Tag Archives: input-tax

VAT – Treatment of used pre-registration assets

By Marcus Ward 9 November 2016

New HMRC Publication: Brief 16/2016

HMRC has clarified its position on the claim of input tax relating to assets used by a business prior to VAT registration. HMRC had previously, in some circumstances, sought to disallow an element of such input tax. They now accept that input tax incurred on fixed assets purchased within four years of the Effective Date of Registration (EDR) is recoverable in full, providing the assets are still in use by the business at the time of EDR. HMRC state that there has been no change of policy on this matter, however, experience insists that that there have been cases where they have sought to limit the amount of VAT claimable prior to registration. This brings the VAT treatment into line with what many advisers always thought the position to be.

Background

UK legislation permits businesses which have become VAT registered to recover tax incurred on goods and services purchased before their EDR. This is so as long as the purchases are used in taxable activities post EDR. The “simplified” rules are now:

Services

Services must have been received less than six months before the EDR for VAT to be deductible. This excludes services that have been supplied onwards pre EDR. There may be a restriction to VAT recovery if a business is partly exempt. A guide to partial exemption here

Goods

Input tax incurred on goods which were purchased within four years of EDR and are still on hand at the time of EDR may be recovered in full (subject to any partial exemption restriction). Input tax on goods which were consumed or sold prior to EDR do not qualify for recovery. This rule also applies to fixed assets.

Please contact us if your business, or that of your clients have been the subject of a disallowance of input tax in these circumstances.

VAT – Cash businesses: Investigations

By Marcus Ward 25 October 2016

HMRC’s methods of establishing underdeclarations

HMRC have always taken interest in cash businesses as they see them as a revenue risk. We have heard, anecdotally, that there is an ongoing campaign to target cash businesses which HMRC suspect are under-declaring takings. Such businesses are usually retail and commonly restaurants and take aways (which I shall use as an example in this article). A retail business is obliged to keep certain records. For sales, this is a record of daily gross takings (DGT) and this is the area I will focus on as it is where “suppression” of income generally occurs. In a very crude example, the owner, or a member of staff does not ring up a sale and the payment is pocketed. There are more sophisticated ways in which suppression occurs, but this is the most common.

Even in this day and age where most payments are made by credit or debit cards, there is still significant scope for declarations to be inaccurate.

The methods

There are a number of ways in which HMRC can determine the accuracy of VAT declarations. These may be from the usual bank and accounts reconciliations, mark up exercises, to, say, counting take-away containers to build up a picture of the turnover. The following are also ways in which HMRC test the credibility of declarations:

Compliance checks

These usually take place in the evenings when a restaurant is open for business (or soon after it closes). Officers gain entrance, question staff, examine records for that and previous days, and remove certain records. From this information they can build up a picture of trading. These visits are usually unannounced.

Invigilation exercise

HMRC observe how the business operates and check that all sales of food and drinks are rung into the till. This is usually with the agreement of the business.

Test meals

HMRC staff will purchase a test meal and at a later time check to see if it has been recorded correctly. It may be that this method will be repeated at a suspect restaurant by different HMRC staff, perhaps in the same evening. If any of the sales are not recorded correctly, it may be insufficient in itself to create an assessment, but it will confirm suspicions of suppression and lead to further action.

Observation

While posing as customers, HMRC will also count the number of covers, the amount of take aways, the number of staff, how orders are taken and paid for, and how payments are made.

Surveillance

Members of HMRC staff park outside a restaurant (usually in an unmarked van) and watch the activities of the restaurant. They count the number of people dining and the numbers of people exiting with take aways. This observation may also record the number of deliveries and other relevant information that they are able to obtain from what they can see. This exercise may be carried out over a number of days/nights or even weeks.

Purchases

In more complex suppression, the value of purchases may also be suppressed in order to present a more credible picture to an inspector. This may be more common if the purchases are zero rated food (on which the business would not claim input tax). HMRC may attempt to build up a picture of sales by the volume of actual purchases made. They often check the restaurant’s suppliers’ records to get a full picture of trade.

Information obtained by one of the above methods may, on its own, be insufficient to raise an assessment, but combined with information obtained in different ways will more often than not result in one (should the exercises demonstrate an under-declaration of course).

Taxpayer’s rights

Attendance

HMRC do not have the right to attend a taxpayer’s premises at any time. The law says that inspections may be carried out “at any reasonable time”. This means that that if a business owner is busy, or the time is outside normal office hours, or there is not access to all of the relevant information, or the request is unreasonable for any other reason, the business owner (or his adviser) may request that an inspector leaves and makes an appointment at a future reasonable time. This is sometimes easier to do in theory than in practice, but a taxpayer’s rights are set out in The Finance Act 2009, Schedule 36, part II.

A business has no right to refuse a “regular” inspection but these are arranged for an agreed time in any case.

Records

The VAT Act 1994, Schedule 11 states that the requirement to produce records is limited to being provided at such time as HMRC “may reasonably require”. So, again, if HMRC are making demands that a business feels are unreasonable, it is within its rights to refuse to allow access and to make a mutually agreed and acceptable appointment to allow access to premises and records. This may lead to a discussion, but HMRC do not have unfettered rights to access premises or records.

Best judgement

Regardless of how HMRC have gathered information, any assessment must be made to the best of their judgement and must be “an honest and genuine attempt to make a reasoned assessment of the VAT payable”. If the business is able to demonstrate that this was not the case, the assessment must be removed. Broadly, this will entail demonstrating that things that ought to have been considered were ignored, or that things that have been included should not have been. Generally, the most common ways to challenge an assessment based on the above exercises are; that the period considered was not representative, or not long enough to be representative, or that the tests carried out were insufficient to demonstrate a consistent pattern of trading. There are usually specific facts in each case that may be used to challenge the validity and quantum of an assessment.

Action

Of course, it is hoped that no business which makes accurate declarations is troubled by such investigations. However, if a business feels that HMRC is being unreasonable with its demands it should seek professional advice before agreeing to permit HMRC access.

Matters change however, if HMRC have a Search Warrant or a Writ of Assistance in which case HMRC are able to compel a business to allow entry or inspection.

As always, we advise that any assessment is, at the very least, reviewed by a business’ adviser.

VAT – Intended penalty for participating in fraud

By Marcus Ward 3 October 2016

Consultation

A consultation was proposed in the 2016 Budget on the introduction of a new penalty for businesses that participate in VAT fraud. Now HMRC has announced that views are sought on; whether there is a case for a new penalty, its structure and to whom it should apply. The intended changes will require amendment to Schedule 24 of the Finance Act 2007. The main target of these proposed new measures is MTIC (Missing Trader Intra-Community) fraud.

Full details of the consultation paper here

Penalty principles

It may be worth reviewing HMRC’s view on the principles of applying a penalty, which they state are;

The penalty regime should be designed from the customer perspective, primarily to encourage compliance and prevent non-compliance. Penalties are not to be applied with the objective of raising revenues.

Penalties should be proportionate to the offence and may take into account past behaviour.

Penalties must be applied fairly, ensuring that compliant customers are (and are seen to be) in a better position than the non-compliant.

Penalties must provide a credible threat. If there is a penalty, we must have the operational capability and capacity to raise it accurately, and if we raise it, we must be able to collect it in a cost-efficient manner.

Customers should see a consistent and standardised approach. Variations will be those necessary to take into account customer behaviours and particular taxes.

Consultation Process

It may be an appropriate time to look at what the consultation process is and how it works. This may helpfully be summarised (by HMRC) as:

There are 5 stages to tax policy development:

Stage 1 Setting out objectives and identifying options.

Stage 2 Determining the best option and developing a framework for implementation including detailed policy design.

Stage 3 Drafting legislation to effect the proposed change.

Stage 4 Implementing and monitoring the change.

Stage 5 Reviewing and evaluating the change.

The closing date for comments on this consultation is 11 November 2016.

Comment

Putting to one side the minor irritation of taxpayers being called customers (a bête noire of mine I’m afraid) it is difficult to argue with the above principles and any attempt to prevent or deter VAT fraud is to be welcomed, as long as it does not impact on innocent parties and HMRC apply any such penalty in an even-handed manner. As a taxpayer in a personal and business capacity, I welcome any measures that may result in my tax bill being increased to cover revenue lost to fraud!

Action

Of course, please respond to HMRC should you feel that you should make your views known. The consultation is open to businesses, individuals, legal firms, accountants, and other interested parties.

We occasionally come across situations where innocent parties have been inadvertently been caught up in fraudulent supply chains. Please contact us for advice on planning that may be put in place to avoid this position and how we can assist if HMRC are making enquiries. As always in VAT, it always pays to be proactive to ensure that processes and structures in place are robust and are demonstrably so.

VAT – Latest from the courts: treatment of web-based introductions

By Marcus Ward 14 September 2016

First Tier Tribunal (FTT) – What intermediary services may be exempted?

Background

The provision of intermediary services (putting those who require a financial product in touch with those who provide them) is exempt from VAT if certain conditions apply. Broadly, the requirement is mainly the need to provide something more than just the introduction, eg; negotiation of credit. If a business acts as a mere conduit or in an advertising capacity its supplies will be standard rated.

The case

In the FTT case of Dollar Financial UK Limited TC05334 (Dollar) the applicant received web-based services from overseas The Reverse Charge was applied to these supplies (details of the Reverse Charge here). Dollar provides “payday loans” which are themselves exempt from VAT. As Dollar was unable to recover all of the VAT on the Reverse Charge it represented a VAT cost to the business. However, if the supplies were exempt there would be no need to apply the Reverse Charge and so the loss would be avoided.

The FTT was required to consider what precisely the suppliers (so called lead generators) provided to Dollar in return for a commission based on the value of the loan. The lead generators operated websites which are mainly comparison sites and which referred potential borrowers to loan providers such as Dollar. HMRC formed the view that these services did not amount to intermediary services and hence were subject to the Reverse Charge.

The FTT ruled that there were differences between the two examples of services received by Dollar. In one example it was decided that despite;

there being no legal relationship between the lead generator and the potential borrower
that the leads were sold to the lender offering the best commission
that the assessment for loan suitability was quick, only involved only a few basic checks, and did not require any judgment or discretion, and
that only 1% of the introductions resulted in offers of loans to borrowers,

the appellant was acting as more than a mere conduit or in an advertising capacity, and was providing exempt introductory services. Consequently, there was no need to apply the Reverse Charge.

In the other example, the Tribunal considered that a single supply of online chat assistance was more akin to an outsourced, principally back-office function which did not amount to intermediary services and was therefore standard rated such that Dollar must apply the Reverse Charge.

Commentary

This case demonstrates the need to identify precisely what is being provided by a business’ suppliers and to review contracts intently. A small change in the circumstances between one supply and another may result in different VAT treatment. This is a comprehensive judgement and it is worth reading in its entirety if a business is involved in these type of transactions. We recommend that advice is sought by those businesses which could be affected by this case; either as supplier or recipient.

Latest from the courts – Recovery of VAT on cars purchase

By Marcus Ward 14 September 2016

Input tax incurred on the purchase of cars

There is a specific blocking order (Value Added Tax (Input Tax) Order 1992) which prohibits the recovery of input tax incurred on the purchase of cars. The block applies if there is any private use of the car whatsoever (even one mile). HMRC’s approach has been that unless a business can demonstrate that there is no private use the input tax is disallowed. Previous case law, notably Elm Milk Limited relied on the terms of the insurance covering the car (whether private use was permitted) and inter alia, the physical security of the car.

The case

In the First Tier Tribunal (FTT) case of Zone Contractors Limited TC05330 it was held that VAT was reclaimable on six cars purchased for business use. The reason for the decision was that the relevant employment contracts specifically and explicitly prohibited any private use of the vehicles.

HMRC claimed that the business had not demonstrated that the use of the cars was monitored and controlled sufficiently to evidence the fact that there was no private use. However the FTT decided that the employment contracts could be relied on and permitted the claims. What is relevant in this case is that the court decided that no reliance could be placed on insurance documentation preventing recovery on the grounds of the policy including cover for use for social, domestic and pleasure and that HMRC could not rely on such documentation to disallow a claim as they had in the past.

Action

If a business has been denied input tax recovery on cars by HMRC, or has refrained from claiming input tax based on previous case law, it may well be beneficial to review the circumstances in light of this case. We can assist in lodging claims where appropriate. After all, the VAT of £8000 on a £40,000 car is significant; even if only one has been purchased.

VAT Latest from the courts – what is an economic activity by a charity?

By Marcus Ward 5 September 2016

In the VAT case of Longridge on the Thames (Longbridge) here the Court of Appeal considered previous decisions at the First Tier Tribunal (FTT) and Upper Tribunal (UT) on whether Longbridge carried on an economic activity. This is an important case as it goes some way in determining the meaning of “business” in light of the term “economic activity” used in EC legislation. The term “business” is only used in UK legislation, The Principal VAT Directive refers to “economic activity” rather than business, and since UK domestic legislation must conform to the Directive both terms must be seen as having the same meaning. Since the very first days of VAT there have been disagreements over what constitutes a “business”. I have previously commented on this matter here

Background

Longbridge is a charity. It uses volunteers to provide boating activities (mainly to young people) on the Thames. The fees charged by Longbridge were often at below cost and the charity relied on donations to continue its operations. It constructed a new building and sought VAT zero rating of these costs on the basis that the building was to be used for non-business purposes. Consequently, it was crucial to the relief claimed that the charity was not carrying out a business in VAT terms. The FTT and the UT found that the charity’s “predominant concern” was not to make supplies for a consideration and therefore it was not in business. These findings were based on long standing case law, the most salient being; Lord Fisher and Morrison’s Academy Boarding Houses Association. Lord Fisher set out a series of tests which HMRC rely on to determine whether a business exists – considered here and here

Decision

The Court of Appeal allowed HMRC’s appeal. It decided that Longridge was carrying on an economic activity and therefore the construction of the new building could not be zero rated. The decision is worth considering in full, however, the court held that there was a “direct link” between the fees paid and service the recipients received, even if it was subsidised in certain instances and that Longbridge was furthering its charitable objectives. The requirement for a direct link was clearly demonstrated in The Apple and Pear Development Council case. The establishment of the direct link meant that Longridge was carrying in business (in UK law).

Commentary

The important test for whether an economic activity is being carried on is now; the direct link between payment and service. There is no longer the requirement to consider the test of “predominant concern” and in fact it was stated in the decision by the judges that this test is “unhelpful and may be misleading.” We must now ignore; the motive of the provider of the service, its status as a charity, the amount charged, whether subsidies are received by the charity, and whether volunteers are involved in the relevant activities.

This is a very big change in the analysis of whether a business exists and basically means that previous cases on this matter were wrongly decided. It brings the UK into line with the EC on the definition of an economic activity and therefore provides clarity on this matter – which has long been an area which has desperately required it.

It means that, unless the decision is reversed at the Supreme Court, we say goodbye to the unloved Lord Fisher tests. However, this may be very bad news for charities and not for profit entities that have relied on these tests to avoid VAT registration and charging VAT on their supplies. It is likely that many more charities will be dragged into the VAT net. It remains to be seen whether this case will trigger a renewed targeting effort on charities by HMRC, but what is clear is that charities need to be conscious of this new turn of events and consider their position. We strongly recommend that any bodies which have had previous discussions with HMRC on this point and any entity which is affected by this decision take professional advice immediately.

VAT Input Tax recoverable in each Member State – A country by country guide

By Marcus Ward 17 August 2016

VAT incurred in other EC Member States may be recovered in certain circumstances. However, some claims are specifically blocked by Member States. Unfortunately, there are differences between each Member State’s domestic legislation.

For full details of how to make a claim for VAT incurred abroad, please see here

Here is a summary of VAT which cannot be claimed via the refund system:

Austria

VAT cannot be recovered on:

• The purchase, hire, operation and repair of passenger motor vehicles, except driving school vehicles, taxis and hire car vehicles;

• Entertainment expenses, except for business meals where the purpose of the meeting and the identity of the participants are documented.

Belgium

VAT cannot be recovered on:

• Manufactured tobacco;

• Spirits, except those intended for resale or supply in respect of a service (e.g. bars, hotels and restaurants);

• Accommodation, meals and beverages under an accommodation or a catering contract, unless these costs are incurred by a company’s staff effecting outside supplies of goods or services or by taxable persons who in turn supply the same services for consideration;

• Entertainment expenses (although expenses incurred in respect of an advertising event may be recoverable);

• Generally; the purchase of motor vehicles used for passenger transport and goods and services relating to such vehicles (although in some cases a 50% restriction applies and there are exceptions depending on use).

Bulgaria

VAT cannot be recovered on:

• Goods or services intended for making VAT-exempt supplies;

• Goods or services intended for “non-business” supplies;

• Entertainment expenses;

• Motorcycles or passenger cars (with less than five seats, excluding the driver’s seat), although certain exceptions apply;

• Goods or services related to the maintenance of a motorcycle or passenger car; and

• Goods that have been confiscated by the State or a building that has been demolished because it was unlawfully constructed.

Croatia

VAT cannot be recovered on;

• Entertainment expenses;

• Purchase and lease of aircraft, vessels, cars and means of personal transport for leisure purposes;

• Supplies exempt from VAT via The Croatian VAT Act Articles 39, 40 and 114;

• Supplies of goods exempt from VAT via The Croatian VAT Act Articles 41 (1) and 45 (1) (2) – (intra-Community supply of goods);

• VAT charged in contravention of the provisions, ie; VAT charged when it should not have been.

Cyprus

VAT cannot be recovered on:

• Non-business supplies; if a supply has both business and non-business purposes, VAT can be reclaimed only on the business portion of the supply;

• Supplies or imports of passenger cars;

• Certain second-hand goods, e.g. cars and antiques for which the VAT margin scheme is used;

• Business entertainment and hospitality expenses, except the provision of

entertainment to employees;

• Supplies used or to be used to make a supply in Cyprus; and

• Goods and services, such as hotel accommodation, purchased for resale and that are for the direct benefit of travellers.

Czech Republic

VAT cannot be recovered on:

• Entertainment expenses.

Denmark

VAT cannot be recovered on:

• Meals for the owner and staff of a business. However, VAT on meals incurred for business purposes is partly refundable;

• The acquisition and running of places of residence for the owner and staff of a business;

• The acquisition and operating costs connected to holiday homes for the owner and staff of a business;

• Entertainment expenses, representation costs and gifts. However, VAT on business entertainment is partly refundable;

• The driving of foreign tourist buses;

• The acquisition, repair and operation of motor vehicles designed for the conveyance of not more than nine persons; and

• Payments in kind to the staff of a business. No more than 25% of VAT may be recovered on restaurant bills and no more than 50% of VAT on hotel accommodation.

• There is a right to deduct a specific amount of VAT for companies that lease

passenger cars if:

• The leasing period is at least six months; and

• The vehicle is used for business purposes for at least 10% of the mileage.

Estonia

A VAT refund is available if an Estonian company can make a similar VAT deduction on its business expenses. This limits the VAT deduction, for example, on meals and entertainment expenses. VAT on accommodation costs is deductible if the trip is not for leisure purposes.

Finland

VAT cannot be recovered on:

• Immovable property that the taxable person or its staff uses as a residence, nursery, recreational or leisure facility, as well as goods and services connected with it or its use;

• Goods and services related to transport between the place of residence and place of work of the taxable person or its staff;

• Goods and services used for business entertainment purposes and business gifts;

• (With some exceptions) Passenger cars, motorcycles, caravans, vessels intended for recreational or sports purposes and aircraft with a maximum permissible take-off weight not exceeding 1,550 kg, or on goods and services related to their use;

• Purchases intended for the private consumption of the entrepreneur or his personnel;

• Purchases related to exempt sales of investment gold;

• Purchases of taxable goods and services for direct benefit of passengers made in the name of a foreign travel service company; and

• Purchases that are VAT-exempt, but have erroneously been charged with VAT.

France

VAT cannot be recovered on:

• Accommodation costs incurred on behalf of the management or staff of a company. (VAT is recoverable when such expenses are incurred for the benefit of persons not employed by the company, provided the expenses are incurred in the interest of the company or when it supplies the same services for consideration);

• The supply, import, leasing, repair and maintenance of most cars for passenger transport and other related costs, such as petrol. (However, 80% of VAT on diesel fuel can be recovered and VAT is recoverable when the cars are purchased by a car dealer for resale or by a person who hires out cars.);

• Goods transferred without remuneration or for remuneration that is much lower than their normal price, unless the value of the goods is very low (except business gifts whose collective value does not exceed EUR 65, including VAT, per beneficiary per year); and

• Domestic transport of passengers and related expenses (except for public transport supplies and transportation from home to work, subject to conditions).

If French VAT has been incorrectly charged, a foreign taxable person can, in principle, obtain a refund (unless a corrected invoice has been issued—a specific procedure applies for a supplier to issue a corrected invoice).

Germany

VAT cannot be recovered on:

• Supplies of goods and services that are not used for business purposes, including gifts; or

• Supplies of services acquired or goods imported connected to certain exempt activities.

Greece

VAT cannot be recovered on:

• Intra-community supplies and exports.

• The supply, import or intra-community acquisition of tobacco products that are destined for use in non-taxable transactions;

• The supply, import or intra-community acquisition of alcoholic beverages that are destined for use in non-taxable transactions;

• Entertainment expenditure, including expenditure on hospitality and amusement;

• The acquisition, leasing or hire, modification, repair or maintenance of passenger vehicles with up to nine seats, pleasure boats except if they are used for the sale, leasing or transportation of persons for a fee;

• Accommodation, food, transport and entertainment expenses incurred for company personnel or representatives;

• The supply of goods and services in connection with real estate located in Greece (in certain circumstances);

• Expenses unrelated to the business activity of the claimant; and

• Incorrect VAT invoicing.

• If the VAT imposed is used for both taxable and exempt transactions, a refund will be granted only in respect of the taxable transactions.

Hungary

VAT cannot be recovered on:

• Use of goods or the services directly for exempt supply of goods and/or services; or

• Use of goods or services for purposes other than taxable business activities, except when the goods or services are entirely used in the interest of achieving taxable objectives.

• Motor fuels and other fuels, goods that are necessary directly for the operation of passenger cars;

• Passenger cars, motorcycles above 125 cc, yachts, sporting and leisure boats;

• Residential buildings (except where a taxable person engaged in the leasing of such buildings opted for taxation of the rental);

• Purchases of goods and services related to the construction and renovation of residential buildings;

• Food and beverages;

• Services received in connection with the operation and maintenance of passenger cars;

• Services of restaurants and other public catering services;

• Entertainment services;

• Taxi services;

• Parking services and highway tolls, with the exception of parking services used and highway tolls paid for a motor vehicle whose gross weight is equal to 3.5 tons or more (including buses); and

• 30% of telephone and mobile phone costs and services related to data submission by internet protocol.

Ireland

VAT cannot be recovered on:

• Petrol except diesel;

• Food, drink, hotels/accommodation or other personal services (as from 1 July 2007, VAT on accommodation is recoverable if certain stringent conditions are satisfied);

• Entertainment expenses; and

• The purchase, hire or importation of passenger motor vehicles (VAT on motor vehicles used for certain purposes is recoverable).

Italy

VAT cannot be recovered on:

• Entertainment expenses.

• It is possible to deduct VAT paid on cars/fuel/maintenance used for the company’s business. The percentage deduction set by Italian VAT legislation is 40% in the case of both private and business use. The deduction is 100% if exclusively used for business purposes.

Latvia

VAT cannot be recovered on:

• The acquisition of unused immovable property and services received in relation to the construction, reconstruction, renovation, restoration or repair of immovable property;

• Goods and services purchased for personal use;

− Rental, maintenance and repair of a passenger car if these services are not used for business purposes. If the vehicle is used for business purposes, VAT can be recovered for the business use (in proportion to that use), but the claimant must provide supporting documentation with the application (e.g. route description in Latvian or English);

− Purchase of fuel, lubricants and spare parts intended for a passenger car if they are not used for business purposes;

− Expenses for recreation activities;

− Catering (including restaurants);

− Health improvement activities; and

− Entertainment.

Lithuania

VAT cannot be recovered on:

• The purchase or lease of a passenger car;

• Transport of passengers by cars (taxi services);

• Entertainment and representation expenses. However, where a taxable person is established in the EU, 75% of the VAT incurred on entertainment and representation expenses (goods and

services) is refundable;

• The supply of goods or services on which VAT does not have to be accounted for;

• Goods supplied to another EU member state if the supply of these goods would have been subject to the zero rate; and

• Goods exported from the EU if the supply of these goods would have been subject to the zero rate.

Luxembourg

VAT cannot be recovered on:

• Supplies on which VAT has been charged by mistake;

• Goods or services that are VAT exempt.

• Goods or services used for private purposes.

Malta

VAT cannot be recovered on:

• Tobacco or tobacco products, except those intended for resale;

• Alcoholic beverages, except those intended for resale or for the supply of catering;

• Works of art, collectors’ items and antiques, except those intended for resale;

• Non-commercial motor vehicles (and goods and services for the purpose of

repairing, maintaining and fuelling non-commercial motor vehicles), except those intended for resale, charter/hire, driving instructions or for the purpose of the carriage of goods or passengers for consideration;

• Vessels or aircraft, except those intended for resale or charter/hire for the purpose of the carriage of goods or passengers for consideration;

• Purchases relating to the provision of hospitality or entertainment, subject to certain exceptions; and

• Purchases relating to the provision of transport or entertainment to employees, subject to certain exceptions.

The Netherlands

VAT cannot be recovered on:

• Supplies of goods and services that are not used for business purposes;

• Supplies acquired or imported in connection with an exempt business activity;

• Food and drinks in restaurants, hotels and cafes;

• Business entertainment in excess of EUR 227 per year per person;

• Employee benefits in-kind in excess of EUR 227 per year per person;

• VAT on costs for the lease or rental of cars (these are limited to an 84% VAT refund – a 16% adjustment is made for private use).

Poland

VAT cannot be recovered on:

• Goods and services, the acquisition of which resulted from a donation or free provision of services;

• Lodging and catering services, with some exceptions;

• The deductibility of input VAT on the purchase (lease) of passenger cars is limited to 60%, but not exceeding PLN 6,000 per car.

• The purchase of engine fuel, diesel oil and gas for passenger cars or other motor vehicles.

Portugal

VAT cannot be recovered on:

• Accommodation, food and drinks (except in the case of specific events);

• Entertainment expenses;

• Purchase, hire, importation and repairs of vehicles, boats, and aircraft (unless these assets are used in specific activities). However, it is possible to recover VAT incurred on commercial cars and trucks;

• Fuel expenses (50% of the VAT on diesel is recoverable and 100% if certain

vehicles are involved);

• Tobacco; and

• Travel expenses, including tolls (except in the case of specific events).

Romania

VAT cannot be recovered on:

• Invoices on which VAT was unlawfully charged;

• Acquisitions that can be VAT exempt;

• Acquisitions made by tour operators that apply the margin scheme in the Member State in which they are established;

• Tobacco products and spirits, except those intended for resale or for supply during the performance of a catering service and;

• Acquisitions of passenger vehicles and fuel (with some exceptions).

Slovak Republic

VAT cannot be recovered on:

• Supplies of goods and services where the application of VAT was not in compliance with the Slovak VAT legislation;

• Supplies of goods that are or may be exempt from VAT (intra-Community supply of

goods, export of goods); or

• Supplies made under the tour operator margin scheme.

Slovenia

VAT cannot be recovered for:

• Yachts and boats for sport and amusement, fuel, lubricants, spare parts and related services;

• Aircraft and fuel, lubricants, spare parts and connected services;

• Cars and motor bikes and fuel, spare parts and related services;

• Accommodation, meals and beverages, unless these costs are incurred by a taxable person in the course of supplies made as part of their economic activity and;

• Entertainment expenses.

Spain

VAT cannot be recovered on:

• Entertainment expenses;

• Food and drinks, tobacco;

• Jewels and precious stones;

• VAT on accommodation, restaurant and travel expenses will be refundable only to the extent the expenses are deductible for personal and corporate income tax purposes.

• VAT incurred on car rentals and fuel will be refundable only if the car is exclusively used for business activities.

• If not exclusively used for business activities, refunds of VAT on car purchases, car importations and car leases will be possible, but only if the car can be considered an investment good for Spanish VAT purposes (ie; it must be used for at least one year within the company), and only for the proportion that the vehicle is used for business purposes (a business use of at least

50% will be required).

Sweden

VAT cannot be recovered on:

• Permanent accommodation;

• Travel services (only applicable to persons supplying travel services);

• Unreasonable entertainment services;

• Purchase of motor vehicles; and

• Car rentals (these are 50% refundable), with certain exceptions for vehicles intended to be sold or leased by a taxable person whose particular economic activity involves the sale or leasing of motor vehicles, vehicles intended to be solely used for passenger transport for hire or reward and vehicles intended to be used for driving license education and transport of the deceased.

United Kingdom

VAT cannot be recovered on:

• Non-business supplies (if a supply covers both business and non-business use VAT can be reclaimed on the business element of the supply);

• Supplies the claimant intends to use for carrying on an economic activity in the

U.K. or that the claimant intends to export from the U.K. (i.e. economic activities, the place of supply of which is the U.K.);

• Business entertainment and hospitality expenses and other expenses on which the recovery of VAT is restricted in the U.K.;

• Goods and services purchased for resale (e.g. as part of package holiday) and which are for the direct benefit of travellers;

• VAT that has been incorrectly invoiced or where VAT has been charged on the dispatch of goods to another Member State, or the export of goods outside the EU;

• The purchase or import of passenger motor vehicles, unless used wholly for business purposes and

• Certain second-hand goods, such as antiques, for which a tax invoice will not be issued.

• Not more than 50% of VAT can be recovered on the lease of passenger motor vehicles not used solely for business purposes.

Please contact us if you have any queries on claiming overseas VAT.

Reclaiming VAT Overseas

By Marcus Ward 16 August 2016

Refunds of VAT for UK businesses incurring other EC Member States

If a business incurs VAT in another EC Member State it is possible to recover it. It is not claimed on a UK VAT return, but via a special claim process which I have set out below. Unfortunately, this procedure is likely to be unavailable after Brexit. I hope that this is a timely reminder as well as a guide as the deadline for the year of the claim is 30 September.

My next article will look at precisely what VAT is recoverable in each Member State in a country by country guide – here

Claim Process

Gone are the days when a business had to make claims directly to the Member State where VAT was incurred; using numerous, complicated forms, in the language of the Member State of claim, and then waiting months, if not years to hear anything.

Now, a simple online claim to HMRC is all that is required. HMRC then coordinate payment for a business from the relevant country. This is a practical overview of the procedure.

All applications must be submitted using the electronic online system. You must be VAT registered in the UK to obtain a refund.

In order to make a claim a business must meet the following conditions:

you must not be registered, liable or eligible to be registered in the Member State of Refund
you must not have any fixed establishment, seat of economic activity, place of business or other residence in the Member State of Refund
during the refund period you must not have supplied any goods or services in the Member State of refund with the exception of;

a) transport services and ancillary services

b) any goods or services where VAT is payable by the person to whom the supply is made (the reverse charge).

By submitting your application you are declaring that you meet these conditions.

How do I claim?

A separate online application is required for each Member State from which you wish to claim. In order to start an application you must access the relevant online services section and enter standard data into the required fields, along with invoice for expenditure you wish to reclaim.

Period application covers

The refund period must not be more than one calendar year or less than three calendar months. Generally refund periods do not have to cover strict calendar quarters. However, some Member States have their own requirements, and details of these can be obtained from the relevant tax authority.

Minimum amount that may be claimed

If the refund application relates to a period of less than a calendar year, but not less than three months the minimum amount claimable is EUR 400 or the equivalent in national currency.

If the refund application relates to a period of a calendar year or the remainder of a calendar year the minimum amount claimable is EUR 50 or the equivalent in national currency.

Invoices included on the application

Invoices relating to supplies of goods or services with a tax point during the period of the refund application should be included. Additionally, a business may claim for invoices not included in a previous application as long as they relate to the same calendar year.

VAT which cannot be included on a claim

A claim cannot include VAT which has been;

incorrectly invoiced,
invoiced in respect of goods despatched to another Member State or exported from the EC
incurred in respect of non-business activities

Information required from invoices being claimed

Name and address of your supplier
Except in cases of importation the VAT identification number or tax reference number of the supplier and the prefix of the Member State of Refund
Date and number of the invoice or importation document
Taxable amount and amount of VAT expressed in the currency of the Member State of refund
The amount of deductible VAT expressed in the currency of the Member State of refund
Where applicable the deductible proportion
Nature of the goods and services acquired, described according to the following expenditure codes: Fuel, Transport Hire, Road Tolls, Travel Expenses (taxi, public transport), Accommodation, Food and Restaurant Services, Admissions to Fairs and Exhibitions, Luxuries/Amusements/Entertainment.

If an invoice includes items covering more than one expenditure code the code relating to the highest proportion of expenditure is the one that should be used.

Restriction of applications in respect of partial exemption

A business must apply the appropriate recovery rate for the goods or services purchased against each invoice or importation on your application, and show the amount of VAT recoverable in the appropriate box. The recovery rate to be applied is the last percentage appropriate to the refund period covering the invoice date. Following an annual adjustment, you will not be required to amend refund applications already submitted. The invoices can only be entered once and the percentage to be used is that covering the invoice date.

Restriction of applications in respect of non-business expenses

Expenditure incurred in another Member State that relates to non-business activities is not claimable under the refund scheme.

Language needed on the application

Member States generally require the application to be in their own language they may allow the use of a second language in the free text fields, and English is a common option. The language(s) required by the Member State of Refund will be displayed on the electronic portal as you complete the application.

Invoices which may be required to be submitted electronically

A business may be requested to submit invoices with values of EUR 1,000 or more (EUR 250 or more in the case of fuel) with the application. All other invoices should be retained as they may be requested at a later date by the Member State of Refund.

Claim updates

A business will be informed electronically at the following key stages of the process.

If your application fails basic validation checks by the electronic portal
When HMRC forwards your application to the Member State of Refund
When the Member State of Refund receives the application
If the Member State of Refund requires additional information from you
When the Member State of Refund makes its decision

Time limits for submitting an application

Applications must be submitted to HMRC at the latest by 30 September of the calendar year following the refund year and will only be considered submitted if the applicant has completed all of the required standing data fields (see above).

Time limits for the Member State of refund to process an application

The Member State of Refund must notify the applicant of its decision to approve or refuse the application within four months of the date they first received the application.

Payment method

The refund will be paid in the Member State of Refund or, at the applicant’s request, in any other Member State. In the latter case, any bank charges for the transfer will be deducted by the Member State of Refund from the amount to be paid to the applicant.

Error on applications

The electronic portal provides a correction facility whereby a business can recall the original application and amend existing details. You may not, however, add new lines.

Penalties

All Member States take a very serious view of incorrect or false applications. Refunds claimed incorrectly on the basis of incorrect or false information can be recovered and penalties and interest may be imposed and further refund applications suspended.

Applications refused

If the Member State of Refund refuses an application fully or partly they must also notify you of the reasons for refusal.

If this happens you can appeal against the decision using the appeals procedure of that Member State. This means that the normal VAT appeals rules of that Member State on time limits, form of appeal etc., will apply.

Interest on delayed applications

Interest may be payable to you by the Member State of Refund if payment is made after the deadline. If applicable, it will be paid from the day following the deadline up to the date the refund is actually paid. Interest rates must be the same as those applied to refunds of VAT to taxable persons established in the Member State of Refund under the national law of that Member State.

Claims on UK VAT returns

VAT incurred overseas must not be claimed on a UK VAT return. If it is, it is liable to an assessment, penalties and interest levied in the UK by HMRC.

VAT – Partial Exemption: What Is It? What do I need to know?

By Marcus Ward 10 August 2016

As part of our guides to VAT basics, we take a brief look at partial exemption and how it affects a business.

The first point to make is that partial exemption is often complex and costly. In some cases it may be avoided by planning and in others it is a fact of life for a business which needs to be managed properly.

The Basics

The VAT a business incurs on its expenditure is called input tax. For most businesses this is reclaimed from HMRC on VAT returns if it relates to standard rated or zero rated sales (referred to as “taxable supplies”) that that business makes. Exempt supplies are not to be confused with non-business income which are dealt with under a different regime.

However, a business which makes exempt sales may not be in a position to recover all of the input tax which it incurred. A business in this position is called partly exempt. Generally, any input tax which directly relates to exempt supplies is irrecoverable. In addition, an element of that business’ general overheads, e.g.; light, heat, telephone, computers, professional fees, etc are deemed to be in part attributable to exempt supplies and a calculation must be performed to establish the element which falls to be irrecoverable.

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

partial exemption flowchart1

Which businesses are affected?

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

Property letting and sales – generally 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.

* Most businesses which do not routinely make exempt supplies usually encounter exemption in the area of land and property and it is an easy trap to fall into not to consider VAT when involved in property transactions. This is one area where VAT planning may be of assistance as it is possible in most situations to deliberately choose to add VAT to an exempt supply to avoid a loss of input tax. This is known as the option to tax, and it is considered in more detail here

De Minimis relief

There is however relief available for a business in the form of de minimis limits. Broadly, if the total of the irrecoverable directly attributable (to exempt suppliers) and the element of overhead input tax which has been established using a partial exemption method falls to be de minimis, all of that input tax may be recovered in the normal way. The de minimis limit is currently £7,500 per annum of input tax and one half of all input tax for the year.

As a result, after using the partial exemption method, should the input tax fall below £7,500 (£625 per month) and 50% of all input tax for a year it is recoverable in full. This calculation is required every quarter (for businesses which render returns on a quarterly basis) with a review at the year end, called an annual adjustment carried out at the end of a business’ partial exemption year. The quarterly de minimis is consequently £1,875 of exempt input tax which represents spending of under £10,000 net; not a huge amount.

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

The value for the de minimis limit has been in place for over 20 years (when it was increased by a huge £25 per month) and it is rather ridiculous that it has not been increased to reflect inflation. This, coupled with the fact that the VAT rate has increased significantly means that the relief which was once very useful for a business has withered away to such an extent that partial exemption catches even very small businesses which I am sure goes against the original purpose of the relief.

In summary – for a business exemption is a burden not a relief. It represents a real cost in terms of tax payable, time and other resources, and uncertainty. We often find that this is an area which HMRC examine closely and one which benefits from proactive negotiation with HMRC.

VAT Latest from the courts – more on composite or separate supplies

By Marcus Ward 1 August 2016

The case of: General Healthcare Group Limited (GHG)

Those that have read my articles in the past will recognise the topic of composite or separate supplies rears its ugly head on many occasions. It is a matter that has occupied businesses, advisers and HMRC since VAT’s inception, and shows no signs of disappearing any time soon. To put it into the Tribunal chairman’s words: This is another appeal on the subject of whether a transaction which comprises several different elements should be regarded as a single supply or several distinct and independent supplies.

In the latest episode, a ruling was handed down by the Upper Tribunal (UTT) in the case of GHG.

Background

GHG challenged the decision in the First tier Tribunal (FTT) that it made a single supply of prostheses and operating services via its consultants. Consultants fit prostheses in certain procedures, eg; hip replacements when they operate in GHG hospitals. The prostheses are supplied by GHG which also provide the hospital facilities to enable the independent, self-employed consultants to supply healthcare which includes the fitting of prostheses, to its patients. The FTT (in the lead case of Nuffield Hospital with GHG) decided that there was a single supply of exempt healthcare to the patient in these circumstances. GHG appealed against this decision, contending that there is one supply of exempt healthcare, and a separate zero rated supply of the prosthetics prescribed and fitted by the consultants who performed the operations.

VAT Impact

Treating the prosthetics as zero rated rather than exempt would have no impact on output tax (no VAT would be due in either analysis) but zero rating would enable GHG to recover input tax on the prosthetics in question and an increased amount of VAT incurred on general overheads. It is likely that such a claim, across the board would run into many multi-millions.

Decision

The UT dismissed GHG’s appeal, stating that “… from the point of view of the typical patient who requires a prosthesis, GHG makes a single supply of hospital and medical care which includes providing the prosthesis to be fitted by the consultant …”.

Commentary

The decision appears logical and in line with both EC and UK legislation and past case law and was not really a surprise. In these type of cases it is important to consider what the recipient of the supply thinks (s)he is receiving. In this case, and having been on the receiving end of a similar procedure (although I hope that I am a few years off a hip replacement) I think it is absolutely accurate to say that the patient would consider that (s)he is receiving a single supply of medical care. However, I have no doubt that the patient who has just received a new hip would be very unlikely to be thinking of the VAT treatment of their….errr treatment in the slightest…..

The UTT chairman stated that it declined to make any reference to the CJEU.

As always, this is a tricky area, if you have received any questionable rulings from HMRC on single/multiple supplies, or wonder whether there is a different way of analysing your supplies, please contact us as explained above, the matter continues to throw up interesting results.

Full case here