Tag Archives: vat-free

VAT: Top 10 Tips for small businesses and start-ups

By Marcus Ward 17 December 2019

At some point it is likely that a small business or start-up will need to consider VAT. Here are a few pointers:

Should you be registered for VAT?

If your income is above £85,000 pa of taxable supplies, you have no choice. But you can voluntarily register if below this threshold. There are significant penalties for failure to register at the correct time.

Advantages of VAT registration: VAT recovery on expenses plus, perhaps; gravitas for a business
Disadvantages: administration costs plus a potential additional cost to customers if they are unable to recover VAT charged to them (eg; they are private individuals) which could affect your competitiveness

More here

Even non-registered businesses can save VAT

Look to use non-VAT registered suppliers, or non-EU suppliers (however, this may count towards your registration turnover)
If you are purchasing or leasing commercial property, consider looking for non-opted property or raise the issue of your inability to recover VAT in negotiations on the rent
Take advantage of all zero and reduced rates of VAT reliefs available
Challenge suppliers if you consider that a higher rate of VAT has been charged than necessary

Consider using the appropriate simplification scheme

Flat Rate Scheme (1% discount in first year of registration)
Cash Accounting (helps avoid VAT issues on bad debts)
Annual Accounting (can generate real, cash flow and/or administrative savings)
Margin schemes for second-hand goods

Further details here and here

Make sure you recover all pre-registration and/or pre-incorporation VAT

VAT incurred on goods on hand (purchased four years ago or less) and services up to six months before VAT registration is normally recoverable.

Are your VAT liabilities correct?

Many businesses have complex VAT liabilities (eg; financial services, charities, food outlets, insurance brokers, cross border suppliers of goods or services, health, welfare and education service providers, and any business involved in land and property). A review of the VAT treatment may avoid assessments and penalties and may also identify VAT overcharges made which could give rise to reclaims. Additionally, these types of business are often restricted on what input tax they can reclaim. Check business/non-business apportionment and partial exemption restrictions.

VAT – Care with input tax claims

By Marcus Ward 13 December 2019

Claim checklist

You have a purchase invoice showing VAT. You are VAT registered, and you will use the goods or services purchased for your business… can you claim it?

Assuming a business is not partly exempt or not subject to a restriction of recovery of input tax due to non-business activities (and the claim is not for a motor car or business entertainment) the answer is usually yes.

However, HMRC is now, more than ever before, concerned with irregular, dishonest and inaccurate claims. It is an unfortunate fact that some people see making fraudulent claims as an “easy” way to illegally obtain money and, as is often the case, honest taxpayers are affected as a result of the (understandable) concerns of the authorities. Missing Trader Intra-Community (MTIC) or “carousel” fraud has received a lot of publicity over recent years with an estimate of £Billions of Treasury money being obtained by fraudsters. While this has been generally addressed, HMRC consider that there is still significant leakage of VAT as a consequence of dishonest claims. HMRC’s interest also extends to “innocent errors” which result in input tax being overclaimed.

In order to avoid unwanted attention from HMRC, what should a business be watching for when claiming credit for input tax? Broadly, I would counsel making “reasonable enquiries”. This means making basic checks in order to demonstrate to HMRC that a business has taken care to ensure that a claim is appropriate. This is more important in some transactions than others and most regular and straightforward transactions will not be in issue. Here are some pointers that I feel are important to a business:

Was there a supply?

This seems an obvious question, but even if a business holds apparently authentic documentation; if no supply was made, no claim is possible. Perhaps different parts of a business deal with checking the receipt of goods or services and processing documents. Perhaps a business has been the subject of fraud by a supplier. Perhaps the supply was to an individual rather than to the business. Perhaps a transaction was aborted after the documentation was issued. There may be many reasons for a supply not being made, especially when a third party is involved. For example, Co A contracts with Co B to supply goods directly to Co C. Invoices are issued by Co B to Co A and by Co A to Co C. It may not be clear to Co A whether the goods have been delivered, or it may be difficult to check. A lot of fraud depends on “correct” paperwork existing without any goods or services changing hands.

Is the documentation correct?

The VAT regulations set out a long list of details that a VAT invoice must show. Full details on invoicing here If any one of these required items is missing HMRC will disallow a claim. Beware of “suspicious” looking documents including manually amended invoices, unconvincing quality, unexpected names or addresses of a supplier, lack of narrative, “copied” logos or “clip-art” additions etc. One of the details required is obviously the VAT number of the supplier. VAT numbers can be checked for validity here

Additionally, imports of goods require different documentation to support a claim and this is a more complex procedure (which extends to checking whether supplies of goods have been made and physical access to them). A lot of fraud includes a cross border element so extra care should be taken in checking the validity of both the import and the documentation.

Ultimately, it is easy to create a convincing invoice and HMRC is aware of this.

Timing

It is important to claim input tax in the correct period. Even if a claim is a day out it may be disallowed and penalties levied. details of time of supply here

Is there VAT on a supply?

If a supplier charges VAT when they shouldn’t, eg; if a supply is zero rated or exempt or subject to the Transfer of A Going Concern rules (TOGC), it is not possible to reclaim this VAT even if the recipient holds an apparently “valid” invoice. HMRC will disallow such a claim and will look to levy penalties and interest. When in doubt; challenge the supplier’s treatment.

Place of supply

Only UK VAT may be claimed on a UK return, so it is important to check whether UK VAT is actually applicable to a supply. The place of supply (POS) rules are notoriously complex, especially for services, if UK VAT is shown on an invoice incorrectly, and is claimed by the recipient, HMRC will disallow the claim and look to levy a penalty, so enquiries should be made if there is any uncertainty. VAT incurred overseas can, in most cases be recovered, but this is via a different mechanism to a UK VAT return. Details on claiming VAT in other EC Member States here. (As with many things, this may change after Brexit).

One-off, unusual or new transactions

This is the time when most care should be taken, especially if the transaction is of high value. Perhaps it is a new supplier, or perhaps it is a property transaction – if a purchase is out of the ordinary for a business it creates additional exposure to mis-claiming VAT.

To whom is the supply made?

It is only the recipient of goods or services who may make a claim; regardless of; who pays or who invoices are issued to. Care is required with groups of companies and multiple VAT registrations eg; an individual may be registered as a sole proprietor as well as a part of a partnership or director of a limited company, As an illustration, a common error is in a situation where a report is provided to a bank (for example for financing requirements) and the business pays the reporting third party. Although it may be argued that the business pays for the report, and obtains a business benefit from it, the supply is to the bank in contractual terms and the business cannot recover the VAT on the services, in fact, in these circumstances, nobody is able to recover the VAT. Other areas of uncertainty are; restructuring, refinancing or acquisitions, especially where significant professional costs are involved.

e-invoicing

There are additional rules for electronically issued invoices. Details here

A business may issue invoices electronically where the authenticity of the origin, integrity of invoice data, and legibility of invoice content can all be ensured, and the customer agrees to receive invoices electronically.

‘Authenticity of the origin’ means the assurance of the identity of the supplier or issuer of the invoice
‘Integrity of content’ means that the invoice content has not been altered
‘Legibility’ of an invoice means that the invoice can be easily read.

A business is free to choose a method of ensuring authenticity, integrity, and legibility which suits its method of operation. e-invoicing provides additional opportunities for fraudsters, so a business needs to ensure that its processes are bulletproof.

HMRC’s approach

If a claim is significant, or unusual for the business’ trading pattern, it is likely that HMRC will carry out a “pre-credibility” inspection where they check to see if the claim is valid before they release the money. Another regular check is for HMRC to establish whether the supplier has declared the relevant output tax on the other side of the transaction (a so-called “reference”). Not unsurprisingly, they are not keen on making a repayment if, for whatever reason, the supplier has not paid over the output tax.

What should a business do?

In summary, it is prudent for a business to “protect itself” and raise queries if there is any doubt at all over making a claim. It also needs a robust procedure for processing invoices. If enquiries have been made, ensure that these are properly documented for inspection by HMRC as this is evidence which may be used to mitigate any potential penalties, even if a claim is an honest mistake. A review of procedures often flushes out errors and can lead to increased claims being made.

As always, we are happy to assist.

VAT: Place of supply of matchmaking. The Gray & Farrar case

By Marcus Ward 26 November 2019

Latest from the courts

The Gray & Farrar International LLP (G&F) First Tier Tribunal (FTT) case.

The romantic side of VAT (well…if romance comes at a cost of £15,000 a time).

The issue here was the place of supply (POS) of the services provided by G&F to clients all over the world.

Background

The Appellant ran an exclusive matchmaking business. It provides its services to clients in many jurisdictions. It argued that its supplies to non-taxable (individuals) persons who reside outside the EU where outside the scope of UK VAT because the POS was where the supply was received. HMRC formed the view that these services did not fall within the required definition of “consultancy” such that the POS was where the business belonged. As G&F belonged in the UK, the relevant services were subject to VAT. So, the issue was: whether matchmaking could be regarded as a consultancy service.

Legislation

The EU legislation is found at The Principal VAT Directive, Article 59(c) (“para(c)”) and in the UK law at The VAT Act 1994, Schedule 4A para 16(2)(d).

In the words of para (c):

“the services of consultants, engineers, consultancy firms, lawyers, accountants and other similar services, as well as data processing and the provision of information”

So, did G&F’s services fall within para (c)?

Decision

The judge stated that “… the services provided by the appellant must be compared with services “principally and habitually” provided by a consultant…and that such similarity is achieved when both types of service serve the same purpose.” And that consultancy is “advice based on a high degree of expertise” or “specialist and expert advice by someone with extensive experience/qualifications on the subject”. Was matchmaking that?

Well, the FTT decided that services would fall within para(c) if they are services of the sort which are primarily and habitually supplied by one or more of the specifically listed suppliers and that “consultants” are not limited to persons who are members of the liberal professions but to persons who are in ordinary usage “consultants” and typically act in an independent manner – that is to say are not dependent on, or integrated with, their client.

HMRC argued that what G&F were providing was the possibility of entering into a long-term happy relationship: and that was what the Appellant was selling. The FTT accepted that that dream was what the typical client would want, but saw a difference between what is provided and the reason the service is wanted. It gave the example of a school providing education, not the hope of a good job.

Further, HMRC contended that G&F’s activities went far beyond the provision of advice and information because they involved all the other elements that go into the service of matchmaking. Those activities included ascertaining and executing the needs of the client, reading the non-verbal clues, reading body language, and the inexplicable magic of applying knowledge based on intuition and experience to identify people who may be compatible. The FTT said that that was all very well but drew a distinction between the skills required by the seller and what was sold.

Split decision

A first Tribunal member concluded that the material elements of the supply consisted only of the provision of information and expert advice, and the supply fell within para (c).

Another Tribunal member considered that the actions of the liaison team in G&F promoted and helped the making of a successful relationship, but he was not persuaded that the support provided by the liaison team assisted the provision of information about a potential partner or served the supply of G&F’s MD’s advice that a particular person might be suitable. It was support in the developing of a relationship – support in addition to the use of the information and expert advice received – and was not shown to be sufficiently inconsequential to say that it was just part of those elements. The liaison team provided a form of ready-made confidante for the client with whom he or she could discuss a relationship and his or her hopes and concerns for it or for other relationships. It enabled him or her to obtain the kind of support one might obtain from a friend – a listening ear or sounding board – and informal advice.

As two members of the Tribunal disagreed on the outcome, it fell to the judge to give a casting vote; which he did in favour of dismissing the appeal.

So, in this case at least, matchmaking is not consultancy. (Although I like the definition of the service being “inexplicable magic”).

Commentary

If it easy to make assumptions about the precise nature of a type of service. In order for certain services to be UK VAT free they need to meet the relevant criteria fully. “Consultancy” is a bit of a catch all, but this case illustrates the dangers of a lack of analysis. This was a close case and I could see the decision going the other way on another day quite easily.

Charities and VAT

By Marcus Ward 6 November 2019

Surely charities don’t have to pay taxes?

This is a common myth, and while charities and NFPs do enjoy some VAT reliefs, they are also liable for a number of VAT charges.

Charities have a very hard time of it in terms of VAT, since not only do they have to contend with complex legislation and accounting (which other businesses, no matter how large or complicated do not) but VAT represents a real and significant cost.

By their very nature, charities carry out “non-business” activities which means that VAT is not recoverable on the expenses of carrying out these activities. Additionally, many charities are involved in exempt supplies, eg; fundraising events, property letting, and certain welfare and educational services, which also means a restriction on the ability to recover VAT on attributable costs.

These two elements are distinct and require separate calculations which are often very convoluted. The result of this is that charities bear an unfair burden of VAT, especially so since the sector carries out important work in respect of; health and welfare, poverty, education and housing etc. Although there are some specific reliefs available to charities, these are very limited and do not, by any means, compensate for the overall VAT cost charities bear.

Another issue is legal uncertainty over what constitutes “business income” for charities, especially the VAT status of grants. It is worth bearing in mind here the helpful comment in the EC case of Tolsma translated as: “…the question is whether services carried on by [a person] were carried on for the payment or simply with the payment”.

Many charities depend on donations which, due to the economic climate have fallen in value at a time when there is a greater demand on charities from struggling individuals and organisations.

What can be done?

Ensure any applicable reliefs are taken advantage of.
If significant expenditure is planned, ensure that professional advice is sought to mitigate any tax loss.
Review the VAT position to ensure that the most appropriate partial exemption methods and non-business apportionment is in place.
Review any land and property transactions. These are high value and some reliefs are available. Additionally it is possible to carry out planning to improve the VAT position of a property owning charity.
Review VAT procedures to ensure that VAT is declared correctly. Penalties for even innocent errors have increased recently and are incredibly swingeing.
Consider a VAT “healthcheck” which often identifies problems and planning opportunities.

We have considerable expertise in the not for profit sector and would be pleased to discuss any areas of concern, or advise on ways of reducing the impact of VAT on a charity.

More detail on VAT and Charities for guidance

Business activities

It is important not to confuse the term ‘trading’ as frequently used by a charity to describe its non-charitable commercial fund-raising activities (usually carried out by a trading subsidiary) with ‘business’ as used for VAT purposes. Although trading activities will invariably be business activities, ‘business’ for VAT purposes can have a much wider application and include some or all of the charity’s primary or charitable activities.

Registration and basic principles

Any business (including a charity and NFP entity or its trading subsidiary) that makes taxable supplies in excess of the VAT registration threshold must register for VAT. Taxable supplies are business transactions that are liable to VAT at the standard rate, reduced rate or zero rate.

If a charity’s income from taxable supplies is below the VAT registration threshold it can voluntarily register for VAT but a charity that makes no taxable supplies (either because it has no business activities or because its supplies or income are exempt from VAT) cannot register.

Charging VAT

Where a VAT-registered charity makes supplies of goods and services in the course of its business activities, the VAT liability of those supplies is, in general, determined in the normal way as for any other business. Even if VAT-registered, a charity should not charge VAT on any non-business supplies or income.

Reclaiming VAT

This is usually a two stage process (a combined calculation is possible but it must have written approval from HMRC – Notice 706 para 7) . The first stage in determining the amount of VAT which a VAT-registered charity can reclaim is to eliminate all the VAT incurred that relates to its non-business activities. It cannot reclaim any VAT it is charged on purchases that directly relate to non-business activities. It will also not be able to reclaim a proportion of the VAT on its general expenses (eg; telephone, IT and electricity) that relate to those non-business activities.

Once this has been done, the remaining VAT relating to the charity’s business activities is input tax.

The second stage: It can reclaim all the input tax it has been charged on purchases which directly relate to standard-rated, reduced-rated or zero-rated goods or services it supplies.

It cannot reclaim any of the input tax it has been charged on purchases that relate directly to exempt supplies.

It also cannot claim a proportion of input tax on general expenses (after adjustment for non-business activities) that relates to exempt activities unless this amount, together with the input tax relating directly to exempt supplies, is below the minimis limit.

Business and non-business activities

An organisation such as a charity that is run on a non-profit-making basis may still be regarded as carrying on a business activity for VAT purposes. This is unaffected by the fact that the activity is performed for the benefit of the community. It is therefore important for a charity to determine whether any particular transactions are ‘business’ or ‘non-business’ activities. This applies both when considering registration (if there is no business activity a charity cannot be registered and therefore cannot recover any input tax) and after registration. If registered, a charity must account for VAT on taxable supplies it makes by way of business. Income from any non-business activities is not subject to VAT and affects the amount of VAT reclaimable as input tax.

‘Business’ has a wide meaning for VAT purposes based upon Directive 2006/112/EC (which uses the term ‘economic activity’ rather than ‘business’), UK VAT legislation and decisions by the Courts and VAT Tribunals. An activity may still be business if the amount charged does no more than cover the cost to the charity of making the supply or where the charge made is less than cost. If the charity makes no charge at all the activity is unlikely to be considered business.

An area of particular difficulty for charities when considering whether their activities are in the course of business is receipt of grant funding.

Partial Exemption

The VAT a business incurs on running costs is called input tax. For most businesses this is reclaimed on VAT returns from HMRC if it relates to standard rated or zero rated sales that that business makes. However, a business which makes exempt sales may not be in a position to recover all of the input tax which it incurred. A business in this position is called partly exempt. Generally, any input tax which directly relates to exempt supplies is irrecoverable. In addition, an element of that business’ general overheads are deemed to be in part attributable to exempt supplies and a calculation must be performed to establish the element which falls to be irrecoverable.

Input tax which falls within the overheads category must be apportioned according to a so called; partial exemption method. The “Standard Method” requires a comparison between the value of taxable and exempt supplies made by the business. The calculation is; the percentage of taxable supplies of all supplies multiplied by the input tax to be apportioned which gives the element of VAT input tax which may be recovered. Other partial exemption methods (so called Special Methods) are available by specific agreement with HMRC.

My flowchart may be of use: partial exemption flowchart

De Minimis

There is however relief available for a business in the form of de minimis limits. Broadly, if the total of the irrecoverable directly attributable (to exempt suppliers) and the element of overhead input tax which has been established using a partial exemption method falls to be de minimis, all of that input tax may be recovered in the normal way. The de minimis limit is currently £7,500 per annum of input tax and one half of all input tax for the year. As a result, after using the partial exemption method, should the input tax fall below £7,500 and 50% of all input tax for a year it is recoverable in full. This calculation is required every quarter (for businesses which render returns on a quarterly basis) with a review at the year end, called an annual adjustment carried out at the end of a business’ partial exemption year. The quarterly de minimis is consequently £1,875 of exempt input tax.

Should the de minimis limits be breached, all input tax relating to exempt supplies is irrecoverable.

Summary

One may see that this is a complex area for charities and not for profit entities to deal with. Certainly a review is almost always beneficial, as are discussions regarding partial exemption methods.

Please click here for more information on our services for charities.

New VAT Group rules

By Marcus Ward 6 November 2019

Changes to VAT Group rules – an increased opportunity

From 1 November 2019 the rules for VAT grouping have changed.

What is a VAT group?

A VAT group allows two or more entities to account for VAT under a single registration number with one of the corporate bodies in the group acting as the representative member.

The group is registered in the name of that representative member, who is responsible, on behalf of all of the other members of the group, for completing VAT returns and paying and reclaiming VAT.

All supplies of goods and services made by any member of the group to a third party outside the group are treated as having been made by the representative member. Similarly, any supply of goods or services made by a third party outside the group to any member of the group is treated as having been made to the representative member.

Supplies of goods or services between group members are not subject to VAT and a single VAT return will be completed each period for the entire group, as opposed to separate businesses submitting individual returns.

The changes

Prior to 1 November, only bodies corporate were able to form a VAT group (mainly companies and LLPs). From the beginning of this month, VAT grouping is additionally available for all entities, including; partnerships, sole traders and trusts in certain cases.

Eligibility

Via existing legislation, grouping is permitted if the control tests are passed. Bodies corporate can form a VAT group if:

each is established or has a fixed establishment in the UK
they are under common control

(There are additional tests for certain ‘specified bodies’ set out in Notice 700/2 para 3.2)

‘Control’ has a specific meaning based on the definition of holding company and subsidiary in section 1159 of and Schedule 6 to the Companies Act 2006.

New changes to eligibility

Non-corporate entities such as individuals and partnerships can now join a VAT group if they meet all of the following conditions:

they are established, or have a fixed establishment in the UK
they can demonstrate that they control all of its body corporate subsidiaries in the group. The test will apply assuming the non-corporate entity would pass the test if it was a corporate body, eg; usually meaning 51% or more of share capital in the relevant company/companies
they can demonstrate that they are entitled to VAT register independently of any other business (the distinction here is that a body corporate may be included in a VAT group if it is not trading, nor intends to trade)

The current eligibility to group is set out at VAT Act 1994, Section 43A and has been updated with a new section 43AZA which includes the new changes.

VAT Group pros and cons

So, would it be beneficial to VAT group entities? I set out here the pros and cons for businesses.

Pros

only one VAT return per quarter – less administration
no VAT on supplies between VAT group members.
no need to invoice etc or recognise supplies on VAT returns
likely to improve partial exemption position if exempt supplies are made between group companies.
likely to improve input tax recovery if taxable supplies are made to partly exempt group companies
may provide useful planning opportunities/convenience at a later date.

Cons

all members of the group are jointly and severally liable for any VAT due
only one partial exemption de-minimis limit for group
obtaining all relevant data to complete one return may take time thus increasing the potential for missing filing deadlines
a new VAT number is issued
assessments can be issued to the representative member relating to earlier periods when it was not the representative member and even when it was not a member of the group at that time
the limit for voluntary disclosures of errors on past returns applies to the group as a whole (rather than each company having its own limit)
payments on account limits apply to the group as a whole. This applies to a business whose VAT liability is more than £2million pa. Please see HMRC Reference: Notice 700/60 details here
may detrimentally affect partial exemption position if a partly exempt company makes taxable supplies to a fully taxable group company

Planning

If you think that there is a potential advantage for you, or your clients’ business, in VAT grouping, please contact us to discuss the VAT position.

VAT: What’s a TOGC (and what’s not)? – The General Distribution Storage case

By Marcus Ward 7 October 2019

Latest from the courts

A Transfer of a Going Concern (TOGC) is an area of VAT which produces a lot of issues and is a subject which is returned to on a regular basis in the courts. The General Distribution Storage Ltd (GDSL) First Tier Tribunal (FTT) TC 07352 [2019] case provides a warning that getting it wrong can be costly.

Background

The appellant owned the freehold of a commercial property. This property was rented to a third party. Subsequently, the property was sold with the benefit of the existing lease, to Hartlone Scaffolding Ltd (HSL). Output tax was charged and paid on the value of the sale as the property was subject to an option to tax. HSL also opted to tax before the date of completion. On the same day, HSL sold on the property to Foundry Investments Ltd (FIL) and again, VAT was charged and paid.

FIL made a claim for the input tax charged which caused a pre-credibility enquiry from HMRC. During the inspection, HMRC noted that, although GDSL had charged VAT, it had neither declared, nor paid the VAT to HMRC. An assessment was issued to recover this output tax.

The appellant claimed that no VAT was due because the sale of the tenanted building qualified as a VAT free TOGC, ie; it was not a taxable sale of an opted commercial property, but rather, it was the sale of a property letting business which was a going concern.

Technical

TOGC provisions

Normally the sale of the assets of a VAT registered business will be subject to VAT at the appropriate rate. A TOGC, however is the sale of a business including assets which must be treated as a matter of law, as “neither a supply of goods nor a supply of services” by virtue of meeting certain conditions (summarised below). It is always the seller who is responsible for applying the correct VAT treatment. Transfer Of a Going Concern treatment is not optional. A sale is either a TOGC or it isn’t. It is a rare situation in that the VAT treatment depends on; what the purchaser’s intentions are, what the seller is told, and what the purchaser actually does. All this being outside the seller’s control. Full details of TOGCs here.

TOGC Conditions

The conditions for VAT free treatment of a TOGC:

The assets must be sold as a business, or part of a business, as a going concern
The assets must be used by the transferee in carrying on the same kind of business, whether or not as part of any existing business, as that carried on by the transferor in relation to that part (HMRC guidance uses the words “intend to use…” which, in some cases may provide additional comfort)
There must be no break in trading
Where the seller is a taxable person (VAT registered) the purchaser must be a taxable person already or immediately become, as a result of the transfer, a taxable person
Where only part of a business is sold it must be capable of separate operation
There must not be a series of immediately consecutive transfers

Where the transfer includes property which is standard-rated, either because the seller has opted to tax it or because it is a ‘new’ or uncompleted commercial building the purchaser must opt to tax the property and notify this to HMRC no later than the date of the supply.

Please note that the above list has been compiled for this article from; the legislation, HMRC guidance and case law. Specific advice must be sought.

Decision

It was decided that TOGC could not apply in these circumstances. The buyer, HSL, at the time of the sale, could not have intended to carry on the property letting business as it immediately sold on the freehold (at a profit) on the same day. As above, TOGC treatment does not apply if there is a “series of immediately consecutive transfers”. The appeal was consequently dismissed, and output tax was therefore properly due.

Commentary

This appears to have been the only available conclusion. It illustrates the importance of considering VAT whenever a supply of property is made. It is unclear why VAT was initially charged and why this was not declared to HMRC (and it if was thought a TOGC, why the VAT position was not subsequently corrected by the issue of a VAT only credit note). This is a complex area of the tax and an easy issue to miss when there are a considerable number of other factors to consider when a business (or property) is sold. Extensive case law (example here and changes to HMRC policy here ) insists that there is often a dichotomy between a commercial interpretation of a going concern and HMRC’s view.

Contracts are important in most TOGC cases, so it really pays to review them from a VAT perspective.

I very strongly advise that specialist advice is obtained in cases where a business, or property is sold. Yes, I know I would say that!

VAT: Apportionment and best judgement – The Homsub case

By Marcus Ward 3 October 2019

Latest from the courts

In the Homsub Ltd case the issue was the apportionment of values when a supply comprises goods at different VAT rates.

Further to the M & S case here is another First Tier Tribunal (FTT) case on the value of food and drink in meal deals. It also considered whether HMRC exercised ‘best judgement’ when it carried out an invigilation exercise to establish the percentage split between supplies subject to VAT and those which were not.

Background

Homsub is a franchisee in respect of Subway products, essentially being hot and cold food, which can be consumed either on or off their premises.

HMRC had concerns that the correct amount of output tax was being declared on sales. Consequently, it carried out an invigilation exercise as follows: The invigilators recorded, in respect of each of the five outlets, each sale made and annotated it with whether it was eat in or take out. A record was also made as to whether the food was hot or cold. Those differences needed to be recorded because of the different VAT treatment in respect of hot food and cold food on the one hand and eat in and take out food on the other. All eat in food is taxable, while some takeaways are zero rated. Further information here.

Contentions

Homsub complained that the methodology adopted by HMRC was flawed as it was not sufficiently refined to give rise to a reasonably reliable overall picture. It was argued that the exercise should have been undertaken by reference to transaction values, rather than the number of transactions. That is – HMRC should have looked at the value of supplies made which did attract VAT as compared to the value of supplies made which did not attract VAT.

The court identified that the true area of concern on the part of the respondents was that Subway sometimes had promotions called “Meal Deals” whereby several products would be bundled together for a single headline price.

Homsub contended that a meal deal offer was available to customers whereby for the all in price of £3 a customer could purchase a sandwich (hot or cold) and a drink (which could be a fizzy drink or hot beverage upon which VAT would be due). If the meal deal involved hot food, then it would be subject to VAT.

HMRC’s issue was that because of the way in which the appellant’s till was set up, it treated £2.99 of each meal deal as attributable to the sandwich (VAT free if cold) and only 1p to the accompanying drink which, if subject to VAT, would mean that the VAT would be one fifth of one penny.

Outcomes

Homsub stated that it is entitled to run its business as it sees fit and to make such commercial decisions as best suit its business. The appellant said that it is entitled to sell loss leaders, as do many major retailers, or to sell stock at less than cost price if that somehow serves the best overall commercial interests of the business.

The court ruled that this was not a true loss leader situation. This was a transaction were goods are packaged together to be sold at a single price. What must be done is to look at the reality of the transaction when apportioning the part of the money paid by the customer between the various components within the package of goods sold. Consequently, Homsub needed to apportion the sales value in a different way. This would not necessarily be on the basis of the relevant retail prices. This is because accurate apportionment is difficult, especially as, as Homsub explained, that labour is by far the largest cost component within the cost of a sandwich and the overall meal deal package, that is; much more staff labour was devoted to preparing sandwiches than serving drinks.

If the case stopped there, there would be additional output tax for Homsub to pay. However…

Methodology and best judgement

The court decided that the assessment methodology adopted by HMRC was significantly flawed and potentially misleading. A simple count of transactions that did attract VAT and those which did not attract VAT might be capable of being appropriate in certain kinds of business, but not in this case. Further, a statistician or forensic accountant would be ‘alarmed to find that the methodology used by HMRC was considered to be either acceptable or such as to give rise to a reasonably reliable result’. In court, the representative of HMRC was forced to agree with this interpretation- which must have caused embarrassment. The court also said that it was not its function to go on to undertake any kind of assessment to ascertain what, if any, additional VAT might be due.

Decision

In the court’s judgement the methodology was flawed to such an extent that it would be wholly unreasonable, and unfair to the appellant, to base a best judgement assessment thereon. The appeal was therefore allowed.

Commentary

Always have assessments of this sort reviewed. There is significant case law on ‘best judgement’ most salient being: Van Boeckel v C&E [1981] and Rahman v HMRC. Additionally, HMRC often make certain assumptions on assessments based on invigilation and mark up exercises. These can be challenged, as can the methodology. As examples, HMRC need to recognise, inter alia;

seasonal trade variations
discounts
customer preferences (in this case, Homsub explained that at some of its shops’ locations a lot of customers were students and preferred to take away rather than eating in)
representative periods
sales/special offers
the times invigilations were carried out (were they representative of all trade?)
the number of invigilations and ‘test meals’ – were they sufficient to establish a fair overall picture of the business?
own and staff use
business promotions
loss of goods (destroyed, waste, stolen etc)
gross/net
gifts to customers
alternative methods
HMRC staff experience etc

All of these and other situations can affect expected sale values.

I have further set out how HMRC operate in these situations here.

I have a success rate of over 90% in getting these types of assessments reduced or completely withdrawn. Please do not simply accept HMRC’s decision, nor the, increasingly, bullying stance they can adopt. Always challenge!

VAT: Extent of welfare exemption – The Lilias Graham Trust case

By Marcus Ward 3 October 2019

Latest from the courts

Certain welfare services are exempt from VAT via VAT Act 1994, Schedule 9, Group 7, Item 9 – services which are directly connected with the care or protection of children. In the The Lilias Graham Trust (LGT) First Tier Tribunal case, the scope of the exemption was considered.

Background

LGT, which has charitable status, operated residential assessment centres, which supported parents (many of whom had mental health issues) in learning how to care for their children.

It was common ground that LGT’s services were as summarised in a letter from Glasgow City Council (where relevant):

LGT is an assessment centre providing assessment services on the parenting capacity of those referred to the service
The assessment services cover families where there is an uncertainty about whether the parent(s) can safely look after their children
LGT is simply acting as an observer watching the parent’s care for their own children and providing information in the form of advice
LGT is not providing any treatment in the form of medical care for any illness or injury
LGT’s recommendation following the assessment provides a recommendation to social workers around whether the parent(s) has sufficient capacity to keep their child safe and healthy
GCC viewed the residential accommodation as a fundamental part of the provision of the assessment services on the parenting capacity of those families which were referred to LGT.

Although the major part of LGT’s income came from the Local Authority fees, it is also subsidised to a degree by grants and donations.

Technical

In this case the odd position was that HMRC was arguing for exemption because, in learning how to care for their children, the services were “closely linked” to welfare services or “directly connected” to them as provided for by the Principal VAT Directive and the VAT Act in turn.

LGT contended that their supplies to a Local Authority (which could recover any VAT charged) were taxable as they did not fall within the welfare definition. LGT admitted that there was a causal relationship between the services provided and the care and protection of children, but the connection was too remote to be deemed to be a direct connection – There were several intervening factors and intermediaries between the service provided and the care and protection of children.

At issue was net input tax of circa £400,000 which would be recoverable by LGT if its supplies were taxable, but not if they were exempt. Guide to partial exemption here.

Decision

The court found that the essential purpose of the supplies made by LGT was to ensure that the child was better cared for and had optimal protection. That is precisely why the Local Authority employed LGT. Its supplies are both closely linked and directly connected with the protection of children as also to their care. Accordingly, the appellant made supplies of welfare services which are exempt from VAT. The fact that LGT provided its services to the Local Authority rather than the parents did not mean that its services should be taxable. Therefore, there was no output tax chargeable to the Local Authority and no input tax recovery by LGT on expenditure attributable to those exempt supplies.

Commentary

In this case, HMRC originally ruled that the services were taxable and LGT were required to VAT register, it even issued a late registration penalty. HMRC clearly subsequently changed its view which put input tax which LGT had recovered at risk. There are often disputes on the extent of the exemption, and sometimes debates on whether a service is supplied, or simply staff providing their services. It is important to understand these sometimes subtle differences as getting it wrong can be costly, as LGT found out.

VAT: Disaggregation – The Caton case

By Marcus Ward 12 September 2019

Latest from the courts.

In the Charles John Caton First Tier tribunal (FTT) case the issue was whether HMRC were correct in deciding that a business was artificially split to avoid VAT registration (so called disaggregation, details here).

Background

The appellant ran a café known as The Commonwealth for a number of years. Subsequently, his wife opened a restaurant in adjoining premises. HMRC decided that this was a single business and required a backdated VAT registration. This resulted in a retrospective VAT return and associated penalties for late registration.

HMRC pointed to the leases, the liability insurance and the alcohol licence, which are all in Mr Caton’s name, together with the fact he signed a questionnaire stating that he was sole proprietor of the restaurant, and the fact that the washing up area is shared, and say that these show that there was only one business. They also said that the fact that Mrs Caton did not have a bank account and therefore card takings from the restaurant went into Mr Caton’s bank account further bolsters their case.

The appellant proffered the following facts to support the contention that there were two separate businesses: There were separate staff in the restaurant and the café. Those for the cafe were hired by Mr Caton, and are his responsibility, and those for the restaurant were hired by Mrs Caton and are her responsibility. The cooking is done completely separately, by different people using different cooking areas. The menus are completely different, and when the café sells the restaurant ‘specials’ they are rung up on the till with a marker that shows they are restaurant sales. Although the majority of the food is ordered from the same place, there are separate orders (even though these orders are placed at the same time and paid for using Mr Caton’s bank account). Mrs Caton decides on the menu for the restaurant and the prices. She keeps the cash generated from the sales in the cafe, and this is not banked in Mr Caton’s account. Depending on the ratio of cash sales to card sales in any given month, she may need to pay some of it to Mr Caton for the rent, rates etc, but any surplus she keeps.There were two tills, one for the restaurant and one for the cafe.

The Law

The VAT Act 1994, Schedule 1 para 1A provides that:

(1) Paragraph 2 below is for the purpose of preventing the maintenance or creation of any artificial separation of business activities carried on by two or more persons from resulting in an avoidance of VAT.

(2) In determining for the purposes of sub-paragraph (1) above whether any separation of business activities is artificial, regard shall be had to the extent to which the different persons carrying on those activities are closely bound to one another by financial, economic and organisational links.

VAT Act 1994, Schedule 1 para 2 provides that:

(1)… if the Commissioners make a direction under this paragraph, the persons named in the direction shall be treated as a single taxable person carrying on the activities of a business described in the direction…

Decision

The judge decided that she considered the facts that point to the businesses being run and owned as two separate operations were significantly stronger that facts that point to a joint ownership. And the appeal was allowed.

Commentary

These types of cases are decided on the precise facts. I think that this one must have been a close call. It appears the fact that may have swung it was that the judge commented “We find it extremely surprising, in this case, that HMRC have never met with Mrs Caton or, in correspondence, asked her for any details. Mr Caton and HMRC have both told us that he has consistently maintained from the first meeting the fact that Mrs Caton runs the restaurant. We find it impossible that HMRC could be in possession of facts sufficient to make a reasonable decision on this case without hearing from Mrs Caton.” That approach by HMRC is never going to play well in court. It strikes me that this type of approach is increasing in the department. Whether this is down to lack of training, resources or simple corner cutting to save time I cannot say.

If HMRC issue a direction under VAT Act 1994, Schedule 1 para 2 that two or more businesses should be treated as one, it is always worth having that decision reviewed. This is especially relevant in cases such as this where customers are the final consumers making the VAT sticking tax.

VAT DIY Housebuilders’ Scheme – useful information

By Marcus Ward 9 September 2019

The DIY Housebuilders’ Scheme is a tax refund scheme 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). Details here.

However, there are often uncertainties and disputes over precisely what tax may be claimed on various expenditure. To this end, HMRC has published a comprehensive list of items, sorted alphabetically, which should avoid a lot of potential disagreements on claims.

It should be noted that a claim for services can only be made for conversions (at the reduced rate of 5%) as any services in respect of a new build property should be zero rated.

What else can a housebuilder not claim for?

There is no claim available for:

building projects outside the UK
materials or services that are not subject to VAT, eg; are zero-rated or exempt or provided by a non VAT-registered supplier
professional or supervisory fees, eg; architects and surveyors
the hire of plant, tools and equipment, eg; generators, scaffolding and skips
building materials that aren’t permanently attached to or, part of, the building itself
some fitted furniture, electrical and gas appliances, carpets or garden ornaments
supplies for which you do not have a VAT invoice.

If you would like assistance with making a claim, please contact us.