Tag Archives: vat-invoice

VAT: Pre-registration activities

By   2 October 2024
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This article looks at the period of activity before a business VAT registers: How to deal with sales and what input tax may be recovered.

VAT Registration

The obligation to VAT register here and the pros and cons of voluntary registration here.

Sales

Between application and receiving a VAT number:

During the wait, a business cannot charge or show VAT on its invoices until it receives a VAT number. However, it will still be required to pay the VAT to HMRC for this period. Usually, a business will increase its prices to allow for this and tell its customers why. Once a VAT number is received, the business can then reissue the relevant invoices showing VAT.

Purchases

Purchases made before registration:

Only the legal entity which actually purchased the goods or services and has applied to VAT register is entitled to input tax recovery.

There are time limits for backdating claims for input tax incurred before registration. These are:

  • four years for goods on hand at the time of the Effective Date of Registration (EDR), or that were used to make other goods on hand at the EDR. This includes both stock for resale or fixed assets
  • six months for services

Input tax can only be reclaimed if the pre-registration expenditure related to the taxable supplies made, or to be made, by the newly VAT registered business (whether these supplies are subject to subsequent output tax or whether they were made pre-registration but would have been taxable if the business was VAT registered).

The only VAT return on which such input tax is recoverable is the first.

Tip

When a business applies for registration, there is an opportunity to backdate the EDR. The provision for taxpayers to negotiate an earlier date is contained in The VAT Act 1994, Schedule 1, 9. This option should be considered if there is additional VAT that would become recoverable. This will mean that the first return will be longer than the normal quarterly or monthly returns.

The limit for backdating EDR is four years.

Irrecoverable VAT

Input tax cannot be reclaimed on:

  • goods that have been completely consumed before registration, eg; fuel, electricity or gas
  • goods that have been sold before registration
  • goods or services which relate to exempt supplies made, or to be made, by the registered business (see below)
  • services which related to goods disposed of before registration

NB: Businesses are not required to reduce the VAT deducted in respect of pre-registration use of fixed assets. Eg; input tax incurred on a van purchased three years before registration and used before and after registration would be recoverable in full.

The “usual” rules for input tax also apply to pre-registration claims; that is, some VAT is never reclaimable, see here.

Specific circumstances

There are special rules for partially exempt businesses and for businesses that have non-business income and for the purchase of certain items (see below) covered by the Capital Goods Scheme (CGS).

Included in the CGS are:

  • taxable land, property purchases of £250,000 or over
  • refurbishment or civil engineering works costing £250,000 or over
  • computer hardware costing £50,000 or over (single items, not networks)
  • aircraft, ships, and other vessels costing £50,000 or more

NB: The partial exemption de minimis limit does not apply to input tax incurred pre-registration.

Pre-incorporation

A limited company cannot register for VAT until it is formally incorporated. Goods or services may have been supplied to the directors or employees setting up the company before then.

A company can claim input tax on those goods and services if the it relates directly to the taxable business to be carried on by it following incorporation and registration for VAT. The six-month (services) four-year (goods) limits also apply to pre-incorporation claims.

Documentation

Any claim must be supported by a valid VAT invoice for each item. If this documentation is not available, there is a possibility that HMRC will accept alternative evidence.

Legislation

The right to deduct input tax as above is covered by The VAT general Regulations 1995, reg 111.

VAT Invoices – A Full Guide

By   9 September 2024
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VAT Basics

The subject of invoices is often misunderstood and can create serious issues if mistakes are made. VAT is a transaction tax, so primary evidence of the transaction is of utmost importance. Also, a claim for input tax is usually not valid unless it is supported by an original valid invoice. HMRC can, and often do, reject input claims because of an inaccurate invoice.  There are a lot of misconceptions about invoices, so, although a rather dry subject, it is very important and I thought it would be useful to have all the information in one place, so here is my guide:

Obligation to provide a VAT invoice

With certain exceptions, a VAT registered person must provide the customer with an invoice showing specified particulars when there is a supply of goods or services in the UK (other than an exempt supply) to a taxable person.

 Exceptions

The above does not apply to the following supplies.

• Zero-rated supplies

• Supplies where the VAT charged is excluded from credit under VATA 1994, s 25(7) eg; business entertaining and certain motor cars although a  VAT invoice may be issued in such cases.

• Supplies on which VAT is charged but which are not made for a consideration. This includes gifts and private use of goods.

• Sales of second-hand goods under one of the special schemes – any invoices for such sales must not show any VAT.

• Supplies that fall within the Tour Operators’ Margin Scheme (TOMS). VAT invoices must not be issued for such supplies.

• Supplies where the customer operates a self-billing arrangement.

• Supplies by retailers unless the customer requests a VAT invoice.

• Supplies by one member to another in the same VAT group.

• Transactions between one division and another of a company registered in the names of its divisions.

• Supplies where the taxable person is entitled to issue, and does issue, invoices relating to services performed in fiscal and other warehousing regimes.

Documents treated as VAT invoices

Although not strictly VAT invoices, certain documents listed below are treated as VAT invoices either under the legislation or by HMRC.

(1) Self-billing invoices

Self-billing is an arrangement between a supplier and a customer in which the customer prepares the supplier’s invoice and forwards it to him, normally with the payment.

(2) Sales by auctioneer, bailiff, etc.

Where goods (including land) forming part of the assets of a business carried on by a taxable person are, under any power exercisable by another person, sold by that person in or towards satisfaction of a debt owed by the taxable person, the goods are deemed to be supplied by the taxable person in the course or furtherance of his business.

The particulars of the VAT chargeable on the supply must be provided on a sale by auction by the auctioneer and where the sale is otherwise than by auction by the person selling the goods. The document issued to the buyer is treated as a VAT invoice.

(3) Authenticated receipts in the construction industry.

(4) Business gifts

Where a business makes a gift of goods on which VAT is due, and the recipient uses the goods for business purposes, that person can recover the VAT as input tax (subject to the normal rules). The donor cannot issue a VAT invoice (because there is no consideration) but instead may provide the recipient with a ‘tax certificate’ which can be used as evidence to support a deduction of input tax. The tax certificate may be on normal invoicing documentation overwritten with the statement:

“Tax certificate – No payment is necessary for these goods. Output tax has been accounted for on the supply.”

Full details of the goods must be shown on the documentation and the amount of VAT shown must be the amount of output tax accounted for to HMRC.

Invoicing requirements and particulars

A VAT invoice must contain certain basic information and show the following particulars:

(a) A sequential number based on one or more series which uniquely identifies the document.

The ‘invoice number’ can be numerical, or it can be a combination of numbers and letters, as long as it forms part of a unique and sequential series.

(b) The time of the supply, ie tax point.

(c) The date of issue of the document.

(d) The name, address and registration number of the supplier.

(e) The name and address of the person to whom the goods or services are supplied.

(f) A description sufficient to identify the goods or services supplied.

(g) For each description, the quantity of the goods or extent of the services, the rate of VAT and amount payable, excluding VAT, expressed in any currency.

(h) The unit price.

This applies to ‘countable’ goods and services. For services, the countable element might be, for example, an hourly rate or a price paid for standard services. If the supply cannot be broken down into countable elements, the total VAT-exclusive price is the unit price.

(i) The gross amount payable, excluding VAT, expressed in any currency.

(j) The rate of any cash discount offered.

(k) The total amount of VAT chargeable expressed in sterling.

(l) Where the margin scheme for second-hand goods or TOMS is applied, either a reference to the appropriate provision of The VAT Act 1994 or any indication that the margin scheme has been applied.

The way in which margin scheme treatment is referenced on an invoice is a matter for the business and but we recommend:

• “This is a second-hand margin scheme supply.”

• “This supply falls under the Value Added Tax (Tour Operators) Order 1987.”

The requirement only applies to TOMS invoices in business to business transactions.

(m) Where a VAT invoice relates in whole or in part to a supply where the person supplied is liable to pay the VAT, a reference to the appropriate provision of The VAT Act 1994 or any indication that the supply is one where the customer is liable to pay the VAT.

This covers UK supplies where the customer accounts for the VAT (eg under the gold scheme or any reverse charge requirement under the missing trader intra-community rules). The way in which margin scheme treatment is referenced on an invoice is a matter for the business and we recommend: “This supply is subject to the reverse charge”.

Exempt or zero-rated supplies

Invoices do not have to be raised for exempt or zero-rated transactions when supplied in the UK. But if such supplies are included on invoices with taxable supplies, the exempt and zero-rated supplies must be totalled separately and the invoice must show clearly that there is no VAT payable on them.

Leasing of motor cars

Where an invoice relates wholly or partly to the letting on hire of a motor car other than for self-drive, the invoice must state whether the car is a qualifying vehicle

Alternative evidence to support a claim for input tax

In certain situations HMRC can use its discretion and allow an input tax with documentary evidence other than an invoice. Guidance here.

Electronic invoices

Full information on electronic invoicing here.

Retailers

Retailers may issue a “less detailed tax invoice” if a customer requests one.  the supply must be for £250 or less (including VAT) and must show:

  • your name, address and VAT registration number
  • the time of supply (tax point)
  • a description which identifies the goods or services supplied
  • and for each VAT rate applicable, the total amount payable, including VAT and the VAT rate charged.

Summary

As may be seen, it is a matter of law whether an invoice is valid and when they must be issued. Therefore it is important for a business to understand the position and for its system to be able to produce a valid tax invoice and to recognise what is required to claim input tax. As always with VAT, there are penalties for getting documentation wrong.

What VAT CAN’T you claim?

By   12 August 2024
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VAT Basics
The majority of input tax incurred by most VAT registered businesses may be recovered. However, there is some input tax that may not be. I thought it would be helpful if I pulled together all of these categories in one place:

Blocked VAT claims – an overview

  • No supporting evidence

In most cases this evidence will be an invoice (or as the rules state “a proper tax invoice”) although it may be import, self-billing or other documentation in specific circumstances. A claim is invalid without the correct paperwork. HMRC mayaccept alternative evidence, however, they are not duty bound to do so (and rarely do unless the amount is minimal). So ensure that you always obtain and retain the correct documentation.

  • Incorrect supporting evidence

Usually this is an invalid invoice, or using a delivery note/statement/pro forma in place of a proper tax invoice. To support a claim an invoice must show all the information set out in the legislation. HMRC are within their rights to disallow a claim if any of the details are missing.

  •  Input tax relating to exempt supplies

Broadly speaking, if a business incurs VAT in respect of exempt supplies it cannot recover it. If a business makes only exempt supplies it cannot even register for VAT. There is a certain easement called de minimis which provide for recovery if the input tax is below certain prescribed limits. Input tax which relates to both exempt and taxable activities must be apportioned. More details of partial exemption may be found here.

  •  Input tax relating to non-business activities

If a charity or NFP entity incurs input tax in connection with non-business activities this cannot be recovered and there is no de minimis relief. Input tax which relates to both business and non-business activities must be apportioned. Business versus non-business apportionment must be carried out first and then any partial exemption calculation for the business element if appropriate. More details here

  •  Time barred

If input tax is not reclaimed within four years of it being incurred, the capping provisions apply and any claim will be rejected by HMRC.

  •  VAT incurred on business entertainment

This is always irrecoverable unless the client or customer being entertained belongs overseas. The input tax incurred on staff entertainment costs is however recoverable. A flowchart for recoverability in this area here.

  •  Car purchase

In most cases the VAT incurred on the purchase of a car is blocked. The only exceptions are for when the car; is part of the stock in trade of a motor manufacturer or dealer, or is used primarily for the purposes of taxi hire; self-drive hire or driving instruction; or is used exclusively for a business purpose and is not made available for private use. This last category is notoriously difficult to prove to HMRC and the evidence to support this must be very good.

  •  Car leasing

If a business leases a car for business purposes it will normally be unable to recover 50% of the VAT charged.  The 50% block is to cover the private use of the car.

  • Fuel costs

The element of fuel costs used for personal use is blocked. There are three ways to treat input tax on fuel:

    • claim 100% of the VAT charged. This is possible if fuel is bought for business motoring only or for both business and private motoring and the appropriate road fuel scale charge is applied on the value of supplies of fuel for private use
    • use detailed mileage records to separate business mileage from private mileage and only claim for the business element
    • claim no input tax
  •  A business using certain schemes

For instance, a business using the Flat Rate Scheme cannot recover input tax except for certain large capital purchases, also there are certain blocks for recovery on for Tour Operators’ Margin Scheme (TOMS) users

  •  VAT charged in error

Even if a business obtains an invoice purporting to show a VAT amount, this cannot be recovered if the VAT was charged in error; either completely inappropriately or at the wrong rate. A business’ recourse is with the supplier and not HMRC.

  •  Goods and services not used for a business

Even if a business has an invoice addressed to it and the services or goods are paid for by the business, the input tax on the purchase is blocked if the supply is not for that business’ use. This may be because the purchase is for personal use, or by another business or for purposes not related to the claimant business.

This is not input tax and therefore is not claimable. However, there are exceptions for goods on hand at registration and which were purchased within four years of registration, and services received within six months of registration if certain conditions are met.

  •  VAT incurred by property developers

Input tax incurred on certain articles that are installed in buildings which are sold or leased at the zero rate is blocked.

  •  Second hand goods

Goods sold to a business under one of the VAT second-hand schemes will not show a separate VAT charge and no input tax is recoverable on these goods.

  •  Transfer of a going concern (TOGC)

Assets of a business transferred to you as a going concern are not deemed to be a supply for VAT purposes and consequently, there is no VAT chargeable and therefore no input tax to recover.

  •  Disbursements

A business cannot reclaim VAT when it pays for goods or services to be supplied directly to its client. However, in this situation the VAT may be claimable by the client if they are VAT registered. For more on disbursements see here.

  •  VAT incurred overseas

A business cannot reclaim VAT charged on goods or services that it has bought from suppliers in other EU States. Only UK VAT may be claimed on a UK VAT return. There is however, a mechanism available to claim this VAT back from the relevant authorities in those States. Details here. However, in most cases, supplies received from overseas suppliers are VAT free, so it is usually worth checking whether any VAT has been charged correctly.

  • Business assets of £50,000 and more

There are special rules for reclaiming input tax using the Capital Goods Scheme, which means a business must spread the initial VAT claimed over a number of years.

VAT: What is a proforma invoice and how can it be used?

By   11 December 2023
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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: Electronic Invoicing (eInvoicing)

By   21 August 2023
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The rules for sending, receiving and storing VAT invoices in an electronic format.

What is an eInvoicing?

eInvoicing is the transmission and storage of invoices in an electronic format without duplicate paper documents. The format may be a structured format such as XML or an unstructured format such as PDF.

The benefits of eInvoicing

eInvoicing offers significant advantages over paper invoices. The electronic transmission of documents in a secure environment usually provides for:

  • structured data for auditing
  • improved traceability of orders
  • decreased reliance on paper reducing storage and handling costs
  • rapid access and retrieval
  • improved cash flow
  • security and easier dispute handling

Currently, a business does not have to use eInvoicing, but if it does, in conjunction with paper invoices, (a so-called dual system) it can only do this for a short period, ie; if eInvoicing is being trialled.

It is not necessary to inform HMRC that a business is using eInvoicing.

Requirements

eInvoices must contain the same information as paper invoices.

A business may eInvoice where the “authenticity of the origin”, “integrity of invoice data”, and “legibility” can be ensured, and the customer agrees to receive eInvoices

  • 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 select a method of ensuring the above requirements. Examples of ensuring authenticity and integrity include:

Formats

HMRC accepts a variety of eInvoice message formats, including:

  • traditional EDI standards such as UN/EDIFACT, EANCOM and ODETTE
  • XML-based standards
  • comma-delimited ASCII, PDF

The eInvoices must be transmitted in a secure environment, using industry-accepted authenticity and security technologies, including, but not limited to: http-s, SSL, S-MIME and FTP.

Internal controls required

A business will need to demonstrate that it has control over:

  • completeness and accuracy of the invoice data
  • timeliness of processing
  • prevention, or detection of, the possible corruption of data during transmission
  • prevention of duplication of processing (by the person who receives the invoice)
  • prevention of the automatic processing, by the person who receives the invoice, of certain types of invoice on which VAT may not be recoverable – for example, margin scheme invoices
  • a recovery plan in case of a system failure or loss of data
  • an audit trail between eInvoicing systems and the internal application systems which are used to process the eInvoices

Storage

The same rules apply to storage of eInvoices as to paper invoices. A business must normally keep copies of all invoices for six years.

HMRC Access

HMRC may request access to:

  • the operations of any computer systems which produce or receive VAT invoices, and to the data stored on them
  • supporting documentation including; file structures, audit trail, controls, safe keeping, and information about how the accounting system is organised
  • information about the system’s interrogation facilities

HMRC must be able to take copies of information from the system.

If a business cannot meet the conditions for transmission and storage of eInvoicing, it will have to issue paper invoices.

VAT: New process to support repayment claims

By   14 November 2022
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HMRC has announced a useful new tool for speeding up repayment payments.

When a business submits a repayment return (when input tax exceeds output tax) HMRC may carry out a “pre-cred” (pre-credibility check) inspection or queries. This is to ensure that a claim is valid before money is released.

If not subject to a visit, a business is likely to be asked for information to support a claim. Such requests are more common if a business normally submits payment returns or it is a first return. The requested information is usually in the form of copy purchase invoices or import documentation.

Prior to the changes, HMRC sent a letter by snail mail and the information would also be returned by post. This was often subject to delays and “misunderstandings”.

From this month, HMRC has launched an online form so that a claimant, or an agent, can upload documents to support the claim via the Government Gateway. It is hoped that this will result in businesses receiving a repayment in shorter order.

HMRC require:

  • the VAT registration number
  • the CFSS reference number from the HMRC letter
  • details of the main business activities
  • the date the business began
  • the VAT rates that apply to sales
  • details of any VAT schemes
  • the detailed VAT account
  • the five highest value purchase invoices, and
  • any additional specific information requested by HMRC

Depending on circumstances, HMRC may also need:

  • bank statements
  • export sales invoices or supporting documents
  • import VAT documents
  • hire purchase or lease agreements
  • completion statements and proof of transfer of funds for the purchase of land or property
  • the planning reference and postcode of construction
  • sales invoices where non-standard VAT rates were charged

HMRC aim to look at this information within seven working days and will contact the claimant or agent when a decision is made, or if any further information is required.

Let us hope that speeds up the process.

Recovering VAT on Staff Expenses

By   21 September 2022
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VAT on Staff Expenses – what is claimable?

Although the VAT rules normally prevent a business reclaiming input tax on supplies that are not made directly to it, there are certain circumstances when the rules are relaxed. Although rather a dry and basic area, experience insists that it creates many issues at inspections and is “low hanging fruit” for which HMRC may levy penalties. Some business decide not to recover VAT on such costs to avoid problems, but certain claims are permissible and may be worth significant sums if they have a number of employees.

Subsistence Expenses

For instance, the VAT element of subsistence expenses paid to your employees may be treated as input tax. In order to qualify for this concession, employees must be reimbursed for their actual expenditure and not merely receive round sum allowances. These costs include hotels and meals.

VAT invoices (which may be made out to the employee) must also be obtained. The rule of thumb is that the employee must be more than five miles away from their place of employment and spend over five hours there (the so-called 5 mile/5 hour rule). A business cannot reclaim input tax if it pays an employees a flat rate for expenses.

Reimbursement for Road Fuel

The VAT legislation permits a business to treat as its own supply road fuel which is purchased by a non-taxable person whom it then pay for the actual cost of the fuel (usually through an expenses claim). This would therefore allow a business to recover input tax when it reimburses its employees for the cost of road fuel used in carrying out their employment duties.

A business is able to reclaim all the input tax on fuel if a vehicle is used only for business. There are three ways of claiming VAT if a business uses a vehicle for both business and private purposes.

  • reclaim all the VAT and pay the fuel scale charge – HMRC details here
  • only reclaim the VAT on fuel you use for business trips – this requires the retention of detailed mileage records
  • choose not to reclaim any VAT eg; if your business mileage is so low that the fuel scale charge would be higher than the VAT you can reclaim

If a business chooses not to reclaim VAT on fuel for one vehicle it cannot reclaim VAT on any fuel for vehicles used in the business.

Mileage Allowances

The legislation also enables you to reclaim the VAT element (or a reasonable approximation) of mileage allowances paid to employees.

Business entertainment

For details of this complex area please see here

Goods

Certain goods which are to be used in a business, eg; office supplies, the business may reclaim the input tax on purchases made by employees or directors. In all cases you’ll need a VAT invoice. Details required on a VAT invoice here

Mobile telephones

An element of mobile phone costs may be recovered. The VAT on the business use of the phone may be recovered, eg; if half of the mobile phone calls are private 50% of the VAT on the purchase price and the service plan can be recovered.

Work from home

If a person works from home an element of the costs may be recovered. As an example: if an office takes up 20% of the floor space in a house. A business may reclaim 20% of the VAT on utility bills.

Apportionment

A business must keep all records to support a claim and show how it arrived at the business proportion of a purchase of goods or services and it must also have valid VAT invoices.

VAT: Which entity receives a supply? The Star Services case

By   8 September 2022
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Latest from the courts

In the Star Services Oxford Limited (Star) First Tier Tribunal (FTT) case the issue was the identity of the entity receiving the supply, whether it held a valid tax invoice, and whether input tax could be claimed.

Background

The appellant claimed input tax incurred on rental payments to Oxford City Council. This was disallowed by HMRC on the grounds that the rental agreement was with Mr Latifi (a sole proprietor in a property rental business) and not the company which was VAT registered.

After the rental agreement was signed the business was incorporated and carried on a bed and breakfast activities from the premises, along with two separate sub-lets to third parties. One party paid rent to Star and one directly to Mr Latifi.

Contentions

HMRC argued that:

  • Mr Latifi and the Appellant are separate legal entities, both of whom are required to register for VAT separately if carrying on taxable business activities
  • the assessment was correct as the company was not entitled to an input tax credit as it was not the person who had incurred the liability
  • the Appellant did not hold a valid VAT invoice, which entitles it to deduct the input tax

Star contended:

  • there was a technical error in the lease agreement
  • the assessment was excessive
  • subsequent to the assessment, the lease was registered to the Appellant
  • the lease was acquired in Mr Latifi’s name because the Appellant did not exist at the time that the lease agreement was entered into. At the relevant time there was an innocent omission to transfer the lease from Mr Latifi’s name to the Appellant’s name, and the delay was caused by forgetfulness
  • a company may, under The VAT Act 1994 s. 24(6)(c) and if permitted by Regulations, claim input tax on the pre-incorporation supplies received for its business
  • the Appellant has accounted for the VAT (therefore there was no loss of tax)
  • the fact that Mr Latifi is beneficial owner of both “the company” (by virtue of controlling shares and directorship) and “the property” must have an impact on the decision to assess

Decision

The appeal was dismissed.

The Appellant was not entitled to claim input tax on the invoices and HMRC were correct to disallow input tax. It did not receive the supply and it did not hold a VAT invoice.

It was decided that the legal relationship was between Oxford City Council and Mr Latifi. This is because the lease agreement was between these parties and not the Appellant.

It was found that the rent from one sub-tenant was paid to Mr Latifi directly and is not accounted for by the Appellant and that the reassigned lease has no bearing on the property rental activities undertaken by Mr Latifi prior to the reassignment.

The rules on pre-incorporation supplies* do not apply in this case because Mr Latifi, as sole proprietor, and the Appellant, are separate legal entities, requiring separate VAT registration.

Interestingly, a recent case was relied on: In Tower Bridge GP Ltd the Court of Appeal ruled that absent a valid VAT invoice showing the supplier’s VAT number and the customer’s name, the right to deduct input tax on that invoice could not be exercised.

Summary

An unfortunate oversight was sufficient for HMRC to refuse the input tax claim. This case does have a whiff of unfairness about it, but by applying the letter of the law the outcome is unarguable. The contentions here are similar to those in the Aitmatov Academy case.

Another case of taking care with claims.

* A business may, generally, claim the VAT incurred on services it has purchased for its taxable business purposes during the six months prior to VAT registration .

The VAT Act 1994, s 24(6) (c) and The Value Added Tax Regulations 1995, Reg 111.

VAT: No invoice – no claim. The Tower Bridge GP Ltd case

By   9 August 2022
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Latest from the courts

In the Court of Appeal (CoA) case of Tower Bridge GP Ltd the issue was whether the appellant could claim input tax in a situation where it did not (and does not) hold a valid tax invoice.

Background

Tower Bridge was the representative member of a VAT group which contained Cantor Fitzgerald Europe Ltd (CFE). CFE traded in carbon credits. These carbon credit transactions were connected to VAT fraud.

The First Tier Tribunal (FTT) found that CFE neither knew, nor should have known, that the transactions it entered into before 15 June 2009 were connected to VAT fraud but that it should have known that its transactions were connected to fraud from 15 June 2009. The appeal relates only to transactions entered into before that date.

CFE purchased carbon credits from Stratex Alliance Limited (“Stratex”) The carbon credits supplied to CFE were to be used by the business for the purpose of its own onward taxable transactions (in carbon credits). The total of VAT involved was £5,605,119.74.

The Stratex invoices were not valid VAT invoices. They did not show a VAT registration number for Stratex, nor did they name CFE as the customer. Although Stratex was a taxable person, it transpired that Stratex was not registered for VAT (and therefore could not include a valid VAT number on its invoices) and that it fraudulently defaulted on its obligation to account to HMRC for the sums charged as output tax on these invoices.

Subsequent investigations by HMRC resulted in Stratex not being able to be traced.

Contentions

The appellant contended that it is entitled to make the deduction either as of right, or because HMRC unlawfully refused to use its discretion to allow the claim by accepting alternative evidence.

HMRC denied Tower Bridge the recovery of the input tax on the Stratex invoices on the basis that the invoices did not meet the formal legal requirements to be valid VAT invoices. HMRC also refused to exercise their discretion to allow recovery of the input tax on the basis that:

  • Stratex was not registered for VAT
  • the transactions were connected to fraud
  • CFE failed to conduct reasonable due diligence in relation to the transactions

Decision

Dismissing this appeal, the CoA ruled that where an invoice does not contain the information required by legislation (The Value Added Tax Regulations 1995 No 2518 Part III, Regulation 14), or contains an error in that information, which is incapable of correction, the right to deduct cannot be exercised. The appellant did not have the ability to make a claim as of right.

The Court then considered whether HMRC ought to have permitted Tower Bridge to make a claim using alternative evidence. It found that the attack on HMRC’s exercise of discretion fails for the reasons contended by HMRC (above). These were perfectly legitimate matters for HMRC to take into account in deciding whether to exercise the first discretion in the taxable person’s favour.

CFE had failed to carry out “the most basic of checks on Stratex”.

So, the appeal was dismissed.

Commentary

This was hardly a surprising outcome considering that if an exception were to be made, there would be a loss to the public purse consisting of the input tax, with no corresponding gain to the public purse from the output tax that Stratex ought to have paid, but fraudulently did not.

This case demonstrates the importance of obtaining a proper tax invoice and to carry out checks on its validity. Additionally, there is a need to conduct accurate due diligence on the supply chain. I have summarised the importance of Care with input tax claims which includes a helpful list of checks which must be carried out.

VAT – Business Entertainment. What input tax may I recover?

By   4 August 2022
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VAT – Recovery of input tax incurred on entertainment – Flowchart

One of the most common questions asked on “day-to-day” VAT is whether input tax incurred on entertainment is claimable.  The answer to this seemingly straightforward question has become increasingly complex as a result of; HMRC policy, EU involvement and case law.

Different rules apply to entertaining; clients, contacts, staff, partners and directors depending on the circumstances.  It seems reasonable to treat entertaining costs as a valid business expense.  After all, a business, amongst other things, aims to increase sales and reduce costs as a result of these meetings.  However, HMRC sees things differently and there is a general block on business entertainment.  It seems like HMRC does not like watching people enjoying themselves at the government’s expense!

If, like me, you think in pictures, then a flowchart may be useful for deciding whether to claim entertainment VAT.  It covers all scenarios, but if you have a unique set of circumstances or require assistance with some of the definitions, please contact me.

VAT -Business Entertainment Flowchart

Download here: VAT Business Entertainment Input tax recovery flowchart