Tag Archives: output-tax

VAT – Understanding land and property issues

By   8 July 2024
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Help!

Supplies relating to property may be, or have been; 20%, 17.5%, 15.%, 10% 5%, zero-rated, exempt, or outside the scope of VAT – all impacting, in different ways, upon the VAT position of a supplier and customer. In addition, the law permits certain exempt supplies to be changed to 20% without the agreement of the customer. As soon as a taxpayer is provided with a choice, there is a chance of making the wrong one! Even very slight differences in circumstances may result in a different and potentially unexpected VAT outcome, and it is an unfortunate fact of business life that VAT cannot be ignored.

Why is VAT important?

The fact that the rules are complex, ever-changing, and the amounts involved in property transactions are usually high means that there is an increased risk of making errors. This is increased by the fact that these are often one-off transactions by a business, and in-house, in depth tax knowledge is sometimes absent. Such activities can result in large penalties and interest payments, plus unwanted attentions from VAT inspectors. Uncertainty regarding VAT may affect budgets and an unforeseen VAT bill (and additional SDLT) may risk the profitability of a venture.

Problem areas

Certain transactions tend to create more VAT issues than others. These include;

  • whether a property sale can qualify as a VAT free Transfer Of a Going Concern (TOGC)
  • conversions of properties from commercial to residential use
  • whether to opt to tax (OTT) a commercial property
  • the recovery of VAT charged on a property purchase
  • supplies between landlord and tenants
  • the Capital Goods Scheme (CGS)
  • the anti-avoidance rules
  • mixed developments
  • apportionment of VAT rates
  • changes in number of dwellings in a building(s)
  • changes in intention of use of a building
  • sale of partially completed developments
  • partial exemption
  • charity use
  • non-business use
  • relevant residential use
  • the place of supply (POS) of services
  • holiday lets
  • serviced apartments
  • contracts
  • new build residential
  • DIY Housebuilders
  • tax points (time of supply)
  • HMRC queries
  • deposits
  • and even seemingly straightforward: VAT registration

Additionally, the VAT treatment of building services throws up its own set of VAT complications.

The above are just examples and the list is not exhaustive.

VAT Planning

The usual adage is “right tax, right time”. This, more often than not, means considering the VAT treatment of a transaction well in advance of that transaction taking place. Unfortunately, with VAT there is usually very little planning that can be done after the event. For peace of mind a consultation with a VAT adviser can steer you through the complexities and, if there are issues, to minimise the impact of VAT on a project. Assistance of a VAT adviser is usually crucial if there are any disputes with VAT inspectors. Experience insists that this is an area which HMRC have raised significant revenue from penalties and interest where taxpayers get it wrong.

Don’t leave it to chance!

For more information, please see our Land & Property services

A VAT: Did you know?

By   25 June 2024
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In the current election the Liberal Democrats’ manifesto stated that they would apply zero-rating to children’s toothbrushes and toothpaste. Whether this impacts the money left by the tooth fairy remains to be seen…

VAT: What is an exempt supply, and what does it mean?

By   17 June 2024
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VAT Basics

Exemption generally

Some services are exempt from VAT. If all the services a business provides are exempt, it will not be able to register for VAT, which means it cannot reclaim any input tax incurred on its purchases or expenses.

If a business is VAT registered it may make both taxable and exempt supplies (it will need to make at least some taxable supplies to be registered). Such a business is classed as partly exempt and it may be able to recover some input tax, but usually not all (Please see de minimis below).

Types of supply which may be exempt

Examples are:

The above list is not exhaustive.

* Most businesses which do not routinely make exempt supplies usually encounter exemption in the area of land and property and it is an easy trap to fall into not to consider VAT when involved in property transactions. This is one area where VAT planning may be of assistance as it is possible in most situations to deliberately choose to add VAT to an exempt supply to avoid a loss of input tax.  This is known as the option to tax, and it is considered in more detail here.

The legislation covering exemption is found at The VAT Act 1994, Schedule 9. 

What does exemption mean?

 An entity only making exempt supplies cannot register for VAT and consequently has no VAT responsibilities or obligations. While this may seem attractive, exemption is often a burden rather than a relief. This is because any VAT it incurs on any expenditure is irrecoverable and represents an additional cost.  This often affects charities, although there are some limited reliefs.

Exempt supplies are completely different to non-business activities, although the VAT outcome is often similar.

 Partial exemption de-minimis

A partly exempt business cannot usually recover all of the input tax it incurs. However, there is a relief called de minimis. Broadly, if VAT bearing expenditure is below certain limits in may be recovered in full. These are provisional calculations and are subject to a Partial Exemption Annual Adjustment.

Further information on terms used in partial exemption here.

VAT: Education – what, precisely, is exempt?

By   17 June 2024
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In my experience, there is a general assumption that all “education’ is exempt. It is true to say that a lot of education and tuition is indeed exempt, but that is not automatically the case. It is important to establish the reason for the application of non-taxable treatment. The VAT treatment depends on; what is actually being provided, who is providing it and the precise arrangements. I consider the more common issues below.

The legislation covering education is VAT Act 1994, Schedule 9, Group 6.

What does the term education mean?

It means a course, class or lesson of instruction or study in a subject. This includes:

  • lectures
  • educational seminars
  • conferences and symposia
  • recreational and sporting courses
  • distance teaching and associated materials

Schools etc

The first type of education exemption is relatively clear: It is the provision of education by an eligible body. An eligible body is, broadly; a school, college, or university (supplies by Local Authority schools, city technology colleges, sixth form colleges, academies and free schools – where education is provided for no charge, are non-business activities rather than exempt, and have their own set of rules). More on academies here

It is also worth noting that any ‘closely related” goods or services provided with exempt education are themselves exempt. This may cover items such as; certain stationery, accommodation, transport and catering.

There is usually very little disagreement about the VAT treatment of these entities.

Charities/ non-profit making organisations

If a charity/NFP entity is an eligible body supplies of education and vocational training (see below) by it are exempt. Such an organisation is likely to be an eligible body, where it’s a charity, professional body or company which:

  • cannot and does not distribute any profit it makes, and
  • any profit that does arise from its supplies of education is used solely for the continuation or improvement of such supplies.

There can be disputes over the term “does not distribute any profit” so care should be taken in this respect and advice sought if there is any doubt.

Tuition

Exemption applies to the supply of “private tuition, in a subject ordinarily taught in a school or university, by an individual teacher acting independently of an employer” – VAT Act 1994 Schedule 9, Group 6, item 2.

Taking each of these tests in turn:

  • What is “private tuition?

In order to qualify, the provider of tuition must act independently and not be an employee. Practically, this means that the person providing the tuition must either be a sole proprietor, a partner in a partnership, or a member of a Limited Liability partnership (LLP). Consequently, exemption does not apply if the teaching is carried out by a company or an employee. This is a matter of fact, however, it is possible to structure matters such that the exemption applies if it does not currently (and the restructure is possible commercially).

  • What does “ordinarily taught” in schools/universities mean?

This is often a moot issue and the significant amount of case law highlights this. Most of the mainstream subjects are covered of course, but what about subjects like; golf, horse riding and dance? Would they be ordinarily taught in schools? (The answer according to case law is; yes). However, there are many other subjects which are debatable and HMRC usually take an uncompromising line on this area, especially around sporting activities. If there is any doubt, we recommend seeking advice.

  • What does tuition mean?

Clearly, if a person teaches or coaches a subject to an individual or group, then this qualifies as tuition. However, a distinction must be made between this and a recreational type of activity which may be called a “class”, but no actual tuition is provided. Exemption does not apply, for example, for the simple provision of gymnasium or swimming pool facilities, or a yoga class where no coaching takes place (however, it is possible that these may be exempt under different parts of the legislation, but that is not the subject of this article).

Vocational training

Vocational training means training or re-training and work experience for paid employment or voluntary employment in areas beneficial to the community.

If vocational training is provided for a charge the VAT consequences are either:

  • for an eligible body (see above) vocational training is exempt
  • for a non-eligible body vocational training is still exempt to the extent that it is funded under an approved government funding scheme. Otherwise the supply is taxable.

English as a Foreign Language (EFL)

If a commercial entity makes supplies of tuition of EFL they will qualify for exemption. In these cases, tuition includes all elements that are integral to the course, held out for sale as such, and are the means by which it is intended to promote fluency in the use of the English language.

General

In respect of all of the above, if exemption does not apply the supply of education falls to be taxable as a default.

For completeness, exemption may also apply to; research, examination services, youth clubs, day nurseries, crèches and playgroups but these activities are outside the scope of this article.

Summary

There are many traps for the unwary here. Planning is always advisable and I recommend that any entity which provides education is conscious of the VAT implications and seeks advice where/when necessary.

VAT: More on separate and single supplies. The KFC dip pot case

By   10 June 2024
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Latest from the courts

In the First-Tier tribunal case of Queenscourt Limited the issue was whether dip pots supplied as part of a takeaway meal deal are a separate zero-rated supply (of cold food) or whether they are part of a single VATable supply of hot food.

Background

The appellant had originally accounted for output tax on the basis that dip pots formed part of a single standard rated supply with other food. However, following advice, it then formed the view that zero-rating applied to these pots and submitted a claim for overpaid output tax. HMRC agreed to repay the VAT claimed.

Subsequently, a further claim as made on a similar basis for a later period. This was considered by a different officer who refused to make the repayment on the basis that there was no separate supply of the dip pots. This called into question whether the payment of the initial claim was correct. The officer considered the previous repayment to have been incorrect and issued assessments in order to recover the amount which had been repaid.

Queenscourt now appealed both against the decision to refuse the repayment claimed in the second error correction notice and also against the recovery assessment relating to the first error correction notice.  Moreover, the recovery assessments are invalid as there has been no change in circumstances and no new facts have come to light since HMRC agreed to repay the tax. Alternatively, it argues that HMRC are prevented from recovering the tax, either on the basis of legitimate expectation or estoppel by convention, in each case arising as a result of HMRC’s original agreement that that tax should be repaid.

Decision

The appeal was dismissed.

  • On the dip point issue, the FTT stated that it was unlikely the dip would be eaten on its own, or as an end in itself, unlike the coleslaw or cookie elements – It is a means of better enjoying the hot food. Consequently, it is an element of a standard rated single composite supply of hot takeaway food.
  • Legitimate expectation – Whilst the Tribunal did have jurisdiction to consider arguments based on legitimate expectation in the context of an appeal against a recovery assessment, it is not in this case sufficiently unfair for HMRC to resile from their initial acceptance of the claim made in the first error correction notice and to apply the correct tax treatment.
  • Estoppel – HMRC is not estopped from making or relying on their recovery assessments as there has been no detrimental reliance on the original position taken by HMRC in connection with any subsequent mutual dealings.

Commentary

It is difficult to see the end of single/multiple supply cases, as my previous articles consider:

Here, here, here, here, and how to categorise a supply here.

A VAT: Did you know?

By   24 May 2024
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Banana and strawberry flavoured Nesquik drinks are standard rated, but chocolate flavoured Nesquik is zero rated.

VAT tertiary legislation – HMRC’s new guidance

By   13 May 2024
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HMRC has published new a guide to all information about VAT that has ‘force of law’.

The manual contains all the tertiary legislation for VAT which HMRC has published – all in one place. Primary and secondary legislation is published on Legislation.gov.uk.

What is tertiary legislation?

Within primary and secondary legislation, government departments are sometimes granted the power to publish additional legally binding conditions or directions on a given topic. This information is known as ‘tertiary legislation’.

Tertiary legislation carries ‘force of law’. This means it has the same legal status as primary and secondary legislation. HMRC has an obligation to publish this information in accordance with the law.

The guidance covers:

(with links to the relevant legislation)

 

 

VAT treatment of voluntary carbon credits – soon to be taxable

By   10 May 2024
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HMRC has published Revenue and Customs Brief 7 (2024) which explains:

  • the VAT treatment of voluntary carbon credits from 1 September 2024
  • the voluntary carbon credits that will be in the scope of the Terminal Markets Order

This is not yet fully comprehensive guidance, but does at least provide certainty in some areas.

A carbon credit is a tradable instrument issued by an independently verified carbon-crediting programme. It represents a reduction or removal of one metric tonne of carbon dioxide, or an equivalent amount of greenhouse gases from the atmosphere. Voluntary carbon credits are any carbon credits that are not compliance market credits.

Voluntary carbon credits are currently treated as outside the scope of UK VAT. This is because when they were first introduced, HMRC’s view was that they could not be incorporated into an onward supply and there was no evidence of a secondary market.

HMRC recognise that there have been significant changes in the voluntary carbon credit market, including the emergence of secondary market trading and businesses incorporating voluntary carbon credits into their onward supplies. Because of this, from 1 September 2024, the sale of these carbon credits must be treated as taxable for VAT where the place of supply is in the UK.

VAT: Are cosmetic skin treatments exempt medical care? The Skin Science case

By   8 May 2024
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Latest from the courts

In the First Tier Tribunal (FTT) case of Gillian Graham T/A Skin Science the issue was whether certain cosmetic skin treatments were exempt via The VAT Act 1994, Schedule 9, Group 7, item 1 which covers services for the primary purpose of protecting, restoring or maintaining health: “medical care”                                                                  

Were the services provided by Skin Science (SS) medical care?

Background

SS ran a clinic at 10 Harley Street, London and Ms Graham was a Registered General Nurse (RGN).

As an RGN the Appellant must submit revalidation every three years to the Nursing & Midwifery Council. The revalidation process requires her to demonstrate evidence of the scope of her professional practice including; evidence of hours worked, case studies, discussions with other medical professionals to obtain feedback and attending training courses. The Appellant’s realm of practice is disorders of the skin.

Patients generally attend the Appellant’s clinic by choice and are not referred to the Appellant by a doctor or psychologist. Some clients might see the Appellant following referrals from beauticians who may be unable to carry out treatments for certain conditions.

The treatments that the Appellant provides to her patients are not generally part of a treatment plan which involves other health professionals. SS could not confirm whether psychiatrists, psychological professionals or doctors would prescribe fillers or toxin for the conditions that she diagnoses.

A range of treatments were provided, including:

  • Restylane
  • Pix Cannula
  • Teosyal light filling
  • Muscle relaxing injections
  • Dermal roller
  • Glycolic Acid Peel
  • TCA Peel
  • Botox
  • Belotero Volume
  • Dermal fillers
  • Face lift by injection
  • Hollywood Eye Magic Serum
  • Belotero injections

SS provided a description of each treatment to the Tribunal.

The appellant also prescribed medicines such as; Lidocaine, Botulinum, Scleremo, Zinerate and Tretinoin.

Contentions

SS argued that the supplies of skin care treatments are exempt from VAT as they are supplies of medical care. She diagnoses recognised medical conditions, provides treatment to address those conditions and is fully qualified to do so. As all of her treatments are aimed at treating or curing those recognised medical conditions, they inevitably have a therapeutic purpose. Although they may improve the appearance of the patients and in some cases be regarded as inherently cosmetic, this is consequential as the primary purpose is to address an underlying medical condition whether physical or psychological or both. Moreover, purpose should be determined by a medical professional and not by HMRC.

HMRC contended that these supplies were standard rated (causing SS to become VAT registered) as they did not have the primary purpose of protecting, restoring or maintaining health as they were overwhelmingly cosmetic and so do not satisfy the requirements of the exemption.

Decision

It was noted that the concept of the “provision of medical care” does not include medical interventions carried out for a purpose other than that of diagnosing, treating and in so far as possible, curing diseases or health disorders and it is the purpose of the medical intervention rather than merely the qualifications of the person providing it that is key.

Health problems may be psychological, they are not limited to physical problems. Where treatment is for purely cosmetic reasons it cannot be within the exemption. Where, however, the purpose of the treatment is to treat or provide care for persons who as a result of illness, injury or a congenital physical impairment are in need of plastic surgery or other cosmetic treatment then this may fall within the concept of medical care.

The Appellant is not a psychological professional under Item 1(c) of Group 7 (health professionals) or a psychiatrist under Item 1(a) (medical practitioners), so the focus must be on what is within the scope of an RGN’s profession. The judge found that the Appellant had not proven her case that diagnosing and treating conditions which are psychological is within the scope of her profession as an RGN.

The decision was that the treatments were not for the primary purpose of protecting, restoring or maintaining health and so not “medical care” and consequently the appeal was dismissed.

A parallel outcome to a similar case in the Skin Clinics Ltd case. Other cases on medical exemption here, here and here.

Commentary

There has been an ongoing debate as to what constitutes medical care. Over 20 years ago I was advising a large London clinic on this very point and much turned on whether patients’ mental health was improved by undergoing what many would regard as cosmetic procedures. We were somewhat handicapped in our arguments by the fact that many of the patients were lap dancers undergoing breast augmentation on the direction of the owner of the club…

It is crucial to apply the above tests to any medical services to determine whether they come within the exemption.

It is worth remembering that not all services provided by a medically registered practitioner are exempt. The question of whether the medical care exemption is engaged in any given case will turn on the particular facts.

VAT – Charity Fundraising Exemption

By   2 May 2024
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Avoid adding VAT to fundraising income

There are very few VAT reliefs for charities (and it may be argued that an exemption is more than a burden than a relief) but there is an exemption for a charity which qualifies as undertaking a one-off fundraising event. The criteria are quite restrictive, and it is important that the correct treatment is applied. Furthermore, it may be in a charity’s interest to avoid the exemption if there is a lot of input tax attributable to the event, say; venue hire, entertainment, catering etc.

A qualifying event means that a charity (or its trading subsidiary) does not charge VAT on money paid for admittance to that event.

What is covered?

In order to be exempt, the event must be a one-off fundraising event which is “any event organised and promoted primarily to raise funds (monetary or otherwise) for a charity”. Consequently, we always advise clients to make it clear on tickets and advertising material (including online) that the event is for raiding funds and to use a statement; “all profits will be used to support the charitable aims of XYZ” or similar.

HMRC say that an event is an incident with an outcome or a result. This means that activities of a semi-regular or continuous nature, such as the operation of a shop or bar, cannot therefore be an event.

The following are examples of the kind of event which qualify:

  • ball, dinner dance, disco or barn dance
  • performance – concert, stage production and any other event which has a paying audience
  • showing of a film
  • fete, fair or festival
  • horticultural show
  • exhibition: art, history or science
  • bazaar, jumble sale, car boot sale, or good-as-new sale
  • sporting participation (including spectators): sponsored walk or swim
  • sporting performance
  • game of skill, contest or a quiz
  • participation in an endurance event
  • fireworks display
  • dinner, lunch or barbecue
  • an auction of bought in goods

Tip

Often there may be an auction of donated goods at a fundraising event. There is a specific and helpful relief for such sales. The sale of donated goods is zero rated which means any attributable input tax is recoverable. Consequently, if both exempt and zero rated supplies are made it is possible to apportion input tax to a charity’s benefit. Zero rating may also apply to sales such as: food (not catering) printed matter and children’s clothing

Limit to the number of events held

Eligible events are restricted to 15 events of the same kind in a charity’s financial year at any one location. The restriction prevents distortion of competition with other suppliers of similar events which do not benefit from the exemption. If a charity holds 16 or more events of the same kind at the same location during its financial year none of the events will qualify for exemption. However, the 15-event limit does not apply to fundraising events where the gross takings from all similar events, such as coffee mornings, are no more than £1,000 per week.

Clearly, the number of events needs to be monitored and planning will therefore be available should exemption be desired (or avoided as the relevant figures dictate).

What is a charity?

This seems to be a straightforward question in most cases, but can cause difficulties, so it is worthwhile looking at the VAT rules here.

Bodies have charitable status when they are:

  • registered, excepted or exempted from registration with the Charity Commission in England and Wales
  • registered by the Office of the Scottish Charity Regulator (OSCR) in Scotland
  • invited to register by The Charity Commission for Northern Ireland which are treated by HMRC as charitable.

Not all non-profit making organisations are charities. The term ‘charity’ has no precise definition in any law. Its scope has been determined by case law. It is therefore necessary to establish whether an organisation is a charity using the following guidelines:

  • charities are non-profit distributing bodies established to advance education, advance religion, relieve poverty, sickness or infirmity or carry out certain other activities beneficial to the community
  • in England and Wales charities must normally register with Charity Commission- some very small charities don’t need to register with Charity Commission, there are also some other special cases where particular bodies do not need to register, if there is uncertainty regarding a position see the Charity Commission website
  • in Scotland all charities must be registered with the OSCR – HMRC decides whether bodies in Northern Ireland are eligible.

Trading arm

It is worth noting that HMRC also accept that a body corporate which is wholly owned by a charity and whose profits are payable to a charity, will qualify and may therefore may apply the VAT exemption to fundraising events. This means that a charity’s own trading company can hold exempt fundraising events on behalf of the charity.

Further/alternative planning

If sales are not exempt as a fundraising event, there is a way to avoid VAT being chargeable on all income received. It is open to a charity to set a basic minimum charge which will be standard rated, and to invite those attending the event to supplement this with a voluntary donation.

The extra contributions will be outside the scope of VAT (not exempt) if all the following conditions are met:

  • it is clearly stated on all publicity material, including tickets, that anyone paying only the minimum charge will be admitted without further payment
  • the extra payment does not give any particular benefit (for example, admission to a better position in the stadium or auditorium)
  • the extent of further contributions is ultimately left to ticket holders to decide, even if the organiser indicates a desired level of donation
  • for film or theatre performances, concerts, sporting fixtures etc, the minimum charge is not less than the usual price of the particular seats at a normal commercial event of the same type
  • for dances, and similar functions, the minimum total sum upon which the organisers are liable to account for VAT is not less than their total costs incurred in arranging the event

It should be noted that any other donations collected at an event are also outside the scope of VAT.

Partial exemption

A charity must recognise the impact of making exempt supplies (as well as carrying out non-business activity). These undertakings will have an impact on the amount of input tax a charity is able to recover. Details here

Summary

We find that charities are often confused about the rules and consequently fail to take advantage of the VAT position. This also extends to school academies which are all charities. It is usually worthwhile for charities to carry out a VAT review of its activities as quite often VAT savings can be identified.