Ferrets are considered to be pets under VAT legislation, but rabbits are not.
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VAT: New One Stop Shop (OSS) rules from 1 July 2021
All you need to know about the new One Stop Shop (OSS)
New VAT rules will be introduced on 1 July 2021, and it is important that businesses and advisers are aware of the impact on transactions from this date. These changes have been introduced to increase the control of tax revenues as it is an area where a significant amount of tax is lost – creating an unfairness for businesses that correctly pay tax. They also aim to provide simplification for suppliers and consumers.
Who will be affected?
The new rules will impact all businesses that sell products online to consumers (B2C) in the EU, known as: distance sales. It will also affect suppliers of certain designated services and electronic interfaces.
UK online sellers not established anywhere in the EU can use the “Non-Union” version of OSS.
How OSS works
The current position
The current EU VAT rules state that cross-border sales of goods are subject to VAT in the EU Member State (MS) of dispatch. However, there are thresholds; once these sales reach a threshold in the MS of sale, a business is required to VAT register in that MS and ensure compliance and payment of VAT there.
The new rules
All sales will be subject to VAT in the MS of arrival of the goods. The existing thresholds for distance sales of goods (where the supplier is responsible for the transport of the products) within the EU will be replaced by a new EU threshold of €10,000*. To avoid a business having to VAT register in every EU MS into which it supplies goods, online sellers will be able to use the OSS electronic portal. This will enable the seller to account for, and pay, VAT in all EU MS on a single electronic quarterly return in one EU MS.
* As, since Brexit, the UK is no longer an EU MS, one the main differences is that the €10,000 annual turnover threshold for small business does not apply, so an EU VAT registration will be required for any distance sales to the EU. The business will need to nominate any single EU MS to register, submit returns, and make payments. Additionally. As a non-union OSS, depending on the chosen MS’s domestic regulations, a business may be required to appoint a fiscal representative.
Note: Even if a UK business has a turnover below the VAT registration threshold (currently £85,000 pa) so that it need not register here, it will be subject to OSS rules and need to register in an EU MS, this is compulsory.
Supplies covered by OSS
- distance sales of goods within the EU by suppliers not belonging in that MS
- supplies of certain B2C services (below) made by a supplier which take place in a MS in which it is not established
Services covered by Non-Union OSS
Examples of supplies of services to customers (a non-exhaustive list) that could be reported under the non-Union scheme are:
- accommodation services
- admission to cultural, artistic, sporting, scientific, educational, entertainment or similar events; such as fairs and exhibitions
- transport services, plus ancillary activities such as; loading, unloading, handling or similar
- valuation and work on movable tangible property
- services connected to immovable property
- hiring of means of transport
- restaurant and catering services for consumption on board ships, aircraft or trains etc
Electronic interfaces
From 1 July 2021, if an electronic interface, eg; marketplace, platform, etc facilitates distance sales of goods by a non-EU established seller to a buyer in the EU, the electronic interface is considered to be the seller (“deemed supplier” rather than agent) and is liable for the payment of VAT via the OSS.
IOSS
In addition to the OSS, a new scheme covering the import of goods subject to a distance sales transaction and in consignments not exceeding €150 is being introduced to simplify accounting for VAT. This is called the Import One-Stop Shop (IOSS). If the value of the consignment exceeds €150, it will usually be the end customer who will be the importer and will have to pay VAT, and any, customs clearance etc costs.
Note: The VAT exemption at import of small consignments of a value up to €22 will be removed. This means all goods imported in the EU will now be subject to VAT.
VAT rates
Businesses will need to apply the VAT rate of the MS where the goods are dispatched to or where the services are supplied. Information on the VAT rates in the EU is available on the European Commission website.
How to register for the OSS
Each EU MS will have an online OSS portal where businesses can register from 1 April 2021 and can use for transactions made on or after 1 July 2021. The single registration will be valid for all eligible supplies made by online sellers (including electronic interfaces) or supplies facilitated by electronic interfaces.
OSS Requirements
A business that uses the OSS will be required to:
- apply the VAT rate of the MS to which the goods are shipped
- collect VAT from the buyer
- submit a quarterly electronic VAT return
- make quarterly VAT payments
- keep records of all OSS supplies for ten years
Summary
The OSS is not compulsory, however, as the alternative is to VAT register in every EU MS where goods are received, it is a simplification in that respect – the previous distance selling rules were cumbersome and antiquated.
Further information
Full details of the OSS and IOSS from the EC here
VAT Schemes Guide – Alternative ways of accounting for tax
There are a number of VAT Schemes which are designed to simplify accounting for the tax. They may save a business money, reduce complexity, avoid the need for certain documentation and reduce the time needed to deal with VAT. Some schemes may be used in combination with others, although I recommend that checks should be made first.
It is important to compare the use of each scheme to standard VAT accounting to establish whether a business will benefit. Some schemes are compulsory and there are particular pitfalls for certain businesses using certain schemes.
I thought that it would be useful to consider the schemes all in one place and look at their features and pros and cons.
These schemes reviewed here are:
- Cash Accounting Scheme
- Annual Accounting Scheme
- Flat Rate Scheme
- Margin schemes for second-hand goods
- Global Accounting
- VAT schemes for retailers
Cash Accounting Scheme
Normally, VAT returns are based on the tax point (usually the VAT invoice date) for sales and purchases. This may mean a business having to pay HMRC the VAT due on sales that its customers have not yet paid for.
The VAT cash accounting scheme instead bases reporting on payment dates, both for purchases and sales. A business will need to ensure its records include payment dates.
A business is only eligible for the Cash Accounting Scheme if its estimated taxable turnover is no more than £1.35m, and can then remain in the scheme as long as it remains below £1.6m.
Advantages
- Usually beneficial for cash flow especially if its customers are slow paying
- Output tax is not payable at all if a business has a bad debt
Disadvantages
- Is generally not beneficial for a repayment business (one which reclaims more VAT than it pays, eg; an exporter or supplier of zero rated goods or services)
- Not usually beneficial if a business purchases significant amounts of goods or services on credit
Annual Accounting Scheme
The Annual Accounting Scheme allows a business to pay VAT on account, in either nine monthly or three quarterly payments. These instalments are based on VAT paid in the previous year. It is then required to complete a single, annual VAT return which is used to calculate any balance owed by the business or due from HMRC.
A business is eligible for the scheme if its estimated taxable turnover is no more than £1.35m and is permitted to remain in the scheme as long as it remains below £1.6m.
Advantages
- Reduces paperwork as only the need to complete one return instead of four (Although it does not remove the requirement to keep all the normal VAT records and accounts)
- Improves management of cash flow
Disadvantages
- Not suitable for repayment businesses as they would only receive one repayment at the end of the year
- If turnover decreases, the interim payments may be higher than under standard accounting
Flat Rate Scheme
The Flat Rate Scheme is designed to assist smaller businesses reduce the amount of time and complexity required for VAT accounting. The Flat Rate Scheme removes the need to calculate the VAT on every transaction. Instead, a business pays a flat rate percentage of its VAT inclusive turnover. The percentage paid is less than the standard VAT rate because it recognises the fact that no input tax can be claimed on purchases. The flat rate percentage used is dependent on a business’ trade sector.
A business is eligible for this scheme if its estimated taxable turnover in the next year will not exceed £150,000. Once using the scheme, a business is permitted to continue using it until its income exceeds £230,000.
If eligible, a business may combine the Flat Rate Scheme with the Annual Accounting Schemes, additionally, there is an option to effectively use a cash basis so there is no need to use the Cash Accounting Scheme. New rules regarding ” limited cost traders” mean that the scheme has become less attractive.
Advantages
- Depending on trade sector and circumstances may result in a real VAT saving
- Simplified record keeping; no requirement to separate out gross, VAT and net in accounts
- Fewer rules; no issues with input tax a business can and cannot recover on purchases
- Certainty of knowing how much of income is payable to HMRC
Disadvantages
- No reclaim of input tax incurred on purchases
- Limited cost traders impact
- If a business buys a significant amount from VAT registered businesses, it is likely to result in more VAT due
- Likely to be unattractive for businesses making zero-rated or exempt sales because output tax would also apply to this hitherto VAT free income
- Low turnover limit
Margin Scheme for Second Hand Goods
A business normally accounts for output tax on the full value of its taxable supplies and reclaims input tax on its purchases. However, if a business deals in second-hand goods, works of art, antiques or collectibles it may use a Margin Scheme. This scheme enables a business to account for VAT only on the difference between the purchase and selling price of an item; the margin. It is not possible to reclaim input tax on the purchase of an item and there will be no output tax if no profit is achieved. There is a special margin schemes for auctioneers. A variation of the Margin Scheme is considered below.
Advantages
- Usually beneficial if buying from (non-VAT registered) members of the public
- Purchaser will not see a VAT charge
- Although no input tax claimable on purchases of scheme items, VAT may be claimed in the usual way on overheads and other fees etc
Disadvantages
- Record keeping requirements are demanding and closely checked, eg; stock records and invoices which are required for both purchases and sales
- Cannot be used for items purchased on a VAT invoice
- Can be complex and create a cost if goods exported
- Although no VAT due on sales if a loss is made, there is no set-off of the loss
Global Accounting
The problem with the Second Hand Goods Scheme is that full details of each individual item purchased and sold has to be recorded. Global Accounting is an optional, simplified variation of the Second Hand Margin Scheme. It differs from the standard Margin Scheme in that rather than accounting for the margin achieved on the sale of each individual item, output tax is calculated on the margin achieved between the total purchases and total sales in a particular accounting period.
Advantages
- Simplified version of the Margin Scheme
- Record keeping requirements reduced
- Losses made on sales reduce VAT payable
- Beneficial for businesses which buy and sell bulk volume, low value eligible goods
Disadvantages
- Cannot be used for; aircraft, boats, caravans, horses or motor vehicles
- Similar to Margin Scheme disadvantages apart from loss set off
VAT Schemes for Retailers
It is usually difficult for retailers to issue an invoice for each sale made, so various retail schemes have been designed to simplify VAT. The appropriate scheme for a business depends on whether its retail turnover (excluding VAT) is; below £1m, between £1m and £130m and higher.
Smaller businesses may be able to use a retail scheme with Cash Accounting and Annual Accounting but it cannot combine a Retail Scheme with the Flat Rate Scheme. However, retailers may choose to use the Flat Rate Scheme instead of a Retail Scheme.
Using standard VAT accounting, a VAT registered business must record the VAT on each sale. However, via a Retail Scheme, it calculates the value of its total VAT taxable sales for a period, eg; a day, and the proportions of that total that are taxable at different rates of VAT; standard, reduced and zero.
According to the scheme a business uses it then applies the appropriate VAT fraction to that sales figure to calculate the output tax due. A business may only use the Retail Scheme for retail sales and must use the standard accounting procedures for other supplies. It must still issue a VAT invoice to any VAT registered customer who requests one. It is a requirement of any scheme choice that HMRC must consider it fair and reasonable.
Examples of Retail Schemes
- Apportionment
- Direct calculation
- The point of sale scheme
There are special arrangements for caterers, retail pharmacists and florists.
Advantages
- No requirement to issue an invoice for each sale
- Most schemes are relatively simple to administer once set up. Technology assists in a helpful way with EPOS systems
- Simplifies record keeping
Disadvantages
- It is usual for each line sold to need to be coded correctly for VAT liability
- Smaller businesses without state of the art technology may be at a disadvantage
- Time and resources required to set up and maintain systems
- In some cases the calculation depends on staff “pressing the right button”
- Often complex calculations and record keeping
- Very precise and complicated rules
- Lack of understanding by a number of inspectors
- Complexity increases the risk of misdeclaration
Overall
As may be seen, there are a lot of choices for a business to consider, especially a start-up. Choosing a scheme which is inappropriate may result in VAT overpayment and a lot of unneeded record keeping and administration. There are real savings to be made by using a beneficial scheme, both in terms of VAT payable and staff time.
We are happy to review a business’ circumstances and calculate what schemes would produce the best outcome.
Please contact us if you require further information.
A VAT did you know?
Wigs for teddy bears are subject to duty, but in a recent Upper Tribunal case it was ruled that ‘realistic” hearts used for a Build-A-Bear toy are duty free.
New rules of origin for goods
Brexit update
HMRC has published updated, detailed guidance for the rules of origin for goods moving between the UK and EU.
It is important to understand the impact of the rules and how they impact a business. Specifically, to ensure advantage is taken of zero tariffs when dealing with cross-border goods. The rules apply to both imports and exports and clearly, incurring unnecessary tariffs is to be avoided if possible.
Background
The UK moved to trading based on a new Free Trade Agreement (FTA) – the Trade and Cooperation Agreement (TCA) between the UK and the EU post-Brexit.
To export tariff-free under the TCA, goods must meet the UK-EU preferential rules of origin. This means that there must be a qualifying level of processing in the country of export to access zero tariffs. This applies to EU origin goods imported and moving through the UK from a Member State to another EU Member State, as well as goods imported from the Rest of World.
These rules are set out in the TCA and determine the origin of goods based on where the products or materials (or inputs) used in their production come from. Their purpose is to ensure that preferential tariffs are only given to goods that originate in the UK or EU and not from third countries.
VAT: Is a car wash a car park? The RK Fuels Ltd case
Latest from the courts
More on car parking.
In the RK Fuels Ltd First Tier Tribunal (FTT) case, the issue was whether the lease of an area of the supplier’s petrol station to a business operating a car wash was an exempt right over land or whether it was excluded from the exemption because it was a car park (the ‘grant of facilities for parking a vehicle’ VAT Act Schedule 9, Grp. 1, Item [1] [h]) and was therefore standard rated.
Background
Although the tenant operated a car wash (and not a car park) and this was a permitted use under the commercial use agreement, the car wash was located on land used as a car park.
The appellant contended that the car park was rented to carry out the business of car washing, and this is clearly stated in the lease agreement. It is not rented as a car park to park cars. Furthermore, a VAT inspection was carried out by HMRC and the point about the rental income being exempt was raised and accepted by HMRC.
HMRC relied on, inter alia, the fact that the relevant part of the lease stated that “the landlord agrees to rent to the tenant the car park. The car park will be used for only the following permitted use (the Permitted use): as a car wash business. Neither the car park nor any part of the premises will be used at any time during the terms of this lease by the tenant for any purpose other than the permitted use.” And the fact that the appellant was permitted an alternative use of the car park to run a car wash does not cause the area to cease to be a car park, nor does it mean that it cannot be used as a car park. There is a need for cars to be parked on the land whilst waiting to be washed, dried, and cleaned. Without the ability to park a car on the land, the permitted use could not occur.
Decision
The appeal was dismissed. The judge found that a grant of facilities for parking vehicles was made, either expressly or by necessary implication and so was standard rated. Further, the occupation of the car park under the terms of the lease agreement is a means to enable the car wash facility to operate. The site for parking is any place where a motor vehicle may be parked. It was also found that the fact that a person may not leave a vehicle does not render a vehicle any less parked.
The fact that the land was referred to as a “car park” consistently throughout the lease agreement was always going to be a problem for the appellant.
The court went on to consider whether a licence over land had been granted. It is a long-standing principle that a central characteristic of a licence over land is the right to exclude others. As the tenant had no right to exclude others from the relevant land (because, as an example given; customers of the petrol station could park there to visit the shop) there was no exempt supply of the right over land.
Commentary
There were other subsidiary issues, namely on whether an option to tax had been made but this was redundant considering the court’s decision on the substantive point. The decision was unsurprising even considering the guidance set out in VAT Notice 742 para 4.3:
“When a supply is of land rather than parking facilities
If you grant an interest in, or right over or licence to occupy land in the following circumstances, your supply will be exempted, unless you have opted to tax…
· letting of land or buildings where any reference to parking a vehicle is incidental to the main use..”
Even if the argument could be made that the parking was incidental, as the decision was that there was not an interest in, or right over or licence to occupy land the ancillary use point fell away.
Another nail in the coffin of the appeal was that the court found that the decision in the Fareham Borough Council [2014] TC04129 (which found that the right to operate was not an exempt right over land) applied in this case.
Care should be taken when analysing the VAT treatment of a lease. It is tempting to consider that if there is a lease, and it is of land, it is sufficient to merit exemption, but this case demonstrates that further consideration must always be given.
VAT: Car parking provided by a hospital – Exempt? Non-Business? Taxable?
Latest from the courts
In the Northumbria Healthcare NHS Foundation Trust (The Trust) First Tier (FT) case the issue was whether pay and display car park charges were subject to VAT considering the status and activities of the Trust.
Background
The Trust provided parking for staff and visitors at the 14 sites for which it was responsible. The question was whether output tax was due on the parking charges. The Trust submitted a claim for overpaid VAT considering that either:
- there was no economic activity, or, if there was,
- there was a “special legal regime” which meant that tax was not due because The Trust was not a taxable person, or
- the parking charges were closely related to the Trust’s exempt activity (medical care) such that they themselves were exempt
HMRC rejected the claim on the grounds that car parking is a standard rated supply and The Trust appealed against this decision.
It was agreed that The Trust, in carrying out its statutory activities (NHS medical services) is not in business (no economic activity) and therefore the services were outside the scope of VAT. Some private medical services were also supplied, and it was common ground that these were exempt.
Decision
The court found that:
- the Trust made supplies for a consideration for the purposes of obtaining income on a continuing basis so there was economic activity
- the Trust did not provide car parking under a “special legal regime” as a public authority; there is no concept of special legal regime in the relevant legislation
- the treatment of The Trust as a non-taxable person re; car parking would lead to significant distortion of competition
- supplies of car parking were not closely related to medical care. The service must be an indispensable stage and integral in the supply of medical services, ie; the diagnosis, treatment and cure of diseases or health disorders
- the supply of car parking was consequently a taxable business activity carried out by a taxable person, was not exempt, so output tax was properly due.
Commentary
We are aware of a number of cases stayed behind this appeal and there will be disappointment, but little surprise (I suspect) at the outcome. Car parking is a significant source of income for hospitals, medical centres and clinics etc, but this case made it clear that there is no difference in VAT terms between hospital parking and other commercial car parks.
VAT: Postponed Accounting available for Section 33 bodies
HMRC has announced that bodies covered by The VAT Act 1994, Section 33 such as; Local Authorities, Academies, Transport Authorities and the Police can use Postponed Accounting for imports.
Normally, a body cannot account for import VAT on its VAT return if it import goods that it knows will be used solely for non-business purposes. However, this no longer applies to a body that is eligible to reclaim import VAT through a VAT refund scheme (Section 33). Section 33 entities when completing its customs declaration, should select the “making an immediate payment or using a duty deferment account” option.
Section 33 bodies
These entities have special VAT treatment which is effectively the opposite of normal VAT rules. To avoid a cost to the taxpayer, these entities are permitted to specifically recover input tax that relates to non-business activities. Nobody said that VAT was straightforward and in these cases, the VAT rules are inverted!
We act for many Local Authorities and Academies. Please contact us should you, or your clients, have any queries on this matter.
VAT: Treatment of transactions involving cryptoassets. New guidance
Further to my articles on cryptoassets and Bitcoin HMRC have published an updated Cryptoassets Manual CRYPTO40000 which sets out its interpretation of trading in cryptocurrencies.
It covers:
- economic activity
- supplies of tokens
- exchanges
- exemption
- value
- case law
- betting and gaming
- other taxes; CGT, CT, CTCG, Income Tax, NIC and Stamp Taxes
Any business dealing in any way with cryptoassets needs to understand the VAT and other tax implications of services to, and by it.
VAT – Top 10 Tax Point Planning Tips
VAT Tax Point Planning
If a business cannot avoid paying VAT to the HMRC, the next best thing is to defer payment as long as legitimately possible. There are a number of ways this may be done, dependent upon a business’ circumstances, but the following general points are worth considering for any VAT registered entity.
A tax point (time of supply) is the time a supply is “crystallised” and the VAT becomes due to HMRC and dictates the VAT return period in which VAT must be accounted for. Very broadly, this is the earliest of; invoice date, receipt of payment, goods transferred or services completed (although there are quite a few fiddly bits to these basic rules as set out in the link above).
The aims of tax point planning
1. Deferring a supplier’s tax point where possible. It is sometimes possible to avoid one of these events or defer a tax point by the careful timing of the issue of a tax invoice.
2. Timing of a tax point to benefit both parties to a transaction wherever possible. Because businesses have different VAT “staggers” (their VAT quarter dates may not be the co-terminus) judicious timing may mean that the recipient business is able to recover input tax before the supplier needs to account for output tax. This is often important in large or one-off transactions, eg; a property sale.
3. Applying the cash accounting scheme. Output tax is usually due on invoice date, but under the cash accounting scheme VAT is only due when a payment is received. Not only does this mean that a cash accounting business may delay paying over VAT, but there is also built in VAT bad debt relief. A business may use cash accounting if its estimated VAT taxable turnover during the next tax year is not more than £1.35 million.
4. Using specific documentation to avoid creating tax points for certain supplies. If a business supplies ongoing services (called continuous services – where there is no identifiable completion of those services) if the issue of a tax invoice is avoided, VAT will only be due when payment is received (or the service finally ends). More details here.
5. Correctly identifying the nature of a supply to benefit from certain tax point rules. There are special tax point rules for specific types of supplies of goods and services. Correctly recognising these rules may benefit a business, or present an opportunity for VAT planning.
6. Generate output tax as early as possible in a VAT period, and incur input tax as late as possible. This will give a business use of VAT money for up to four months before it needs to be paid over, and of course, the earlier a claim for repayment of input tax can be made – the better for cashflow.
7. Planning for VAT rate changes. Rate changes are usually announced in advance of the change taking place. There are specific rules concerning what cannot be done, but there are options to consider when VAT rates go up or down.
8. Ensure that a business does not incur penalties for errors by applying the tax point rules correctly. Right tax, right time; the best VAT motto! Avoiding penalties for declaring VAT late is obviously a saving.
9. Certain deposits create tax points, while other types of deposit do not. It is important to recognise the different types of deposits and whether a tax point has been triggered by receipt of one. Also VAT planning may be available to avoid a tax point being created, or deferring one.
10. And finally, use duty deferment for imports. As the name suggests, this defers duty and VAT to avoid it having to be paid up front at the time of import.
Always consider discussing VAT timing planning for your specific circumstances with your adviser. It should always be remembered that it is usually not possible to apply retrospective VAT planning as VAT is time sensitive, and never more so than tax point planning.
I have advised a lot of clients on how to structure their systems to create the best VAT tax point position. Any business may benefit, but I’ve found that those with the most to gain are; professional firms, building contractors, tour operators, hotels, hirers of goods and IT/internet businesses.