Tag Archives: input-tax

I have to charge myself VAT?!

By Marcus Ward 1 July 2015

I have to charge MYSELF VAT?!

How comes?!

Well, normally, the supplier is the person who must account to the tax authorities for any VAT due on the supply. However, in certain situations, the position is reversed and it is the customer who must account for any VAT due. Don’t get caught out!

Here are just some of the situations when you have to charge yourself VAT:

Purchasing services from abroad

These will be obtained free of VAT from an overseas supplier. What is known as the ‘reverse charge’ procedure must be applied. Where the reverse charge procedure applies, the recipient of the services must act as both the supplier and the recipient of the services. On the same VAT return, the recipient must account for output tax, calculated on the full value of the supply received, and (subject to partial exemption and non-business rules) include the VAT charged as input tax. The effect of the provisions is that the reverse charge has no net cost to the recipient if he can attribute the input tax to taxable supplies and can therefore reclaim it in full. If he cannot, the effect is to put him in the same position as if had received the supply from a UK supplier rather than from one outside the UK. Thus creating a level playing field between purchasing from the UK and overseas.

Accounting for VAT and recovery of input tax.

Where the reverse charge procedure applies, the recipient of the services must act as both the supplier and the recipient of the services. On the same VAT return, the recipient must

1. 1. account for output tax, calculated on the full value of the supply received, in Box 1;
  2. (subject to partial exemption and non-business rules) include the VAT stated in box 1 as input tax in Box 4; and;
  3. include the full value of the supply in both Boxes 6 and 7.

Value of supply: The value of the deemed supply is to be taken to be the consideration in money for which the services were in fact supplied or, where the consideration did not consist or not wholly consist of money, such amount in money as is equivalent to that consideration. The consideration payable to the overseas supplier for the services excludes UK VAT but includes any taxes levied abroad.

Time of supply: The time of supply of such services is the date the supplies are paid for or, if the consideration is not in money, the last day of the VAT period in which the services are performed.

Purchasing goods from another EC Member States

Something similar to reverse charge; called acquisition tax, applies to goods purchased from other EC Member States. These are known as acquisitions (they are imports if the goods come from outside the EC and different rules apply). The full value of the goods is subject to output tax and the associated input tax may be recovered by the business acquiring if the goods are used for taxable purposes. If you‘re not already registered for VAT in the UK and acquire goods worth £82,000 or more in the UK from other EC countries, you will have to register for VAT in the UK on the strength of the value of the acquisition tax. A business will also have to complete an Intrastat Supplementary Declaration (SDs) if its acquisitions of goods from the EC exceed an annual amount – currently £1.5 million.

More details on Intrastat Supplementary Declarations here

Deregistration

Any goods on hand at deregistration with a total value of over £1,000 on which input tax has been claimed are subject to a self supply. This is a similar mechanism to a reverse charge in that the goods are deemed to be supplied to the business by the business and output tax is due. However, in these circumstances it is not possible to recover any input tax on the self supply.

Flat Rate Scheme

There is a self supply of capital items on which input tax has been claimed when a business leaves the flat rate scheme (and remains VAT registered).

Mobile telephones

In order to counter missing trader intra-community fraud (‘MTIC’), supplies of mobile ‘phones and computer chips which are made by one VAT registered business to another and valued at £5,000 and over are subject to the reverse charge. This means that the purchaser rather than the seller is responsible for accounting for VAT due.

Land and buildings…. and motor cars

There are certain circumstances where land and buildings must be treated as a self supply… but that is a whole new subject in itself… as is supplies in the motor trade.

Even if the result of a self-supply or reverse charge is VAT neutral HMRC is within its rights to assess and levy penalties and interest in cases where the charge has not been applied; which always seems unfair. However, more often than not simple accounting entries will deal with the matter…. if the circumstances are recognised and it is remembered to actually make the entries!

VAT – Retrospective input tax claim opportunity for charities and not for profit bodies.

By Marcus Ward 22 June 2015

The Upper Tribunal has decided In the University Of Cambridge case that costs incurred on running its endowment fund relate to the university’s overall economic activity in general and consequently it is possible to recover an element of it. The full judgement here

This will impact on all charities and similar bodies which have non-business activities that support their business activities.

Please contact us if your charity is in a similar position because if past input tax claims have been restricted as a result of HMRC’s interpretation (which is highly likely) it is possible to make a claim which covers the last four years’ VAT costs.

VAT – Business Entertainment Flowchart. What input tax may I recover?

By Marcus Ward 11 May 2015

VAT – Recovery of input tax incurred on entertainment

One of the most common questions asked on “day-to-day” VAT is whether input tax incurred on entertainment is claimable. The answer to this seemingly straightforward question has become increasingly complex as a result of; HMRC policy, EC involvement and case law. Different rules apply to entertaining; clients, contacts, staff, partners and directors depending on the circumstances. It seems reasonable to treat entertaining costs as a valid business expense. After all, a business, amongst other things, aims to increase sales and reduce costs as a result of these meetings. However, HMRC sees things differently and there is a general block on business entertainment. It seems like HMRC does not like watching people enjoying themselves at the government’s expense!

If, like me, you think in pictures, then a flowchart may be useful for deciding whether to claim entertainment VAT. It covers all scenarios, but if you have a unique set of circumstances or require assistance with some of the definitions, please contact me.

I thank my friend and colleague Leila Ong for help with this, and also with the series of presentations we have recently carried out and which, amongst other subjects, covered business entertainment. Should you require VAT training or presentations, don’t forget our comprehensive service here which can be tailored to your needs.

VAT -Business Entertainment Flowchart

Download here: VAT Business Entertainment Input tax recovery flowchart

VAT: Global Accounting simplification

By Marcus Ward 27 April 2015

VAT: Second Hand Scheme – Global Accounting simplification

Overview

The problem with the VAT Second-Hand Goods Scheme is that details of each individual item purchased, and then later sold, has to be recorded. This requirement can lead to a lot of paperwork and an awful lot of administration which, obviously, many businesses are not too keen to comply with.

Global Accounting is an optional, simplified variation of the Second Hand Margin Scheme (Margin Scheme).

It differs from the standard Margin Scheme because rather than accounting for the margin achieved on the sale of individual items VAT is calculated on the margin achieved between the total purchases and total sales in a particular accounting period without the requirement to establish the mark up on each individual item. It is beneficial if a business buys and sells bulk volume, low value eligible goods, and is unable to maintain the detailed records required of businesses who use the standard Margin Scheme

There two significant differences in respect of Global Accounting compared to the standard Margin Scheme. The first difference is that losses on an item are automatically offset against profits on items. Thus losses and profits are offset together in the period. In the standard Margin Scheme no VAT is due if a loss is made on an item, but that loss cannot be offset against any other profit. There is also a timing advantage with Global Accounting because all purchases made in the period are included, even if those goods are not actually sold in the same period.

Goods which may be included in Global Accounting

Global Accounting can be used for all items which are eligible under the standard Margin Scheme. However, the following goods cannot be included in Global Accounting:

individual items costing more than £500 (although these can be accounted for via the standard Margin Scheme)
aircraft, boats and outboard motors,
caravans and motor caravans,
horses and ponies, and
motor vehicles, including motorcycles; except those broken up for scrap.

Starting to use the scheme

When a business starts using Global Accounting, it may find that it already has eligible stock on hand. It may include the value of this stock when it calculates the total purchases at the end of the first period. If a business does not take its stock on hand into account, it will have to pay VAT on the full price, rather than on the margin achieved, when it is sold.

Valuation of stock

A business must be able to identify:

stock which is eligible for Global Accounting, and
its purchase value

It would normally be possible to establish the value from the original purchase documentation, ie; invoices.

But if a business is newly VAT registered, or it does not have original purchase records it may determine the purchase value using another method. There is no set way of doing this, but a business must be able to demonstrate that the method used has produced a fair and reasonable total.

Note: any goods bought on an invoice which shows a separate VAT figure are not eligible for resale under the scheme.

The calculation

VAT is calculated at the end of each tax period. Because you can take account of opening stock in your scheme calculations, you may find that you produce a negative margin at the end of several periods. In other words, your total purchases may exceed your total sales. In such cases, no VAT is due. But you must carry the negative margin forward to the next period as in the following example:

Period One

a) Total purchase value of stock on hand 10,000

b) Total purchases 2,000

c) Total sales 8,000

Margin = c – (a+b) = (4,000)

Because this is a negative margin there is no VAT to pay. However, negative margin must be carried forward into the next period as follows:

Period Two

a) Negative margin from previous period 4,000

b) Total purchases 1,000

c) Total sales 7,000

d) Margin = c – (a + b), sales minus (purchases plus negative margin), £7,000 – (£1,000 + £4,000) 2,000

e) VAT due = margin (£2,000) × VAT fraction (1/6) 333.33

There is no negative margin to carry forward this time. Therefore, in the third period, the margin is calculated solely by reference to sales less purchases.

The negative margin may only be offset against the next Global Accounting margin. It cannot be offset against any other figure or record.

Global Accounting Records and Accounts

A business does not need to keep all the detailed records which are required under the normal Margin Scheme – for instance, you do not have to maintain a detailed stock book.

Global Accounting records do not have to be kept in any set way but they must be complete, up to date and clearly distinguishable from any other records. A business must keep records of purchases and sales as set out below, together with the workings used to calculate the VAT due.

If we HMRC cannot check the margins declared from the records, VAT will be due on the full selling price of the goods sold, even if they were otherwise eligible for the scheme.

Buying goods under Global Accounting

When a business buys goods which it intends to sell under Global Accounting it must:

check that the goods are eligible for Global Accounting
obtain a purchase invoice. If a business buys from a private individual or an unregistered entity, the purchaser should make out the invoice at the time the goods are purchased. If purchased from another VAT-registered dealer, the dealer must make out the invoice at the time of sale, and
enter the purchase details of the goods in your Global Accounting purchase records. The purchase price must be the price on the invoice which has been agreed between you and the seller.

You cannot use the scheme if VAT is shown separately on the invoice.

Details to be included on purchase invoices

Purchase invoices must include:

your name and address

the seller’s name and address
invoice number
date of transaction
description of goods (this must be sufficient to enable HMRC to verify that the goods are eligible for Global Accounting)
total price, you must not show VAT separately, and
for goods purchased from another VAT-registered dealer: the statement “Global Accounting Invoice”

Remember: if you are buying from a private individual or an unregistered business, you must make out the purchase invoice yourself.

When selling goods under Global Accounting

If the purchase conditions above apply, Global Accounting may be used when the goods are sold by:

recording the sale in the usual way
issuing a sales invoice for sales to other VAT-registered dealers and keeping a copy of the invoice, and
transferring totals of copy invoices to the Global Accounting sales record or summary
you must be able to distinguish at the point of sale between sales made under Global Accounting and other types of transaction

Details to be included on sales invoices

A sales invoice must be issued to other VAT-registered customers. These invoices and any other Global Accounting sales invoice issued must show the following details:

your name, address and VAT registration number
the buyer’s name and address
invoice number
date of sale
description of goods (this must be sufficient to enable HMRC to verify that the goods are eligible for Global Accounting)
total price – you must not show VAT separately
the statement “Global Accounting Invoice”
you are selling an item for more than £500 and you don’t want the purchaser to know that you bought it under Global Accounting, you may use one of the Margin Scheme sales invoice statements.

Details to be included in purchase and sales summaries

Although a business does not have to keep purchase and sales records or summaries in any particular way, they must include the following details taken from the purchase invoices and any sales invoices you issue:

invoice number (where the purchase invoice shows one)
date of purchase/sale
description of goods, and total price

Cessation of using the scheme

If a business stops using Global Accounting for any reason, it must make a closing adjustment to take account of purchases for which it has taken credit, but which have not been sold (closing stock on hand). The adjustment required does not apply if the total VAT due on stock on hand is £1,000 or less. In the final period for which the business uses the scheme, it must add the purchase value of its closing stock to the sales figure for that period. In this way VAT will be paid (at cost price) on the stock for which the business previously had credit under the scheme.

Here is an example of a closing adjustment under Global Accounting: At the end of the period calculate:

(a) value of purchases during the period – £5,000

(b) value of sales during the period – £10,000

(d) add purchase value of closing stock to sales for period (c+b) – £18,000

(e) subtract purchases in this period from sale (d-a) – £13,000

(f) VAT due on margin (e x 1/6) – £2,166.66

You must make a similar adjustment if you transfer goods as part of a transfer of a going concern (TOGC). In that case, you should add the purchase value of goods included in the scheme to your sales figure for the period in which the TOGC takes place. This adjustment is separate from the TOGC itself, which is not subject to VAT.

Items sold outside the scheme

If goods are sold which had been included in a business’ Global Accounting purchase (for example, they are exported), a business must adjust its records accordingly. This is done by subtracting the purchase value of the goods sold outside the scheme from the total purchases at the end of the period.

Stolen or destroyed goods

If a business loses any goods through breakage, theft or destruction, it must subtract their purchase price from your Global Accounting purchase record.

Repairs and restoration costs?

A business may reclaim the VAT it is charged on any business overheads, repairs, restoration costs, etc. But it must not add any of these costs to the purchase price of the goods sold under the scheme.

EC Sales List, Intrastat and VAT returns

VAT registered businesses in the UK who make supplies of goods to VAT-registered businesses in other EC Member States are required to complete lists (form VAT 101) of their EC supplies.

But a business should not include any margin schemes transactions on an EC Sales list because they will be subject to VAT in the UK.

Intrastat is the system for collecting statistics on the trade in goods between EC Member States. But, because margin scheme goods are subject to VAT in the country of origin, there is no requirement either:

to include margin scheme purchases or sales in boxes 8 and 9 of your VAT return, or
to complete a supplementary declaration

For further advice on any global accounting, used goods schemes, or any other special VAT schemes please contact me.

© Marcus Ward Consultancy Ltd

VAT and Customs Duties. Bringing goods into the UK – A brief guide.

By Marcus Ward 16 April 2015

VAT and duty on and imports and acquisitions

If you are bringing goods into the UK it is important to recognise important VAT and duty rules and procedures. You must ensure that you pay the right amount of VAT and import duties via the correct mechanism.

Goods brought into the UK from other EC countries are called acquisitions rather than imports, and this is an important distinction as we shall see below.

The details and practicalities can be complex and you may want to seek advice or use an agent or freight forwarder to handle your responsibilities, particularly if you are new to international trade or only need to bring goods here occasionally.

Acquisition of goods from EC Member States

EC Member States

The 28 EC countries are: Austria, Belgium, Bulgaria, Croatia, Republic of Cyprus, Czech Republic, Denmark, Estonia, Finland, France, Germany, Greece, Hungary, Ireland, Italy, Latvia, Lithuania, Luxembourg, Malta, Netherlands, Poland, Portugal, Romania, Slovakia, Slovenia, Spain, Sweden and the UK.

Information

If you are UK VAT registered you need to give your supplier your VAT number. This allows the supplier to treat the sale to you as VAT free. You will need a VAT invoice as with any other purchase. If not UK VAT registered you will pay VAT applicable in the Member State of the supplier.

Accounting for VAT

You must account for VAT on acquisitions (“acquisition tax”) on your VAT return. VAT is charged at the normal UK rate of VAT for those goods. You reclaim this acquisition tax in the same way as you reclaim input tax on purchases of supplies within the UK. So for most businesses the effect is VAT neutral. In this way there is no difference between buying the goods in the UK or another EC Member State so it rules out cross-border “VAT rate shopping”. There are no Customs Duties to pay on acquisitions

Reporting

All VAT-registered businesses must show the total value of goods acquired from other EU Member States in box 9 of their VAT Return.

In addition, those who trade in the EC above the Intrastat exemption threshold in force during the year must also complete a monthly Supplementary Declaration (SD). The threshold is £1.5 million.

Importing goods from outside the EC

Your responsibilities for imports

You are normally responsible for clearing the goods through UK customs and paying any taxes and duties. Your supplier needs to provide the documentation you need to clear the goods through Customs. If you are importing you may have to pay import duty.

You will need to decide whether to use an agent to handle your responsibilities. Freight forwarders can handle Customs clearance as well as transport. You can find reputable freight forwarders through the British International Freight Association: here

You need to check what import duty applies.

Import duty is based on the type of goods you are importing, the country they originate from and their value. HMRC’s Integrated Tariff sets out the classification of goods and the rates of duty in detail: here

Confirm what paperwork you require from the supplier for Customs clearance

This normally includes an invoice and a copy of the transport documents. You may need proof of the origin of the goods to claim reduced import duty for goods from certain countries. A valuation document is also normally required for imports above a set value.

Complete an import declaration.

You normally declare imports using the Single Administrative Document (SAD). If you are registered for VAT in the UK you will need an EORI (Economic Operator Registration & Identification) to enable your inbound commercial shipments to be cleared through the automated CHIEF (Customs Handling of Import and Export Freight). This is made up of your VAT number, plus a further three digits.

Release of goods

You will need to pay VAT and duty to get the goods released.You pay VAT at the normal UK rate for those goods when sold in the UK.

Deferment

Regular importers are able to defer payment of VAT and duty by opening a deferment account with HMRC. You need to provide security and must agree to pay by direct debit. It is also possible to use your agent or freight forwarder’s deferment account.

Accounting for VAT

If you import works of art, antiques and collectors’ items they are entitled to a reduced rate of VAT.

HMRC will send you a monthly C79 certificate showing the import VAT you have paid. You must retain this. Certificates cover accounting transactions made in each calendar month should be received around the 24th of each month following imports logged the previous month.

You can reclaim VAT paid on imports on a C79 in the same way as you reclaim input tax on purchases of supplies within in the UK. It is not possible to reclaim VAT on any other document, eg; an invoice. Shipping or forwarding agents can’t reclaim this input tax because the goods weren’t imported to be used in part of their business.

You cannot reclaim import duty.

Be aware of special cases

Check whether any goods you are buying are subject to Excise Duty.

Excise duty is charged on fuel, alcohol and tobacco products.

Excise duty is charged on acquisitions from within the EU as well as imports from countries outside the EC.

If goods are subject to excise duty, you pay this at the same time as you pay VAT and import duty.

VAT is charged on the value of the goods plus excise duty.

Warehousing

You may want to consider using a Customs warehouse if you expect to store imports for a long time. If you store goods in a Customs warehouse, you will not need to pay import duty and VAT until you remove the goods from the warehouse.

Storage ‘in bond’ like this is often used for products subject to excise duty, such as wine and cigarettes, although it is not limited to these goods.

Re-exported goods

You will also find it beneficial to find out about tax relief if you are planning to re-export goods you import. There are special Inward Processing Relief (IPR) rules so that you do not have to pay import duty and VAT. This relief can apply to imports that you process before re-exporting them.

Valuation of imported goods for VAT and Duties

There are six methods of valuing imported goods, however, in the vast majority of cases (over 90%) the “Transaction Method” is used and, in fact, you must use this method wherever possible.

Transaction Value

This is the price paid or payable by the buyer to the seller for the goods when sold for export to the EC adjusted in accordance with certain specific rules.

This may also cover situations where goods are imported from a processor. The “transaction value” may be “built up” or “constructed” by reference to the cost of processing plus any items to be added commonly referred to as “assists”.

What items must be added to the price paid or payable?

You must add the following to the price you pay (unless they are already included):

(a) Delivery costs. – The costs of transport, insurance, loading or handling connected with delivering the goods to the EC border must be included.

(b) Commissions. – Certain payments of commission and brokerage, including selling commission, must be included.

But you can exclude buying commission if it is shown separately from the price paid or payable for the goods.

(c) Royalties and licence fees. – You must include these payments when they relate to the imported goods and are paid by you as a condition of the sale to you of those goods.

(d) Goods and services provided free of charge or at reduced cost by the buyer. – If you provide, directly or indirectly, any of the following, you must include in the customs value any part of the cost or value not included in the price charged to you by the seller:

i. materials, components, parts and similar items incorporated in the imported goods including price tags, kimball tags, labels

ii. tools, dies, moulds and similar items used in producing the imported goods, for example, tooling charges. There are various ways of apportioning these charges

iii. materials consumed in producing the imported goods, for example, abrasives, lubricants, catalysts, reagents etc which are used up in the manufacture of the goods but are not incorporated in them,

iv. engineering, development, artwork, design work and plans and sketches carried out outside the EC and necessary for producing the imported goods. The cost of research and preliminary design sketches is not to be included.

(e) Containers and packing. Include:

the cost of containers which are treated for customs purposes as being one with the goods being valued (that is not freight containers the hire-cost of which forms part of the transport costs), and
the cost of packing whether for labour or materials

Where containers are for repeated use, for example, reusable bottles, you can spread their cost over the expected number of imports. If a number of the containers may not be re-exported, this must be allowed for.

(f) Proceeds of resale. – If you are to share with the seller (whether directly or indirectly) the profit on resale, use or disposal of the imported goods you must add the seller’s share to the price paid. If at the time of importation the amount of profit is not known, you must request release of the goods against a deposit or guarantee.

(g) Export duty & taxes paid in the country of origin or export. – When these taxes are incurred by the buyer they are dutiable. However, if you benefit from tax relief or repayment of these taxes they may be left out of the customs value.

Summary

If you are new to acquisitions or importing it may be worthwhile talking to an expert. This article only scratches the surface of the subject. There can be significant savings made by accurately classifying goods and applying the correct procedures and rates will avoid assessments and penalties being levied.

What I’ve learned about VAT – The Top 10 lessons

By Marcus Ward 13 March 2015

I know that anybody who has ever met me will find it difficult to believe (!) but I have been involved with VAT for over 20 years. So what are some of the things that I have learned in this time? Here are ten of the biggest lessons I’ve learned so far:

Errors – If you get it wrong it can be very, very expensive. Not only in terms of paying back tax, penalties and interest, but also the time and resources needed to deal with VAT issues. It can often have a profound impact on business transactions too. If VAT isn’t properly considered during negotiations or the contact stage it could be that a business suffers an unexpected 20% reduction of income or an added burden of irrecoverable input tax.
HMRC Errors – HMRC sometimes get it wrong. One only has to look at case law to find that HMRC’s interpretation of the legislation and their introduction of new domestic legislation has resulted in unfair burdens on the taxpayer. Consequently, it is always worthwhile looking to challenge any “unhelpful” decisions by HMRC and indeed, past errors by the department often provide an opportunity to make retrospective claims for VAT plus interest.
Complexity – VAT was introduced all those years ago as a “simple tax”. The fact is that VAT is now, and has always really been, extremely complex and ever-changing. It is likely that this complexity will increase. As a comparatively “young tax” it will continue to develop, be challenged, be abused, be open to conflicting interpretation and need to change as a result of technology, new products and trading patterns.
Timing – More than any other tax, legal issue or accounting procedure timing is critical in VAT. Because VAT is a transaction based tax timing is crucial and there is rarely the opportunity to carry out retrospective planning. If a taxpayer is even “one day out” in certain circumstances it could add VAT to a hitherto VAT free transaction. Of course, filing or paying VAT late also results in surcharges. The best VAT motto is: Right tax, right time.
Exemption – For a business exemption is a burden not a relief. It will, in nearly all cases, mean that any business which makes exempt supplies will suffer the burden of irrecoverable input tax. Added to this is the complexity of partial exemption calculations and often the rigmarole of agreeing a partial exemption method with HMRC.
Doubt – Increasingly obtaining a ruling from HMRC is difficult. Changes to the way that HMRC approach requests for a determination or clearance means that a taxpayer who is eager to get the technicalities correct will just be referred to a published guidance. This is very unhelpful and uncertainty is a very dangerous thing in the VAT world.
Compliance – The vast majority of businesses want, and try, to get it right. This is hardly an earth-shattering observation, but it is often not a view shared by HMRC – despite some published statements. It is reasonable that HMRC inspectors should challenge VAT treatments and establish whether declarations are credible, after all we as individual taxpayers have an interest that all VAT due is collected, but experience insists that sometimes it is difficult to dislodge an opinion formed by an inspector in cases where a business has actually accounted for VAT correctly.
Charities – Charities have a hard time of it with VAT. It is an unfortunate fact that VAT wasn’t really designed for them, so they have to “fit in” with the VAT system. This means that, compared to most businesses, they have to deal with more complex issues and ultimately, in nearly all cases, VAT will represent a real cost to them, thus reducing the available funds for them to carry out their work. There are some reliefs for charities, but these are of limited value and are very specific.
Planning – The objective of VAT planning is to legitimately defer payment to HMRC until the latest time possible. The converse of this of course, is to obtain any repayments of VAT due from HMRC as soon as possible. It is also important to avoid VAT representing an actual cost and taking advantage of any beneficial UK and EC legislation, determinations, guidance, case law and Business Briefs etc available. There are “off the shelf” – one size fits all schemes and also aggressive planning available BUT these should be approached with the utmost caution. I have often been called in to deal with the aftermath of such schemes and have seen the consequences of a business signing up to these products without a full understanding of their impact and the business’ relationship with HMRC.
VAT Bubble – It is sometimes tempting to look at VAT in isolation. However, it is important to remember that VAT does not exist in a vacuum and that structures/planning may impact on other tax and/or commercial positions. I am fortunate to work with great direct tax people and it is important to us that our clients get a proper holistic advice.

On advisers – I will leave the last word to the famous Red Adair (younger readers – ask your parents) “If you think it’s expensive to hire a professional to do the job, wait until you hire an amateur.”

So there you have it – what I’ve learned about VAT in 10 lessons. Make sure you are aware! (Or know a VAT consultant who is!).

© Marcus Ward Consultancy Limited 2015

VAT – Domestic legislation versus EC law – a new case

By Marcus Ward 4 March 2015

In the recent case of VDP Dental Laboratory NV & ors (C-144/13) the ECJ has decided that a Dutch exemption for a supply which is ultra vires in respect of EC VAT legislation does not give a right to input tax deduction via EC legislation. The exemption precludes input VAT recovery, but has the effect of exempting imports and acquisitions into The Netherlands. The ECJ held that a taxable person who is not obliged to charge VAT on the supply of goods because national law (in contravention of Community law) provides for exemption, cannot however, rely on Community law to claim input tax deduction of VAT incurred on purchases incurred in respect of that supply. What this means though is that the exemption in Dutch domestic legislation means that the taxpayer will not be taxed on importations or acquisitions, irrespective of the VAT treatment in the Member State of an EU supplier.

Broadly, this means that a business cannot take advantage of domestic legislation and/or EC law in circumstances where it may benefit.

VAT – Top 10 Tax Point Planning Tips

By Marcus Ward 24 February 2015

VAT Tax Point Planning

If a business cannot avoid paying VAT to the HMRC, the next best thing is to defer payment as long as legitimately possible. There are a number of ways this may be done, dependent upon a business’ circumstances, but the following general points are worth considering for any VAT registered entity.

A tax point (time of supply) is the time a supply is “crystallised” and the VAT becomes due to HMRC and dictates the VAT return period in which VAT must be accounted for. Very broadly, this is the earliest of; invoice date, receipt of payment, goods transferred or services completed (although there are quite a few fiddly bits to these basic rules).

The aims of tax point planning

1. Deferring a supplier’s tax point where possible. It is sometimes possible to avoid one of these events or defer a tax point by the careful timing of the issue of a tax invoice.

2. Timing of a tax point to benefit both parties to a transaction wherever possible. Because businesses have different VAT “staggers” (their VAT quarter dates may not be the co-terminus) judicious timing may mean that the recipient business is able to recover input tax before the supplier needs to account for output tax. This is often important in large or one-off transactions, eg; a property sale.

3. Applying the cash accounting scheme. Output tax is usually due on invoice date, but under the cash accounting scheme VAT is only due when a payment is received. Not only does this mean that a cash accounting business may delay paying over VAT, but there is also built in VAT bad debt relief. A business may use cash accounting if its estimated VAT taxable turnover during the next tax year is not more than £1.35 million.

4. Using specific documentation to avoid creating tax points for certain supplies. If a business supplies ongoing services (called continuous services – where there is no identifiable completion of those services) if the issue of a tax invoice is avoided, VAT will only be due when payment is received (or the service finally ends).

5. Correctly identifying the nature of a supply to benefit from certain tax point rules. There are special tax point rules for specific types of supplies of goods and services. Correctly recognising these rules may benefit a business, or present an opportunity for VAT planning.

6. Generate output tax as early as possible in a VAT period, and incur input tax as late as possible. This will give a business use of VAT money for up to four months before it needs to be paid over, and of course, the earlier a claim for repayment of input tax can be made – the better for cashflow.

7. Planning for VAT rate changes. Rate changes are usually announced in advance of the change taking place. There are specific rules concerning what cannot be done, but there are options to consider when VAT rates go up or down.

8. Ensure that a business does not incur penalties for errors by applying the tax point rules correctly. Right tax, right time; the best VAT motto! Avoiding penalties for declaring VAT late is obviously a saving.

9. Certain deposits create tax points, while other types of deposit do not. It is important to recognise the different types of deposits and whether a tax point has been triggered by receipt of one. Also VAT planning may be available to avoid a tax point being created, or deferring one.

10. And finally, consider discussing VAT timing planning for your specific circumstances with your adviser.

It should always be remembered that it is usually not possible to apply retrospective VAT planning as VAT is time sensitive, and never more so than tax point planning.

I have advised a lot of clients on how to structure their systems to create the best VAT tax point position. Any business may benefit, but I’ve found that those with the most to gain are; professional firms, building contractors, tour operators, hotels, hirers of goods and IT/internet businesses.

(c) Marcus Ward Consultancy Ltd 2015

VAT – Prompt Payment Discounts (PPD) changes to valuation from 1 April 2015

By Marcus Ward 19 February 2015

VAT – Prompt Payment Discount Changes

Businesses don’t have much time to change their accounting procedures and systems to deal with the new PPD rules. A recent survey has shown that over 13% of business will be affected by the changes which do not appear to have been given much publicity. These changes are necessary to align UK legislation with the EC Principal VAT Directive. It is crucial that advisers and businesses are not caught out by the change in valuation of supplies offered at a discount.

The changes – summary

Old Rules

Under the previous rules output tax was due on the discounted price offered for prompt payment – regardless of whether the customer takes up the discount.

New Rules

From 1 April 2015 output tax is due on the full consideration actually paid by the customer when PPD is offered.

The new rules are required because HMRC is concerned that there was a difference between output tax paid on the discounted price, and the (higher) amount received if a PPD is not taken. Historically, this was not so much of an issue because most PPD was offered B2B and the VAT was generally recoverable by the recipient of the supply. However, increasingly, PPD is now offered B2C and therefore reduces “sticking tax” and the consequential VAT loss for HMRC.

A simple example

Old Rules

B2B PPD of 10% if invoice paid within 21 days.

Goods £10,000

VAT 20% on £9,000 £1,800

Invoice Total £11,800

Both parties post £1,800 to VAT account and there is no adjustment if discount not taken.

New Rules

Using the above figures:

Must assume discount is not taken so invoice total = £12,000

If customer actually takes up PPD a credit note is issued for both elements of the supply – £200 credit for the VAT.

Both parties process the new documentation to adjust the original invoice – VAT is neutral.

This increases a business’ administrative burden and also creates a significant additional risk of penalties and interest if businesses are ignorant of the change, or implement the changes incorrectly.

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

By Marcus Ward 16 February 2015

VAT Refunds – Irrecoverable Tax A Country by Country Detailed Guide

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 “Reclaiming VAT Overseas” 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.

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.

Iceland

VAT cannot be recovered on:

• Cars used for personal transport, including car hires and fuel;

• Food and drinks, including restaurant expenses;

• Gifts and entertainment expenses;

• Residential housing of employees.

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).

Norway

VAT cannot be recovered on:

• Entertainment expenses;

• Food and drinks;

• The purchase, hire or importation of passenger cars, as well as on petrol, oil, repairs, maintenance and other related costs;

• Goods and services acquired for use outside the scope of Norwegian VAT;

• Goods imported and used for activities outside the scope of Norwegian VAT; and

• Benefits-in-kind for employees.

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.

Claims

For details of how to make a claim for VAT incurred abroad, please see “Reclaiming VAT Overseas” here

Accounting for VAT and recovery of input tax.

Where the reverse charge procedure applies, the recipient of the services must act as both the supplier and the recipient of the services. On the same VAT return, the recipient must

account for output tax, calculated on the full value of the supply received, in Box 1;

(subject to partial exemption and non-business rules) include the VAT stated in box 1 as input tax in Box 4; and;

include the full value of the supply in both Boxes 6 and 7.

Time of supply: The time of supply of such services is the date the supplies are paid for or, if the consideration is not in money, the last day of the VAT period in which the services are performed.

© Marcus Ward Consultancy Ltd

Acquisition of goods from EC Member States

Importing goods from outside the EC

Valuation of imported goods for VAT and Duties

© Marcus Ward Consultancy Limited 2015

(c) Marcus Ward Consultancy Ltd 2015