HMRC have released a recorded webinar about VAT on private school fees — what you need to do, and when and how to register.
It covers:
The subject of invoices is often misunderstood and can create serious issues if mistakes are made. VAT is a transaction tax, so primary evidence of the transaction is of utmost importance. Also, a claim for input tax is usually not valid unless it is supported by an original valid invoice. HMRC can, and often do, reject input claims because of an inaccurate invoice. There are a lot of misconceptions about invoices, so, although a rather dry subject, it is very important and I thought it would be useful to have all the information in one place, so here is my guide:
Obligation to provide a VAT invoice
With certain exceptions, a VAT registered person must provide the customer with an invoice showing specified particulars when there is a supply of goods or services in the UK (other than an exempt supply) to a taxable person.
Exceptions
The above does not apply to the following supplies.
• Zero-rated supplies
• Supplies where the VAT charged is excluded from credit under VATA 1994, s 25(7) eg; business entertaining and certain motor cars although a VAT invoice may be issued in such cases.
• Supplies on which VAT is charged but which are not made for a consideration. This includes gifts and private use of goods.
• Sales of second-hand goods under one of the special schemes – any invoices for such sales must not show any VAT.
• Supplies that fall within the Tour Operators’ Margin Scheme (TOMS). VAT invoices must not be issued for such supplies.
• Supplies where the customer operates a self-billing arrangement.
• Supplies by retailers unless the customer requests a VAT invoice.
• Supplies by one member to another in the same VAT group.
• Transactions between one division and another of a company registered in the names of its divisions.
• Supplies where the taxable person is entitled to issue, and does issue, invoices relating to services performed in fiscal and other warehousing regimes.
Documents treated as VAT invoices
Although not strictly VAT invoices, certain documents listed below are treated as VAT invoices either under the legislation or by HMRC.
(1) Self-billing invoices
Self-billing is an arrangement between a supplier and a customer in which the customer prepares the supplier’s invoice and forwards it to him, normally with the payment.
(2) Sales by auctioneer, bailiff, etc.
Where goods (including land) forming part of the assets of a business carried on by a taxable person are, under any power exercisable by another person, sold by that person in or towards satisfaction of a debt owed by the taxable person, the goods are deemed to be supplied by the taxable person in the course or furtherance of his business.
The particulars of the VAT chargeable on the supply must be provided on a sale by auction by the auctioneer and where the sale is otherwise than by auction by the person selling the goods. The document issued to the buyer is treated as a VAT invoice.
(3) Authenticated receipts in the construction industry.
(4) Business gifts
Where a business makes a gift of goods on which VAT is due, and the recipient uses the goods for business purposes, that person can recover the VAT as input tax (subject to the normal rules). The donor cannot issue a VAT invoice (because there is no consideration) but instead may provide the recipient with a ‘tax certificate’ which can be used as evidence to support a deduction of input tax. The tax certificate may be on normal invoicing documentation overwritten with the statement:
“Tax certificate – No payment is necessary for these goods. Output tax has been accounted for on the supply.”
Full details of the goods must be shown on the documentation and the amount of VAT shown must be the amount of output tax accounted for to HMRC.
Invoicing requirements and particulars
A VAT invoice must contain certain basic information and show the following particulars:
(a) A sequential number based on one or more series which uniquely identifies the document.
The ‘invoice number’ can be numerical, or it can be a combination of numbers and letters, as long as it forms part of a unique and sequential series.
(b) The time of the supply, ie tax point.
(c) The date of issue of the document.
(d) The name, address and registration number of the supplier.
(e) The name and address of the person to whom the goods or services are supplied.
(f) A description sufficient to identify the goods or services supplied.
(g) For each description, the quantity of the goods or extent of the services, the rate of VAT and amount payable, excluding VAT, expressed in any currency.
(h) The unit price.
This applies to ‘countable’ goods and services. For services, the countable element might be, for example, an hourly rate or a price paid for standard services. If the supply cannot be broken down into countable elements, the total VAT-exclusive price is the unit price.
(i) The gross amount payable, excluding VAT, expressed in any currency.
(j) The rate of any cash discount offered.
(k) The total amount of VAT chargeable expressed in sterling.
(l) Where the margin scheme for second-hand goods or TOMS is applied, either a reference to the appropriate provision of The VAT Act 1994 or any indication that the margin scheme has been applied.
The way in which margin scheme treatment is referenced on an invoice is a matter for the business and but we recommend:
• “This is a second-hand margin scheme supply.”
• “This supply falls under the Value Added Tax (Tour Operators) Order 1987.”
The requirement only applies to TOMS invoices in business to business transactions.
(m) Where a VAT invoice relates in whole or in part to a supply where the person supplied is liable to pay the VAT, a reference to the appropriate provision of The VAT Act 1994 or any indication that the supply is one where the customer is liable to pay the VAT.
This covers UK supplies where the customer accounts for the VAT (eg under the gold scheme or any reverse charge requirement under the missing trader intra-community rules). The way in which margin scheme treatment is referenced on an invoice is a matter for the business and we recommend: “This supply is subject to the reverse charge”.
Exempt or zero-rated supplies
Invoices do not have to be raised for exempt or zero-rated transactions when supplied in the UK. But if such supplies are included on invoices with taxable supplies, the exempt and zero-rated supplies must be totalled separately and the invoice must show clearly that there is no VAT payable on them.
Leasing of motor cars
Where an invoice relates wholly or partly to the letting on hire of a motor car other than for self-drive, the invoice must state whether the car is a qualifying vehicle
Alternative evidence to support a claim for input tax
In certain situations HMRC can use its discretion and allow an input tax with documentary evidence other than an invoice. Guidance here.
Electronic invoices
Full information on electronic invoicing here.
Retailers
Retailers may issue a “less detailed tax invoice” if a customer requests one. the supply must be for £250 or less (including VAT) and must show:
Summary
As may be seen, it is a matter of law whether an invoice is valid and when they must be issued. Therefore it is important for a business to understand the position and for its system to be able to produce a valid tax invoice and to recognise what is required to claim input tax. As always with VAT, there are penalties for getting documentation wrong.
Blocked VAT claims – an overview
In most cases this evidence will be an invoice (or as the rules state “a proper tax invoice”) although it may be import, self-billing or other documentation in specific circumstances. A claim is invalid without the correct paperwork. HMRC mayaccept alternative evidence, however, they are not duty bound to do so (and rarely do unless the amount is minimal). So ensure that you always obtain and retain the correct documentation.
Usually this is an invalid invoice, or using a delivery note/statement/pro forma in place of a proper tax invoice. To support a claim an invoice must show all the information set out in the legislation. HMRC are within their rights to disallow a claim if any of the details are missing.
Broadly speaking, if a business incurs VAT in respect of exempt supplies it cannot recover it. If a business makes only exempt supplies it cannot even register for VAT. There is a certain easement called de minimis which provide for recovery if the input tax is below certain prescribed limits. Input tax which relates to both exempt and taxable activities must be apportioned. More details of partial exemption may be found here.
If a charity or NFP entity incurs input tax in connection with non-business activities this cannot be recovered and there is no de minimis relief. Input tax which relates to both business and non-business activities must be apportioned. Business versus non-business apportionment must be carried out first and then any partial exemption calculation for the business element if appropriate. More details here
If input tax is not reclaimed within four years of it being incurred, the capping provisions apply and any claim will be rejected by HMRC.
This is always irrecoverable unless the client or customer being entertained belongs overseas. The input tax incurred on staff entertainment costs is however recoverable. A flowchart for recoverability in this area here.
In most cases the VAT incurred on the purchase of a car is blocked. The only exceptions are for when the car; is part of the stock in trade of a motor manufacturer or dealer, or is used primarily for the purposes of taxi hire; self-drive hire or driving instruction; or is used exclusively for a business purpose and is not made available for private use. This last category is notoriously difficult to prove to HMRC and the evidence to support this must be very good.
If a business leases a car for business purposes it will normally be unable to recover 50% of the VAT charged. The 50% block is to cover the private use of the car.
The element of fuel costs used for personal use is blocked. There are three ways to treat input tax on fuel:
For instance, a business using the Flat Rate Scheme cannot recover input tax except for certain large capital purchases, also there are certain blocks for recovery on for Tour Operators’ Margin Scheme (TOMS) users
Even if a business obtains an invoice purporting to show a VAT amount, this cannot be recovered if the VAT was charged in error; either completely inappropriately or at the wrong rate. A business’ recourse is with the supplier and not HMRC.
Even if a business has an invoice addressed to it and the services or goods are paid for by the business, the input tax on the purchase is blocked if the supply is not for that business’ use. This may be because the purchase is for personal use, or by another business or for purposes not related to the claimant business.
This is not input tax and therefore is not claimable. However, there are exceptions for goods on hand at registration and which were purchased within four years of registration, and services received within six months of registration if certain conditions are met.
Input tax incurred on certain articles that are installed in buildings which are sold or leased at the zero rate is blocked.
Goods sold to a business under one of the VAT second-hand schemes will not show a separate VAT charge and no input tax is recoverable on these goods.
Assets of a business transferred to you as a going concern are not deemed to be a supply for VAT purposes and consequently, there is no VAT chargeable and therefore no input tax to recover.
A business cannot reclaim VAT when it pays for goods or services to be supplied directly to its client. However, in this situation the VAT may be claimable by the client if they are VAT registered. For more on disbursements see here.
A business cannot reclaim VAT charged on goods or services that it has bought from suppliers in other EU States. Only UK VAT may be claimed on a UK VAT return. There is however, a mechanism available to claim this VAT back from the relevant authorities in those States. Details here. However, in most cases, supplies received from overseas suppliers are VAT free, so it is usually worth checking whether any VAT has been charged correctly.
There are special rules for reclaiming input tax using the Capital Goods Scheme, which means a business must spread the initial VAT claimed over a number of years.
HMRC has updated its guidance to businesses on VAT. The helpful instruction includes: email updates, videos and seminars which cover such subjects as:
VAT basics
Proforma invoices (proformas) are preliminary documents usually sent to buyers in advance of a delivery of goods/provision of services. Proformas will typically describe details of the purchase of goods/services and other important information, such as the terms of the transaction. Proformas are not “official” documents and represent an informal agreement. Usually, requesting a proforma represents a more serious interest on the part of a buyer than a quote – a buyer is generally committed to making a purchase but want to understand the details before proceeding with the approval process and making a binding agreement with the seller. They are therefore a useful business tool and use of them may result in a beneficial cashflow position for VAT (please see below).
Proforma translates from Latin as “for the sake of form”, and this provides an indication that the document is provisional or a step in a process.
It is also worth noting that the use of proformas is not mandatory.
The difference between an invoice and a proforma
Invoices (also called commercial invoices, VAT invoices or tax invoices) are distinct from proformas. They may contain similar information but serve different purposes. It is important to avoid confusing the two, since only invoices are legal documents; that is, they evidence a transaction and is the document on which VAT may be claimed. An invoice must contain certain information and there are specific legal obligations for providing them.
It is a matter of law whether an invoice is valid and when they must be issued. A proforma is not required to follow any set form, apart from the facts that they must not have an invoice number and must state that it is a proforma invoice. We also recommend that a proforma does not show the supplier’s VAT number for the avoidance of doubt.
Contents of a proforma
Proformas can be considered as “dummy invoices” and they are prepared by the seller usually to provide details of:
However, there are no set formats for proformas.
Use for buyer
The purpose of a proforma is to provide the buyer with an accurate and complete good faith estimate they can use to decide whether or not to go ahead with a transaction. It also avoids surprises when the actual tax invoice is issued.
VAT implications
The main distinctions are that, compared to a tax invoice, a proforma:
Very broadly, the tax point (time of supply) this is the earliest of; invoice date, receipt of payment, goods transferred or services completed. The tax point fact is helpful in tax planning for suppliers. Broadly, using proformas, requests for payment, or similar documents rather than issuing an invoice, defers a tax point and consequently when VAT is payable to HMRC. This is especially relevant to businesses which provide ongoing services (known as continuous supplies of services).
Please contact us if you require more information on the commercial use of proformas.
HMRC updated Notice 700 on 9 June 2023.
Changes
VAT MOSS references to credit notes for supplies of digital services, the annual accounting scheme, and monthly tax periods have been removed.
Updates also reflect the introduction of VAT late submission and late payment penalties, as well as the new interest regime in paragraphs 2.7, 19.9, 21.1, 21.2.1, 21.6, 27.1 and 28.
HMRC has, last week, set out the main reasons why online VAT registration applications submitted by agents are delayed. In such cases a caseworker is required to review the application and usually raise additional queries.
The “Top Five” reasons for delay
If an agent can avoid these, then the chances of a quick and successful registration is enhanced.
It is important to have all the business details available when completing the application. There can be difficulties when an application is started but set aside while more information is sought. There is only a seven-day limit once the process is underway.
This is the Principal Place of Business (PPOB) and should be where the day-to-day activities of the business take place. It is not the applicant’s residence (unless the business is run from home) or the agent’s address.
Bank details for VAT repayments must be:
If the entity is a partnership the account name may be in the name of a partner. If no UK account exists when the application is being made, this can be added later, but thus itself can cause issues.
These are cases where the applicant has chosen to provide identification documents by post. There is a facility to attach digital ID and this should be used wherever possible to avoid delays. Three items of ID are required: one a photo ID (passport or driving licence) and the other two non-photo documents (utility bills or birth certificates etc).
This is often when the business belongs overseas or does not yet have an Unique Taxpayer Reference (UTR). Again, it is preferrable to have all this information to hand before the process is started.
Information which an agent needs
Previously HMRC has commented on delays and set out these additional common errors:
And I will add; do not forget form VAT5L when registering a business which is involved in land and property transactions.
As a consequence of the change in the Bank Of England base rate from 3% to 3.5%, HMRC’s interest rates for late payment and repayment will also increase.
These changes will come into effect on:
The HMRC publication Information on the interest rates for payments will be updated shortly.
HMRC interest rates are set in legislation and are linked to the Bank of England base rate. Late payment interest is set at base rate plus 2.5%. Repayment interest is set at base rate minus 1%, with a lower limit, or “minimum floor” of 0.5%.
With news that HMRC is testing a new electronic submission portal – the Secure Data Exchange Service (SDES) system for overseas businesses to recover VAT incurred in the UK, I thought it timely to look at the process. Especially as the deadline is 31 December 2022 for VAT incurred between 1 July 2021 and 30 June 2022.
The SDES is currently being tested. However, it is available to businesses to make claims, but during the testing period a claimant will need to email HMRC to request access.
Access to SDES request
Claimants wishing to use SDES, are required to email newcastle.oru@hmrc.gov.uk and should include:
HMRC says it will contact the requestor within 15 calendar days to start the registration process and provide registration guidance.
Any queries on the registration process, may be addressed to the Overseas Repayment Unit on 0300 322 9279
If it goes wonky
HMRC states that during testing there may be times when SDES be stopped without notice. If it is stopped, claimants will be told by HMRC updating its online guidance. Further: If the service is stopped, it will not affect the claims that have already been submitted through it.
The alternative to claiming during testing is the good old-fashioned paper claims.
Claims in the UK
A non-UK based business may make a claim for recovery of VAT incurred in the UK. Typically, these are costs such as; employee travel and subsistence, service charges, exhibition costs, tooling, imports of goods, training, purchases of goods in the UK, and clinical trials etc.
Who can claim?
The scheme is available for any businesses that are:
What cannot be claimed?
The usual rules that apply to UK business claiming input tax also apply to claims from overseas. Consequently, the likes of; business entertainment, car purchase, non-business use and supplies used for exempt activities are usually barred.
Amount
There is no maximum claim amount, but for most periods of less than twelve months a minimum of £130 of VAT must be claimed. For annual claims or for periods less than three months ending on 30 June, the VAT must be at least £16.
Process
The business must obtain a Certificate Of Status (CoS) from its local tax or government department to accompany a claim.
The CoS must be the original and contain the:
The CoS is only valid for twelve months. Once it has expired you will need to submit a new CoS.
HMRC has previously announced (RCB 12 – 2018) that it is taken a firmer stance on what constitutes an acceptable CoS.
Claim form
The application form is a VAT65A and is available here Original invoices which show the VAT charged must be submitted with the claim form and CoS. Applications without a certificate, or certificates and claim forms received after the deadline are not accepted by HMRC. It is possible for a business to appoint an agent to register to enable them to make refund applications on behalf of that business.
Deadline
Claim periods run annually up to 30 June and must be submitted by 31 December of the same year. With the usual Christmas rush and distractions, it may be easy to overlook this deadline and some claims may be significant. Unfortunately, this is not a rapid process and even if claims are accurate and the supporting documents are in all in order the claim often takes some time to be repaid. Although the deadline is the end of the year HMRC say that it will allow an additional three months for submission of a CoS (only).
Payment
Refunds are made within six months of a “satisfactory application”.
Further information is available here HMRC guidance.
Further to my article on the introduction of changes to penalties for late filing and payments of VAT and follow up guidance, the forthcoming introduction on 1 January 2023 has focussed attention on how they will impact certain businesses.
Late returns
Many businesses who have had to deal with the “old” default surcharge regime realised that it could be disproportionate and create unfair outcomes. The new penalties are, in my view, fairer, and, the changes bring some welcome features and some which are less so.
The good news is that the introduction of the new rules mean that businesses will start with a clean slate, regardless of their position under the default surcharge mechanism – there is no carry over form one set of rules to another.
However, for the first time, late rendering of returns can incur penalties and interest if the returns are either:
In the previous regime when “non-payment” returns were filed late, this did not trigger a default.
Nil returns
Businesses which did not carry out any activity in the prescribed period, eg; intending traders, businesses temporary closed, or at the end of their life will have to recognise that a late nil return will now trigger points.
Repayment returns
Again, businesses which typically submit repayment returns, such as; new build constructors, exporters, and any business supplying zero rated goods or services will have to recognise tardy submissions will now affect them.
We understand that HMRC is aware of the impact on this sector and is planning to communicate with these businesses to make them aware of the new changes.
An additional point; from 1 March 2021 the Domestic Reverse Charge was introduced for the construction industry. As a result, an increased number of builders found themselves in a repayment position and will now need to ensure timely returns to avoid penalties.
Late payments – penalties and interest
The new late payment penalties regime will replace the default surcharge, which served as a combined late submission and late payment sanction.
Under the new rules, there will be two separate late payment penalties.
The first penalty has two separate elements:
The second penalty is triggered from day 31. This is charged daily and is based on an annual rate of 4% of any outstanding amount.
If all outstanding VAT is paid within 15 days of the due date, no late-payment penalty will arise. Although here will however still be late payment interest.
Interest
From 1 January 2023, HMRC will charge late-payment interest from the day a VAT payment is overdue to the day the VAT is paid, calculated at the Bank of England base rate plus 2.5%.
Time-to-Pay arrangements
HMRC offers the option of requesting a Time To Pay arrangement. This will enable a business to stop a penalty from accruing any further by approaching HMRC and agreeing a schedule for paying their outstanding tax.
Period of familiarisation
HMRC say that to give businesses time to get used to the changes, it will not be charging a first late payment penalty for the first year from 1 January 2023 until 31 December 2023, if the tax is paid in full within 30 days of the payment due date.
Appeals
It is anticipated that the number of appeals against late filing/payments will be reduced because of the more proportional approach of the new rules. However, it is still possible to appeal if a taxpayer considers the imposition of penalties and interest is unfair. An appellant needs a reasonable excuse to succeed.
Action
Advisers should ensure that clients affected by the new rules, specifically repayment business and those submitting nil returns, are aware of the impact. I know that a lot of these are habitual late filers and some “save up” returns for when they need a cash injection.
It will also be prudent for advisers to monitor penalty points accrued. We understand that HMRC is looking at how this information could be made available to agents and taxpayers. We expect more details about this in the coming months, including how software can be used to display points.
Repayment supplement
The new system may be fairer, however, the withdrawal of the repayment supplement is not! More details here. (I am still quite cross!)