Tag Archives: latest-vat-news

Small businesses/start ups: Should I register for VAT voluntarily?

By Marcus Ward 1 February 2024

VAT Basics – voluntary registration

Why?

OK, so why would a business choose to VAT register when it need not? Let’s say its turnover is under the VAT registration limit of £90,000, isn’t it just best to avoid the VATman if at all possible?

Planning

This is not an article which considers whether a business MUST register, but rather it looks at whether it is a good idea to register on a voluntary basis if it is not compulsory. The first time a business would probably consider VAT planning.

Decision

As a general rule of thumb; if you sell to the public (B2C) then probably not. If you sell to other VAT registered businesses (B2B) then it is more likely to be beneficial.

If you sell B2B to customers overseas it is almost certain that VAT registration would be a good thing, as it would if you supply zero rated goods or services in the UK. This is because there is no output tax on sales, but full input tax recovery on costs; VAT nirvana! A distinction must be made between zero rated supplies and exempt supplies. If only exempt supplies are made, a business cannot register for VAT regardless of level of income.

Compliance

Apart from the economic considerations, we have found that small businesses are sometimes put off VAT registration by the added compliance costs (especially since MTD) and the potential penalties being in the VAT club can bring. Weighed against this, there is a certain kudos or prestige for a business and it does convey a degree of seriousness of a business undertaking. We also come across situations where a customer will only deal with suppliers who are VAT registered.

The main issue

The key to registration is that, once registered, a business may recover the VAT it incurs on its expenditure (called input tax). So let us look at some simple examples of existing businesses for comparison:

Examples

Example 1

A business sells office furniture to other VAT registered business (B2B)

It buys stock for 10,000 plus VAT of 2,000

It incurs VAT on overheads (rent, IT, telephones, light and heat etc) of 2,000 plus 400 VAT

It makes sales of 20,000

If not registered, its profit is 20,000 less 12,000 less 2400 = 5600

If VAT registered, the customer can recover any VAT charged, so VAT is not a disincentive to him

Sales 20,000 plus 4000 VAT (paid to HMRC)

Input tax claimed = 2400 (offset against payment to HMRC)

Result: the VAT is neutral and not a cost, so profit is 20,000 less 12,000 = 8000, a saving of 2400 as compared to the business not being registered. The 2400 clearly equals the input tax recovered on expenditure.

Example 2

A “one-man band” consultant provides advice B2B and uses his home as his office. All of his clients are able to recover any VAT charged.

He has very few overheads that bear VAT as most of his expenditure is VAT free (staff, train fares, use of home) so his input tax amounts to 100.

He must weigh up the cost (time/admin etc) of VAT registration against reclaiming the 100 of input tax. In this case it would probably not be worthwhile VAT registering – although the Flat Rate Scheme may be attractive.

Example 3

A retailer sells adult clothes to the public from a shop. She pays VAT on the rent and on the purchase of stock as well as the usual overheads. The total amount she pays is 20,000 with VAT of 4000.

Her sales total 50,000

If not VAT registered her profit is 50,000 less 24,000 = 26,000

If VAT registered she will treat the value of sales as VAT inclusive, so of the 50,000 income 8333 represents VAT she must pay to HMRC. She is able to offset her input tax of 4000.

This means that her profit if VAT registered is 50,000 less the VAT of 8333 = 41,667 less the net costs of 20,000 = 21,667

Result: a loss of 4333 in profit.

As may be seen, if a business sells to the public it is nearly always disadvantageous to be voluntarily VAT registered. It may be possible to increase her prices by circa 20%, but for a lot of retailers, this is unrealistic.

Intending traders

If a business has not started trading, but is incurring input tax on costs, it is possible to VAT register even though it has not made any taxable supplies. This is known by HMRC as an intending trader registration. A business will need to provide evidence of the intention to trade and this is sometimes a stumbling block, especially in the area of land and property. Choosing to register before trading may avoid losing input tax due to the time limits (very generally a business can go back six months for services and four years for goods on hand to recover the VAT). Also cashflow will be improved if input tax is recovered as soon as possible.

Action

Careful consideration should be given to the VAT status of a small or start-up business. This may be particularly relevant to start-ups as they typically incur more costs as the business begins and the recovery of the VAT on these costs may be important. In most cases it is also possible to recover VAT incurred before the date of VAT registration.

This is a basic guide and there are many various situations that require further consideration of the benefits of voluntary VAT registration. We would, of course, be pleased to help.

VAT: Buildings and construction update

By Marcus Ward 1 February 2024

HMRC has amended Notice 708 which covers:

when building work can be zero-rated or reduced-rated at 5%
when building materials can be zero-rated or reduced-rated at 5%
when the sale, or long lease in a building is zero-rated
where you can find out more about the VAT domestic reverse charge for building and construction services
when developers are blocked from deducting input tax on goods that are not building materials
when a builder or developer needs to have a certificate from their customer, confirming that the building concerned is intended to be used for a purpose that attracts the zero or reduced rate
when a customer can issue that certificate to a builder or developer
what happens when a certificated building is no longer used for the purpose that attracted the zero rate, the use for that purpose decreases or the building is disposed of
the special time of supply rules for builders
when a business, on using its own labour to carry out building work on a building or civil engineering structure that it occupies or uses, must account for a self-supply charge

Sections 18.1 and 18.2 of the Notice and the certificates in those sections have been updated to show they have force of law under The VAT Act 1994, Schedule 8, Group 5, Note 12.

VAT: HMRC agent update

By Marcus Ward 23 January 2024

HMRC have published a recent agent update. In respect of VAT it covers:

reporting accurate tax turnover for VAT registration
reporting VAT deregistration to HMRC
reporting dissolved companies and VAT deregistration to HMRC
reporting insolvent companies and VAT deregistration to HMRC
intending traders
DIY housebuilders’ scheme digitalisation
changes for goods moving from the island of Ireland to GB from 31 January 2024

A VAT Did you know?

By Marcus Ward 22 January 2024

Size matters Part III – Bay plants are VAT free – as long as they are no bigger than 50cm and they have not been clipped or shaped.

Extension of VAT energy-saving materials relief

By Marcus Ward 22 January 2024

HMRC have published a new Policy Paper on the extension of energy-saving materials (ESMs).

Installations of ESMs in residential accommodation currently benefit from a temporary VAT zero rate until 31 March 2027, after which they revert to the reduced rate of VAT at 5%.

This measure extends the relief to installations of ESMs in buildings used solely for relevant charitable purposes, such as village halls or similar recreational facilities for a local community.

It also expands the scope of the relief to the following technologies:

electrical batteries that store electricity generated by certain ESMs and from the National Grid
water-source heat pumps
diverters that enable excess electricity from certain ESMs to be used within a building in which it is generated rather than exported to the grid

It also adds certain preparatory groundworks that are necessary for the installation of ground- and water-source heat pumps.

The changes apply from 1 February 2024

The policy objective is to incentivise the installation of ESMs across the UK to improve energy efficiency and reduce carbon emissions.

The measures are implemented by The Value Added Tax (Installation of Energy-Saving Materials) Order 2024.

VAT: Alternative Dispute Resolution guidance updated

By Marcus Ward 16 January 2024

HMRC has, this month, updated its guidance on how to use Alternative Dispute Resolution (ADR) to settle a tax dispute.

Anyone can apply for ADR to help resolve a dispute with HMRC, or to get more information about issues that need to be taken for a legal ruling. The Guidance explains how to apply for ADR and when you can use it to resolve a VAT disagreement with HMRC.

A full overview of the ADR system written by us here, but broadly, it is the involvement of a third party (a facilitator) to help resolve disputes between HMRC and taxpayers. Its aim is to reduce costs for both the taxpayer and HMRC when disputes occur and to reduce the number of cases that reach statutory review and/or Tribunal.

VAT treatment of serviced apartments: The Realreed Limited case

By Marcus Ward 11 January 2024

Latest from the courts

In this First-Tier Tribunal (FTT) case the issue was whether serviced apartments qualify for exemption.

Background

Realreed owns a property called Chelsea Cloisters in Sloane Avenue, London. The property comprises; 656 self-contained apartments and some commercial units. 421 of these apartments are let on long leases (no VAT issues arise from these supplies). The appeal concerned the VAT treatment of the letting of the remaining 235 apartments, which include studio, one-bedroom or two-bedroom self-contained rooms. The appellant has, at all times, received a significant number of occupiers from corporate customers when they relocate their employees to London for a specified period, such as a secondment.

The contentions

Realreed argued that the letting of the apartments is a supply of accommodation which is exempt under The VAT Act 1994, Schedule 9, Group 1, Item 1. Chelsea Cloisters operates like a ‘home from home’ for its tenants: it provides residential accommodation. The physical appearance of the building is very similar to that of other residential buildings in the vicinity. It does not have signage suggesting the serviced accommodation is a hotel or similar establishment. It is rare for hotels (or similar establishments) at the booking point to offer long-term availability in the same way as Realreed does. Chelsea Cloisters does not offer room service, or catering of any form. Tenants have fully functioning kitchens and other self-catering facilities within their apartments and have washing machines and dryers to do all their own laundry. Tenants can, and do, stay for extended periods of time (one for around 20 years). The business has always involved the provision of residential accommodation on a longer-term basis than would typically be found in a hotel, with a much higher degree of personal autonomy for the occupant.

HMRC contended that the use of the Apartments is carved out of the exemption in Item 1 by excepted item (d), which applies to “the provision in an hotel, inn, boarding house or similar establishment of sleeping accommodation”. Note 9 to Group 1 provides that “similar establishment” “includes premises in which there is provided furnished sleeping accommodation whether with or without the provision of board or facilities for the preparation of food, which are used or held out as being suitable for use by visitors or travellers”.

Decision

The court considered that Realreed provided sleeping accommodation in an establishment which is similar to a hotel. The two hallmarks of short-term accommodation coupled with additional services (daily maid service, linen changing, cleaning at the end of a stay, residents bar, concierge) mean that Chelsea Cloisters is an establishment in potential competition with the hotel sector, which also offers short-term accommodation with services.

The FTT found that Realreed provided furnished sleeping accommodation, so the remaining question was whether Chelsea Cloisters is used by or held out as being suitable for use by “visitors or travellers” per Note 9.

The FTT interpreted ‘visitor or traveller’ as referring to a person who is present in a particular place without making it their home, ie; they are not staying there with any degree of permanence. The average length of visit was less than a fortnight which must mean that the apartments were indeed made available to visitors or travellers.

The supplies were therefore standard rated.

Commentary

There is a distinction between leases and other room lettings for VAT. The most important issue is the degree of “permanence”, although other factors have a bearing. Businesses which let rooms should consider the nature of their supplies with reference to this case which helpfully sets out which factors need to be considered.

VAT: Are freemasons’ aims philanthropic? The United Grand Lodge UT case

By Marcus Ward 10 January 2024

Latest from the courts

In the Upper Tribunal (UT) case of United Grand Lodge of England (UGLE) the issue was whether subscriptions paid by members of the freemasons are exempt via The VAT Act 1994, Schedule 9, Group 9, section 31, item 1(e) “Subscriptions to trade unions, professional and other public interest bodies” which exempts membership subscriptions paid to a non-profit making organisation which has objects which are of a political, religious, patriotic, philosophical, philanthropic or civic nature. UGLE submitted claims on the basis that its subscription income was exempt (and not standard rated as declared on previous returns) and HMRC declined to make the repayments.

Background

UGLE is an unincorporated association. It has approximately 175,000 members who, in turn, are members of some 6,500 local Lodges.

An organisation which has more than one main aim can still come within the exemption if those aims are all listed and described in the legislation. The fact that the organisation has other aims which are not set out in law does not mean that its services to members are not exempt provided that those other aims are not main aims. If, however, the organisation has a number of aims, all equally important, some of which are covered by the exemption, and some of which are not, then the services supplied by the organisation to its members are wholly outside the exemption.

In the first hearing the First-Tier Tribunal concluded that the services supplied by UGLE were not exempt from VAT. It also held that UGLE does not have a civic aim. The FTT held that if an organisation had more than one aim, its eligibility for the relief would depend on its main (or primary) aim, and if it had multiple main aims, it would only qualify for the relief if all its main aims fell within the listed exemptions. If it had a number of aims which were all equally important (ie; if it had no main aim), then all those aims would have to fall within the list to enable the organisation to qualify for exemption.

The FTT Decision

The appeal was dismissed. The judge decided that the supplies made by UGLE in return for subscription payments were properly standard rated.

It was common ground that the motives of the members in joining the organisation are irrelevant.

It was accepted that since 2000 freemasonry has become more outward looking and since then has become more involved in charitable work among those, and for the benefit of those, who are not freemasons or their dependants. That said, the judge was not satisfied that the charitable works of individual freemasons, such as volunteering to give time to a local charity, were undertaken by them as freemasons rather than simply as public-spirited members of the community.

It was found that UGLE did have aims of a philosophical, philanthropic and civic nature (the promotion of all aspects of the practice of freemasonry and charity was central to UGLE’s activities). However, it was not accepted that these were UGLE’s main or primary aims. At least 48% of payments made by UGLE were to freemasons and their dependants and in the FTT’s judgment such support remained one of the main aims of freemasonry and thus of UGLE. The importance of providing support for freemasons and their dependants who are in need is a central tenet of freemasonry – The duty to help other freemasons is clearly set out in the objects of the four central masonic charities. The evidence showed that the provision of relief to freemasons and their dependants was the more important than donations to good causes unconnected with freemasonry.

Civic aims

There was nothing in the evidence which indicates any civic aim. UGLE cannot be said to be an organisation that has aims pertaining to the citizen and the state. Indeed, freemasons are prohibited from discussing matters of religion and politics in lodges.

Consequently, as one of UGLE’s main aims could not be described as philosophical, philanthropic, or civic, its membership subscriptions were standard rated. Making payments to freemasons was more akin to self-insurance, rather than philanthropic in nature.

UT – Grounds for appeal

There were two specific grounds:

The FTT failed to address or give reasons for rejecting UGLE’s case that it had one main philosophical aim and that its activities in support of the Masonic charities were in service of the philosophy of Freemasonry, in particular the third of the three Grand Principles, Relief, and thus fell within its philosophical aim.
Even if its activities related to UGLE’s charities could be treated as an aim which was not in service of its main philosophical aim, the activities of UGLE in support of the Masonic charities fall within the ordinary meaning of the word ‘philanthropic’. The FTT misdirected itself in law by failing to apply the ordinary meaning of the word and instead adopted a meaning of ‘philanthropic’ which is too narrow.

On the first ground the UT decided that this is not a situation in which the FTT had simply failed to set out every step of its reasoning, rather, the FTT did not give reasons for rejecting an important aspect of the Appellant’ case and found that the FTT therefore erred in law

On the second; The UT accepted that an aim may be considered to be philanthropic if an organisation aims to provide relief to specific categories of persons. However, it considered that there is a qualitative difference between organisations which raise and distribute funds for identified groups of persons and an organisation that raises funds from within the members that constitute that organisation with the aim of essentially re-distributing a large part of the funds back to some of those members and members’ dependents. That cannot be considered to be philanthropic in the sense of benevolence to the world at large, a love of mankind etc.

Decision

The appeal was dismissed. The UT rejected the contention that the FTT applied too narrow an interpretation of philanthropic. Consequently, UGLE’s membership income was standard rated for VAT purposes.

VAT: Fuel and power HMRC update

By Marcus Ward 10 January 2024

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.

VAT: Electronic Sales Suppression (ESS)

By Marcus Ward 3 January 2024

HMRC has published new guidance on ESS and information on how to make a disclosure.

What is ESS?

ESS is also known as till fraud or till manipulation. It is where a business manipulates their till systems to hide or reduce the true value or number of sales. This is carried out through the use of ESS tools such as misusing built in till functions or installing software specifically designed to suppress sales. HMRC call this sales suppression and it is done either at, or after, the point of sale (POS). The records then appear to be correct and complete.

Businesses do this to reduce their turnover so that they pay less tax. They also do this to try to appear compliant.

Misusing a till system reduces the recorded turnover of the business and the amount of VAT payable, whilst providing what appears to be an accurate and complete record.

ESS is tax fraud. You are involved with ESS if you have made, supplied, promoted, possess or have access to an ESS tool.

You are also involved in ESS if:

you own an ESS tool
have access to an ESS tool
have tried to access an ESS tool

What is an ESS tool?

An ESS tool is a piece of software, computer code script or hardware. It allows a business to hide or reduce the value of individual transactions on its electronic sales records. This includes using and/or configuring a till, or point of sale system, in a way that suppresses sales.

You do not have to have used an ESS tool to suppress sales or pay less VAT for HMRC to charge a penalty for being involved in ESS, it is fraud regardless.

HMRC powers

Finance Act 2022, Schedule 14 allows HMRC to issue an information notice for ESS. This means HMRC can ask for certain information that only applies to ESS. It allows the issue of a Notice to a ‘relevant person’ for a ‘relevant purpose’.

Who is a ‘relevant person’

A ‘relevant person’ is any person who HMRC think it might be able to charge a penalty for being involved in ESS.

What is a ‘relevant purpose’

A ‘relevant purpose’ is the reason that HMRC is asking for information about ESS and ESS Tools. The law allows HMRC to do this in three types of situations which are to help it:

decide whether a relevant person has made, supplied, promoted, or possesses an ESS tool — HMRC would be able to charge this person a penalty
understand how an ESS tool works
identify any other person who has made, supplied, promoted, or possesses the ESS tool

Disclosure

HMRC is offering an opportunity for those involved in ESS to make a disclosure. Early voluntary disclosure could lead to a reduction in financial penalties. Use the ‘Make a disclosure about misusing your till system’ form to tell HMRC that you have been using your till system to reduce your tax bill.

Further reading and more detailed information on penalties here.