Tag Archives: HMRC

VAT: B2B and B2C – The distinction and importance

By   1 August 2023
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A key feature of the place of supply rules is the distinction between B2B (business to business) and B2C (business to consumer) supplies. The distinction is important because it determines, inter alia, whether GB VAT is applicable to a supply made by a GB supplier.

Status of the customer:

  • B2C: A supply is B2C when the customer is a private individual, an organisation with only non-business activities or the supply is wholly for private use (eg for the private use of a business owner)
  • B2B: A supply is B2B when the customer has any level of business activity (though if a supply is wholly for private use it remains B2C). It does not matter if the supply is for a non-business activity of the customer or if the customer is not VAT registered. All that matters is the customer has some level of business activity – this includes VAT exempt activity and taxable activity below the VAT registration threshold VAT place of supply.

To apply the B2B treatment a GB supplier must obtain evidence that the customer has business activities. If the supplier cannot obtain any evidence, they should apply B2C treatment.

  • If the customer is VAT registered, the customer’s VAT number is evidence of status and it is good practice to quote this on the supplier’s invoice. A GB supplier should check the customer’s VAT registration number is in the correct format for the country concerned. This can be done via the EC Vies website. for EU customers. NB: Special evidence rules apply to electronically supplied services.
  • If the customer is not VAT registered, a GB supplier should obtain and retain evidence that the customer has business activities. HMRC state “If your customer is unable to provide a VAT number, you can accept alternative evidence.This includes certificates from fiscal authorities, business letterheads or other commercial documents indicating the nature of the customer’s activities”.

A supplier needs to identify where his customer belongs in order to establish the place of supply.

VERY broadly, depending on the nature of the supply, the rule of thumb is that a B2B service is GB VAT free (it is subject to a reverse charge by the recipient as it is deemed to be “supplied where received”) but a B2C service is generally subject to GB VAT, regardless of the place of belonging of the recipient. There are exceptions to these rules however, such as the use and enjoyment provisions, land related services, hire of transport and admission to events.

A VAT Did you know?

By   27 July 2023
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Popcorn is standard rated, but microwavable popcorn is VAT free.

Apply to receive VAT data from HMRC

By   13 July 2023
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Credit reference agencies and other qualifying applicants can now apply for VAT registration data for use in making financial assessments.

A UK-based credit reference agency or similar financial organisation can apply for authorisation to get non-financial VAT registration data for the purpose of:

  • credit scoring
  • anti-fraud checking
  • compliance with other financial regulations

It may help small businesses and new start-ups gain access to credit and finance for the first time and give increased access to credit and finance to established VAT-registered businesses.

The data file will cover all VAT-registered businesses, not individual businesses or grouped by trade sector or geographical location.

In addition to the VAT registration number and available contact information, the data for each registered business includes the:

  • effective date of registration
  • overseas trader indicator
  • group or divisional registration indicator
  • organisational name
  • trading name and trading style
  • standard industrial classification code (trade class)
  • legal entity status
  • company number and incorporation date

Where applicable, this will also include the date of:

  • deregistration
  • transfer of a going concern

No financial or payment data is included.

The file shared will be updated weekly to ensure it is accurate.

HMRC will only share non-financial VAT registration data with you if your business has a genuine need to use it for the purposes set out in section 8(1) of the Small Business Enterprise and Employment Act (SBEEA) 2015.

How to apply

An interest may be registered by applying to receive VAT registration data by emailing: vat.datasharing@hmrc.gov.uk, quoting ‘VAT Data Sharing’ in the subject line.

 

VAT: Is a cosmetic treatment exempt medical care? The Illuminate Skin Clinics Ltd case

By   12 July 2023
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Latest from the courts

In the Illuminate Skin Clinics Ltd First-Tier Tribunal (FTT) case the issue was whether cosmetic procedures qualified as exempt medical treatment.

Background

The Appellant runs a private, ie; non-NHS clinic offering a range of aesthetic, skincare and wellness treatments advertised as: fat freezing, thread lifts, chemical peels, fillers, facials, intravenous drips and boosters. The Appellant’s sole director and shareholder, Dr Shotter, complies with Item 1 (below) in terms of qualifications, ie; she is enrolled on the register of medical professionals.

The list of treatments included:

  • Botox
  • Dermal fillers
  • CoolSculpting
  • Microsclerotherapy
  • Prescription skincare
  • Chemical peels
  • Microdermabrasion
  • Thread lifting
  • Thermavein
  • Aqualyx
  • Platelet-rich plasma treatment.

HMRC contended that these supplies were standard rated because there is no medical purpose behind the treatments, and they are carried out for purely cosmetic purposes. An assessment was raised for output tax on this income.

The Appellant argued that what it provided was exempt medical care via The VAT Act 1994, Schedule 9, Group 7, item 1 – “The supply of services consisting in the provision of medical care by a person registered or enrolled in any of the following:

  • The register of medical practitioners…”

And its contention was that the primary purpose of the treatments was “the protection, maintenance or restoration of the health of the person concerned”

In the Mainpay case it was established that “medical” care means “diagnosing, treating and, in so far as possible, curing diseases or health disorders”

Decision

Although there may have been a beneficial psychological impact on undergoing such treatments and this may have been the reason for a patient to proceed (and they may be recommended by qualified medical professionals) this, in itself, was insufficient to persuade the judge that the services were exempt. Consequety, the appeal was rejected and the assessment was upheld.

The FTT found that there was very little evidence of diagnosis. This was important to the overall analysis because diagnosis is the starting point of medical care. Without diagnosis, “treatment”, in the sense of the exemption, is not something which is being done responsively to a disease or a health disorder.

The fact that people go to the clinic feeling unhappy with some aspect of their appearance, and (at least sometimes) are happier when something is done at the clinic about that aspect of their appearance, does not mean that the treatment is medical, or has a therapeutic aim.

It was telling that the differentiation, in Dr Shotter’s own words, between what the clinic does from what “a GP or other health professional” does is; diagnosis. It also highlighted the general trend or purpose of the clinic’s activity – helping people to feel better about their appearance, in contexts where their appearance is not itself a health condition, or threatening to their health in a way which mandates treatment of their appearance by a GP or another health professional.

Helping someone to achieve goals in relation to their appearance, which is what this clinic did, is not treating someone’s mental health status, but is going to their self-esteem and self-confidence. It is a misuse of language to say that this is healthcare in the sense that it would fall within Item 1 of Group 7.

Commentary

There has been an ongoing debate as to what constitutes medical care. Over 20 years ago I was advising a large London clinic on this very point and much turned on whether patients’ mental health was improved by undergoing what many would regard as cosmetic procedures. We were somewhat handicapped in our arguments by the fact that many of the patients were lap dancers undergoing breast augmentation on the direction of the owner of the club…

It is worth remembering that not all services provided by a medically registered practitioner are exempt. The question of whether the medical care exemption is engaged in any given case will turn on the particular facts.

Further recent cases on medical exemption here and here.

VAT: New HMRC guidance on error reporting

By   4 July 2023
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HMRC has published new guidance to assist taxpayers on how to deal with errors discovered on submitted VAT returns. The catchy title is: Check if you need to report errors in your VAT Return – Check if you need to notify HMRC about errors that are over the threshold on your VAT Return and find out how to report them.

The guidance sets out how to report errors of £10,000 or more (net of all errors). This broadly comes down to using the online service by completing a form VAT652 or adjusting a current VAT return.

Please see our flowchart on error reporting Error Reporting Flowchart

New portal for VAT payment plans

By   4 July 2023
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VAT is normally due on the relevant due date*. However, HMRC has launched a new self-service portal for businesses to set up payment plans.

We look at managing VAT debt in detail here.

A business can set up a VAT payment plan online if it:

  • has filed its latest tax return
  • owes £20,000 or less
  • is within 28 days of the payment deadline
  • does not have any other payment plans or debts with HMRC
  • plans to pay off its debt within the next six months

A taxpayer cannot set up a VAT payment plan online if it uses the Cash Accounting Scheme, Annual Accounting Scheme, or makes payments on account.

If a business cannot set up a payment plan online it will need to contact HMRC.

HMRC will ask:

  • if you can pay in full
  • how much you can repay each month
  • if there are other taxes you need to pay
  • how much money you earn
  • how much you usually spend each month
  • what savings or investments you have

If you have savings or assets, HMRC will expect you to use these to reduce your debt as much as possible.

* For businesses that pay their VAT monthly or quarterly, the deadline for both submitting a return and paying the VAT owing is usually one calendar month plus seven days after the VAT period has ended

VAT payment deadline calculator here.

VAT: Business or non-business? The 3D Crowd CIC case

By   4 July 2023
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Latest from the courts

Business or non-business?

In the First-Tier Tribunal (FTT) case of 3D Crowd CIC (3D) the issue was whether a donation of goods, with a subsequent intention to sell similar goods constituted a business activity such that input tax incurred in relation to it was recoverable.

Background

3D was formed at the beginning of the Covid 19 pandemic to produce face protection via the process of 3D printing. Such protection was in high demand, but there was a shortage of suitable products for healthcare workers. The appellant produced 130,000 face shields in the first six weeks of production; which was an admirable feat. However, it was not possible to sell this equipment without the appropriate accreditation. Consequently, to alleviate demand, 3D donated the PPE to the NHS.

By the time accreditation was given the demand for PPE had reduced so it was not possible to sell the 3D printed face coverings as initially intended.

Technical

The issue of business versus non-business has been a contentious issue in the VAT world from day one. This classification is important for two reasons. If an activity is a business (an economic activity) it could be subject to VAT and, as in this case, if an activity is non-business there is usually a restriction of input tax.

Contentions

3D said that input tax could be recovered on costs which involved no direct onward supply of goods or services, but which laid the groundwork for them. That is, the input tax could be attributed to an intended taxable supply, even though that intention was not fulfilled by circumstances outside its control.

HMRC argued that per Longbridge the correct test for determining whether an activity is a business activity is whether there is a direct link between the services or goods supplied and a payment received by the supplier. In this case, there was not so no input tax was reclaimable. HMRC also referred to the decision in Wakefield College, supporting the proposition that an activity is only a business activity if it results in the supply of goods or services for a consideration.

Decision

The FTT found that the VAT incurred on supplies made to 3D, constituted elements:

  • in connection with 3D seeking CE certification
  • related to general overheads
  • related to VAT incurred on materials bought to produce the PPE

Input tax incurred on the costs of accreditation is recoverable because these were incurred in order to sell PPE in the future and for no other purpose. The fact that these costs are not linked to a particular supply (and is in the nature of preparing the ground for future supplies) was irrelevant per The VAT Act 1994, Schedule 1, para 10.

The VAT incurred on the general overhead costs and on the costs of producing the PPE was incurred in part for business purposes and party for non-business (donations) and should be apportioned using a method agreed between 3D and HMRC.

Commentary

Another case highlighting the difficulty in identifying the distinction between business and non-business and the complexity of input tax attribution. The altruistic efforts of the CIC is to be admired, but such charitable (in the broad sense) activities do not always get their just reward in VAT terms.

Recovery of VAT on company cars

By   3 July 2023
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Further to our guide to the recovery of input tax on motoring expenses we are often asked about the specifics of a business acquiring a motor car. So, this article sets out the different rules.

Purchase of a car

If a business purchases a car outright, regardless of how this is funded, no input tax is claimable at all. However, If the taxpayer is either a taxi or driving instructor business, VAT falls to be 100% recoverable.

Hire Purchase (HP)

This is treated as a supply of goods as the ownership of the car passes at the end of the agreement. Similarly, to an outright purchase, input tax is blocked for all taxpayers except taxi and driving instructor businesses.

Lease hire

If the car is ‘qualifying car’, and is returned at the end of the agreement it is a supply of services; a lease. There is a specific rule which means that 50% of the VAT is recoverable on the rental payments if it is used for business purpose. The 50% block is to cover the private use of the car. Again, a 100% reclaim is possible if it is to be used for hire with a driver for carrying passengers or providing driving instruction.

The 50% block applies to all the VAT on charges paid for the rental of the car. This includes:

  • optional services — unless they’re supplied and identified separately from the leasing supply on the tax invoice
  • excess mileage charge — if it forms part of a supply of leasing but not if it was incurred on an excess mileage charge that forms part of a separate supply of maintenance

Personal Contract Purchase (PCP)

This is a little more complex because a PCP can either be treated as a supply of goods (the car), or a supply of services (a lease) depending on the terms of the contract. The following treatment is based on the Mercedes Benz Financial Services case.

The difference between services or goods:

This distinction depends on the level of the final payment. This is known as the Guaranteed Minimum Future Value (GMFV).

Services

  • If the final optional payment (known as a balloon payment) is set at or above the anticipated market value (the GMFV) of the car at the time the option is to be exercised, the contract will be deemed a supply of leasing services with VAT on each instalment. A business can therefore recover 50% of input tax on each monthly payment. A balloon payment is the final “lump sum” which the agreement sets out is to be paid if a customer chooses to own the car at the end of the agreement.

Goods

  • If the final optional payment is set below the anticipated market value, such that any rational customer would choose to buy the car, the contract is a supply of goods with a separate supply of finance. VAT is therefore due on the supply of goods in full at the beginning of the contract and the finance element is exempt. In such cases input tax is 100% blocked.

The distinction

It is often difficult to distinguish between services and goods in relation to PCP cars. We find that the wording of contracts is often arcane and unhelpful (and not particularly drafted with VAT in mind). If the supply is not determinable by reference to the agreement documentation, a simple and practical solution is to consider the invoice. Broadly, if it is a lease the supplier will charge VAT on the monthly payments, but a purchase would mean VAT is charged in full up front at the tax point.

Input tax on repairs 

If a vehicle is used for business purposes, there is a 100% reclaim of the VAT charged on repairs and maintenance as long as the business paid for the work and the vehicle is used for some business purposes. It does not matter if the vehicle is used for some private motoring or if a business has chosen not to reclaim input tax on road fuel.

VAT: How to characterise a supply – The tests

By   27 June 2023
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In the age-old matter of whether a supply is separate/composite/compound for VAT purposes which and what is the nature of that supply, the Court of Appeal case of Gray & Farrar International LLP has provided very helpful guidance. A background to facts of the initial hearing here (although this decision was overturned by both the UT and the CoA).

I have previously considered these types of supply here, here, here, here, and here. Although not specifically concerning composite/separate supplies, the case sets out a hierarchy of tests to be applied in characterising a single supply for VAT purposes which now sets the standard. These test are:

  1. The Mesto predominance test should be the primary test to be applied in characterising a supply for VAT purposes.
  2. The principal/ancillary test is an available, though not the primary, test. It is only capable of being applied in cases where it is possible to identify a principal element to which all the other elements are minor or ancillary. In cases where it can apply, it is likely to yield the same result as the predominance test.
  3. The “overarching” test is not clearly established in the ECJ jurisprudence, but as a consideration the point should at least be taken into account in deciding averments of predominance in relation to individual elements, and may well be a useful test in its own right.

Comments

The Mesto Test

CJEU Mesto Zamberk Financini (Case C-18/12)

The primary test to be applied when characterising a single supply for VAT purposes is to determine the predominant element from the point of view of the typical consumer with regard to the qualitative and not merely the quantitative importance of the constituent elements.

Principal/ancillary

If a distinct supply represents 50% or more of the overall cost, it can not be considered ancillary to the principal supply. In such cases an apportionment will usually be required.

Overarching

A generic description of the supply which is distinct from the individual elements. In many cases the tax treatment of that overarching single supply according to that description will be self-evident.

CPP

One must also have regard to the Card Protection Plan Ltd case. This has become a landmark case in determining the VAT treatment for single and multiple supplies. In this case the ECJ ruled that standard rated handling charges were not distinct from the supply of exempt insurance. It was noted that ‘a supply that comprises a single service from an economic point of view should not be artificially split’. Notably many subsequent court decisions have since followed this outcome thereby suggesting a general lean towards viewing cases as single supplies where there are reasonable grounds to do so.

A VAT Did you know?

By   26 June 2023
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In this hot weather it is important to drink sufficient fluids. If you buy a bottle of water, you will pay VAT, but milk is zero rated.