HMRC has updated its VAT Notice 701/19 from 5 January 2024.
Sections 2, 3 and 5 have been amended to include information about the VAT treatment of charging of electric vehicles (EVs) when using charging points.
Tag Archives: input-tax
VAT: What is a proforma invoice and how can it be used?
VAT basics
Proforma invoices (proformas) are preliminary documents usually sent to buyers in advance of a delivery of goods/provision of services. Proformas will typically describe details of the purchase of goods/services and other important information, such as the terms of the transaction. Proformas are not “official” documents and represent an informal agreement. Usually, requesting a proforma represents a more serious interest on the part of a buyer than a quote – a buyer is generally committed to making a purchase but want to understand the details before proceeding with the approval process and making a binding agreement with the seller. They are therefore a useful business tool and use of them may result in a beneficial cashflow position for VAT (please see below).
Proforma translates from Latin as “for the sake of form”, and this provides an indication that the document is provisional or a step in a process.
It is also worth noting that the use of proformas is not mandatory.
The difference between an invoice and a proforma
Invoices (also called commercial invoices, VAT invoices or tax invoices) are distinct from proformas. They may contain similar information but serve different purposes. It is important to avoid confusing the two, since only invoices are legal documents; that is, they evidence a transaction and is the document on which VAT may be claimed. An invoice must contain certain information and there are specific legal obligations for providing them.
It is a matter of law whether an invoice is valid and when they must be issued. A proforma is not required to follow any set form, apart from the facts that they must not have an invoice number and must state that it is a proforma invoice. We also recommend that a proforma does not show the supplier’s VAT number for the avoidance of doubt.
Contents of a proforma
Proformas can be considered as “dummy invoices” and they are prepared by the seller usually to provide details of:
- the issuing business’s name, address, and contact details
- customer’s name and address
- date of issue
- length of time the pricing is valid
- the goods/services requested, including quantities, type, and physical specifications
- pricing, including individual costs as well as the total amount to be charged
- terms of sale, including eg; shipping and delivery dates
- payment terms
- whether VAT is applicable
However, there are no set formats for proformas.
Use for buyer
The purpose of a proforma is to provide the buyer with an accurate and complete good faith estimate they can use to decide whether or not to go ahead with a transaction. It also avoids surprises when the actual tax invoice is issued.
VAT implications
The main distinctions are that, compared to a tax invoice, a proforma:
- does not create a tax point
- the recipient is unable to recover input tax on a proforma
Very broadly, the tax point (time of supply) this is the earliest of; invoice date, receipt of payment, goods transferred or services completed. The tax point fact is helpful in tax planning for suppliers. Broadly, using proformas, requests for payment, or similar documents rather than issuing an invoice, defers a tax point and consequently when VAT is payable to HMRC. This is especially relevant to businesses which provide ongoing services (known as continuous supplies of services).
Please contact us if you require more information on the commercial use of proformas.
VAT: The Partial Exemption Annual Adjustment
An annual adjustment is a method used by a business to determine how much input tax it may reclaim.
Even though a partly exempt business must undertake a partial exemption calculation each quarter or month, once a year it will have to make an annual adjustment as well.
An annual adjustment is needed because each tax period can be affected by factors such as seasonal variations either in the value supplies made or in the amount of input tax incurred.
The adjustment has two purposes:
- to reconsider the use of goods and services over the longer period; and
- to re-evaluate exempt input tax under the de minimis rules.
An explanation of the Value Added Tax Partial Exemption rules is available here
Throughout the year
When a business makes exempt supplies it will be carrying out a partial exemption calculation at the end of each VAT period. Some periods it may be within the de minimis limits and, therefore, able to claim back all of its VAT and in others there may be some restriction in the amount of VAT that can be reclaimed. Once a year the business will also have to recalculate the figures to see if it has claimed back too much or too little VAT overall. This is known as the partial exemption annual adjustment. Legally, the quarterly/monthly partial exemption calculations are only provisional, and do not crystallise the final VAT liability. That is done via the annual adjustment.
The first stage in the process of recovering input tax is to directly attribute the costs associated with making taxable and exempt supplies as far as possible. The VAT associated with making taxable supplies can be recovered in the normal way while there is no automatic right of deduction for any VAT attributable to making exempt supplies.
The balance of the input tax cannot normally be directly attributed, and so will be the subject of the partial exemption calculation. This will include general overheads such as heating, lighting and telephone and also items such as building maintenance and refurbishments.
The calculation
Using the partial exemption standard method the calculation is based on the formula:
Total taxable supplies (excluding VAT) / Total taxable (excluding VAT) and exempt supplies x 100 = %
This gives the percentage of non-attributable input VAT that can be recovered. The figure calculated is always rounded up to the nearest whole percentage, so, for example, 49.1 becomes 50%. This percentage is then applied to the non-attributable input VAT to give the actual amount that can be recovered.
Once a year
Depending on a businesses’ VAT return quarters, its partial exemption year ends in either March, April, or May. The business has to recalculate the figures during the VAT period following the end of its partial exemption year and any adjustment goes on the return for that period. So, the adjustment will appear on the returns ending in either June, July, or August. If a business is newly registered for VAT its partial exemption “year” runs from when it is first registered to either March, April or May depending on its quarter ends.
Special methods
The majority of businesses use what is known as “the standard method”. However, use of the standard method is not mandatory and a business can use a “special method” that suits a business’ activities better. Any special method has to be “fair and reasonable” and it has to be agreed with HMRC in advance. When using a special method no rounding of the percentage is permitted and it has to be applied to two decimal places.
Commonly used special methods include those based on staff numbers, floor space, purchases or transaction counts, or a combination of these or other methods.
However, even if a business uses a special method it will still have to undertake an annual adjustment calculation once a year using its agreed special method.
De minimis limits
If a business incurs exempt input tax within certain limits it can be treated as fully taxable and all of its VAT can be recovered. If it exceeds these limits none of its exempt input tax can be recovered. The limits are:
- £625 per month on average (£1,875 per quarter or £7,500 per annum) and;
- 50% of the total input VAT (the VAT on purchases relating to taxable supplies should always be greater than the VAT on exempt supplies to pass this test)
The partial exemption annual adjustments are not errors and so do not have to be disclosed under the voluntary disclosure procedure. They are just another entry for the VAT return to be made in the appropriate VAT period.
Conclusion
If a business fails to carry out its partial exemption annual adjustment it may be losing out on some input VAT that it could have claimed. Conversely, it may also show that it has over-claimed input tax. When an HMRC inspector comes to visit he will check that a business has completed the annual adjustment. If it hasn’t, and this has resulted in an over-claim of input VAT, (s)he will assess for the error, charge interest, and if appropriate, raise a penalty. It is fair to say that partly exempt businesses tend to receive more inspections than fully taxable businesses.
VAT: Best judgement; what is it, and why is it important?
If HMRC carry out an inspection and decide that VAT has been underdeclared (eg: either by understating sales, applying the incorrect VAT rate, or overclaiming input tax) an inspector has the power to issue an assessment to recover VAT that it is considered underdeclared. This is set out in The VAT Act 73(1)
“Where a person has failed to make any returns … or where it appears to the Commissioners that such returns are incomplete or incorrect, they may assess the amount of VAT from him to the best of their judgment and notify it to him”.
So, the law requires that when an inspector makes an assessment (s)he must ensure that the assessment is made to the best of their judgement, otherwise it is invalid and will not stand.
Guidance to surviving a VAT inspection here.
HMRC’s methods of assessing cash businesses here.
Definition of best judgment
Per Van Boeckel vs HMCE (1981) the judge set out three tests:
- HMRC must make a value judgment on the material set before it honestly and bona fide and not knowingly set an inflated figure and then expect the taxpayer to disprove it on appeal
- there must be material available
- HMRC is not expected to do the work of the taxpayer but instead fairly interpret the material before it and come to a reasonable conclusion rather than an arbitrary one
If any of these three tests are failed, then best judgement has not been employed. However, the onus is on the appellant to disprove the assessment.
There were further comments on the matter:
“There are…obligations placed on the Commissioners to properly come to a view on the amount of tax that was due to the best of their judgement. In particular:
- a value judgement must be made on the material put before them
- they must perform their function honestly
- there must be material on which to base their judgement
- but they should not be required to do the job of the taxpayer, or carry out extensive investigations
This means that the assessing inspector must fairly consider all material placed before them and, on that material, come to a decision that is reasonable and not arbitrary, taking into account the circumstances of the business. In some cases, some “guesswork” may be required, but it should be honestly made based on the information available and should not be spurious, but HMRC must be permitted a margin of discretion.
Experience insists that it is usually more successful if the quantum of a best judgement assessment is challenged.
Where a business successfully disputes the amount of an assessment and the assessment is reduced, it will rarely fail the best judgement test.
In the case of MH Rahman (Khayam Restaurant) CO 2329/97 the High Court recognised the practice whereby the tribunal adopts a two-step approach, looking initially at the question of best judgement and then at the amount of the assessment. The message of the High Court appeared to be that the Tribunal should concern itself more with the amount of an assessment rather than best judgement.
Arguments which may be employed to reduce a best judgement assessment are, inter alia:
- period of calculation is unrepresentative
- wastage
- discounts
- staff use
- theft
- seasonal trends
- competition
- sales
- opening hours
- client base, etc
HMRC’s guidance to its own officers states that: Any assessments made must satisfy the best judgement criteria. This means that given a set of conditions or circumstances, “you must take any necessary action and produce a result that is deemed to be reasonable and not arbitrary”.
In other words, best judgement is not the equivalent of the best result or the most favourable conclusion. It is a reasonable process by which an assessment is successfully reached.
In the case of CA McCourtie LON/92/191 the Tribunal considered the principles set out in Van Boeckel and put forward three further propositions:
- the facts should be objectively gathered and intelligently interpreted
- the calculations should be arithmetically sound, and
- any sampling technique should be representative
Tribunals will not treat an assessment as invalid merely because they disagree as to how the judgement should have been exercised. It is possible that a Tribunal may substitute its own judgement for HMRC’s in respect of the amount of the assessment. However, this does not necessarily mean that because a different quantum for the assessment was arrived at that the assessment failed the best judgement test.
Further, it is not the function of the Tribunal to engage in a process that looks afresh at the totality of the evidential material before it (M & A Georgiou t/a Mario’s Chippery, QB October 1995 [1995] STC 1101).
It should be also noted that even if one aspect of an assessment is found not to be made to best judgement this should not automatically invalidate the whole assessment – Pegasus Birds [2004] EWCA Civ1015.
Summary
There are significant difficulties in arguing that an inspector did not use best judgement and it is a high bar to get over.
In order to succeed on appeal, it would be required to be demonstrated, to the judge’s satisfaction, that the assessment was raised:
- dishonestly
- vindictively
- capriciously
- arbitrarily
- spuriously
- via an estimate or a guess in which all elements or best judgement are absent
- wholly unreasonably
and that this action applies to the assessment in its entirety.
VAT: What is culture? The Derby Quad case
Latest from the courts
In the Derby Quad Ltd First-Tier tribunal (FTT) case the issue was whether the appellant’s supplies of admission to a screening were of a theatrical performance which would be cultural and exempt, or akin to a cinema presentation which is standard rated.
Background
A RSC live performance of The Tempest performed at Stratford-upon-Avon was live screened at The Quad venue in Derby by way of a broadcast – A so-called live event performed by a company other than DQ. The Quad is a comprehensive creative centre with indie cinema, art gallery, café-bar and event spaces for hire. DQ pays theatre companies a percentage of the proceeds from ticket sales to the screenings, and a small flat fee per simultaneous screening to help offset the satellite transmission costs.
The core of the dispute was whether the live events were a ‘live performance’ as required by The VAT Act 1994, Schedule 9, Group 13 item 2(b) for exemption.
The Arguments
The appellant contended that a live event was different from a cinematic film where the admission price is subject to VAT – it is an “experience”. The event is thought of as an experience on its own and is of artistic merit. It allows for audience participation and interaction even remotely.
To support this, it was stated that 84% percent of audiences “felt real excitement” because they knew the performance was being broadcast live that evening. Watching the show with others was also an important factor. Audiences tended to applaud at the end of the screening and they appear to feel connected to the performance and the audience. Further, the majority of audiences attending live events enjoyed the collective experience of watching as a group. This differs from audiences at cinemacasts of films and or recordings who typically watch as an individual or as a couple.
HMRC’s position was that admission charges to cinematic performances, and to live performances broadcast from other locations, were taxable.
Decision
The differences in the experiences of members of the audience and the actors/performers between a live theatre performance and at a live event are ones of kind, and not just degree, as they go to the essence of what makes and constitutes a theatrical performance and require interaction. A live event is, consequently, not capable of being a ‘theatrical performance’.
The actors in Stratford would receive no feedback from the audience in The Quad in a way they would from the audience at the live ‘physical’ event.
The FTT found that this is not a modern variant of a theatre performance and the appeal was dismissed.
Commentary
An interesting case which highlights the fact that subtle variations of supplies, and their interpretations can significantly affect the VAT outcome. In light of technical advances in this area we will need to watch how the definition of ‘theatrical performances’ develops.
VAT: Revoke an option to tax after 20 years have passed – update
HMRC’s Form VAT1614J has been updated. This form is used to revoke an option to tax (OTT) land or buildings for VAT purposes after 20 years have passed. There is a new address to which the form and supporting documents are sent:
BT VAT
HM Revenue and Customs
BX9 1WR
Scanned copies of the form can be emailed to: optiontotaxnationalunit@hmrc.gov.uk
Background: Revoking an option where more than 20 years have elapsed since it first had effect.
A business may revoke an OTT without prior permission from HMRC where more than 20 years have elapsed since the option first had effect. This is done by submitting the Form VAT1614J.
When the OTT first has effect: An OTT first had effect on the day it was exercised, or any later day that was specified when opting to tax.
Who can revoke: The relevant guidance VAT Notice 742A – which has the force of law here states that the ‘Taxpayer’ can revoke the OTT. The taxpayer is defined as the person who exercised the option to tax or is treated as making that option by virtue of a real estate election.
When the revocation will take effect: The revocation will take effect from the day that the taxpayer specifies when HMRC is notified, but this cannot be any earlier than the day on which the taxpayer notifies HMRC.
Outcomes of revoking an Option To Tax
- any income (rent or sale) relating to the property becomes exempt
- any input tax relating to the property is not recoverable (subject to the de minimis rules)
- if no other taxable supplies are made a business must deregister
Revocation of option: The VAT Act 1994, Schedule 10, 25(1)(a).
VAT reliefs for charities – A brief guide
Unfortunately, there is no “general” rule that charities are relieved of the burden of VAT.
In fact, charities have to contend with VAT in much the same way as any business. However, because of the nature of a charity’s activities, VAT is not usually neutral and often becomes an additional cost. VAT for charities often creates complex and time consuming technical issues which a “normal” business does not have to consider.
There are only a relatively limited number of zero rated reliefs specifically for charities and not for profit bodies, so it is important that these are taken advantage of. These are broadly:
- advertising services* received by charities
- purchase of qualifying goods for medical research, treatment or diagnosis
- new buildings constructed for residential or non-business charitable activities
- self-contained annexes constructed for non-business charitable activities
- building work to provide disabled access in certain circumstances
- building work to provide washrooms and lavatories for disabled persons
- supplies of certain equipment designed to provide relief for disabled or chronically sick persons
* HMRC have set out its views on digital/online advertising in Revenue and Customs Brief 13 (2020): VAT charity digital advertising relief.
There are also special exemptions applicable to supplies made by charities:
- income from fundraising events
- admissions to certain cultural events and premises
- relief from “Options to Tax” on the lease and acquisition of buildings put to non-business use
- membership subscriptions to certain public interest bodies and philanthropic associations
- sports facilities provided by non-profit making bodies
Although treating certain income as exempt from VAT may seem attractive to a charity, it nearly always creates an additional cost as a result of the amount of input tax which may be claimed being restricted. Partial exemption is a complex area of the tax, as are calculations on business/non-business activities which fundamentally affect a charity’s VAT position.
The reduced VAT rate (5%) is also available for charities in certain circumstances:
- gas and electricity in premises used for residential or non-business use by a charity
- renovation work on dwellings that have been unoccupied for over two years
- conversion work on dwellings to create new dwellings or change the number of dwellings in a building
- installation of mobility aids for persons aged over 60
Additionally, there are certain Extra Statutory Concessions (*ESCs) which benefit charities. These zero rate supplies made to charities, these are:
- certain printed stationery used for appeals
- collection boxes and receptacles
- lapel stickers and similar tokens, eg; remembrance day poppies
* ESCs are formal, published concessions but have no legal force.
We strongly advise that any charity seeks assistance on dealing with VAT to ensure that no more tax than necessary is paid and that penalties are avoided. Charities have an important role in the world, and it is unfair that VAT should represent such a burden and cost to them.
VAT: Partial exemption – updated HMRC guidance
HMRC has published updated partial exemption guidance in Manual PE21500.
The main changes are in respect of updated case law, including the Royal Opera House Court of Appeal case dealing with the attribution of input tax.
In that case the CoA considered: the test of direct and immediate link, economic necessity, business/non-business, and chains of transactions.
A VAT Did you know?
We know that burying a deceased person is exempt, but exhumation is standard rated and we now know, thanks to the UK Funerals On-line Ltd FTT case, that the service of the repatriation of the body of a deceased person can be viewed as either an exempt supply of funeral services or a zero-rated supply of transport services.
This being the case, zero rating trumps exemption via of The VAT Act 1994, section 30(1).
VAT: Updated guidance for medical professionals
HMRC has updated VAT Notice 701/57 – Health professionals and pharmaceutical products.
The changes, in summary, are:
Para 2.1 – Pharmacy technicians (only in England, Scotland and Wales) has been added to the meaning of a health professional list.
Para 2.5 – Services directly supervised by a pharmacist has been removed: Services that are not exempt from VAT.
Para 4.7 has been updated to make it clear when forensic physicians services are exempt healthcare.
Para 5.2 – Services supervised by pharmacists are now included when referring to a health professional: Exemption of care services performed by a person not enrolled on a statutory medical register.
The exemptions covered in the health and welfare area are complex and even slight differences in circumstances can change the VAT liability of a supply. Additionally, there are further exemptions for charities and NFP bodies and the age-old issue of business/non-business.
We advise that specialist advice is sought when considering the VAT position of supplies in this area.