or period of the tenancy in order to end the tenancy
  • Beneficial owner – party deemed to make a supply of property rather than the legal owner
  • Blocked input tax – VAT which a developer is unable to recover when constructing a new dwelling. Typically, expenditure on good such as; carpets, fitted furniture, and gas and electrical appliances
  • Building materials– goods ordinarily incorporated into a property which attracts similar VAT treatment to the construction services.
  • Capital Goods Scheme(CGS) – a method of calculating the recovery amount of input tax incurred on property over a ten-year period, Details of the CGS here
  • Certificate – a document issued to a supplier in order to obtain certain zero-rated or reduced-rated building work
  • Change of number of dwellings– usually a conversion from commercial to residential, or a single house into flats (or flats into a single house) at 5% VAT
  • Consideration– a thing done or given in exchange for something else = a supply. Usually quantified in money, but in some cases non-monetary consideration
  • Construction of new dwellings – a zero rated supply
  • Contract – legal document detailing the agreement of terms between the vendor and buyer
  • Contractor – entity responsible for building works
  • Conversion–work on a non-residential building which results in a property designed as a dwelling(s) being created
  • Covenants – rules governing the property in its title deeds or lease. May impact the definition of dwellings
  • Curtilage– either a garden, or an area surrounding a building which is deemed to be part of the property
  • Designed as a dwelling– a property initially designed for residential use, regardless of any subsequent alternative use
  • Dilapidations – items that have been damaged during a tenancy for which the tenant is responsible for the cost of repair or replacement. Usually VAT free
  • DIY Housebuilders’ Scheme – a scheme which ‘self-builders’ to recover VAT on a new build dwelling or conversion. Details here
  • Dwelling– a building deemed to be residential
  • Empty house – if, in the ten years before work on a dwelling starts, it has not been lived in, the work may be subject to 5% rather than 20% VAT
  • Exempt– a supply that is VAT free. It usually results in attributable input tax falling to be irrecoverable
  • Facade– a wall (or two walls on a corner plot) which may be retained without affecting the zero rating of a new dwelling construction
  • Grant– a supply of an interest in land
  • Holiday home – the sale or long lease of a holiday home cannot be zero-rated even if it is designed as a dwelling
  • Housing Association – a non-profit organisation which rents residential property to people on low incomes or with particular needs
  • In the course of construction– meaningful works that have occurred in relation to the construction of a building (but prior to its completion)
  • Incorporated goods – goods sold with a new dwelling which are zero rated and to which the input tax block does not apply. See white goods
  • Input tax– VAT incurred on expenditure associated with property
  • Interest in, or right over, land– the right to access to and use of, land. Usually via ownership or lease
  • Lease – legal document governing the occupation by the tenant of a premises for a specific length of time
  • Licence to occupy– a permission to use land that does not amount to a tenancy
  • Live-work units – a property that combines a dwelling and commercial or industrial working space. Usually subject to apportionment
  • Major interest–a supply of a freehold interest or a lease exceeding 21 years
  • Multiple occupancy dwelling – a dwelling which is designed for occupation by persons not forming a single household
  • New building–a commercial building less than three years old the sale of which is mandatorily standard
  • Non-residential– a commercial building which is not used as a dwelling
  • Open market value – likely sale price with a willing seller and buyer, with a reasonable period of marketing and no special factors affecting the property
  • Option to tax (OTT) – act of changing the exempt sale or letting of a commercial into a taxable supply. The purpose is to either; recover input tax or avoid input tax being charged. Details here
  • OTT disapplication– the legal removal of a vendor’s option to tax
  • OTT not applicable – the OTT does not apply to residential buildings (so VAT can never apply to dwellings)
  • OTT revocation– the ability to revoke an option to tax after six months or twenty years
  • Partial exemption– a calculation to attribute input tax to exempt and taxable. Generally, VAT incurred in respect of exempt supplies is irrecoverable
  • Person constructing – a developer, contractor or sub-contractor who constructs a building
  • Premium – upfront payment for a supply of property
  • Relevant Charitable Purpose (RCP)–the use by a charity for non-business purposes or for use as a village hall or similar
  • Relevant Residential Purpose (RRP)– dwelling used for certain defined residential purposes, eg; children’s home, a hospice or student accommodation
  • Reverse surrender– a tenant surrenders an onerous lease to the landlord and makes a payment to surrender
  • Share of freehold – where the freehold of the property is owned by a company and the shareholders are the owners of the property
  • Single household dwelling– a building designed for occupation by a single household
  • Snagging – the correction of building faults. Usually follows the VAT liability of the original work
  • Stamp Duty Land Tax (SDLT) – tax paid by a purchaser of a property. SDLT is increased if the sale of a commercial property is the subject of an option to tax
  • Substantial reconstruction– certain significant works to a listed building
  • Surrender– a tenant surrenders the lease to the landlord in return for payment
  • Taxable supply– a supply subject to VAT at the standard, reduced or zero-rate
  • Use as a dwelling – a building which was designed or adapted for use as someone’s home and is so used
  • Vendor – entity selling a property
  • Transfer of a Going Concern (TOGC) – the VAT free sale of the assets of a business as a going concern. This may include a tenanted property
  • Zero-rated– a taxable supply subject to VAT at a rate of 0%

We strongly recommend that advice is obtained if any property transaction is being undertaken.

Details of our land and property services may be found here.

VAT: Worldwide rates and registration limits

By   20 May 2019
0

It can be difficult finding the answer to simple questions on VAT/GST. So, I provide a summary below of the rates of VAT applicable in the major countries which apply VAT/GST and the amount of income per year that a domestic business may receive before it is required to VAT register. You, or your clients, will need to be aware of these if they have a Place Of Supply (POS) overseas. I hope that it is useful to have this information all in one place – a “cut out and keep” type document!

Worldwide VAT/GST rates Annual turnover limit for Registration 
Standard rate Reduced rates National currency Limit
Australia 10.0 0.0 AUD  75 000
Austria 20.0 10.0/13.0 EUR  30 000
Belgium 21.0 0.0/6.0/12.0 EUR  25 000
Canada 5.0 0.0 CAD  30 000
Chile 19.0 N/A CLP None
Czech Republic 21.0 10.0/15.0 CZK 1 000 000
Denmark 25.0 0.0 DKK  50 000
Estonia 20.0 0.0/9.0 EUR  40 000
Finland 24.0 0.0/10.0/14.0 EUR  10 000
France 20.0 2.1/5.5/10.0 EUR  82 800
Germany 19.0 7.0 EUR  17 500
Greece 24.0 6.0/13.0 EUR  10 000
Hungary 27.0 5.0/18.0 HUF 8 000 000
Iceland 24.0 0.0/11.0 ISK 2 000 000
Ireland 23.0 0.0/4.8/9.0/13.5 EUR  75 000
Israel 17.0 0.0 ILS  99 003
Italy 22.0 4.0/5.0/10.0 EUR  65 000
Japan 8.0 N/A JPY 10 000 000
Korea 10.0 0.0 KRW 30 000 000
Latvia 21.0 5.0/12.0 EUR  40 000
Lithuania 21.0 5.9/9.0 EUR  45 000
Luxembourg 17.0 3.0/8.0/14.0 EUR  30 000
Mexico 16.0 0.0 MXN None
Netherlands 21.0 9.0 EUR  1 345
New Zealand 15.0 0.0 NZD  60 000
Norway 25.0 0.0/12.0/15.0 NOK  50 000
Poland 23.0 5.0/8.0 PLN  200 000
Portugal 23.0 6.0/13.0 EUR  10 000
Slovak Republic 20.0 10.0 EUR  49 790
Slovenia 22.0 9.5 EUR  50 000
Spain 21.0 4.0/10.0 EUR None
Sweden 25.0 0.0/6.0/12.0 SEK  30 000
Switzerland 7.7 0.0/2.5/3.7 CHF  100 000
Turkey 18.0 1.0/8.0 TRY None
United Kingdom 20.0 0.0/5.0 GBP  85 000

Source National Delegates – position as at 1 January 2019

Notes

Reduced rates include zero-rates applicable to domestic supplies (ie; exemption with right to deduct input tax). They do not include zero-rated exports or other supplies subject to similar treatment such as international transport.

Registration/collection thresholds identified in this table are general concessions that relieve domestic suppliers from the requirement to register for and/or to collect VAT/GST until such time as they exceed the turnover threshold.  Thresholds shown in this table apply to businesses established in the country. In most countries, the registration threshold does not apply to foreign businesses ie;. businesses having no seat, place of business, fixed establishment, domicile or habitual residence within the country.

VAT: Transactions in Bitcoins

By   1 May 2019
0

Further to my articles here and here concerning transactions involving cryptocurrencies, and considering the increased use of them, it seems timely to provide an update on the VAT treatment of certain business activities which use Bitcoins as a value for exchange, or payment for goods or services.

What is cryptocurrency?

Cryptocurrency is a line of computer code that holds monetary value. Cryptocurrency is also known as digital currency and it is a form of money that is created by mathematical computations. In order for a Bitcoin transaction to take place, a verification process is needed, this is provided by millions of computer users called miners and the monitoring is called mining. Transactions are recorded in the blockchain which is public and contains records of each and every transaction that takes place. Cryptocurrency is not tangible, although they may be exchanged for traditional cash. It is a decentralised digital currency without a central bank or single administrator (which initially made it attractive) and can be sent from user to user on the peer-to-peer network without the need for intermediaries.

What is Bitcoin?

Bitcoin was the first popular cryptocurrency and it first appeared in 2009. The advantage of bitcoin is that it can be stored offline on the owner’s local hardware (a process called cold storage) which protects the currency from being taken by others. If a person loses access to the hardware that contains the bitcoins, the currency is lost forever, and it is estimated that as much as 23% of bitcoin has been mislaid by miners and/or investors.

Exchange between currencies and bitcoin

The VAT treatment of transactions exchanging traditional currencies for Bitcoin, or Bitcoin for currencies carried out for consideration (added by the supplier) are exempt services in a similar way to any other currency transactions via The VAT Directive Article 135(1)(e).

Paying for goods or services using Bitcoin

Similar to any other payment method, simply using Bitcoin to obtain goods or services is outside the scope of VAT and no VAT is due on the value the Bitcoin represents. That is to say that the authorities do not consider that such a transaction is a barter.

Provision of goods or services in return for Bitcoin payment

The provision of goods or services paid for in Bitcoin are treated in a similar way as any supplied for consideration consisting of

  • Traditional currencies, or
  • Non-monetary consideration

and the value is; anything received by the supplier in consideration of that supply.

Should the consideration be in Bitcoin, there two alternatives for the conversion of foreign currencies into the main currency of a Member State (although these were drafted before the introduction of Bitcoin and originally relate simply to foreign currencies)

  • the latest exchange rate recorded on the most representative exchange market of the Member State, or
  • the latest exchange rate published by the European Central Bank

However, as above, because Bitcoin is not administered by any bank, this may make valuation difficult. The VAT Committee of the European Commission (EC) has indicated that a potential resolution is to use Open Market Rate (OMR*) as the exchange of the virtual currency. This would be the responsibility of the supplier. This is likely to be commercially available information from the websites of the likes of; coindesk, Cryptocompare or Cointelegraph for eg.

All of the above seems logical, although confirmation provided by the EC VAT Committee is welcome.

* OMR is the amount for which an asset is transferred between a willing buyer and a willing seller in an arm’s-length transaction after proper marketing wherein the parties had each acted knowledgeably, prudently, and without compulsion.