Children’s clothing is zero rated. But where a child has one foot larger than the other, the pair of shoes can be zero-rated if the smaller shoe qualifies as a child’s size (boys 6 1/2 and girls; generally, size 3).
Tag Archives: vat-free
VAT: Property – The Option To Tax Guide
VAT Bsics
Opting To Tax commercial property
Opting to tax provides a unique situation in the VAT world. It is the only example of where a supplier can choose to add VAT to a supply….. or not.
What is an option to tax (OTT)?
The sale or letting of a property is, in most cases, exempt (VAT free) by default. However, it is possible to apply the OTT to commercial property. This has the result of turning an exempt supply into a taxable supply at the standard rate. It should be noted that an OTT made in respect of a residential property is disregarded and consequently, the supply of residential properties is always exempt (unless it is the first time sale of a new build – in which case it is zero-rated).
Why opt?
Why would a supplier then deliberately choose to add VAT on a supply?
The only purpose of OTT is to enable the optor to recover or avoid input tax incurred in relation to the relevant land or property. The OTT is a decision solely for the property owner or landlord and the purchaser or tenant is not able to affect the OTT unless specific clauses are included in the lease or purchase contracts. Care should be taken to ensure that existing contracts permit the OTT to be taken. Despite a lot of misleading commentary and confusion, it is worth bearing in mind that the recovery or avoidance of input tax is the sole reason to OTT.
Once made the OTT is usually irrevocable for a 20-year period (although there are circumstances where it may be revisited within six months of it being taken – see below). There are specific rules for circumstances where the optor has previously made exempt supplies of the relevant land or property. In these cases, HMRC’s permission must usually be obtained before the option can be made.
What to consider
The important questions to be asked before a property transaction are:
- Was VAT incurred on the purchase price?
- Is the purchase with the benefit of an existing lease (will the tenant remain?) if so, it may be possible to treat the transaction as a VAT free TOGC (see below)
- Is the property subject to the Capital Goods Scheme (CGS here)?
- Is it intended to spend significant amounts on the property, eg; refurbishment?
- What other costs will be incurred in respect of the property?
- If renting the property out – will the lease granted be full tenant repairing?
- Will the tenant or purchaser be in a position to recover any or all VAT charged on the rent/sale?
These are the basic questions to be addressed; further factors may need to be considered depending on the facts of a transaction.
Input tax recovery
Input tax relating to an exempt supply is usually irrecoverable. In fact, a business only making exempt supplies is unable to register for VAT. A guide to partial exemption here. So input tax incurred on, say; purchase, refurbishment, legal costs etc would be lost if a property was sold or rented on an exempt basis. In order to recover this tax, it must relate to a taxable supply. If an OTT is taken, the sale or rent of the property will be standard rated which represents a taxable supply. VAT on supply = input tax claim.
Two-part process
The OTT is a two-part process.
- The first part is a decision of the business to take the OTT and it is prudent to minute this in Board meeting minutes or similar. Once the decision to OTT is taken VAT may be added to a sale price or rent and a valid tax invoice must be raised.
- The second part is to formally notify HMRC. If the OTT is straightforward the form on which this is done is a VAT1614A. Here. In some cases, it is necessary to obtain HMRC’s permission in which case separate forms are required. HMRC guidance here – para 5.
There can be problems in cases where the OTT is taken, but not formally notified.
Timing
It is vital to ensure that an OTT is made at the correct time. Even one day late may affect the VAT treatment. Generally speaking, the OTT must be made before any use of the property, eg; sale or rent. Care should also be taken with deposits which can trigger a tax point before completion.
Disadvantages
As mentioned above (and bears repeating) the benefit of taking the OTT is the ability to recover input tax which would otherwise fall to be irrecoverable. However, there are a number of potential disadvantages.
- opting a commercial property may reduce its marketability. It is likely that entities which are unable to recover VAT would be less inclined to purchase or lease an opted property. These entities may be; partly exempt business, those not VAT registered, or charities/NFP organisations.
- the payment of VAT by the purchaser may necessitate obtaining additional funding. This may create problems, especially if a VAT charge was not anticipated. Even though, via opting, the VAT charge is usually recoverable, it still has to be paid for up-front.
- an OTT will increase the amount of SDLT payable when a property is sold. This is always an absolute cost.
Transfer of a Going Concern (TOGC)
I always say that advice should be taken in all property transactions and always in cases of a TOGC or a possible TOGC. This is doubly important where an opted building is being sold, because TOGC treatment only applies to a sale of property when specific tests are met. A TOGC is VAT free but any input tax incurred is recoverable, so this is usually a benefit for all parties.
Revoking an Option To Tax
- The cooling off period – If an OTT has been made and the opter changes his/her mind within six months it can be revoked. This is as long as no tax has become chargeable on a supply of the land, that no TOGC has occurred, and the OTT has actually been notified to HMRC. There are additional considerations in certain cases, so these always need to be checked.
- No interest has been held for more than six years – An OTT is revoked where the opter has not held an interest in the opted building for a continuous period of six years. The revocation is automatic, and no notification is required.
- 20 years – It is possible to revoke an OTT which was made more than 20 years ago. Certain conditions must be met, and advice should be taken on how such a revocation affects future input tax recovery.
Summary
Property transactions are high value and often complex. The cost of getting VAT wrong or overlooking it can be very swingeing indeed. I have also seen deals being aborted over VAT issues. Of course, if you get it wrong there are penalties to pay too. For these reasons, please seek VAT advice at an early stage of negotiations.
More on our land and property services here
New HMRC publications: VAT on cladding remediation work
In the aftermath of the horrific Grenfell fire, a lot of buildings require unsafe cladding to be replaced.
A new Brief clarifies HMRC’s policy on the deduction of VAT incurred on cladding remediation works which are carried out on existing residential buildings. It sets out:
- the reason VAT costs are incurred when carrying out remediation works to residential buildings with fire and safety defects
- the circumstances in which the VAT incurred in providing remediation works can be recovered
Broadly, the distinction is whether the work qualifies as snagging. If it does, the VAT treatment follows the liability of the original building work – zero rated if the original construction was of a zero-rated new residential building, ie; they are supplied in the course of construction of a qualifying building.
If not snagging, the remedial work will be standard rated.
If the work is standard rated, it may be recoverable by the recipient in certain circumstances.
Snagging
HMRC’s definition of snagging is “the carrying out of remedial works to correct faulty workmanship or replace faulty materials”. Normally, it is carried out by the original developer under the terms of the original contract. This means it is not seen as a separate supply of construction services. Snagging covers faults that are:
- found soon after the building is completed
- still covered by the building contract
More details on snagging here.
Furthermore, HMRC has published Guidelines for Compliance GfC11. This guidance covers HMRC’s existing policy on the VAT treatment of remedial works and includes:
- the definition of snagging
- an explanation of when you can recover input tax
- examples to help you work out the VAT treatment of remedial works
- examples of documents and evidence you should keep
- information about correcting a submitted return
HMRC state that its policy has not changed.
VAT: Updated HMRC guidance on exemption for healthcare supplies
HMRC has published new guidance in its internal manual VATHLT2035.
It covers the services of the medical and paramedical professions: Anaesthesia Associates and Physician Associates.
Regulation for Anaesthesia Associates (AAs) and Physician Associates (PAs) came into effect on 13 December 2024. A full registration is required by December 2026. The exemption will only apply to the AAs and PAs that have joined from the date of registration.
Anaesthesia Associates
AAs are specialised practitioners trained to perform certain medical procedures related to anaesthesia under the supervision of qualified medical personnel. They are not doctors but play a crucial role in the healthcare system by assisting in the administration of anaesthesia and monitoring patients during surgical procedures. AAs are authorised to perform specific procedures they are trained and approved for. They will be regulated by the General Medical Council (GMC). Their services will be exempt from VAT, provided they are carried out for the purpose of medical care.
Physician Associates
PAs are healthcare professionals who support doctors in diagnosing and managing patients. They are trained to perform various medical procedures and provide care under the supervision of doctors. PAs are not doctors but are essential members of the multidisciplinary healthcare team, enhancing the capacity of healthcare services. They are meant to supplement, not replace, the role of doctors. Their services will be exempt from VAT, provided they are carried out for the purpose of medical care.
The exemption is via The VAT Act 1994, Schedule 9, Group 7.
A VAT Did you know?
In or out?
If a biscuit is covered, even partially, in chocolate the VAT is 20%, but if the chocolate is inside, say a choc chip cookie or a bourbon, it is VAT free.
A VAT did you know?
Children’s clothes are zero-rated. These include; hats, caps, braces, belts, garters and scarves, but not earmuffs – which are standard rated even if they are for children.
VAT: Zero-rated exports. The Procurement International case
Latest from the courts
In the First-Tier Tribunal (FTT) case of Procurement International Ltd (PIL) the issue was whether the movement of goods constituted a zero-rated export.
Background
Both parties essentially agreed the facts: The Appellant’s business is that of a reward recognition programme fulfiller. The Appellant had a catalogue of available products, and it maintained a stock of the most ordered items in its warehouse. PIL supplied these goods to customers who run reward recognition programmes on behalf of their customers who, in turn, want to reward to their customers and/or employees (reward recipients – RR). The reward programme operators (RPOs) provide a platform through which those entitled to receive rewards can such rewards. The RPO will then place orders PIL for the goods.
A shipper collected the goods from PIL in the UK and shipped them directly to the RR (wherever located). The shipper provided the services of delivery including relevant customs clearances etc. on behalf of the Appellant. PIL had zero-rated the supply of goods sent to RRs located overseas. All goods delivered to RRs outside the UK are delivered duty paid (DDP) or delivered at place (DAP). As may be seen by Incoterms the Appellant remained at risk in respect of the goods and liable for all carriage costs and is responsible for performing or contracting for the performance of all customs (export and import) obligations. The Appellant was responsible for all fees, duties, tariffs, and taxes. Accordingly, the Appellant is responsible for, and at risk until, the goods are delivered “by placing them at the disposal of the buyer at the agreed point, if any, or at the named place of destination or by procuring that the goods are so delivered”.
Contentions
HMRC argued that in situations where the RPO was UK VAT registered, the appellant was making a supply of goods to the RPO at a time when the goods were physically located in the UK, and consequently there was a standard-rated supply. It issued an assessment to recover the output tax considered to be underdeclared.
PIL contended that there was a supply of delivered goods which were zero-rated when the goods were removed to a location outside the UK. It was responsible (via contracts which were accepted to reflect the reality of the transactions) for arranging the transport of the goods.
Decision
The FTT held that there was a single composite supplies of delivered goods, and these were a zero-rated supply of exported goods by PIL. The supplies were not made on terms that the RPOs collected or arranged for collection of the goods to remove them from the UK. The Tribunal found that the RPOs took title to the goods at the time they were delivered to the RR, and not before such that it was PIL and not the RPOs who was the exporter. This meant that the RPOs would be regarded as making their supplies outside the UK and would be responsible for overseas VAT as the Place Of Supply (POS) would be in the country in which it took title to the goods (but that was not an issue in this case).
The appeal was allowed, and the assessment was withdrawn.
Legislation
Domestic legislation relevant here is The VAT Act 1994:
- Section 6(2) which fixes the time of supply of goods involving removal as the time they are removed
- Section 7 VATA sets out the basis on which the place of supply is determined. Section 7(2) states that: “if the supply of any goods does not involve their removal from or to the United Kingdom they shall be treated as supplied in the United Kingdom if they are in the United Kingdom and otherwise shall be treated as supplied outside the United Kingdom”.
- Section 30(6) VATA provides that a supply of goods is zero-rated where such supply is made in the UK and HMRC are satisfied that the person supplying the goods has exported them
- For completeness, VAT Regulations 1995, regulation 129 provides the framework for the zero-rating goods removed from the UK by and on behalf of the purchaser of the goods.
Some paragraphs of VAT Notice 703 have the force of law which applies here, namely the sections on:
- direct and indirect exports
- conditions which must be met in full for goods to be zero-rated as exports
- definition of an exporter
- the appointment of a freight forwarder or other party to manage the export transactions and declarations on behalf of the supplier of exporter.
- the conditions and time limits for zero rating
- a situation in which there are multiple transactions leading to one movement of goods
Commentary
The Incoterms set out in the relevant contracts were vital in demonstrating the responsibilities of the parties and consequently, who actually exported the goods. It is crucial when analysing the VAT treatment of transactions to recognise each party’s responsibilities, and importantly, when (and therefore where) the change in possession of the goods takes place.
VAT Schemes Guide – Alternative ways of accounting for tax
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 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 on sales which customers have not yet paid for.
The VAT cash accounting scheme (CAS) 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 CAS 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 to pay
- output tax is not payable at all if a business has a bad debt (other bad debt relief here)
Disadvantages
- it 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)
- it is 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 (FRS) is designed to assist smaller businesses reduce the amount of time and complexity required for VAT accounting. The FRS 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 FRS with the Annual Accounting Scheme, additionally, there is an option to effectively use a cash basis so there is no need to use CAS. Unfortunately, changes to the scheme 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 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 (however, if an item is sold for less than the purchase price, a business cannot offset losses against the profits of other items to reduce the overall VAT liability).
There is a special margin schemes for auctioneers and a variation of the Margin Scheme (Global Accounting) 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 CAS and Annual Accounting but it cannot combine a Retail Scheme with the FRS. However, retailers may choose to use the FRS 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. A business must still issue a VAT invoice to any customer who requests one. It is a requirement of any scheme choice that HMRC must consider it fair and reasonable.
A business can join a retail scheme at the beginning of any VAT period and HMRC does not need to be notified.
Examples of Retail Schemes
- Apportionment
- Direct calculation
- The point of sale scheme
The required calculations vary for each scheme.
NB: 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. There are also some schemes which are compulsory, like the Tour Operators’ Margin Scheme (TOMS).
We are happy to review a business’ circumstances and calculate what schemes would produce the best outcome.
Please contact us if you require further information.
A VAT did you know?
If you buy a flapjack* from a vending machine in the corridor at work it is VAT free. However, if you buy the same product from a machine in the staff canteen it will be standard rated.
* Of course, zero rating only applies to a “traditional” flapjack and not cereal or energy/sports nutrition bars…
VAT Business/Non-Business HMRC Internal Manual updated
HMRC internal guidance manual has been updated on 9 October 2024.
This is likely to affect; charities and similar bodies, NFP, clubs, associations, philanthropic organisations, galleries and museums, “hobby” activities, amongst other persons.
Business or Non-Business (N-B) is very important in VAT as it determines, inter alia, whether a supplier is
- liable to register
- liable to account for output tax
- able to recover (all, some, or no) input tax
The definition of business and N-B here.
Legislation: The I Act 1994 Section 24(5).
Further reading
I have written about this issue many times, as it is a fundamental issue in the tax.
The following articles consider case law and other relevant business/N-B issues:
Lajvér Meliorációs Nonprofit Kft. And Lajvér Csapadékvízrendezési Nonprofit Kft
What the Guidance Manual covers:
- an overview of the meaning of business for VAT purposes
- general principles
- meaning of N-B
- the term ‘business activity’ (economic activity)
- the concept of ‘business’ for VAT purposes
- the meaning of business
- the purpose of activity
- N-B activities
- persons with both business and N-B activities
- outside the scope income
- N-B activities which result in payment
- determination procedures to establish whether an activity is business N-B
- the relevant UK law and caselaw (per above amongst other cases)
- the general approach for inspectors on business/N-B
- factors to consider when determining if an activity is business or not
- the link between supplies and consideration
- methods of apportionment of input tax and approval of apportionment methods
- formal procedures and work systems
- clubs and associations
- specific issues
- legal history
- HMRC policy background
This is the main reference material for HMRC inspectors and other employees, so it is very helpful for advisers to understand HMRC’s likely approach to a potential VAT issue.