Tag Archives: marcus-ward-consultancy

VAT – Latest from the courts: A round up of partial exemption

By Marcus Ward 20 June 2016

The partial exemption calculation

The calculation is required to quantify the amount of input tax a partly exempt business is able to claim. A partly exempt business is one which makes a mixture of taxable and non-taxable (eg; exempt) supplies. Input tax attributable to exempt activities is not recoverable.

With certain businesses HMRC accept that the usual “partial exemption standard method” based on taxable turnover versus exempt turnover is either impractical, distortive, or inappropriate. In such cases the business submits an application for a partial exemption special method (PESM). This may be based on many various factors such as; floorspace, staff numbers, transaction counts, management accounting etc (or any combination). If HMRC accept that the proposal is fair and reasonable, a formal agreement will be entered into by both parties.

The question in this case was when a PESM is agreed with HMRC is there a requirement to round up figures to a whole percentage point?

According to the CJEU decision in Kreissparkasse Wiedenbrück the answer is no. It was decided that, via EC legislation, in cases where there is a PESM agreement in place there was no obligation to round up.

The view was that as a significant amount of PESMs are “sophisticated” (compared to the partial exemption standard method) they achieve a more accurate allocation of input tax between taxable and exempt activities and rounding would counter this accuracy.

Full case here

Please contact us if your business is partly exempt and you either have a PESM in place, are in the process of agreeing one, or feel that your input tax recovery is suffering by the use of the standard method.

VAT Quickie – HMRC change bank details for payments

By Marcus Ward 13 June 2016

HMRC’s new bank details

Most taxpayers who pay electronically will not be affected by the change. However, if a business pays its VAT using HMRC’s IBAN and BIC need to use the new IBAN and BIC with immediate effect. This change will mainly affect overseas businesses. It is observed that HMRC’s efforts to publicise this change have not been very successful.

Details for Overseas payments:

Account Number (IBAN) GB36BARC20051773152391

BIC BARCGB22

Account Name: HMRC VAT

HMRC banking address:

Barclays Bank PLC
1 Churchill Place
London
United Kingdom
E14 5HP

VAT Tax Point Planning – Applications for Payment

By Marcus Ward 13 June 2016

Further to my previous article on tax points, I look at a specific planning point.

General

Applications for payment can be used to defer the date when output tax is accountable to HMRC and avoids the supplier having to account (and pay) VAT if the relevant supply becomes a bad debt.

Approval

No formal approval to use applications for payment is required from HMRC. This is because this VAT planning simply uses the “Time of Supply” (tax point) legislation.

Technical

No output tax is due until a tax point is crystallised. Broadly speaking, for the supply of services, a tax point is created at the earlier of; invoice date, receipt of payment, or completion of the work. Consequently, in order to be of benefit, the services in question have to be a “continuous supply of services”. This is defined as “services are supplied for any period for a consideration the whole or part of which is determined or payable periodically or from time to time”. Therefore, if an application for payment is issued rather than an invoice, output tax is only due when payment is received. This means if the debt becomes bad, no VAT is payable on it so long as the service is continuous. An application for payment is only of benefit if there is ongoing work (continuous supply of services) since, as above, there is a tax point created when the job is complete, regardless of the invoicing or payment position. Another relevant issue is; that under the existing VAT legislation, there is no requirement to issue a proper VAT invoice to an unregistered client/customer (unless specifically requested to do so by the client).

Implementation

Sending applications for payment (rather than invoices) may be done on a job by job basis or for all services from a selected date – although, the benefit will only be obtained for those jobs which are continuous. The VAT accounting system is required to recognise and report receipts of fees rather than applications for payment or invoices raised (although if invoices are issued on the day payment is received the tax point will be the same date). Additionally, the system needs to be able to identify completion tax points since these cannot be deferred by the use of application for payment.

Documentation

A request for payment must clearly state; “This is not a VAT invoice” and it may also be helpful if it appears distinct from “usual” invoices. It should state that it is an application/request for payment. It is also helpful if it does not show the supplier’s VAT number.

Cons

If the recipient of the services is VAT registered, it may complicate their accounting and will delay the date on which input tax may be recovered. This should not affect individuals or non-VAT registered clients. As considered above, it will also affect the accounting for the supplier and may add complexity.

Summary

This is relatively simple, yet effective VAT planning. It cannot be challenged technically by HMRC, although the actual operation will be examined at an inspection.

Please contact me if this matter is of interest.

VAT – Time of supply (Tax Point). The Rules

By Marcus Ward 10 June 2016

Although one of the “VAT basics”, it is sometimes quite difficult to establish the date for a tax point, and there is a great deal of case law which suggests that this seemingly straightforward exercise can throw up difficulties.

The time at which a supply of goods or services is deemed to take place is called the tax point. VAT must normally be accounted for in the VAT period in which the tax point occurs and at the rate of VAT in force at that time. Small businesses may, however, account for VAT on the basis of cash paid and received.

Although the principal purpose of the time of supply rules is to fix the time for accounting for, and claiming VAT, the rules have other uses including

calculating turnover for VAT registration purposes
establishing the period to which supplies (including exempt supplies) are to be allocated for partial exemption purposes, and
establishing when and if input tax may be deducted

The tax point for a transaction is the date the transaction takes place for VAT purposes. This is important because it crystallises the date when output tax should be declared and when input tax may be reclaimed. Unsurprisingly, get it wrong and there could be penalties and interest or VAT is declared too early or input tax claimed late – both situations are to be avoided, especially in large value and/or complex situations.

The time of supply rules

Basic tax point (Date of supply)

Goods

The basic tax point for a supply of goods is the date the goods are removed, ie; sent to, or taken by, the customer. If the goods are not removed, it is the date they are made available for his use.

Services

The basic tax point for a supply of services is the date the services are performed.

Actual tax point
In the case of both goods and services, where a VAT invoice is raised or payment is made before the basic tax point, there is an earlier actual tax point created at the time the invoice is issued or payment received, whichever occurs first.

14 Day Rule
There is also an actual tax point where a VAT invoice is issued within 14 days after the basic tax point. This overrides the basic tax point.

Continuous supply of services
If services are supplied on a continuous basis and payments are received regularly or from time to time, there is a tax point every time:

A VAT invoice is issued
a payment is received, whichever happens first

Deposits

Care should be taken when accounting for deposits. The VAT rules vary depending on the nature of the deposit. In some circumstances deposits may catch out the unwary, these could be, inter alia; auctions, stakeholder/escrow/solicitor accounts in property transactions, and refundable/non-refundable deposits. There are also other special provisions for particular supplies of goods and services, for eg; TOMS.

Summary

The tax point may be summarised (in most circumstances) as the earliest of:

The date an invoice is issued
The date payment is received
The date title to goods is passed, or services are completed.

Some brief examples:

Situation	Tax point
No invoice needed	Date of supply
VAT invoice issued	Date of invoice
VAT invoice issued 15 days or more after the date of supply	Date the supply took place
Payment or invoice issued in advance of supply	Date of payment or invoice (whichever is earlier)
Payment in advance of supply and no VAT invoice yet issued	Date payment received

There are certain exceptions, so care should be taken when establishing a tax point.

Planning

Tax point planning can be very important to a business. the aims in summary are:

Deferring a supplier’s tax point where possible
Timing of a tax point to benefit both parties to a transaction wherever possible
Applying the cash accounting scheme (or withdrawal from it)
Using specific documentation to avoid creating tax points for certain supplies
Correctly identifying the nature of a supply to benefit from certain tax point rules
Generating positive cashflow between “related” entities where permitted
Broadly; generate output tax as early as possible in a VAT period, and incur input tax as late as possible
Planning for VAT rate changes
Ensure that a business does not incur penalties for errors by applying the tax point rules correctly.

Getting a tax point wrong by even one day can be very costly. This is particularly relevant in respect of property transactions. Also, a significant savings may be made by careful tax point planning.

In my next article I shall look at how the tax point rules may be used for beneficial VAT planning in a specific example.

VAT Latest from the courts – what is a business?

By Marcus Ward 8 June 2016

In the CJEU case of * * takes a deep breath * * Lajvér Meliorációs Nonprofit Kft. and Lajvér Csapadékvízrendezési Nonprofit Kft the court considered whether these Not For Profit companies were making taxable supplies (economic activity). This then dictated whether input tax incurred by them was recoverable.

As a starting point, it may be helpful to look at what the words “economic activity”, “business”, “taxable supplies” and “taxable person” mean: The term “business” is only used in UK legislation, The Principal VAT Directive refers to “economic activity” rather than business and since UK domestic legislation must conform to the Directive both terms must be seen as having the same meaning. Since the very first days of VAT there have been disagreements over what constitutes a “business”. I have only recently ended a dispute over this definition for a (as it turns out) very happy client. In the UK the tests were set out as long ago as 1981 and may be summarised as follows:

Is the activity a serious undertaking earnestly pursued?
Is the activity an occupation or function, which is actively pursued with reasonable or recognisable continuity?
Does the activity have a certain measure of substance in terms of the quarterly or annual value of taxable supplies made (bearing in mind that exempt supplies can also be business)?
Is the activity conducted in a regular manner and on sound and recognised business principles?
Is the activity predominately concerned with the making of taxable supplies for a consideration?
Are the taxable supplies that are being made of a kind which, subject to differences of detail, are commonly made by those who seek to profit from them?

If there is no business, an entity cannot be making taxable supplies.

In EC Legislation, Article 9(1) of Directive 2006/112 provides: that “a ‘Taxable person’ shall mean any person who, independently, carries out in any place any economic activity, whatever the purpose or results of that activity.”

The case

The case involved the Not For Profit companies constructing and operating a water disposal system. When complete, it was intended to charge a “modest” fee to users of the system. The companies engaged in economic activities that were not intended to make a profit and only engaged in a commercial activity on an ancillary basis.

The majority of the funding for the work was provided by State (Hungarian) and EC aid. The Hungarian authority formed the view that, because a nominal fee was charged this did not amount to an economic activity and so there was no right to deduct input tax incurred on the costs of getting the system operational. The CJEU went straight to judgement and decided that the construction and operation of the system could rightly be regarded as an economic activity and found for the taxpayer. It also provided a very helpful and clear summary in respect of “business” by commenting that “… the fact that the price paid for an economic transaction is higher or lower than the cost price, and, therefore, higher or lower than the open market value, is irrelevant for the purpose of establishing whether it was a transaction effected for consideration …”.

NB: The one area that the CJEU did refer back to the National Court however, was whether the transaction at issue in the case was a wholly artificial arrangement which did not reflect economic reality and was set up with the sole aim of obtaining a tax advantage.

It is interesting to compare this finding with the UK case law above, especially the points concerning “a certain measure of substance in terms of the quarterly or annual value of taxable supplies made” and “sound and recognised business principles”. I strongly suspect that what constitutes a business will continue to occupy advisers and HMRC and throw up disputes until the end of time (and/or the end of VAT….).

Full case here

VAT – Latest from the courts. More on separate and composite supplies and land exemption

By Marcus Ward 17 May 2016

TC05078 Blue Chip Hotels Ltd

This is a FTT case which considered the VAT analysis of a supply in two ways. The appellant was an hotel which offered a wedding “package”. The package comprised; a room which was licensed for civil wedding ceremonies, the hire of other rooms, catering, accommodation, car parking and the use of the grounds for photographs. The only activity carried out in the “wedding room” was the wedding ceremony itself. The hotel treated the hire of the wedding room as exempt and added VAT to the remainder of the package.

The two technical points were:

Was the supply of the wedding room a separate supply to the rest of the wedding package as advanced by the taxpayer, or was it one element of the overall package to which standard rating applied?, and;
If an independent supply, was it an exempt supply of land under VAT Act, Schedule 9, Group 1 as argued by the appellant?

Somewhat to the puzzlement of the Tribunal, HMRC had accepted that if the wedding room was supplied without any other element of the wedding package it could be treated as an exempt supply of land.

On the first point the Tribunal decided that the hire of the wedding room should be treated as a separate supply for VAT purposes. However, this was only relevant if the taxpayer could demonstrate that the provision of the wedding room was a supply of land.

On the second point, the issue was whether what the hotel supplied was more than the mere hire of the wedding room as a passive letting of land. The tribunal was of the view that an additional service was being provided, this being the service of a legal wedding ceremony which could be carried out only because of the licensed nature of the wedding room. That is; what was being paid for was the right to participate in a particular event, only part of which entailed the provision of the physical space in which that event occurred.

The Tribunal concluded that the supply of the wedding room could not be treated as an exempt supply of land via VAT Act, Schedule 9, Group 1, the provision of licensed premises in which a civil wedding could legally be carried out went beyond the passive letting of land and was outside the scope of the exemption.

This seems to go against the decision in Drumtochty Castle Ltd (TC2111) inter alia, where the Tribunal found that in similar circumstances to those in this instant case that what was being offered was a single package such that exemption could not be applied to certain elements. Although it may simply demonstrate that even subtle differences in the facts can result in a different VAT outcome. As previously observed in a number of these types of cases, it is crucial to analyse precisely what is being provided, even in cases where the VAT treatment has remained unchanged for a number of years. Case law develops at a very fast rate and legislation changes regularly, both of which can affect the tax position.

New approach to VAT inspections by HMRC

By Marcus Ward 16 May 2016

A VAT quickie.

We understand that HMRC are about to introduce new plans to change the way some VAT inspections are carried out.

The intention is that when a business is selected to an inspection, rather than arranging and visiting the business in the traditional way, initial contact will be made with the responsible person. At this point a short telephone questionnaire will take place. If this option is taken then it is possible that HMRC will reconsider the need for a full inspection. This appears to be along the lines of some pre-credibility processes. It is a pilot exercise and will be entirely voluntary for the taxpayer.

If this approach enables HMRC to focus on evasion and high risk business while reducing the burden for the majority of businesses who always try to be accurate with VAT declarations it is to be welcomed. We shall see how the pilot goes and whether this is rolled out to more businesses. HMRC expects that this will be a benefit for both them and taxpayers and it is to be hoped that this is the case.

We have no knowledge currently how “brief” the questionnaire will be and how much information and preparation will be required. However, it is likely that they will focus on industry specific questions rather than on processes and controls.

If contacted by HMRC our usual advice is to contact us to ensure everything is as it should be. This may avoid penalties and ensure any enquires are concluded smoothly.

VAT – Liability of works carried out under Permitted Development Rights

By Marcus Ward 10 May 2016

HMRC has clarified its views on the zero and reduced rating of conversion construction work carried out under Permitted Development Rights (PDRs).

Who is affected?

Builders and developers who convert non-residential buildings into dwellings for which individual statutory planning consent is not required because the development is covered by PDRs. Additionally, it applies to any person carrying out a similar conversion who will be making a claim for a refund of VAT under the DIY Housebuilders’ Scheme.

What are PDRs?

PDRs are a national grant of planning permission for particular types of development. They are intended to streamline the planning process by removing the need for a full planning application, therefore reducing the amount of information required.

What has changed?

To zero-rate the sale of all newly converted dwellings (from non-residential buildings) or to make a valid claim under the DIY Housebuilders’ Scheme, the converted building must meet the requirements of a building “designed as a dwelling”. One of these conditions is that the developer, builder or DIY Housebuilders’ Scheme claimant must be able to demonstrate that statutory planning consent has been granted for a dwelling and that its construction has been carried out in accordance with that consent. In addition, part of the conditions for some supplies of construction services to be eligible for the reduced rate of VAT of 5% for the conversion of a non-residential building into a dwelling requires individual statutory planning consent.

HMRC have announced that following the introduction of PDRs, individual statutory planning consent will no longer be required for some developments making the meeting of this condition difficult.

HMRC Brief 9 (2016) sets out that when certain conditions are met, zero rating and/or reduced rating where applicable is additionally available when converting non-residential buildings to dwellings when work is carried out under a PDR. This is in contrast to work undertaken via planning consent.

Relevant parties will still be required to provide evidence that the work has been undertaken legally and that it qualifies as a permitted development.

The full guidance is here

VAT Latest from the courts – importance of invoicing requirements

By Marcus Ward 16 March 2016

In the recent case of Gradon Construction Ltd the validity of invoices was considered and whether input tax could be recovered in respect of them.

HMRC disallowed a claim for input tax on the basis that the supplier had retrospectively deregistered on a date prior to the date shown on the invoices. The Tribunal decided that this was not a reason to disallow the claim. However, it decided that the claim should be disallowed on the grounds that the invoices did not contain a description sufficient to identify the goods or services supplied, nor did they provide the quantity of the goods or the extent of the services as required by legislation. Consequently, the documents did not meet the requirements of a valid tax invoice with the result that the recipient could not recover the amount on the documents which purported to be VAT. HMRC has the discretion to accept alternative evidence in lieu of an invoice, but in this case the Tribunal decided that HMRC acted reasonably in not accepting any other documentation, so the recipient of the supply could not recover the input tax.

This case again highlights the crucial importance of primary documentation when it comes to VAT. A full guide to invoices here

Information on input tax that it is not possible to claim here https://www.marcusward.co/what-vat-cant-you-claim-2/

It is crucial that a business’ invoices meet all the requirements, and that a procedure is in place to check the validity of invoices received in order to determine whether the input tax is claimable, or whether the invoice issuer should be contacted so that a valid tax invoice may be obtained.

VAT – Overseas Holiday Lets; a warning

By Marcus Ward 8 February 2016

It is important to understand the VAT consequences of owning property overseas. It may not be commonly known that the UK has the highest VAT threshold in the EC. This means that for many ‘sideline’ businesses such as; the rental of second or holiday properties in the UK, the owners, whether they are; individuals, businesses, or pension schemes, only have to consider VAT if income in relation to the property exceeds £82,000 pa. and this is only likely if a number of properties are owned.

However, other EC Member States have nil thresholds for foreign entrepreneurs meaning that if any rental income is received, VAT registration may be compulsory. Consequently, a property owner that rents out a property abroad will probably have a liability to register for VAT there. Failure to comply with the domestic legislation of the relevant Member State means; payment of back VAT and interest and fines being levied. It is also not a good idea to provoke the interest of overseas tax authorities. VAT registration however, does mean that a property owner can recover input tax on expenditure in connection with the property, eg; agent’s fees, repair and maintenance and other professional costs. Such claims may be restricted if the home is used for own use.

It should be noted that, unlike other types of rental of homes, holiday lettings are always standard-rated. Also, the letting of holiday homes is always treated as a business activity unless lettings are very infrequent. If lettings are a one-off or rare, evidence should be retained to evidence this fact. There is no set number of times a property can be let before it is treated as a business, and the interpretation may differ between different Member States. Details of taxable supplies and being in business here

Given that every EC Member State has differing rules to the UK, it is crucial to check all the consequences of letting property overseas.

A final word of warning; I quite often hear the comment “I’m not going to bother – how will they ever find out?”

If an overseas property owner based in the UK is in competition with local letting businesses, those businesses generally do not have any compulsion in notifying the authorities. In addition, I have heard of authorities carrying out very simple initiatives to see if owners are VAT registered. In many resorts, income from tourism is vital and this is a very important revenue stream for them so it is well policed.

Please contact us for further details. We have experience in dealing with overseas VAT matters on our clients’ behalf.