Tag Archives: input-tax

VAT: Latest from the courts – Hastings Insurance Place Of Supply

By Marcus Ward 22 February 2018

In the First Tier Tribunal (FTT) case of Hastings Insurance the issue was where was the place of supply (POS) of services?

The POS rules determine under which VAT regime the supply is treated, whether the associated input tax may be recovered and how the services are reported. Consequently, determining the POS for any supply is vitally important because getting it wrong may not only mean that tax is overpaid in one country, but it is not declared in the appropriate country so that penalties and interest are levied. Getting it wrong also means that the input tax position is likely to be incorrect; meaning that VAT can be over or underclaimed. The rules for the POS of services are notoriously complicated and even subtle differences in a business’ situation can produce a different VAT outcome.

Background

Hastings is an insurance services company operating in the UK. The appeal relates to whether the appellant was able to recover input tax it incurred in the UK which was attributable to supplies of; broking, underwriting support and claims handling services made to a Gibraltar based insurance underwriter (Advantage) which supplied motor insurance to UK customers through Hastings. In order to obtain credit for the relevant input tax, the supply to Advantage must have a POS outside the EU, eg: the recipient had a place of belonging in Gibraltar and not the UK. HMRC argued that Advantage belonged in the UK so that the input tax could not have been properly recoverable. Consequently, the issue was where Advantage “belonged” for VAT purposes.

The POS rules set out where a person “belongs”.

A taxable person belongs:

where it has a business establishment, or;
if different, where it has a fixed establishment, or;
if it has both a business establishment and a fixed establishment (or several such establishments), where the establishment is located which is most directly concerned with the supply

Further details on this point are explained here

Contentions

It was not disputed that Advantage had a business establishment in Gibraltar. The question was whether it also had a fixed establishment in the UK and, if so, whether the supplies of services were made to that fixed establishment rather than to its business establishment in Gibraltar. HMRC contended that Advantage had a fixed establishment in the UK which was “more directly concerned with the supply of insurance” such that the POS was the UK. This was on the basis that Advantage had human and technical resources in the UK which were actually used to provide its services to UK customers. Hastings obviously argued to the contrary; that Advantage had no UK fixed establishment and that services were supplied to, and by, Advantage in Gibraltar.

Technical

It may be helpful to look briefly at CJEU case law which considered what an establishment other than a business establishment is. It is: “characterised by a sufficient degree of permanence and a suitable structure in terms of human and technical resources”, where looking at the location of the recipient of the supply, “to enable it to receive and use the services supplied to it for its own needs” or, where looking at the location of the supplier, “to enable it to provide the services which it supplies”.

Decision

The FTT concluded that the input tax in dispute is recoverable because it was attributable to supplies made to Advantage on the basis that it belonged outside the EU (as interpreted in accordance with the relevant EU rules and case law). After a long and exhaustive analysis of the facts the summary was;

The appellant’s human and technical resources, through which it provided the services to Advantage, did not comprise a fixed establishment of Advantage in the UK, whether for the purposes of determining where Advantage made supplies of insurance or where the appellant made the supplies of its services.
Even if, contrary to the FTT’s view, those resources comprised a fixed establishment in the UK, there is no reason to depart from the location of Advantage’s business establishment in Gibraltar as the place of belonging/supply in the circumstances of this case.

Summary

If this case affects you or your clients it will be rewarding to consider the details of the arrangements which are helpfully set out fully in the decision. This was, in my opinion, a borderline case which could have been decided differently quiet easily. A significant amount of the evidence produced was deemed inadmissible; which is an interesting adjunct to the main issue in itself. Whether HMRC take this matter further remains to be seen. It is always worthwhile reviewing a business’ POS in depth and we are able to assist with this.

VAT: Timeshare is exempt

By Marcus Ward 19 February 2018

Latest from the courts

The Fortyseven Park Street Ltd (FPSL) Upper Tribunal case.

Brief technical overview

In general terms the provision of a “timeshare” in the UK is standard rated for VAT. This is because HMRC regard supplies of this type to be similar to hotels, inns, boarding houses and are treated as “serviced flats” (other than those for permanent residential use). The appellant sought to argue that what it provided was not “similar” to a hotel or boarding house.

Background

The issue in the FPSL case was whether “Fractional Interests” (akin to timeshares) in a property amount to an exempt supply of that property. The Fractional Interests entitled FPSL’s clients up to 21 days a year in block of apartments in Mayfair.

The First Tier Tribunal (FTT) determined that here were three main issues:

The FTT decided that the supplies of the Fractional Interests fell within the exemption from VAT provided for the leasing or letting of immovable property.
However, the FTT further found that the land exemption was excluded because the grant of the Fractional Interests was the provision of accommodation in a similar establishment to an hotel.
The therefore FTT dismissed FPSL’s argument that under the principle of fiscal neutrality the supplies of the Fractional Interests should be treated in the same way (exempt) as more traditional timeshare interests.

Decision

The UT decided that the relevant interests provided amounted to an exempt supply of the property. This was on the basis that the judges concluded that the grant of the Fractional Interest was the grant of a right to occupy a residence and to exclude others from enjoying such a right, and was thus within the concept of the “letting of immovable property”. It was also found that the supply was a passive activity and not outside the land exemption by reason of FPSL having added significant value to the service despite providing; certain additional facilities, services (eg; concierge) and benefits to clients – this was not, it was decided, a situation where the appellant had actively exploited the asset to add value to the supply (which may have made it taxable). The UT also ruled that as the concierge was provided by a third party, it could not be combined to form a single supply made by FPSL thus emphasising the fact that this was a more passive activity.

It was noted that there was a distinction in this case from supplies of boutique hotels (which are standard rated hotel accommodation) because residents were contracting for the supply of a long-term right to occupy an apartment and not a series of short-term stays and that the high amount paid for the Fractional Interest brought with it certain financial obligations which are not found in the hotel industry.

Commentary

This is an interesting case and the decision somewhat surprising. There is a subtle distinction between what was provided here and serviced flats or hotel accommodation, but the UT found it sufficient to apply exempt treatment. If you, or your clients may be affected by this decision, please contact us.

VAT: Doctors and healthcare professionals

By Marcus Ward 29 January 2018

VAT and Doctors

I have noticed that I am receiving more and more queries in this area and HMRC does appear to be taking an increased interest in healthcare entities. This is hardly surprising as it can be complex and there are some big numbers involved.

(This article refers to doctors, but applies equally to most healthcare professional entities.)

The majority of the services provided by doctors’ practices are VAT free. Good news one would think; no need to charge VAT and no need to deal with VAT records, returns and inspections.

However, there is one often repeated question from practices; “How can we reclaim the VAT we are charged?”

The first point to make is that if a practice only makes exempt supplies (of medical services) it is not permitted to register for VAT and consequently cannot recover any input tax. Therefore we must look at the types of supplies that a practice may make that are taxable (at the standard or zero rate). If any of these supplies are made it is possible to VAT register regardless of the value of them. Of course, if taxable supplies are made, the value of which exceeds the current turnover limit of £85,000 in a rolling 12-month period, registration is mandatory.

Examples of services and goods which may be taxable are:

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

So what does VAT registration mean?

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

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

Partial Exemption

Once the calculations described above have been carried out, the resultant amount of input tax which relates to exempt supplies is compared to the de-minimis limits (broadly; £625 per month VAT and not more than 50% of all input tax). If the figure is below these limits, all VAT incurred is recoverable regardless of what activities the practice is involved in.

VAT registration in summary

Benefits

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

Drawbacks

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

Please contact us if any of the above affects you or your clients.

VAT – What records must be kept by a business?

By Marcus Ward 9 January 2018

Requirements for VAT records by taxable persons

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

General requirements

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

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

Additionally

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

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

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

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

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

Comprehensive records

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

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

VAT – There is no such thing as a free lunch

By Marcus Ward 3 January 2018

Latest from the courts

In the Court of Appeal case of ING Intermediate Holdings Ltd the issue was whether the provision of “free” banking actually constituted a supply for VAT purposes.

Background

The appeal concerned the recoverability of input tax. ING wished to recover (via deduction against the outputs of a separate investment business) a proportion of VAT expenses incurred in connection with a “deposit-taking” business. ING contended that this activity did not involve any VATable supply. HMRC contended, and did so successfully before both prior tribunals, that it is more than a deposit-taking business and involved the provision of banking services.

The issue

The relevant services were supplied to the public, and the user of the services were not charged a fee. Consequently, the essential issue was; whether the “free” banking services were provided for consideration and, if so, how that consideration ought to be quantified for VAT purposes. If there was a consideration, there was a supply, and that supply would be exempt; thus not providing a right to recovery of input tax for the appellant.

Technical

There is no definition of consideration in either the EC Principal VAT Directive or the VAT Act 1994. In the UK, the meaning was originally taken from contract law, but the European Court of Justice (ECJ) has confirmed that the term is to be given the Community meaning and is not to be variously interpreted by Member States. The Community definition used in ECJ cases is taken from the EC 2nd VAT Directive Annex A13 as follows even though this Directive is no longer in force:

“…the expression “consideration” means everything received in return for the supply of goods or the provision of services, including incidental expenses (packing, transport, insurance etc), that is to say not only the cash amounts charged but also, for example, the value of the goods received in exchange or, in the case of goods or services supplied by order of a public authority, the amount of the compensation received.”

NB: In order for there to be consideration, it must be able to be quantifiable and able to be expressed in monetary terms.

Decision

The CA decided that although there was no distinct charge to the users of the service, there was a supply of services for a consideration. That consideration was the difference between what the customer obtained from the relevant account, and what he could have obtained from an account which was not free, but provided better returns (the interest rate offered must have contained some deduction for the services provided). This was capable of being expressed in monetary terms (although it is interesting to note that the CA stated that it would be undesirable to say which method should be applied, although the court was “entirely satisfied” that it could be done).

Consequently there was a supply for VAT purposes and ING’s appeal was therefore dismissed.

Commentary

HMRC quite often argue that there is a supply when in fact, there is no supply. However, they did have a decent argument in this case and I understand that they are likely to apply this to a number of other long running disputes. Please contact us if you consider that this case could affect your business or your client’s business.

Ding Dong – Avon calling (for VAT)

By Marcus Ward 21 December 2017

Latest from the courts

The CJEU case of Avon Cosmetics Limited considered the validity and completeness of a specific UK derogation called a “Retail Sale Direction”.

Background

Avon Cosmetics Limited (‘Avon’) sells its beauty products in the UK to representatives, known colloquially as ‘Avon Ladies’, who in turn make retail sales to their customers (‘direct selling model’). Many of the Avon Ladies are not registered for VAT. As a result, their profit margins would not normally be subject to VAT. As an example; an Avon Lady may buy goods from Avon at £50 and sell them at £70. In HMRC’s eyes, the £20 difference is not taxed.

“Lost VAT” Derogation

That problem of ‘lost VAT’ at the last stage of the supply chain is typical of direct selling models. In order to deal with the problem, the UK sought and obtained a derogation from the standard rule that VAT is charged on the actual sales price. In Avon’s case that derogation allowed HMRC to charge Avon VAT, not on the wholesale price paid by the unregistered Avon Ladies, but instead on the retail price at which the Avon Ladies would go on to sell the products to the final consumer. However, the way the derogation is applied does not take into account the costs incurred by the unregistered representatives in their retail selling activities, and the input tax that they would normally have been able to deduct had they been VAT registered (‘notional input tax’). In particular, where Avon Ladies buy products for demonstration purposes (not to resell but to use as a selling aid) they cannot deduct VAT on those purchases as input tax. The result is that the disregarded notional input tax in relation to such costs ‘sticks’ in the supply chain and increases the overall VAT charged on the direct selling model over that charged on sales through ordinary retail outlets.

Challenge

The appeal by Avon concerns the interpretation and validity of the Derogation.

In particular

whether there is an obligation to take into account the notional input tax of direct resellers such as the Avon Ladies
whether there was an obligation for the UK to bring the issue of notional input tax to the EC’s attention when it requested the Derogation, and
what would be/what are the consequences of failing to comply with either of those obligations?

Result

The CJEU found that neither the derogation authorised by Council Decision 89/534/EEC of 24 May 1989 authorising the UK to apply, in respect of certain supplies to unregistered resellers nor, national measures implementing that decision infringe the principles of proportionality and fiscal neutrality. Therefore, output tax remains due on the ultimate retail sale value, but there is no credit for any VAT incurred by the Avon Ladies.

VAT – A Christmas Tale

By Marcus Ward 12 December 2017

Well, it is Christmas…. and at Christmas tradition dictates that you repeat the same nonsense every year….

Dear Marcus

My business, if that is what it is, has become large enough for me to fear that HMRC might take an interest in my activities. May I explain what I do and then you can write to me with your advice? If you think a face to face meeting would be better I can be found in most decent sized department stores from mid September to 24 December.

First of all I am based in Greenland but I do bring a stock of goods, mainly toys, to the UK and I distribute them. Am I making supplies in the UK?

If I do this for philanthropic reasons, am I a charity, and if so, does that mean I do not pay VAT?

The toys are of course mainly for children and I wonder if zero rating might apply? I have heard that small T shirts are zero rated so what about a train set – it is small and intended for children. Does it matter if adults play with it?

My friend Rudolph has told me that there is a peculiar rule about gifts. He says that if I give them away regularly and they cost more than £150 I might have to account for VAT. Is that right?

My next question concerns barter transactions. Dads often leave me a food item such as a mince pie and a drink and there is an unwritten rule that I should then leave something in return. If I’m given Tesco’s own brand sherry I will leave polyester underpants but if I’m left a glass of Glenfiddich I will be more generous and leave best woollen socks. Have I made a supply and what is the value please? My feeling is that the food items are not solicited so VAT might not be due and, in any event; isn’t food zero-rated, or is it catering? Oh, and what if the food is hot?

Transport is a big worry for me. Lots of children ask me for a ride on my airborne transport. I suppose I could manage to fit 12 passengers in. Does that mean my services are zero-rated? If I do this free of charge will I need to charge air passenger duty? Does it matter if I stay within the UK, or the EU? My transport is the equivalent of six horse power and if I refuel with fodder in the UK will I be liable for fuel scale charges? After dropping the passengers off I suppose I will be accused of using fuel for the private journey back home. Somebody has told me that if I buy hay labelled as animal food I can avoid VAT but if I buy the much cheaper bedding hay I will need to pay VAT. Please comment.

Can I also ask about VAT registration? I know the limit is £85,000 per annum but do blips count? If I do make supplies at all, I do nothing for 364 days and then, in one day (well night really) I blast through the limit and then drop back to nil turnover. May I be excused from registration? If I do need to register should I use AnNOEL Accounting? At least I can get only one penalty per annum if I get the sums wrong.

I would like to make a claim for input tax on clothing. I feel that my red clothing not only protects me from the extreme cold but it is akin to a uniform and should be allowable. These are not clothes that I would choose to wear except for my fairly unusual job. If lady barristers can claim for black skirts I think I should be able to claim for red dress. And what about my annual haircut? That costs a fortune. I only let my hair grow that long because it is expected of me.

Insurance worries me too. You know that I carry some very expensive goods on my transport. Play Stations, Mountain Bikes, i-pads and Accrington Stanley replica shirts for example. My parent company in Greenland takes out insurance there and they make a charge to me. If I am required to register for VAT in England will I need to apply the reverse charge? This seems to be a daft idea if I understand it correctly. Does it mean I have to charge myself VAT on something that is not VATable and then claim it back again?

Next you’ll be telling me that Father Christmas isn’t real……….

HAPPY CHRISTMAS EVERYBODY!

Deregistration – When a business leaves the VAT club

By Marcus Ward 11 December 2017

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

General points

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

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

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

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

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

The Rules

Compulsory deregistration

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

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

Voluntary deregistration

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

Consequences of deregistration

Final return

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

Output tax

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

Input tax

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

Self-supply (Deemed supply)

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

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

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

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

Re-registration

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

Option To Tax

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

Capital Goods Scheme (CGS)

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

Cash Accounting

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

Partial exemption

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

Flat Rate Scheme

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

Self-Billing

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

Bad Debt Relief (BDR)

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

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

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

Summary

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

VAT: Time limit for claiming input tax

By Marcus Ward 4 December 2017

Latest from the courts.

In the helpful CJEU case of Biosafe (this link is in French, so with thanks to Mr Lees – for my schoolboy French and more helpfully; a translation website) the issue was the date at which input tax can be reclaimed in cases where VAT was charged at an incorrect rate (lower than should have been applied) and this is subsequently corrected by the issue of an additional VAT only invoice.

Background

The two parties to a transaction believed that a reduced rate of VAT applied to the supply of certain goods. The Portuguese tax authorities subsequently determined the correct VAT rate applicable was higher. The recipient refused to pay the additional tax on the grounds that the recovery of the input tax may be time barred.

Decision

Broadly, the CJEU held that VAT may be recovered on the date when a “correcting” (VAT only) invoice is issued, rather than when the initial tax point was created. So the capping provisions applicable in this case where not an issue.

Commentary

This is often an issue, and I come across it usually in the construction industry (where various VAT rates may be applicable). It is an important issue as in the UK we have a four year capping provision. If the initial supply was over four years ago, any claim for input tax will be time barred if this was deemed to be the only tax point.

In my experience, this issue does create some “confusion” in HMRC and is a helpful point of reference if there are any future disagreements on this matter. It must be correct that the right to recover input tax only arises when there is a document (invoice) issued to support such a claim as it would not be possible to make a claim without evidence to support it. If the original tax point is used as a one-off date which cannot be subsequently moved, it means that the claim for the difference in the two rates of tax (the original incorrect rate and the later, higher rate) could not be made after the capping period; which seems, at the very least, unfair. The later correcting invoice therefore creates a new tax point.

Please contact us if you have any similar input tax claims disallowed as being time barred, or you are currently in a dispute with HMRC on this matter.

VAT – Work on farm buildings

By Marcus Ward 14 November 2017

I am quite often asked if there are any VAT reliefs for farming businesses carrying out work to farm buildings.

Indeed, there are some areas of the VAT rules which may be of assistance to owners of farms and farm buildings. Clearly, the best position is to avoid VAT being charged in the first place. If this is not possible, then we need to consider if the VAT may be recovered.

Repairs and Renovations of Farmhouses

The following guidelines apply to businesses VAT registered as sole proprietors or partnerships. Where the occupant of the farmhouse is a director of a limited company (or a person connected with the director of the company) it is unlikely that any VAT incurred on the farmhouse may be recovered. The following notes are provided by HMRC after consultations with the NFU:

Where VAT is incurred on repairs, maintenance and renovations, 70% of that VAT may be recovered as input tax provided the farm is a normal working farm and the VAT-registered person is actively engaged full-time in running it. Where farming is not a full-time business for the VAT-registered person, input tax claimable is likely to be between 10%–30% on the grounds that the dominant purpose is a personal one.
Where the building work is more associated with an alteration (eg; building an extension) the amount that may be recovered will depend on the purpose for the construction. If the dominant purpose is a business one then 70% may be claimed. If the dominant purpose is a personal one HMRC would expect the claim to be 40% or less, and in some cases, depending on the facts, none of the VAT incurred would be recoverable.

Other farm buildings

As a general rule, when VAT is incurred on non-residential buildings, then, as long as they are used for business purposes, it would be expected that 100% of the VAT is recoverable. Care should be taken if any buildings are let and it may be that planning is necessary in order to achieve full recovery.

It should be noted that if any work to a building which is not residential results in the building becoming residential, eg; a barn conversion, then the applicable VAT rate should be 5%. If the resulting dwelling is sold then generally the 5% VAT is recoverable. If the dwelling is to be lived in by the person converting it; the VAT incurred may be recovered, but the mechanism is outside the usual VAT return and a separate claim can be made. In these circumstances it is not necessary for the “converter” to be VAT registered.

As may be seen, in many cases it will be necessary to negotiate a percentage of recovery with HMRC. We can assist with this, as well as advising on VAT structures and planning to ensure as much input tax as possible is either not chargeable to you, or is recoverable.