HMRC has updated its VAT Notice 701/19 from 5 January 2024.
Sections 2, 3 and 5 have been amended to include information about the VAT treatment of charging of electric vehicles (EVs) when using charging points.
Tag Archives: vat-claim
VAT: What is a proforma invoice and how can it be used?
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:
- the issuing business’s name, address, and contact details
- customer’s name and address
- date of issue
- length of time the pricing is valid
- the goods/services requested, including quantities, type, and physical specifications
- pricing, including individual costs as well as the total amount to be charged
- terms of sale, including eg; shipping and delivery dates
- payment terms
- whether VAT is applicable
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:
- does not create a tax point
- the recipient is unable to recover input tax on 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.
VAT: Contact lens services – taxable or exempt? The Vision Direct case
Latest from the courts
In the First-Tier Tribunal (FTT) case of Vision Dispensing Limited the issue was whether services linked to the online sale of prescription contact lenses were covered by the exemption at The VAT Act 1994, Schedule 9, group 7, item 1 (b) – the provision of medical care.
Generally speaking, opticians provide two types of supply
- exempt medical care; sight tests, measuring and fitting
- the standard rated supply of goods; spectacles, contact lenses, accessories etc
Almost always a customer pays a single amount which covers the services as well as the goods, so an apportionment is required. HMRC updated guidance on apportionment here.
Background
The Appellant “VDL” supplies services in connection with the online sale of contact lenses and this appeal was concerned with the question whether those supplies are subject to VAT at the standard rate.
The legislation provides for exemption for medical care by a person registered or enrolled in either of the registers of Ophthalmic Opticians or the register of Dispensing Opticians kept under the Opticians Act 1989. The exemption is also extended to persons who are not registered/enrolled under the Act but are directly supervised by a person who is so registered or enrolled.
VDL is a UK incorporated company and a member of the Vision Direct corporate group. VDL has a sister group company called Vision Direct BV (“VDBV”) which is based in The Netherlands. VDL operates a warehouse facility in the UK. Goods (contact lenses and other optical products) belonging to VDBV were stored in the warehouse and dispatched to purchasers by VDL, using its own workforce. VDL also employed customer assistants, who deal with a range of enquiries from customers. VDBV operates the website visiondirect.co.uk through which prescription contact lenses and other optical goods are supplied to UK customers. Customers purchasing prescription contact lenses or other optical products online enter two contracts; one with VDBV for the supply of contact lenses and one with VDL for the supply of dispensing services. There is also a contract between VDL and VDBV. VDL is not paid a fee by VDBV, its income comprises by the fee paid by customers.
The arguments
HMRC contended that there is little evidence to support that there was advice being provided to customs by VDL and consequently, there were serious questions about whether healthcare services are being supplied. The supplies fall short of a number of regulatory requirements and that the supplies described as dispensing services cannot properly be described as professional clinical advice or therapeutic care. HMRC stated that VDL has never seen a single customer. Clinical advice cannot be delivered in an impersonal or generic way.
HMRC pointed out that:
- the website makes it clear that VDL does not provide advice on which customers can depend. Consequently, it cannot rely on the website as evidence of medical care
- there is no direct link between the use of the website and payments to VDL. For there to be a supply, there must be a direct link between the supplier and the recipient
VDL contended that its dispensing services are superior to those available on the High Street. Contrary to HMRC’s case, it is able to identify multiple examples of clinical advice and the purpose of its supplies is to assist in the treatment of defective eyesight. All services are directly supervised by those with the appropriate qualifications.
Deliberation
The FTT was required to determine whether VDL’s services constituted medical care and were those services wholly performed or directly supervised by appropriate persons?
It was agreed that the advice does not need to be complex or personalised to be covered by the exemption as long as it contributes to the efficacy of the overall therapeutic process. The material provided on the website was comprehensive and covered the entire process from an eye test, the diagnosis of an eye defect, and then the selection, measuring and fitting of spectacles or lenses to the supply of those spectacles or lenses.
It was concluded by the FTT that the provision of the website was by VDBV as in the T&Cs VDBV operates it and owns the intellectual property rights to its content. Consequently, the provision of the website could not be part of the supply by VDL. VDL supplied the material or reviewed its content for VDBV pursuant to a contract between the two companies.
Decision
The FTT concluded that:
- the quality, quantity, and nature of the optical information on the website was such that its provision could amount to medical care, but;
- the information on the website is not provided by VDL (but by VDBV)
- even if it were provided by VDL, the terms on which it is made available mean that it is not part of any supply made by VDL to customers and must be left out of account when it comes to characterising the supplies VDL does make
- what VDL does do is choose the correct lenses and dispatch them. There is no element of medical care in VDL’s supply
- there was little evidence as to how the opticians monitored the performance of the staff so that they could satisfy themselves that their performance was of a suitable standard, so it could not be said that there was direct supervision.
As a result, VDL did not provide medical care and in any case, the services were not wholly performed or directly supervised by appropriately qualified individuals so exemption could not apply
The appeal was dismissed.
Commentary
Opticians have long produced VAT challenges since the cases of Leightons and Eye-Tech in the 1990s. Any businesses using a similar business model are advised to review the treatment of their supplies in light of this case.
VAT: The Partial Exemption Annual Adjustment
An annual adjustment is a method used by a business to determine how much input tax it may reclaim.
Even though a partly exempt business must undertake a partial exemption calculation each quarter or month, once a year it will have to make an annual adjustment as well.
An annual adjustment is needed because each tax period can be affected by factors such as seasonal variations either in the value supplies made or in the amount of input tax incurred.
The adjustment has two purposes:
- to reconsider the use of goods and services over the longer period; and
- to re-evaluate exempt input tax under the de minimis rules.
An explanation of the Value Added Tax Partial Exemption rules is available here
Throughout the year
When a business makes exempt supplies it will be carrying out a partial exemption calculation at the end of each VAT period. Some periods it may be within the de minimis limits and, therefore, able to claim back all of its VAT and in others there may be some restriction in the amount of VAT that can be reclaimed. Once a year the business will also have to recalculate the figures to see if it has claimed back too much or too little VAT overall. This is known as the partial exemption annual adjustment. Legally, the quarterly/monthly partial exemption calculations are only provisional, and do not crystallise the final VAT liability. That is done via the annual adjustment.
The first stage in the process of recovering input tax is to directly attribute the costs associated with making taxable and exempt supplies as far as possible. The VAT associated with making taxable supplies can be recovered in the normal way while there is no automatic right of deduction for any VAT attributable to making exempt supplies.
The balance of the input tax cannot normally be directly attributed, and so will be the subject of the partial exemption calculation. This will include general overheads such as heating, lighting and telephone and also items such as building maintenance and refurbishments.
The calculation
Using the partial exemption standard method the calculation is based on the formula:
Total taxable supplies (excluding VAT) / Total taxable (excluding VAT) and exempt supplies x 100 = %
This gives the percentage of non-attributable input VAT that can be recovered. The figure calculated is always rounded up to the nearest whole percentage, so, for example, 49.1 becomes 50%. This percentage is then applied to the non-attributable input VAT to give the actual amount that can be recovered.
Once a year
Depending on a businesses’ VAT return quarters, its partial exemption year ends in either March, April, or May. The business has to recalculate the figures during the VAT period following the end of its partial exemption year and any adjustment goes on the return for that period. So, the adjustment will appear on the returns ending in either June, July, or August. If a business is newly registered for VAT its partial exemption “year” runs from when it is first registered to either March, April or May depending on its quarter ends.
Special methods
The majority of businesses use what is known as “the standard method”. However, use of the standard method is not mandatory and a business can use a “special method” that suits a business’ activities better. Any special method has to be “fair and reasonable” and it has to be agreed with HMRC in advance. When using a special method no rounding of the percentage is permitted and it has to be applied to two decimal places.
Commonly used special methods include those based on staff numbers, floor space, purchases or transaction counts, or a combination of these or other methods.
However, even if a business uses a special method it will still have to undertake an annual adjustment calculation once a year using its agreed special method.
De minimis limits
If a business incurs exempt input tax within certain limits it can be treated as fully taxable and all of its VAT can be recovered. If it exceeds these limits none of its exempt input tax can be recovered. The limits are:
- £625 per month on average (£1,875 per quarter or £7,500 per annum) and;
- 50% of the total input VAT (the VAT on purchases relating to taxable supplies should always be greater than the VAT on exempt supplies to pass this test)
The partial exemption annual adjustments are not errors and so do not have to be disclosed under the voluntary disclosure procedure. They are just another entry for the VAT return to be made in the appropriate VAT period.
Conclusion
If a business fails to carry out its partial exemption annual adjustment it may be losing out on some input VAT that it could have claimed. Conversely, it may also show that it has over-claimed input tax. When an HMRC inspector comes to visit he will check that a business has completed the annual adjustment. If it hasn’t, and this has resulted in an over-claim of input VAT, (s)he will assess for the error, charge interest, and if appropriate, raise a penalty. It is fair to say that partly exempt businesses tend to receive more inspections than fully taxable businesses.
A VAT Did you know?
We know that size matters for VAT – see marshmallows. Also, if you buy a small amount of bicarbonate of soda it is VAT free. However, bigger tubs are VATable.
VAT: Changes to the DIY Housebuilders’ Scheme
The DIY Housebuilders’ Scheme is a tax refund mechanism for people who build, or arrange to have built, a house they intend to live in. It also applies to converting commercial property into a house(s). This puts a person who constructs their own home on equal footing with commercial housebuilders. There is no need to be VAT registered in order to make the claim.
The Scheme can be complex, but here is our Top Ten Tips for claimants.
The Changes
From 5 December 2023, the follow changes apply:
- claimants will be allowed to submit claims electronically
- the deadline for making claims will be extended to six months (from three)
- the list of documents required to support a claim has been amended
- a new requirement for additional evidence when a derelict building has been converted into dwelling(s) – to be made on a specific form
These changes are set out in The Value Added Tax (Refunds to “Do-It-Yourself” Builders) (Amendment of Method and Time for Making Claims) Regulations 2023 and guidance is provided by HMRC here.
The new deadline applies to claims made on, or after 5 December 2023. The deadline, broadly, begins when a dwelling is complete. There is sometimes a dispute on the completion date, so this case and commentary may be of assistance.
VAT: Best judgement; what is it, and why is it important?
If HMRC carry out an inspection and decide that VAT has been underdeclared (eg: either by understating sales, applying the incorrect VAT rate, or overclaiming input tax) an inspector has the power to issue an assessment to recover VAT that it is considered underdeclared. This is set out in The VAT Act 73(1)
“Where a person has failed to make any returns … or where it appears to the Commissioners that such returns are incomplete or incorrect, they may assess the amount of VAT from him to the best of their judgment and notify it to him”.
So, the law requires that when an inspector makes an assessment (s)he must ensure that the assessment is made to the best of their judgement, otherwise it is invalid and will not stand.
Guidance to surviving a VAT inspection here.
HMRC’s methods of assessing cash businesses here.
Definition of best judgment
Per Van Boeckel vs HMCE (1981) the judge set out three tests:
- HMRC must make a value judgment on the material set before it honestly and bona fide and not knowingly set an inflated figure and then expect the taxpayer to disprove it on appeal
- there must be material available
- HMRC is not expected to do the work of the taxpayer but instead fairly interpret the material before it and come to a reasonable conclusion rather than an arbitrary one
If any of these three tests are failed, then best judgement has not been employed. However, the onus is on the appellant to disprove the assessment.
There were further comments on the matter:
“There are…obligations placed on the Commissioners to properly come to a view on the amount of tax that was due to the best of their judgement. In particular:
- a value judgement must be made on the material put before them
- they must perform their function honestly
- there must be material on which to base their judgement
- but they should not be required to do the job of the taxpayer, or carry out extensive investigations
This means that the assessing inspector must fairly consider all material placed before them and, on that material, come to a decision that is reasonable and not arbitrary, taking into account the circumstances of the business. In some cases, some “guesswork” may be required, but it should be honestly made based on the information available and should not be spurious, but HMRC must be permitted a margin of discretion.
Experience insists that it is usually more successful if the quantum of a best judgement assessment is challenged.
Where a business successfully disputes the amount of an assessment and the assessment is reduced, it will rarely fail the best judgement test.
In the case of MH Rahman (Khayam Restaurant) CO 2329/97 the High Court recognised the practice whereby the tribunal adopts a two-step approach, looking initially at the question of best judgement and then at the amount of the assessment. The message of the High Court appeared to be that the Tribunal should concern itself more with the amount of an assessment rather than best judgement.
Arguments which may be employed to reduce a best judgement assessment are, inter alia:
- period of calculation is unrepresentative
- wastage
- discounts
- staff use
- theft
- seasonal trends
- competition
- sales
- opening hours
- client base, etc
HMRC’s guidance to its own officers states that: Any assessments made must satisfy the best judgement criteria. This means that given a set of conditions or circumstances, “you must take any necessary action and produce a result that is deemed to be reasonable and not arbitrary”.
In other words, best judgement is not the equivalent of the best result or the most favourable conclusion. It is a reasonable process by which an assessment is successfully reached.
In the case of CA McCourtie LON/92/191 the Tribunal considered the principles set out in Van Boeckel and put forward three further propositions:
- the facts should be objectively gathered and intelligently interpreted
- the calculations should be arithmetically sound, and
- any sampling technique should be representative
Tribunals will not treat an assessment as invalid merely because they disagree as to how the judgement should have been exercised. It is possible that a Tribunal may substitute its own judgement for HMRC’s in respect of the amount of the assessment. However, this does not necessarily mean that because a different quantum for the assessment was arrived at that the assessment failed the best judgement test.
Further, it is not the function of the Tribunal to engage in a process that looks afresh at the totality of the evidential material before it (M & A Georgiou t/a Mario’s Chippery, QB October 1995 [1995] STC 1101).
It should be also noted that even if one aspect of an assessment is found not to be made to best judgement this should not automatically invalidate the whole assessment – Pegasus Birds [2004] EWCA Civ1015.
Summary
There are significant difficulties in arguing that an inspector did not use best judgement and it is a high bar to get over.
In order to succeed on appeal, it would be required to be demonstrated, to the judge’s satisfaction, that the assessment was raised:
- dishonestly
- vindictively
- capriciously
- arbitrarily
- spuriously
- via an estimate or a guess in which all elements or best judgement are absent
- wholly unreasonably
and that this action applies to the assessment in its entirety.
VAT: Updated guidance on zero-rated exports
has been updated. The Notice sets out how and when a business can apply zero-rate exported goods.
Information on the types of fuel that the Extra Statutory Concession 9.2 does not apply to, and when you cannot zero rate the export of a motor vehicle has been updated.
And: Information on evidence relating to zero rating and direct exports – paragraphs 6.1, 6.5, 7.3 and 7.4.
VAT: New rules for registration and reporting in the EU from 1 January 2025
EU Member States have agreed to extend similar VAT registration thresholds utilised by domestic businesses to EU non-resident taxpayers.
VAT scheme for Small Businesses
New simplification rules will open the VAT exemption to small businesses established in other member states and help reduce VAT compliance costs. The new regime should reduce red tape and administrative burdens for SMEs and create a level playing field for businesses regardless of where they are established in the EU. The new VAT scheme for SMEs will apply from 1 January 2025.
The new scheme
Current rules on the exemption of supplies under a certain threshold:
- Member States are allowed to exempt supplies by small enterprises with an annual turnover not exceeding a given threshold, different in each Member State.
- Small enterprises not established in a certain Member State have, however, no access to such an exemption.
New rules on the exemption of supplies under a certain threshold
- Member States will be allowed to continue exempting small businesses with an annual turnover not exceeding a given threshold, which cannot be higher than € 85,000 (maximum exemption threshold).
- The new rules will open the exemption to small enterprises established in other Member States than the one in which the VAT is due. The exemption will apply if the turnover in Member State where the SME is not established is below the national threshold and if the annual turnover in all of the EU is below €100,000. This is a safeguard threshold preventing companies with large turnover to benefit from the SME exemption in other Member States. For this purpose, SMEs will be able to use the single registration window in their own Member State.
The new rules will provide exempt SMEs with simplifications in terms of registration and reporting. These rules should reduce the overall VAT compliance costs for SMEs by up to 18% per year.
VAT: What is culture? The Derby Quad case
Latest from the courts
In the Derby Quad Ltd First-Tier tribunal (FTT) case the issue was whether the appellant’s supplies of admission to a screening were of a theatrical performance which would be cultural and exempt, or akin to a cinema presentation which is standard rated.
Background
A RSC live performance of The Tempest performed at Stratford-upon-Avon was live screened at The Quad venue in Derby by way of a broadcast – A so-called live event performed by a company other than DQ. The Quad is a comprehensive creative centre with indie cinema, art gallery, café-bar and event spaces for hire. DQ pays theatre companies a percentage of the proceeds from ticket sales to the screenings, and a small flat fee per simultaneous screening to help offset the satellite transmission costs.
The core of the dispute was whether the live events were a ‘live performance’ as required by The VAT Act 1994, Schedule 9, Group 13 item 2(b) for exemption.
The Arguments
The appellant contended that a live event was different from a cinematic film where the admission price is subject to VAT – it is an “experience”. The event is thought of as an experience on its own and is of artistic merit. It allows for audience participation and interaction even remotely.
To support this, it was stated that 84% percent of audiences “felt real excitement” because they knew the performance was being broadcast live that evening. Watching the show with others was also an important factor. Audiences tended to applaud at the end of the screening and they appear to feel connected to the performance and the audience. Further, the majority of audiences attending live events enjoyed the collective experience of watching as a group. This differs from audiences at cinemacasts of films and or recordings who typically watch as an individual or as a couple.
HMRC’s position was that admission charges to cinematic performances, and to live performances broadcast from other locations, were taxable.
Decision
The differences in the experiences of members of the audience and the actors/performers between a live theatre performance and at a live event are ones of kind, and not just degree, as they go to the essence of what makes and constitutes a theatrical performance and require interaction. A live event is, consequently, not capable of being a ‘theatrical performance’.
The actors in Stratford would receive no feedback from the audience in The Quad in a way they would from the audience at the live ‘physical’ event.
The FTT found that this is not a modern variant of a theatre performance and the appeal was dismissed.
Commentary
An interesting case which highlights the fact that subtle variations of supplies, and their interpretations can significantly affect the VAT outcome. In light of technical advances in this area we will need to watch how the definition of ‘theatrical performances’ develops.