Tag Archives: international

VAT: Place of supply of matchmaking. The Gray & Farrar case

By Marcus Ward 26 November 2019

Latest from the courts

The Gray & Farrar International LLP (G&F) First Tier Tribunal (FTT) case.

The romantic side of VAT (well…if romance comes at a cost of £15,000 a time).

The issue here was the place of supply (POS) of the services provided by G&F to clients all over the world.

Background

The Appellant ran an exclusive matchmaking business. It provides its services to clients in many jurisdictions. It argued that its supplies to non-taxable (individuals) persons who reside outside the EU where outside the scope of UK VAT because the POS was where the supply was received. HMRC formed the view that these services did not fall within the required definition of “consultancy” such that the POS was where the business belonged. As G&F belonged in the UK, the relevant services were subject to VAT. So, the issue was: whether matchmaking could be regarded as a consultancy service.

Legislation

The EU legislation is found at The Principal VAT Directive, Article 59(c) (“para(c)”) and in the UK law at The VAT Act 1994, Schedule 4A para 16(2)(d).

In the words of para (c):

“the services of consultants, engineers, consultancy firms, lawyers, accountants and other similar services, as well as data processing and the provision of information”

So, did G&F’s services fall within para (c)?

Decision

The judge stated that “… the services provided by the appellant must be compared with services “principally and habitually” provided by a consultant…and that such similarity is achieved when both types of service serve the same purpose.” And that consultancy is “advice based on a high degree of expertise” or “specialist and expert advice by someone with extensive experience/qualifications on the subject”. Was matchmaking that?

Well, the FTT decided that services would fall within para(c) if they are services of the sort which are primarily and habitually supplied by one or more of the specifically listed suppliers and that “consultants” are not limited to persons who are members of the liberal professions but to persons who are in ordinary usage “consultants” and typically act in an independent manner – that is to say are not dependent on, or integrated with, their client.

HMRC argued that what G&F were providing was the possibility of entering into a long-term happy relationship: and that was what the Appellant was selling. The FTT accepted that that dream was what the typical client would want, but saw a difference between what is provided and the reason the service is wanted. It gave the example of a school providing education, not the hope of a good job.

Further, HMRC contended that G&F’s activities went far beyond the provision of advice and information because they involved all the other elements that go into the service of matchmaking. Those activities included ascertaining and executing the needs of the client, reading the non-verbal clues, reading body language, and the inexplicable magic of applying knowledge based on intuition and experience to identify people who may be compatible. The FTT said that that was all very well but drew a distinction between the skills required by the seller and what was sold.

Split decision

A first Tribunal member concluded that the material elements of the supply consisted only of the provision of information and expert advice, and the supply fell within para (c).

Another Tribunal member considered that the actions of the liaison team in G&F promoted and helped the making of a successful relationship, but he was not persuaded that the support provided by the liaison team assisted the provision of information about a potential partner or served the supply of G&F’s MD’s advice that a particular person might be suitable. It was support in the developing of a relationship – support in addition to the use of the information and expert advice received – and was not shown to be sufficiently inconsequential to say that it was just part of those elements. The liaison team provided a form of ready-made confidante for the client with whom he or she could discuss a relationship and his or her hopes and concerns for it or for other relationships. It enabled him or her to obtain the kind of support one might obtain from a friend – a listening ear or sounding board – and informal advice.

As two members of the Tribunal disagreed on the outcome, it fell to the judge to give a casting vote; which he did in favour of dismissing the appeal.

So, in this case at least, matchmaking is not consultancy. (Although I like the definition of the service being “inexplicable magic”).

Commentary

If it easy to make assumptions about the precise nature of a type of service. In order for certain services to be UK VAT free they need to meet the relevant criteria fully. “Consultancy” is a bit of a catch all, but this case illustrates the dangers of a lack of analysis. This was a close case and I could see the decision going the other way on another day quite easily.

Claiming VAT from the EU after Brexit

By Marcus Ward 1 October 2019

More work, confusion and administration for VAT after Brexit.

After a No-Deal Brexit it will not be possible to recover input tax incurred in other EU Member States by using HMRC’s online service. This is known as; the electronic cross-border refund system which enables a business that incurs VAT on expenditure in a Member State where it is not established and makes no supplies, to recover that VAT directly from that Member State (the Member State of refund).

HMRC state that this will be the case after 5pm on 31 October 2019, but we shall have to wait and see on the precise timing.

HMRC has published meagre guidance on the new method of recovering overseas VAT (for some of us at a certain age, it is the “old” EC 8th Directive method).

Claiming a refund after Brexit

Unhelpfully, each EU Member State has its own process for refunding VAT to businesses based outside the EU (as UK businesses will be post Brexit). This is similar to the existing EC 13^th Directive claims. A UK Business will need to use the process for the EU country where it is claiming a refund; even for unclaimed expenses incurred before Brexit.

A business will have to wade through the requirements and the EC provides assistance here.

This will be a complete headache for claimants and underlines the benefits of a harmonised system. Each claim form is different in each Member State, each form must be completed in the language of the country in which VAT is being claimed, and these forms are very bureaucratic; some run to over ten pages…. It will also be necessary to obtain and provide a Certificate of Status (CoS).

In summary

CoS

HMRC can issue a form VAT66A which may be used by claimants to prove that they are engaged in business activities at the time of the claim. A CoS is only valid for twelve months. Once it has expired you will need to submit a new CoS.

EC 13^th Directive claim

A non-EU based business may make a claim for recovery of VAT incurred in the EU. Typically, these are costs such as; employee travel and subsistence, service charges, exhibition costs, imports of goods, training, purchases of goods in the UK, and clinical trials etc.

The scheme is available for any businesses that are not VAT registered anywhere in the EU, have no place of business or other residence in the EU and do not make any supplies there.

The usual rules that apply to UK business claiming input tax also apply to 13th Directive claims. Consequently, the likes of; business entertainment, car purchase, non-business use and supplies used for exempt activities are usually barred.

Process

The business must obtain a CoS to accompany a claim. The application form is a VAT65A and is available here Original invoices which show the VAT charged must be submitted with the claim form and business certificate. Applications without a certificate, or certificates and claim forms received after the relevant deadline are not accepted. It is possible for a business to appoint an agent to register to enable them to make refund applications on behalf of that business.

VAT: Digital services to EU customers after Brexit

By Marcus Ward 1 October 2019

HMRC has published guidance on how to account for digital sales to EU customers when the UK’s MOSS system becomes redundant. Full document here.

After Brexit, businesses will no longer be able to use the Mini One Stop Shop (MOSS) to declare sales and pay VAT due in EU Member States.

The final return period for MOSS will be the period ending 31 December 2019.

A business will be able to use MOSS to:

submit a final return by 20 January 2020
amend the final return until 14 February 2020
update registration details until 14 February 2020
view previous returns

For sales made after Brexit, a business will need to register for either:

VAT MOSS in any EU member state
VAT in each EU member state where you sell digital services to consumers.

Registration deadline

A business will need to register by the 10th day of the month following its first sale to an EU customer after Brexit.

A business cannot register before Brexit.

The EC website may be used to:

check whether a business should register for Union or Non-Union MOSS
find out who to contact to register for VAT MOSS in an EU member state.

Further details are provided in the HMRC guidance.

The above assumes that the UK will leave the EU, and that there will be no agreements on VAT before Brexit

What are digital services?

Radio and television broadcasting services

These include:

the supply of audio and audio-visual content
live streaming

Telecommunications services

This means transmission of signals of any nature by wire, optical, electromagnetic or other system and includes:

fixed and mobile telephone services
Voice over Internet Protocol (VoIP)
voice mail, call waiting, call forwarding, caller identification, 3-way calling and other call management services
paging services
access to the internet

Electronically supplied services

These rules only apply to e-services that you supply electronically and includes things like:

supplies of images or text, such as photos, screensavers
supplies of music, films and games
online magazines
website supply or web hosting services
distance maintenance of programmes and equipment
supplies of software and software updates
advertising space on a website

Tax – Why do people pay it?

By Marcus Ward 16 September 2019

This seems a rather pointless question to ask, and I suspect many people will reply “because we have to”. But is it as simple as that?

An Organisation for Economic Co-operation and Development (OECD) report this month looks at the willingness of individuals and businesses to voluntarily pay tax and how it can be improved through better understanding of the complex interlinkages between enforcement, trust in government and the ease of compliance.

The report called ‘Tax Morale: What Drives People and Businesses to Pay Tax?‘ is interesting to read for tax advisers and taxpayers alike. It considers the drivers behind compliance with tax obligations and focuses on developing countries where compliance rates are low.

Many developing countries face a range of challenges in increasing revenue domestically. These challenges include:

a small tax base
a large informal sector
weak governance and administrative capacity
low per capita income
low levels of domestic savings and investment
tax avoidance and evasion by firms and elites.

As a result, two-thirds of least developed countries still struggle to raise taxes equivalent to more than 15% of GDP, the widely accepted minimum to enable an effective state. In comparison, OECD member countries raise taxes, on average, close to 35% of GDP.

Apparently, compliance is not determined solely by tax rates or the threat of penalties, but rather by a wide range of socio-economic and institutional factors that vary across regions and populations.

Improving tax morale can contribute to efforts to overhaul the international tax rules and improve compliance by multinational enterprises and it may also improve the efforts to counter banking secrecy and tax evasion.

Tax morale is composed of several, interlinked, elements. A theory set out in the report posits that trust is driven by the degree to which the tax system, including the approach to facilitation and enforcement, is characterised as:

fair
equitable
reciprocal
accountable

As such, strengthening tax compliance is not only about improving tax enforcement and enforced compliance, but also about pursuing “quasi-voluntary compliance” through building trust and facilitating payments.

Why is this important?

The report states that a better understanding of what motivates taxpayers to participate in, and comply with, a tax system is valuable for all countries and stakeholders. Tax administrations can benefit from increased compliance and higher revenues, taxpayers (both businesses and individuals) are better served by tax systems that understand and are responsive to their needs, while increased data and discussion can help researchers deepen their understanding.

So…

In terms of VAT, what are our experiences of HMRC? Is it fair, equitable, reciprocal and accountable? Having discussed this at most client meetings where businesses have been challenged, and my experience in the department and advising businesses is: It used to be a lot better, there was a feeling that they were “trying to get things right”, however, this sense has been declining and trust is increasingly and rapidly being lost. Is this nostalgia, or does HMRC increasingly rely on bullying, ignoring contentions, misunderstanding or misapplying legislation or not being concerned with taxpayers?

All I would say here is that the fact that HMRC can issue a written ruling, but then go back on it if it suits them, is hardly fair or equitable. See here – no more “Sheldon Statement” protection for taxpayers.

VAT EU Gap Report

By Marcus Ward 5 September 2019

Mind the gap

EU countries lost €137 billion in VAT revenues in 2017 according to a study released by the EC on 5 September 2019. The VAT Gap has slightly reduced compared to previous years but remains very high.

This gap represents a loss of 11.2% of the total expected VAT revenue.

During 2017, collected VAT revenues increased at a faster rate of 4.1% than the 2.8% increase of VAT Total Tax Liability (VTTL). As a result, the overall VAT Gap in the EU Member States saw a decrease in absolute values of about EUR 8 billion or 11.2% in percentage terms.

Member States in the EU are losing billions of Euros in VAT revenues because of tax fraud and inadequate tax collection systems according to the latest report. The VAT Gap, which is the difference between expected VAT revenues and VAT actually collected, provides an estimate of revenue loss due to tax fraud, tax evasion and tax avoidance, but also due to bankruptcies, financial insolvencies or miscalculations.

In 2017, Member States’ VAT Gaps ranged from 0.6% in Cyprus, 0.7% in Luxembourg, and 1.5% in Sweden to 35.5% in Romania and 33.6% in Greece. Half of EU-28 MS recorded a Gap above 10.1%.

Overall, the VAT Gap as percentage of the VTTL decreased in 25 Member States, with the largest improvements noted in Malta, Poland, and Cyprus and increased in three – namely Greece, Latvia, and Germany.

The variations of VAT Gaps between the Member States reflect the existing differences in terms of; tax compliance, fraud, avoidance, bankruptcies, insolvencies and tax administration. Other circumstances could also have an impact on the size of the VAT Gap such as economic developments and the quality of national statistics.

The UK

In the year 2017, in the UK the VTTL was £158421 millions of which £141590 millions was actually collected. This leaves a VAT gap for the UK of £16831 millions which represents 11% of the amount which is estimated was due to HMRC. About a mid-table performance compared to other Member States.

VAT and Customs Duty: Brexit latest

By Marcus Ward 20 August 2019

HMRC has been issuing guidance in readiness for Brexit, and in particular, a No Deal Brexit.

They generally provide information on preparations and actions required by business that trade cross-border.

Imports

If a business bring goods into the UK from the EU there are actions you should take before and after you’ve imported the goods. This applies to:

importers
freight forwarders
fast parcel operators
customs agents
traders who move their own goods

(This guidance does not apply to moving goods between Ireland and Northern Ireland). A border on the island of Ireland is a whole other matter.

The full guidance for importers.

Exports

Again, this guidance relates to:

exporters
freight forwarders
fast parcel operators
customs agents
traders who move their own goods.

The full guidance for exporters.

Email updates on Brexit

We recommend that business falling within the above definitions sign up the free HMRC Brexit email alert service.

This service covers: information about Brexit including the Article 50 process, negotiations, and announcements about policy changes as a result of Brexit.

It is crucial that businesses understand the impact of a No Deal Brexit and make preparations for all eventualities of the political negotiations. Sign up here

VAT: Brexit – Retail Export Scheme benefits

By Marcus Ward 2 August 2019

VAT free shopping for all! Save 20% on anything you buy!

This seems very unlikely I hear you mutter, but, but…..

If you live in the UK after a No Deal Brexit, there is a simple way of never paying VAT on any retail purchases for your own use. From a piano to a gymnasium, from a teapot to a lawnmower – all may be purchased completely VAT free and legally. It does not appear that the Government has considered this, it certainly does not feature in the recent report on the “Alternative Arrangements”. This is especially relevant to the Northern Ireland/Republic of Ireland land border. It may be that if we believe hard enough in Brexit we can avoid UK residents not paying UK VAT…

So how will this fabulous shopping opportunity come into being?

There is an EU-wide system (set out at Article 131 of The Principle VAT Directive) which provides for the recovery of VAT incurred by individuals from outside the EU. Clearly, after a No-Deal Brexit, that will be anyone in the UK. This is called the Retail Export Scheme (RES). After a hard Brexit, any goods moving from an EU Member State into the UK will now be classed as exports (pre-Brexit there is free movement of goods within the EU, so there would be no exports when goods move cross-border within the EU).

How does RES work?

When an individual buys goods in an EU Member State and exports them for his/her personal use, the retailer will charge VAT at the rate applicable in that country. The shop will also issue a certain document. This document is stamped when the goods are physically exported buy the buyer and the customer returns the form to the retailer. It is a quite painless procedure. When this evidence that the goods have been exported is received by the retailer, it will refund the VAT paid – The result = VAT free shopping. Also, the scheme has no minimum sales value.

And after Brexit?

The UK has said its 2017 Customs Bill that VAT will not be charged on personal imports. This is effectively inviting tax free cross-border shopping and consequently, logically, reducing retails sales in the UK. I am sure that that is not what the Government had in mind. It is likely that there could be wide scale use of RES. After all, what is a bit of paperwork and a short drive to save 20%?! This is even before one considers the abuse of the arrangements, which, with the obvious financial benefits, could be significant. A day trip to mainland Europe will be very inviting, and then, there is our land border…

Some politics…

The Irish border

Clearly, the most relevant issue is the Irish border. Regardless of the political noises, there will be a “difference” between EU and “third country” (which the UK will be after a No Deal Brexit) rules between the two countries. These differences facilitate the use of the RES. There is nothing in any proposals which will prevent cross-border shopping on the island of Ireland. I can imagine retailers in Dublin rubbing their hands together while those in Belfast gloomily survey empty shops. Perhaps new retailers will pop up on the Irish side of the EU/UK divide to make matters even more helpful for bargain hunting shoppers from the UK. Another issue which I doubt the UK has considered is that if there is no border (which we are told by the Government will happen even though a No-Deal Brexit will definitively and specifically not permit this) there will be nobody to stamp the forms. I won’t get into the politics of the Good Friday Agreement (GFA) and a No Deal Brexit, but it seems almost certain that there will have to be a deal with the EU to ensure there is no border, OR the UK must renege on the GFA which could bring terrifying consequences to peace in the area, amongst a lot of other issues. What a mess.

Importance of a border with the EU

No two countries outside of the EU have ever removed border checks between themselves. They try to streamline checks where possible, as everybody wants smooth trade, but always retain border checks. Why? Simply, for goods trade, a border post is the only place where you can guarantee to have the vehicle, the items definitely being transported, and all relevant paperwork in one place. You can and do make other checks, but the border is at the core. One of the reasons for the EU legal and regulatory framework is to be able to trust that goods trade between members can take place without border checks. This means common tariffs, common rules, and legal redress. Without being a part of the regulations, there can be no such trust and a hard border is necessary.

Unsurprisingly, there have been no studies on the cost to UK retailers, and apparently, no recognition whatsoever, that this could be a serious issue. Given the political issues with the Irish border, and the serious consequences of going against the GFA, this is another issue which has been either; overlooked, dismissed, politically ignored, or relegated to the bottom of a list of so many issues caused by an ill-considered No Deal Brexit.

What the government has continually, apparently deliberately, failed to recognise is that there is no fudge that provides both freedom from EU rules and frictionless trade with a No Deal Brexit. There is no current way to reconcile Northern Ireland remaining aligned with the UK, Ireland staying fully in the EU, pure Brexit, and no border checks. Tax is simply one area in the commercial world which has been ignored, for political reasons. VAT is just one area of tax, and the RES is just one area of VAT.

VAT – A beginner’s practical guide

By Marcus Ward 2 August 2019

I am often asked if there is a VAT beginner’s guide, I find HMRC guidance generally unhelpful for someone without a tax background, so, here is all the basic information you may need in one place.

What is VAT?

Value Added Tax (VAT) is a tax charged on most business transactions made in the UK. It is charged on goods and services and is an ad valorem tax, which means it is proportionate to the value of the supply made.

All goods and services that are VAT rated (at any rate including zero) are called “taxable supplies”. VAT must be charged on taxable supplies from the date a business first needs to be registered. The value of these supplies is called the “taxable turnover”.

Exempt items

VAT does not apply to certain services because the law says these are exempt from VAT. These include some; financial services, property transactions, insurance education and healthcare. Supplies that are exempt from VAT do not form part of the taxable turnover.

The VAT rates

There are currently three rates of VAT in the UK:

20% (standard rate) – Most items are standard rate unless they are specifically included in the lower rate categories.
5% (reduced rate) – this applies to applies to certain items such as domestic fuel and power, installation of energy-saving materials, sanitary hygiene products and children’s car seats.
0% (zero rate) – applies to specified items such as food, books and newspapers, children’s clothing, new houses and public transport.

VAT registration

A business is required to register for, and charge VAT, if:

the taxable turnover reaches or is likely to reach a set limit, known as the VAT registration threshold
a VAT registered business has been acquired as a going concern (TOGC)
potentially; goods or services have been purchased VAT free from non-UK countries (a self-supply)

Registration limit

The current VAT registration threshold is £85,000. If at the end of any month the value of taxable supplies made in the past twelve months is more than this figure a business MUST VAT register. A business can opt to register for VAT if its taxable turnover is less than this. Please note that taxable turnover is the amount of income received by a business and not just profit. If a business does not register at the correct time it will be fined.

Additionally, if, at any time there are reasonable grounds to expect that the value of the taxable supplies will be more than the threshold in the next thirty days alone a business must register immediately.

What are the exceptions?

VAT is not chargeable on:

taxable supplies made by a business which is not, and is not required to be, registered for VAT
zero rated supplies
supplies deemed to be made outside the UK
exempt supplies

What if a business only makes exempt or zero-rated supplies?

Exempt

If a business only makes exempt supplies, it cannot be registered for VAT. If a business is registered for VAT and makes some exempt supplies, it may not be able to reclaim all of its input tax.

Zero rated

If a business only supplies goods or services which are zero-rated, it does not have to register for VAT, but, it may do so if it chooses.

What is input tax and output tax?

Input tax is the VAT a business pays to its suppliers for goods and services. It is VAT on goods or services coming into a business. In most cases, input tax is the VAT that registered businesses can reclaim (offset against output tax).

Output tax is the term used to describe the VAT charged on a business’ sales of goods or services. Output tax is the VAT a business collects from its customers on each sale it makes.

A full guide to VAT jargon here

Is there anything that will make VAT simpler for a small business?

There are a number of simplified arrangements to make VAT accounting easier for small businesses. These are:

Cash Accounting Scheme
Annual Accounting Scheme
Flat Rate Scheme
Margin schemes for second-hand goods
Global Accounting
VAT schemes for retailers
Tour Operators’ Margin Scheme
Bad Debt Relief

Details may be found here and here and here.

VAT calculation

A business adds VAT to the value of sales it makes to other businesses or customers
The VAT amount is reached by multiplying the sale amount by the VAT rate percentage, then adding that to the value of the sale.
The total of the VAT on sales for a VAT period is output tax
For a VAT period, a business will total all VAT it has been charged by suppliers (eg stock, repairs, rent, and general business expenses etc) – this is input tax.
On the VAT return for the period, the amount payable or reclaimable to HMRC is the output tax less input tax.

Records

A business must keep complete, up-to-date records that enable it to calculate the correct amount of VAT to declare on its returns. VAT records must be kept for at least six years, because a business will need to show them to HMRC when asked.

It is acceptable for ordinary business records to be the basis for VAT accounts. A business will need records of sales and purchases (and any adjustments such as credit notes) including details of how much VAT the business charged or paid. If trading internationally, records of imports and exports/dispatches and acquisitions with all overseas territories, including the EU must be recorded. VAT records must show details of any supplies a business has given away or taken for personal use.

VAT records must also include all invoices you have received and issued. Invoice requirements here

Records will also need to include a VAT account, showing how total input tax and output tax has been calculated to include in your VAT returns.

It is vital to ensure that the VAT records are accurate. Failure to do so can lead to significant tax penalties

MTD

For certain business, the new MTD rules apply and certain software must be used. Details here

Time of supply (tax point)

It is important to establish the time VAT is due. Full details here

VAT returns

A VAT registered business must submit returns on a regular basis (usually quarterly or monthly). A VAT return summarises a business’ sales and purchases and the VAT relating to them. All the information a business requires must be in its VAT records, specifically a VAT account.

Return requirements include:

sales total (excluding VAT)
output tax – this also includes VAT due on any other taxable transactions, eg; barters, non-monetary consideration, goods taken for personal use
value of purchases (excluding VAT)
input tax claimable
total of VAT payable/claimable
summary of trade with other EU Member States

Online VAT returns are due one month and seven days after the end of the VAT period. Payment of any VAT owed is due at the same time, although HMRC will collect direct debit payments three days later.

VAT: Land and property quiz – Answers

By Marcus Ward 1 August 2019

The “fun” quiz.

The important thing to consider is what the purchaser does, or intends to do, with the land once purchased. This will dictate the input tax recovery position. So, can the input tax be recovered? Answers to quiz questions in the 26 July 2019 post below

Answers

On the purchased land the person constructs:

a dwelling and supplies the house on a 25-year lease

Yes

The lease is 21 years or over, so it is zero rated. However, a lease under 21 years would be an exempt so no recovery. For more details

an office and uses it for his own business supplying FS to a client in China

Yes

However, if the FS supply had been to the UK or another EU Member State, the supply would be exempt so no input tax recovery. This may change in the event of a No-Deal Brexit.

a storage facility and a fully taxable company leases it to another company in the same partly exempt VAT group after opting to tax

Unlikely to be full input tax recovery as the VAT group is itself partly exempt. The Capital Goods Scheme (CGS) may apply.

a block of ten flats with a gym and swimming pool which tenants are entitled to use. Grants 99 years leases on all flats

Yes

The supply is zero rated, notwithstanding there are additional (to usual residential dwellings) facilities.

a dwelling but uses it for short term holiday lets of no more than a fortnight.

Yes

Holiday lets are standard rated, so the business would be taxable. The purchaser would need to VAT register, however.

a warehouse which is sold on completion but without an option to tax being made before the sale

Yes

A ‘new” commercial building (one under three years old) is mandatorily standard rated, so no option to tax is required.

the land is held with the intention of constructing dwellings at some time in the future, which could be over six years

Yes

As long as the intention remains, and can be evidenced, the input tax may be attributed to the future taxable, zero rated, supply.

a factory which is not subjected to an option to tax but is leased to an US company

The place of supply (POS) is the UK as this is where the immovable property is located, regardless of the status of the client. Consequently, this is an exempt supply with no right to input tax recovery.

a block of three flats which are rented for six months before freehold sale

No, or maybe, or yes

The initial supply is exempt, so the input tax is, preliminarily, attributed to the short term lets. However, a simplified form of the partial exemption de minimis limits may be used and, depending on the scale of the development, it is possible that some, or all, of the input tax may be recovered despite the initial exempt supplies.

a sport hall by a school Academy which is leased to sporting charities and also used for its own educational purposes. No option to tax

It would be unlikely that an Academy would be able to recover all the input tax. Because it would make (exempt) business supplies, this would fall outside the VAT Act 1994, Section 33 rules, so there would be no input tax recovery in respect of those activities. There would be an apportionment and only the input tax referable to own use would be recoverable as those supplies of education would be non-business. If the Academy opted to tax the facilities (and was VAT registered), the input tax would be recoverable in full. No input tax referable to business use would be possible if the Academy was using VAT126 claims. VAT and Academies

a manufacturing plant which a company rents to a connected (non-VAT grouped) party which makes and sells toys. The option is taken

Yes

As the connected party is fully taxable the anti-avoidance rules do not apply. If the connected party was not able to recover the VAT charged to it (say it made exempt supplies) the anti-avoidance legislation would kick in and the option would be disapplied, meaning that the input tax in the hands of the developer would not be recoverable.

a car showroom and offices which a company uses for its own business of selling cars, providing finance and brokering insurance

There would be mixed use; car sales are taxable, finance and insurance are exempt, so some of the input tax would probably not be recoverable (dependent upon the de minimis limits). The development would be an overhead of the business. It is likely that the property would be an item covered by the CGS.

a care home for the elderly which a company uses for that purpose

This likely be an exempt supply, so no input tax recovery on supplies which are properly VATable. There may be reliefs on construction costs, however.

a small cabin office and the remaining land is used for a forestry business which will have no sales for ten years (when the trees are grown)

Yes

Although the intended taxable supplies are some way off, as long as the intention can be evidenced, the input tax may be recovered when incurred as it will relate to those intended taxable transactions. If the intention changes, this may impact the initial recovery. More information

a residential block which is immediately transferred to an associated company (an arm’s length transaction) on completion. No tenants are in situ.

Yes

The transfer of the freehold triggers the zero rating. The associated company may then, if it chooses, make exempt supplies without a VAT cost. This type of planning can be very helpful.

So there we have it. How did you get on? I would say that any score over eight is very good.

VAT: Land and property – A “fun” quiz

By Marcus Ward 26 July 2019

VAT: Land and property

I am quite often asked the seemingly straightforward question: Can I recover VAT on this land purchase? So, by way of a little quiz, I look at why this can be a loaded question.

Background

A person purchases bare land in the UK for £450,000 which is subjected to the option to tax. So, VAT of £90,000 is incurred. Your task, should you wish to accept it, is to say yes, no, or maybe to input tax recovery in the following situations (assume the purchaser is VAT registered).

Questions

On the purchased land the person constructs:

a dwelling and supplies the house on a 25-year lease
an office and uses it for his own business supplying FS to a client in China
a storage facility and a fully taxable company leases it to another company in the same partly exempt VAT group after opting to tax
a block of ten flats with a gym and swimming pool which tenants are entitled to use. Grants 99 years leases on all flats
a dwelling but uses it for short term holiday lets of no more than a fortnight.
a warehouse which is sold on completion but without an option to tax being made before the sale
the land is held with the intention of constructing dwellings at some time in the future, which could be over six years
a factory which is not subjected to an option to tax but is leased to an US company
a block of three flats which are rented for six months before freehold sale
a sport hall by a school Academy which is leased to sporting charities and also used for its own educational purposes. No option to tax
a manufacturing plant which a company rents to a connected (non-VAT grouped) party which makes and sells toys. The option is taken
a car showroom and offices which a company uses for its own business of selling cars, providing finance and brokering insurance
a care home for the elderly which a company uses for that purpose
a small cabin office and the remaining land is used for a forestry business which will have no sales for ten years (when the trees are grown)
a residential block which is immediately transferred to an associated company (an arm’s length transaction) on completion. No tenants are in situ.

We are looking at recovery of input tax on the land purchase here, ignoring other (say; construction and professional) costs. That is another article in itself.

The questions have been simplified, usually, they tend to be rather more “involved”.

Answers

…soon!