Tag Archives: vat-basics

VAT: Input tax recovery – whether a taxable supply. The Door Specialist case

By   9 June 2021
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Latest from the courts

In the First Tier Tribunal case of The Door Specialist Limited (TDSL) the issue was whether an HMRC assessment for overclaimed input tax was correct.

Background

The appellant recovered input tax on the import of goods (doors). The company did not sell the doors, but simply gave the goods (no consideration provided) to a separate company called Just Doors (JD).  It was JD who made the sales of the doors to third party customers.  TDSL and JD were under common ownership but no VAT group in place at the relevant time. TDSL was VAT registered as it made separate, unrelated taxable supplies of property rental

Arguments

HMRC contended that as there was no onward taxable supply of the doors by TDSL, no input tax was recoverable per The VAT Act 1994 section 24 (1). TDSL relied on HMRC’s published guidance (Notices 700 and 700/7) in relation to gifts and proposed that it would be proper to assess for output tax on the “supply” to JD rather than denying the input tax claim.  

Issues

The issues may therefore be summarised as whether;

  • the relevant goods were used for the purpose of any economic activity by TDSL
  • the doors could be treated as business gifts as contended by the applicant such that the input tax was recoverable.

Further cases on economic activity/business here, here and here

Decision

It was decided that as there was no direct and immediate link between the purchase of the goods and any onward taxable supply in the course of business or economic activity by TDSL (as required by the outcome of the cases of BAA Ltd JDI International Leasing Ltd) the disallowance of the input tax was appropriate. The advancement of the business gifts contention did not assist the taxpayer as this was not an economic activity in itself. The appeal was therefore dismissed.

 Commentary

A clear example of not considering the VAT implications when carrying out transactions. This tax cost could have easily been avoided if TDSL had sold the doors to JD. As both parties were fully taxable, there would have been no VAT hit. Business gifts and promotional activities are also often a complex area of VAT and as one former colleague once remarked “If you have a marketing department you have a VAT issue”.

VAT Schemes Guide – Alternative ways of accounting for tax

By   17 May 2021
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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.

VAT: New Road Fuel Scale Charges

By   7 May 2021
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HMRC has updated the valuation table: Road Fuel Scale Charges (RFSC) from 1 May 2021 to 30 April 2022 here.

RFSC

If a business reclaims VAT incurred on road fuel, it will be required recognise the private use element of the fuel.

The RFSC simplifies accounting for VAT on the private use of fuel by motorists. The RFSC is calculated according to a car’s CO2 emissions and the fixed charge is added to output VAT, on the VAT return (in effect, the business supplies to fuel to the individual). The use of this charge is optional, the alternative is to keep detailed mileage records.

A quick RFSC calculator/ready-reckoner is here.

VAT: Treatment of transactions involving cryptoassets. New guidance

By   8 April 2021
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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

By   25 March 2021
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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.

VAT: Certificate of Status

By   16 March 2021
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Claiming VAT in another country

If a UK business wishes to claim VAT incurred in a country outside the UK it will need a Certificate of Status (a “Certificate of Status of Taxable Person”). This certificate, known as a VAT66A, may be obtained from HMRC and certifies that an entity is in business (engaged in an economic activity).

Changes from 8 March 2021

HMRC has announced HMRC changes to the way it issues VAT66As to UK businesses. From 8 March 2021, HMRC will send the certificate by email. A small, but helpful nod to 21st Century technology. A business must first complete an informed consent form before HMRC will correspond by email. The VAT66A only lasts for 12 months, so it is prudent to set a reminder to renew.

However, and there is usually a however, some countries require a “wet stamped” document to support a claim, in which case, HMRC will continue to issue these by post. It makes sense to check what actual documentation each country in which a claim is made requires, as it does vary. It is usually also necessary to make a claim in the language of the country in which the VAT was incurred.

Who can request a certificate of status?

The authorised persons (director or secretary) of the businesses which is registered in the UK for VAT, or an agent which has a letter of authority from a UK VAT-registered business – form 64-8 to act on its behalf.

Requesting a certificate

Send an email to vat66@hmrc.gov.uk with “VAT certificate of status request” in the subject line and the following information:

  • business name
  • VAT registration number
  • business address
  • applicant’s name and role in the business
  • contact telephone number
  • the country (or countries) where the VAT refund claim is being made
  • number of certificates required (one for each country in which a claim is to be made)
  • if the certificate should be sent to you by post or by email

Agent application

Write ‘VAT certificate of status – agent request’ in the subject line of the email, and provide the following information:

  • agent’s name
  • agent’s business address
  • the name of the business to which the certificate relates
  • an attachment with a letter of authority from an authorised signatory of the business you are requesting a certificate for – a list of authorised signatories here; VAT Notice 742A
  • VAT registration number of the business
  • business address
  • the country (or countries) where the VAT refund claim is being made
  • the number of certificates required
  • if the certificate should be sent by post or by email to you or the business you are requesting a certificate for

HMRC say that a certificate will be sent within 15 working days of an application.

Oh for the days of a single electronic application to HMRC which covered all 27 Member States…

A VAT Did you know?

By   30 October 2020
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Latest from the courts.

The rolls used in Subway’s hot sandwiches are not bread. According to a recent ruling by Ireland’s Supreme Court, because of the high level of sugar in the rolls, they cannot be taxed as bread, so the VAT zero rate cannot apply.

Ten Questions every business should ask about VAT

By   14 October 2020
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1. Am I sure that a VAT inspection would not find any errors?  

  • An inspection can result in significant assessments, penalties and interest, apart from a business becoming “known” to HMRC. Peace of mind is a valuable benefit for a business owner too!

 2. Am I sure that I am reclaiming as much VAT as possible?

  • We often find that businesses miss out on recovering input tax, this clearly results in an actual cost.

 3. Do I take full advantage all available VAT reliefs, customs exemptions and duty refund schemes? 

  • Failure to do so will create a tax cost and may be putting a business in a less competitive position.

4. Am I up to date on the indirect tax developments in my key markets?

  • Indirect tax changes rapidly, and so does the market place. Being unaware of changes that affect you may result in VAT being overpaid, or penalties being levied if you have underdeclared tax. It may also put you at a competitive disadvantage.

5. Have I considered the impact of tax rate changes on my pricing and margin, and have I taken the necessary measures?

  • Budgeting is affected by VAT.  Failure to consider indirect taxes may eat into profit.

6. Do I collect all the data about my customers and transactions that could be required by tax authorities?

  • As in many VAT circumstances, getting it wrong or missing something results in penalties.

7. Do I comply with all indirect tax requirements in the jurisdictions where I operate or where my customers belong?

  • VAT and GST does exist outside the UK and ignoring overseas indirect tax obligations may result in action being taken by foreign authorities which will prove to be very uncomfortable and expensive.  It is important to understand the rules for indirect tax in each country/area you trade. Don’t get caught out.

8. Do I have the tools to analyse my indirect tax flows and data?

  • Allocating sufficient technical and human resources to VAT is important.  Seeking professional advice at the appropriate time is also prudent.

9. Could changes in the way my business is structured or how transactions are organised improve my indirect tax position and/or reduce complexity?

  • Saving money and reducing tax complications must be near the top of every business’ wish list. Seeking professional advice on structuring a business or a transaction goes a long way to achieving this

10. Is my business using the right VAT scheme?

  • There are many special schemes that a business may use, from the Flat Rate Scheme to Margin Schemes. Most are optional, but some, like the Tour Operators’ Margin Scheme are compulsory. Choose the wrong one, or being unaware of a beneficial scheme could cost.

It is important to constantly monitor a business’ VAT position.  The nature of trade changes, technology changes, case law changes and the VAT rules are constantly in a state of flux.  It is easy to assume that everything is alright because it has always been done that way, but there may be significant exposures and missed opportunities out there.  Things will also change once the terms of Brexit have been agreed (or not). We offer services from a basic healthcheck to a full technical review.  A review will let you rest easy in your bed if nothing else!

VAT Taxable Supply – Basic Definition

By   5 February 2016
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VAT Back To Basics 

It is sometimes useful when considering a transaction to “go back to basics” for VAT purposes. There are four tests to determine whether a supply is taxable and these are set out below.  Broadly, these tests establish whether UK VAT is payable on a sale.

A transaction is within the scope of UK VAT if all four of the following are satisfied.

  1. It is a supply of goods or services.

There is a distinction between the two types of supply as different VAT treatments may apply.  However, if no goods are services are actually provided, there is no supply.  Indeed, if there is no consideration for a supply, in most cases it is not a taxable supply.

2. It takes place in the UK.

There are quite complex tests to consider when analysing the “place of supply”, especially where services are concerned.  If the place of supply is outside the UK then usually no UK VAT is due, however, the supply may be subject to VAT in another country.

3. It is made by a taxable person.

A taxable person is any legal entity which is, or should be, registered for VAT in the UK.

4. It is made in the course or furtherance of any business carried on by that person

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

So, if the four tests are passed a taxable supply exists.  The next step is often to establish which VAT rate applies!

Tip: It is often easier to consider what isn’t a taxable supply to establish the correct VAT treatment.  Specific examples of situations which are not taxable supplies are; donations, certain free supplies of services, certain grants or funding, some compensation and some transactions which are specifically excluded from the tax by legislation, eg; transfers of going concerns.

I think that it is often the case that the basic building blocks of the tax are overlooked, especially in complex situations and I find it helps to “go back to the first page” sometimes!