Tag Archives: marcus-ward-consultancy

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

By   19 February 2015
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VAT – Prompt Payment Discount Changes

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

The changes – summary

Old Rules

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

New Rules

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

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

A simple example

Old Rules

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

Goods                                          £10,000

VAT 20% on £9,000                     £1,800

Invoice Total                               £11,800

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

New Rules

Using the above figures:

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

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

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

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

VAT Penalties: A Discussion Document by HMRC

By   11 February 2015
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A discussion document is seeking views by 11 May about potential improvements to how HMRC applies penalties for failing to pay what is owed or to meet deadlines for returns or registration.

As HMRC designs a tax system for the modern, digital world, it wants to ensure that its approach to penalties also keeps up to date with both technology and behavioural science. HMRC is considering whether and how it should differentiate between those who deliberately and persistently fail to meet administrative deadlines or to pay what they should on time, and those who make occasional and genuine errors for which other responses might be more appropriate.

HMRC is looking for feedback from individuals and businesses. The purpose of the discussion is to seek views on the policy design and any suitable possible alternatives, before consulting later on a specific proposal for reform.

I look at the main points below and identify where changes to the penalty system are most likely to be made.

The document may be accessed here:

https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/400211/150130_HMRC_Penalties_a_Discussion_Document_FINAL_FOR_PUBLICATION__2_.pdf

 Summary

In terms of Indirect Tax there are two main areas which HMRC is focussing on:

VAT default surcharge – HMRC highlights two issues with the current VAT default surcharge regime. The first is the concern that while the absence of penalty for the initial offence in a 12 month period gives business the chance to get processes right, some customers simply ignore this warning.

The second concern is the issue of proportionality which fails to distinguish between payments that are one or two days late or many months late.

 Excise regulatory penalties – This also considers proportionality, noting that regulatory failures can lead to very large penalties, because the penalty is fixed as a percentage of the duty. The size of such penalties might be viewed as disproportionate.

The existing, long-standing default surcharge regime has always had issues with the principle of proportionality.  The regime has been challenged in the Courts –  notably in the Trinity Mirror Plc case (soon to be heard at the UT) where the earlier FTT allowed the appeal against a default surcharge on the grounds of proportionality.

If you would like assistance in making a representation please contact me.

The penalty regime….the dark side of VAT!

By   9 February 2015
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I have made a lot of references to penalties in my other articles. So what are they, and how much could they cost if a business gets it wrong?

HMRC detail three categories of inaccuracy. These are significant, as each has its own range of penalty percentages. If an error is found to fall within a lower band, then a lower penalty rate will apply. Where the taxpayer has taken ‘reasonable care,’ even though an error has been made, then usually HMRC will not apply a penalty.

Penalty Categories 

–  An error, when reasonable care not taken: 30%;

–  An error which is deliberate, but not concealed: 70%;

–  An error, which is deliberate and concealed: 100%.

Unhelpfully, there is no definition of ‘reasonable care’. However, HMRC have said that they would not expect the same level of knowledge or expertise from a self-employed person, as from a large multi-national.  HMRC expect that, where an issue is unclear, advice is sought, and a record maintained of that advice. They also expect that, where an error is made, it is adjusted, and HMRC notified promptly. They have specifically stated that merely to adjust a return will not constitute a full disclosure of an error. Therefore a penalty may still be applicable.

The amount of the penalty is calculated by applying the appropriate penalty rate (above) to the ‘Potential Lost Revenue’ or PLR. This is essentially the additional amount of VAT due or payable, as a result of the inaccuracy, or the failure to notify an under-assessment. Special rules apply where there are a number of errors, and they fall into different penalty bands.

Defending a penalty

The percentage penalty may be reduced by a range of ‘defences:’

–  Telling; this includes admitting the document was inaccurate, or that there was an under-assessment, disclosing the inaccuracy in full, and explaining how and why the inaccuracies arose;

–  Helping; this includes giving reasonable help in quantifying the inaccuracy, giving positive assistance rather than passive acceptance, actively engaging in work required to quantify the inaccuracy, and volunteering any relevant information;

–  Giving Access; this includes providing documents, granting requests for information, allowing access to records and other documents.

Further, where there is an ‘unprompted disclosure’ of the error, HMRC have power to reduce the penalty further. This measure is designed to encourage businesses to have their VAT returns reviewed.

A disclosure is unprompted if it is made at a time when a person had no reason to believe that HMRC have discovered or are about to discover the inaccuracy. The disclosure will be treated as unprompted even if at the time it is made, the full extent of the error is not known, as long as fuller details are provided within a reasonable time.

HMRC have included a provision whereby a penalty can be suspended for up to two years. This will occur for a careless inaccuracy, not a deliberate inaccuracy. HMRC will consider suspension of a penalty where, given the imposition of certain conditions, the business will improve its accuracy. The aim is to improve future compliance, and encourage businesses which genuinely seek to fulfil their obligations.

Appealing a penalty

HMRC have an internal reconsideration procedure. A business should apply to this in the first instance. If the outcome is not satisfactory, the business can pursue an appeal to the Tribunal. A business can appeal whether a penalty is applicable, the amount of the penalty, a decision not to suspend a penalty, and the conditions for suspension.

The normal time limit for penalties to four years. Additionally, where there is deliberate action to evade VAT, a 20 year limit applies. In particular, this applies to a loss of VAT which arises as a result of a deliberate inaccuracy in a document submitted by that person.  These are just the penalties for making errors on VAT returns. HMRC have plenty more for anything from late registration to issuing the wrong paperwork.

Help

In my view there is generally a very good chance of success in a business challenging a penalty.  Each case should at least be reviewed by an adviser, and experience insists that a robust defence often results in full or part mitigation.  We have a very good track record in appealing HMRC decisions and have taken cases right up to High Court.  However, most cases can be settled before they get to Tribunal, and indeed, the greatest chance of success is usually at the beginning of the process before HMRC become entrenched.

VAT implications of renewable energy sources

By   15 January 2015
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If you own land and install solar panels (which we shall use as an example, although the rules apply equally to any way of generating renewable power), it is relatively straightforward; as you are either consuming the power, or are the provider supplying electricity back to the National Grid.

Where the position may get slightly more complicated is where a solar panel business buy the ‘space’ to install energy producing equipment from someone else. Many businesses are renting the roof space from others upon which to install the solar panels. The businesses may pay the roof owners with ‘free’ electricity in return for renting out this space. Supply of electricity to the owners of the site

For a solar panel business leasing a site, the supply of electricity to the owners of that site is deemed to be a supply of goods.

The business installing the solar panels is the taxable person (if they are, or should be registered for VAT) and they are supplying the owners of the site with a ‘cheap’ supply of electricity in the course of the furtherance of their business.

The supply of electricity for domestic use is a reduced-rate supply under Group 1 of Schedule 7A VATA 1994. The reduced rate of VAT is 5%. If the site owner is using the electricity for domestic purposes then the reduced rate of 5% should apply. If the electricity is being used for business purposes then the supply becomes standard-rated at 20%. However, if there is mixed use, then so long as more than 60% of the use is domestic then the whole supply will be treated as ‘qualifying use’ ie; domestic, and the 5% will apply to the entire amount. Generally speaking, VAT charged at 5% is fully or partly irrecoverable by the recipient.

So in this scenario, the land owner is providing something in exchange for this electricity use; the land owner is giving the solar panel business the use of his land. Therefore this is ‘consideration’ for a service; even if it is ‘non-monetary’ consideration.

This means that the solar panel business will have to calculate a value for this consideration and then charge 5% (or 20%) VAT as necessary, on this amount if they are VAT registered.

The value placed on this non-monetary consideration is not usually a concern for the land owner making the supplies of this land, as this land supply is itself exempt from VAT.

The supply of the land
This is a supply of land by the owner of the site. Unless the land has been ‘opted to tax’ (OTT) then this supply will be exempt from VAT. If the land has been OTT by the landowner – the parties will need to look at the valuation of the (non-monetary) consideration as this will be subject to VAT at 20%. If there is no OTT and the supply is exempt; for a non-VAT registered person, this will have no impact, and this income will not be included in taxable supplies which count towards the VAT registration threshold. If a VAT registered entity makes exempt supplies of land, consideration must be given to his partial exemption position.

VAT consequences of the Feed-In Tariff
In recognition of the higher cost of producing electricity in this manner, people participating in the Feed in Tariff scheme will receive payment under a “generation tariff”. This payment is not consideration for any supply and it is therefore outside the scope of VAT.

Supply of electricity to the electricity board
In addition to the Feed-In Tariff there is the additional income which you may receive from the electricity board ie; the “Export Tariff”. These payments are “consideration for supplies of electricity by people participating in the Feed in Tariff scheme to the electricity company, where they are made by taxable persons in the course of their business”. The export tariff is not outside the scope of VAT and therefore it is a supply of electricity made in the course of the furtherance of your business to the electricity supplier. It will attract standard rated VAT as it is not the supply for domestic use.

 Further…

A recent Court of Justice of the European Union (CJEU – the EU’s highest court) case has ruled in favour of the taxpayer after he argued that solar panels installed on his house constituted a business for VAT purposes. This is good news for any people who supply any energy into the grid and are paid a feed-in tariff (FiT) for doing so.

It means that anyone receiving the FiT can VAT register and reclaim (at least some) VAT incurred on the purchase and installation of solar panels plus input tax incurred on any other goods and services relating to the panels.

The supply and installation of “energy saving materials”, including solar panels, is currently subject to a reduced VAT rate of 5% in the UK. The European Commission is currently challenging this policy, arguing that the tax incentive goes beyond the scope of the law. The VAT Directive only allows Member States to apply reduced VAT rates to a limited number of goods and services, which are specified in an annex to the directive. So the cost of buying and installing solar panels may increase in the future.

It is anticipated that HMRC will need to deal with “thousands” of extra registration applications resulting in significant additional VAT repayments.

Oops! – Top Ten VAT howlers

By   6 January 2015
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I am often asked what the most frequent VAT errors made by a business are. I usually reply along the lines of “a general poor understanding of VAT, considering the tax too late or just plain missing a VAT issue”.  While this is unquestionably true, a little further thought results in this top ten list of VAT horrors:

  1. Not considering that HMRC may be wrong. There is a general assumption that HMRC know what they are doing. While this is true in most cases, the complexity and fast moving nature of the tax can often catch an inspector out. Added to this is the fact that in most cases inspectors refer to HMRC guidance (which is HMRC’s interpretation of the law) rather to the legislation itself. Reference to the legislation isn’t always straightforward either, as often EC rather than UK domestic legislation is cited to support an analysis. The moral to the story is that tax is complicated for the regulator as well, and no business should feel fearful or reticent about challenging a HMRC decision.
  2.  Missing a VAT issue altogether. A lot of errors are as a result of VAT not being considered at all. This is usually in relation to unusual or one-off transactions (particularly land and property or sales of businesses). Not recognising a VAT “triggerpoint” can result in an unexpected VAT bill, penalties and interest, plus a possible reduction of income of 20% or an added 20% in costs. Of course, one of the basic howlers is not registering at the correct time. Beware the late registration penalty, plus even more stringent penalties if HMRC consider that not registering has been done deliberately.
  3.  Not considering alternative structures. If VAT is looked at early enough, there is very often ways to avoid VAT representing a cost. Even if this is not possible, there may be ways of mitigating a VAT hit.
  4.  Assuming that all transactions with overseas customers are VAT free. There is no “one size fits all” treatment for cross border transactions. There are different rules for goods and services and a vast array of different rules for different services. The increase in trading via the internet has only added to the complexity in this area, and with new technology only likely to increase the rate of new types of supply it is crucial to consider the implications of tax; in the UK and elsewhere.
  5.  Leaving VAT planning to the last minute. VAT is time sensitive and it is not usually possible to plan retrospectively. Once an event has occurred it is normally too late to amend any transactions or structures. VAT shouldn’t wag the commercial dog, but failure to deal with it at the right time may be either a deal-breaker or a costly mistake.
  6.  Getting the option to tax wrong. Opting to tax is one area of VAT where a taxpayer has a choice. This affords the possibility of making the wrong choice, for whatever reasons. Not opting to tax when beneficial, or opting when it is detrimental can hugely impact on the profitability of a project. Not many businesses can carry the cost of, say, not being able to recover VAT on the purchase of a property, or not being able to recover input tax on a big refurbishment. Additionally, seeing expected income being reduced by 20% will usually wipe out any profit in a transaction.
  7.  Not realising a business is partly exempt. For a business, exemption is a VAT cost, not a relief. Apart from the complexity of partial exemption, a partly exempt business will not be permitted to reclaim all of the input tax it incurs and this represents an actual cost. In fact, a business which only makes exempt supplies will not be able to VAT register, so all input tax will be lost. There is a lot of planning that may be employed for partly exempt businesses and not taking advantage of this often creates additional VAT costs.
  8.  Relying on the partial exemption standard method to the business’ disadvantage. A partly exempt business has the opportunity to consider many methods to calculate irrecoverable input tax. The default method, the “standard method” often provides an unfair and costly result. I recommend that any partly exempt business obtains a review of its activities from a specialist. I have been able to save significant amounts for clients simply by agreeing an alternative partial exemption method with HMRC.
  9.  Not taking advantage of the available reliefs. There are a range of reliefs available, if one knows where to look. From Bad Debt Relief, Zero Rating (VAT nirvana!) and certain de minimis limits to charity reliefs and the Flat Rate Scheme, there are a number of easements and simplifications which could save a business money and reduce administrative and time costs.
  10.  Forgetting the impact of the Capital Goods Scheme. The range of costs covered by this scheme has been expanded recently. Broadly, VAT incurred on certain expenditure is required to be adjusted over a five or ten year period. Failure to recognise this could either result in assessments and penalties, or a position whereby input tax has been under-claimed. The CGS also “passes on” when a TOGC occurs, so extra caution is necessary in these cases.

So, you may ask: “How do I make sure that I avoid these VAT pitfalls?” – And you would be right to ask.

Of course, I would recommend that you engage a VAT specialist to help reduce the exposure to VAT costs!

VAT MOSS (Mini One-Stop Shop) Update – Small businesses

By   8 December 2014
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Further to my article on the introduction of new place of supply rules and the MOSS for B2C supplies of telecoms, broadcasting and other e-services HMRC have now stated its position on smaller businesses.

Under the initial rules, businesses which have income below the UK VAT registration turnover limit of (currently £81,000 pa) would be forced to either register for VAT in each EC Member State in which they made a sale (where the customer belongs), or registering for VAT in the UK in order to use the simplified MOSS procedure.

This would, of course, mean that such a business would lose the benefit of not being UK VAT registered and consequently having to do business in the UK with the addition of UK VAT.

HMRC has now indicated that these smaller businesses will be permitted to separate their UK and EC trading and register for VAT in the UK (so they can use the MOSS) without accounting for UK VAT on their domestic trading as long as their UK turnover remains below the VAT registration threshold.

This is curious (but welcome) since HMRC have always been against disaggregation.

For further information please see my new 2015 rules flowchart

Bad Debt Relief (BDR) – Avoiding the VAT burden.

By   27 November 2014
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Under the normal rules of VAT, a supplier is required to account for output tax, even if the supply has not been paid for (however, the use of cash accounting or certain retail schemes removes the problem of VAT on bad debts from the supplier).

There is specific relief however:

Conditions for claiming BDR

The supplier must have supplied goods or services for a consideration in money, and must have accounted for and paid VAT on the supply. All or part of the consideration must have been written off as a bad debt by making the appropriate entry in the business’ records (this does not have to be a “formal” procedure). At least six months (but not more than three years and six months) must have elapsed since the later of the date of supply or the due date for payment.

Records required
Various records and evidence must be kept (for four years from the date of claim), in particular to identify:
• The time and nature of the supply, the purchaser, and the consideration
• The amount of VAT chargeable on the supply
• The accounting period when this VAT was accounted for and paid to HMRC
• Any payment received for the supply
• Entries in the refund for bad debts account
• The accounting period in which the claim is made.

Procedure for claiming BDR
The claim is made by including the amount of the refund in Box 4 of the VAT Return for the period in which the debt becomes over six months old.

Repayment of refund
Repayment of VAT refunded is required where payment is subsequently received or where the above conditions have not been complied with.

Refund of input tax to debtor
Businesses are required to monitor the time they take to pay their suppliers, and repay input tax claimed if they have not paid the supplier within six months. Subsequent payment of all or part of the debt will allow a corresponding reclaim of input tax.

Finally, there is tax point planning available to defer a tax point until payment is received for providers of continuous supplies of services

VAT – Medical practices and property

By   18 November 2014
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This article is specific to medical practices (or any other professional practice which makes predominantly exempt supplies) which wants to buy or improve property.

Registration when purchasing practice property – what you need to know:

The majority of the services provided by medical practices are exempt from VAT.  Good news one would think; there is no need to charge VAT on most goods and services supplied, and no need to deal with VAT returns, records and inspections.  Additionally, there is no exposure to the increasingly widely applied and swingeing penalty regime. However, there is one often repeated question from practices; “How can we reclaim the VAT we are charged?”  This is an even more pressing question when the VAT incurred (input tax) is on significant expenditure such as purchasing a property of undertaking a major refurbishment. This article looks at the basic VAT rules applying to practices and what opportunities are available. The first point to make is that if a practice only makes exempt supplies (of medical services) it is not permitted to register for VAT and consequently cannot recover any input tax.  Therefore we must look at the types of supplies that a practice may make that are taxable (at the standard or zero rate).  If any of these supplies are made it is possible to VAT register regardless of the value of them.  This is called a voluntary registration and provides the practice with the ability to reclaim, at least some, input tax.  Of course, if taxable supplies are made, the value of which exceeds the current turnover limit of £81,000 pa, registration is mandatory. Examples of services and goods which may be taxable are;

  • Drugs, medicines or appliances that are dispensed by doctors to patients for self-administration
  • dispensing drugs against an NHS prescription is zero-rated.
  • drugs dispensed against private prescriptions is standard-rated.
  • Signing passport applications.
  • Medico legal services that are predominately legal rather than medical – for example; negotiating on behalf of a client or appearing in court in the capacity of an advocate.
  • Clinical trials or market research services for drug companies that do not involve the care or assessment of a patient.
  • Paternity testing.
  • Certain rental of rooms
  • Providing professional witness evidence
  • Any services which are not in respect of; the protection, maintenance or restoration of health of a patient.

So what does VAT registration mean?

Once you join the “VAT Club” you will be required to file a VAT return on a monthly or quarterly basis.  You will have to issue certain documentation to patients/organisations to whom you make VATable supplies.  You may need to charge VAT at 20% on some services and the range of services which may become VATable in the future is likely to grow.  You will be able to reclaim VAT charged to you on purchases and other expenditure subject to partial exemption rules (see below).  You will have to keep records in a certain way and your accounting system needs to be able to process specific information.

Specific considerations

Because doctors usually provide services which attract varying VAT treatment, a practice will be required to attribute VAT incurred on expenditure (input tax) to each of these categories.  Generally speaking, only VAT incurred in respect of zero-rated and standard-rated services may be recovered.  In addition, there will always be input tax which is not attributable to any specific service and is “overhead” eg; property costs, professional fees, telephones etc.  There is a set way in which the recoverable portion of this VAT is calculated.  VAT registered entities which make both taxable and exempt supplies are deemed “partly exempt” and must carry out calculations on every VAT return.

Partial Exemption

Once the calculations described above have been carried out, the resultant amount of input tax which relates to exempt supplies is compared to the de-minimis limits (broadly; £625 per month VAT and not more than 50% of all input tax).  If the figure is below these limits, all VAT incurred is recoverable regardless of what activities the practice is involved in. Therefore, any accounting system must be capable of attributing input tax to the following headings; taxable (at 20% or zero) exempt and overhead (attributable to both taxable and exempt).

VAT registration in summary

Benefits:

  • Recovery of input tax; the cost of which is not claimable in any other way.
  • Potentially, recovery of VAT on items such as property, refurbishment and other expenditure that would have been unavailable prior to VAT registration.
  • Only a small amount of VAT is likely to be chargeable by a practice.
  • May provide opportunities for pre-registration VAT claims.

Drawbacks

  • Increased administration and staff time.
  • Exposure to VAT penalties and interest.
  • May require VAT to be added to some services provided which were hitherto VAT free.
  • Likely that only an element of input tax is recoverable as a result of partial exemption.
  • Uncertainty on the VAT position of certain services due to current EC cases.
  • Potential increased costs to the practice in respect of professional fees.

How to register

Practices will need to consider how they should be registered, for example individually as sole proprietors or jointly as partnerships. The legal entity chosen should reflect actual working arrangements, so if several doctors work together in a practice, they would normally be registered together as a partnership. VAT registration will cover all the supplies made by the doctors involved in the registered legal entity. For example, where a doctor is registered as a sole proprietor all the income he or she receives, for both medical and non-medical purposes, is subject to the VAT rules relating to such supplies. It may also be possible to VAT register as a company or an LLP depending on the structure of a practice and associated entities. Registration may be applied for using a form VAT1 on-line.

Specific VAT issues for property transactions

Purchase

If possible, it would obviously be preferable to purchase a property without VAT.  These properties are likely to be older buildings as new commercial properties (under three years old) will be mandatorily standard rated.  If the property being purchased is residential, then it will be VAT free.  It is also possible for a vendor to “opt to tax” a commercial property, meaning that a unilateral choice has been made to add VAT to the sale price.  If the property is subject to VAT on the sale or long lease then we must consider the ability to recover this. If there is VAT on a property, it may be used as a lever to reduce the agreed sale price. Assuming a VAT registration is in place for a practice the VAT on the purchase will be an “overhead” for partial exemption purposes so the input tax will feed into the partial exemption calculation and some of it will be recoverable.  If the property is >£250,000 then something known as the Capital Goods Scheme (details Capital Goods Scheme – Guide) will apply and the amount of input tax claimed will need to be adjusted annually over a ten year period. If part of the property is to be sub-let to a third party, it is possible for the practice to opt to tax the rent.  This will improve the practice’s ability to recover input tax on the purchase. Alternatively, a third party entity (eg; a company, an LLP or an individual doctor – the entity must not be “connected” to the entity occupying the premises) may purchase the property, VAT register, opt to tax the building itself, and charge rent to the practice which uses the property.  This means that the purchasing party may immediately recover 100% of the VAT incurred on the purchase, but will need to add VAT to the rent to the practice.  Care should be taken with a structure such as this and professional help should be sought.

Sale

The sale of a property will be VATable if it has been subject to the option to tax and exempt if there is no option and the property is over three years old.  If the property was purchased by a third party (as above) it may be possible to treat the sale of the building as a VAT free “transfer of a going concern”.

Summary

As may be seen; VAT is not straightforward for doctors’ practices but it is worthwhile looking to see if it is possible to reduce or mitigate the actual cost that VAT represents to practices

VAT – Hard or soft? Stiff or floppy?

By   12 November 2014
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Sssshh at the back, this is important!

Whether cakes and biscuits go hard or soft when stale helps to determine whether they are indeed cakes or biscuits (cakes go hard, biscuits go soft). This is the difference between VAT at 20% and zero rating for some products.

Whether printed matter is stiff or floppy can also result in either 20% or zero rated treatment. In this case, for single sheet products, eg; leaflets; limp is good and hard can result in the VAT hit.

What did you think I was talking about? Stop making your own jokes up!