Tag Archives: vat-registration

VAT – Treatment of used pre-registration assets

By   9 November 2016
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New HMRC Publication: Brief 16/2016

HMRC has clarified its position on the claim of input tax relating to assets used by a business prior to VAT registration.  HMRC had previously, in some circumstances, sought to disallow an element of such input tax. They now accept that input tax incurred on fixed assets purchased within four years of the Effective Date of Registration (EDR) is recoverable in full, providing the assets are still in use by the business at the time of EDR. HMRC state that there has been no change of policy on this matter, however, experience insists that that there have been cases where they have sought to limit the amount of VAT claimable prior to registration.  This brings the VAT treatment into line with what many advisers always thought the position to be.

Background

UK legislation permits businesses which have become VAT registered to recover tax incurred on goods and services purchased before their EDR. This is so as long as the purchases are used in taxable activities post EDR. The “simplified” rules are now:

  • Services

Services must have been received less than six months before the EDR for VAT to be deductible. This excludes services that have been supplied onwards pre EDR. There may be a restriction to VAT recovery if a business is partly exempt. A guide to partial exemption here

  • Goods

Input tax incurred on goods which were purchased within four years of EDR and are still on hand at the time of EDR may be recovered in full (subject to any partial exemption restriction). Input tax on goods which were consumed or sold prior to EDR do not qualify for recovery.  This rule also applies to fixed assets.

Please contact us if your business, or that of your clients have been the subject of a disallowance of input tax in these circumstances.

International VAT – Complex, expensive and difficult. The triggerpoints

By   2 August 2016
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Further to the recent announcement of our comprehensive and extensive new International tax service offering here  I thought it a good idea to provide a brief guide on when a business or an adviser needs to consider indirect tax when selling overseas. I hope this summary will be of use.  Please contact us if you feel that any issues here are relevant to you or your clients.

International and cross-border transactions can be extremely complex and frustrating (take it from me if you haven’t already experienced it). From the physical movement of goods to the many various types of services, VAT is a minefield. Not only is it very complicated, but different languages, rules and practices can add to the overall issues with dealing with the tax.  This shouldn’t be a barrier to companies doing business across the world and we are here to support and assist you.

We are experienced in advising not only on UK indirect tax, but issues in other EC Member States and matters outside the EC.

Do you know whether you have indirect tax responsibilities in other countries?  Do you know whether you are taking advantage of all available reliefs?

There are often complex and conflicting issues concerning VAT when dealing with customers or suppliers outside these shores.  Although the EC-wide VAT system is supposed to be harmonised, not unsurprisingly, there are significant differences in domestic law and the application of EC legislation.  It is easy to get caught out or not even consider VAT issues outside the UK.  There are special rules for a lot of activities, with the rules for International Services particularly complex.

Experience insists that overseas tax authorities do not mitigate any assessments and penalties simply because your business is based outside their country.  Another twist is that HMRC are simply not interested in any transactions outside the UK so will not assist with taxpayers’ queries.

So what sort of questions should a business be asking itself and in what circumstances could VAT rear its ugly head?

When should I be considering VAT?

  • Exporting goods – Do they properly qualify for zero rating?
  • Dispatching goods to other EC Member States – Are they UK VAT free?
  • Distance Selling (usually online/mail order) – There are special rules for this.
  • Selling goods in the UK which are to be removed from the UK.
  • Retail sales to visiting customers.
  • Electronically supplied services – MOSS
  • Imports – what value? Recovery of import VAT. Customs Duties. Procedures. Reliefs.
  • Acquisitions from other Member States – what are the rules? Self-supplies. Procedures.
  • Provision of services – What is the Place Of Supply (POS)?
  • Provision of services – UK VAT, no VAT, overseas VAT chargeable?
  • Working abroad – What are the rules?
  • Property owned overseas.
  • Overseas businesses owning UK property
  • Purchasing services overseas – VAT free?  Self-supplies
  • Purchasing/hiring transport/vehicles cross border; aeroplanes, yachts, road vehicles etc.
  • Organising trade fairs, exhibitions seminars or training etc– There are special rules.
  • The Performance rules eg; cultural, artistic, sporting – There are special rules.
  • Supplies of electronically supplied services – There are special rules.  MOSS (Mini One Stop Shop) issues.
  • Place of belonging issues.  Where do you belong for VAT purposes?  Where does your customer belong?
  • Intercompany charges/management charges/recharges – Require careful consideration.
  • Filing overseas returns and dealing with overseas authorities’ inspections/investigations
  • Cross-border transactions in used goods (including works of art and cars) – there are special rules.
  • When negotiating contracts or pricing transactions/projects. You need to know the VAT position first otherwise you cannot budget correctly.

How we can help

We can assist whether you have an ad-hoc query or you require a full service in an overseas country.  We can:

  • Deal with overseas authorities on your behalf
  • Resolve disputes with overseas clients/suppliers
  • Analyse cross-border/international positions
  • Advise on international structures
  • Resolve complex international technical problems
  • File overseas declarations/returns and registrations
  • Deal with HMRC on complex POS matters
  • Assist with classification and valuation matters
  • Deal with documentation (which can be complex and demanding)
  • Review and advise on contracts and tenders
  • Liaise with local domestic legal/accountancy advisers in overseas countries
  • Advise overseas businesses making supplies into the UK
  • Assist with e-services matters including MOSS
  • Resolve disputes with HMRC
  • Handle claims for VAT incurred overseas for a UK business and UK VAT claims for overseas businesses
  • Act as a one-stop shop for all of your overseas tax matters.

So don’t let tax interfere with your business expanding overseas, we are here to help you.

VAT Latest from the courts – importance of invoicing requirements

By   16 March 2016
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In the recent case of Gradon Construction Ltd the validity of invoices was considered and whether input tax could be recovered in respect of them.

HMRC disallowed a claim for input tax on the basis that the supplier had retrospectively deregistered on a date prior to the date shown on the invoices.  The Tribunal decided that this was not a reason to disallow the claim.  However, it decided that the claim should be disallowed on the grounds that the invoices did not contain a description sufficient to identify the goods or services supplied, nor did they provide the quantity of the goods or the extent of the services as required by legislation.  Consequently, the documents did not meet the requirements of a valid tax invoice with the result that the recipient could not recover the amount on the documents which purported to be VAT.  HMRC has the discretion to accept alternative evidence in lieu of an invoice, but in this case the Tribunal decided that HMRC acted reasonably in not accepting any other documentation, so the recipient of the supply could not recover the input tax.

This case again highlights the crucial importance of primary documentation when it comes to VAT.  A full guide to invoices here

Information on input tax that it is not possible to claim here https://www.marcusward.co/what-vat-cant-you-claim-2/

It is crucial that a business’ invoices meet all the requirements, and that a procedure is in place to check the validity of invoices received in order to determine whether the input tax is claimable, or whether the invoice issuer should be contacted so that a valid tax invoice may be obtained.

VAT – Overseas Holiday Lets; a warning

By   8 February 2016
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It is important to understand the VAT consequences of owning property overseas. It may not be commonly known that the UK has the highest VAT threshold in the EC. This means that for many ‘sideline’ businesses such as; the rental of second or holiday properties in the UK, the owners, whether they are; individuals, businesses, or pension schemes, only have to consider VAT if income in relation to the property exceeds £82,000 pa. and this is only likely if a number of properties are owned.

However, other EC Member States have nil thresholds for foreign entrepreneurs meaning that if any rental income is received, VAT registration may be compulsory. Consequently, a property owner that rents out a property abroad will probably have a liability to register for VAT there. Failure to comply with the domestic legislation of the relevant Member State means; payment of back VAT and interest and fines being levied. It is also not a good idea to provoke the interest of overseas tax authorities. VAT registration however, does mean that a property owner can recover input tax on expenditure in connection with the property, eg; agent’s fees, repair and maintenance and other professional costs.  Such claims may be restricted if the home is used for own use.

It should be noted that, unlike other types of rental of homes, holiday lettings are always standard-rated. Also, the letting of holiday homes is always treated as a business activity unless lettings are very infrequent.  If lettings are a one-off or rare, evidence should be retained to evidence this fact.  There is no set number of times a property can be let before it is treated as a business, and the interpretation may differ between different Member States.  Details of taxable supplies and being in business here

Given that every EC Member State has differing rules to the UK, it is crucial to check all the consequences of letting property overseas.

A final word of warning; I quite often hear the comment “I’m not going to bother – how will they ever find out?”

If an overseas property owner based in the UK is in competition with local letting businesses, those businesses generally do not have any compulsion in notifying the authorities. In addition, I have heard of authorities carrying out very simple initiatives to see if owners are VAT registered. In many resorts, income from tourism is vital and this is a very important revenue stream for them so it is well policed.

Please contact us for further details. We have experience in dealing with overseas VAT matters on our clients’ behalf.

VAT – How To Survive The Enforcement Powers

By   19 January 2016
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Penalties for VAT infringements are draconian and there is still an alarming array of enforcement powers to trap the unwary. By being conscious of the problem areas and planning carefully, it should be possible to avoid becoming an unwitting victim of the system. This article focuses mainly on VAT compliance.

Late Registration

You must notify HMRC if your turnover exceeds £82,000 in twelve months, or if you believe it will exceed £82,000 in the next thirty days.  The penalty for failing to notify liability falls within the single penalty system and it could be up to 100% of the VAT due.  There is no penalty if the taxpayer has a reasonable excuse for not registering at the correct time.

After Registration

Every VAT registered business needs to ensure that it is organised to deal with VAT correctly and on time:

  • Is there someone in your business who controls VAT accounting and ensures that new products etc. are properly dealt with for VAT purposes?
  • Do your business systems ensure that all output tax and input tax are properly recorded?
  • Are systems in force to ensure that proper evidence is obtained to support VAT input tax claims?
  • Where VAT is not charged on supplies made, is this correct in law and is proper evidence retained?
  • Are there systems in force to ensure that non‐deductible input tax is not reclaimed, e.g. most VAT on motor cars, or business entertaining?
  • Is VAT always considered before contracts are made?

Default surcharge

A default occurs if HMRC has not received your return and all the VAT due by the due date. The relevant date is the date that cleared funds reach HMRC’s bank account. If the due date is not a working day, payment must be received on the last preceding working day.  .

Consequence of default

You receive a warning after the first default ‐ the Surcharge Liability Notice (SLN). Do not ignore this notice. If you fail to pay the VAT due on the due date within the next five quarters, the surcharge will be 2% of the outstanding tax. The surcharge increases to 5% for the next default, and then by 5% increments to a maximum of 15%.  Each default, whether it is late submission of the return or late payment, extends the surcharge liability period, but only late payment incurs a surcharge.

Errors on returns and claims

Incorrect returns incur a penalty under the following penalties apply:

  • An error, when reasonable care not taken: 30%;
  • An error which is deliberate, but not concealed: 70%;
  • An error, which is deliberate and concealed: 100%.

If a taxpayer takes ‘reasonable care,’ then no penalty is due.

More on errors here

Retention of records

The period for retaining records is six years. There is a fixed penalty of £500 for breaching this requirement.

Default interest

  • Interest on tax will arise in certain circumstances, including cases where:
  • An assessment is made to recover extra tax for a period for which a return has already been made (this includes errors voluntarily disclosed)
  • A person has failed to notify his or her liability to register (or made late notification), and an assessment covering a period longer than three months is made to recover the tax due
  • An invoice purporting to include VAT has been issued by a person not authorised to issue tax invoices.

The rate of interest is set by the Treasury and is broadly in line with commercial rates of interest.

Appeals

Appeals against penalties may be made to the independent tribunal. The tribunal has powers of mitigation in appropriate circumstances. Where the appeal is against the imposition of interest, penalties, or surcharge, the tax must be paid before an appeal can be heard. The tribunal is given the authority to increase assessments that are established as being for amounts less than they should have been.

Access to information

HMRC has extensive powers to obtain information. It can enter premises and gain access to computerised systems and remove documents. A walking possession agreement can arise where distress is levied against a person’s goods.

The sting in the tail

None of the above penalties or interest is allowable as a deduction when computing income for corporation or income tax purposes.

Action points

If you receive a VAT assessment (because you have not submitted a return), you must check it and notify HMRC within thirty days if it understates your liability

Make sure your systems and records are adequate to enable you to establish the gross amount of tax relating to a VAT period. The preparation of annual accounts cannot be regarded as a safeguard against penalties

Make sure you get your VAT return and payment in on time.

Some of these penalties may not apply if there is a reasonable excuse, but the scope is limited and should not be relied upon

If in doubt, contact us. It is important that you seek professional advice as early as possible.

Very basic VAT Q & As for a fledgling business

By   25 August 2015
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There is a lot of information about VAT on the web, but some of it may seem confusing or conflicting.  I hope my simple VAT guide to a complex tax may be of help.

Q: I run a business – do I have to charge VAT on my sales?

A: If a business’s turnover exceeds £82,000 in any 12 month period it is likely that it ought to be VAT-registered and charging VAT on its income. It is the business’s responsibility to monitor its turnover and register with HM Revenue & Customs if necessary. However, not all income counts towards the turnover limit, for instance you can ignore exempt income (see below for a description of exempt sales).

VAT registration may also be necessary if you know that your income will exceed the limit in the next 30 days (the future test). This may because you have signed a contract for work for instance.

A business can also VAT register voluntarily.  This is usually done to reclaim VAT it has incurred.

Finally, a business must VAT register if it receives certain goods and services form overseas worth more than £82,000.

Q: What happens if I don’t register for VAT when I should?

A: In addition to paying VAT from the date a business should have registered, there will be penalties and interest to pay. HM Revenue & Customs may carry out further investigations if they consider that failure to register was more than an innocent error.

Q: Why is paperwork so important in VAT?

A: Since VAT is a transaction-based tax, it is important to have evidence of those transactions.

Q: Are there any benefits to being VAT-registered?

A: Yes, you will usually be able to claim the VAT you incur on expenditure for your business.

Q: Can’t I recover all the VAT I incur?

A: Some VAT is specifically blocked, such as: cars for most businesses and business entertainment. In addition, if a business makes exempt supplies, it is usually unable to recover any VAT it incurs in relation to those supplies. Apart from this, as long as the expenditure is for business (not private) purposes, and the business has supporting documentation to support the claim, most VAT is recoverable from HMRC.

Q: Do I charge VAT on everything?

A: No, some sales such as food, books and children’s clothing are zero-rated, and some activities including certain property rental and sales, insurance and health services are exempt from VAT. In addition, sales to most overseas business purchasers may be treated as VAT-free. The difference between exempt and zero-rated is that there is no block on the recovery of VAT incurred in relation to zero-rated supplies so usually a business making solely or substantially zero-rated supplies will actually receive payments from HMRC.

Q: Are there any short-cuts to accounting for, and paying VAT?

A: There are a number of schemes aimed at simplifying VAT. These range from annual (rather than the more usual quarterly) returns, cash accounting (where you don’t need to pay HMRC until you have been paid) to simplified flat rate schemes whereby you pay over an element of your turnover without the need for further calculations

Q: What if I get it wrong?

A: Unfortunately, as with everything connected to VAT, there are penalties and interest for even innocent errors. If HMRC find an error before you have notified them of it, there can be quite swingeing extra amounts to pay over. If HMRC consider that there is deliberate evasion, and evidence is found, a prison sentence of up to seven years is possible.

Q: What should I do if I am uncertain about what the VAT treatments of my sales are, or when I should register for VAT?

A: Please contact me!  Not only can I assist with the technical side, but there is often planning that may be put in place to mitigate the cost of VAT or penalties.

VAT – Splitting a business to avoid registration doesn’t work

By   30 January 2015
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I have a cunning plan to avoid registering for VAT…….

….I’ll simply split my business into separate parts which are all under the VAT registration turnover limit – ha!

I’ve heard this said many a time in “bloke in the pub” situations. But is it possible?

You will not be surprised to learn that HMRC don’t like such schemes and there is legislation and case law for them to use to attack such planning known as “disaggregation”. This simply means artificially splitting a business.

What HMRC will consider to be artificial separation:

HMRC will be concerned with separations which are a contrived device set up to circumvent the normal VAT registration rules. Whether any particular separation will be considered artificial will, in most cases, depend upon the specific circumstances. Accordingly it is not possible to provide an exhaustive list of all the types of separations that HMRC will view as artificial. However, the following are examples of when HMRC would at least make further enquiries:

Separate entities supply registered and unregistered customers

In this type of separation, the registered entity supplies any registered customers and the unregistered part supplies unregistered customers.

Same equipment/premises used by different entities on a regular basis

In this type of situation, a series of entities operates the same equipment and/or premises for a set period in any one-week or month. Generally the premises and/or equipment is owned by one of the parties who charges rent to the others. This situation may occur in launderettes and take-aways such as fish and chip shops or mobile catering equipment.

Splitting up of what is usually a single supply

This type of separation is common in the bed and breakfast trade where one entity supplies the bed and another the breakfast. Another is in the livery trade where one entity supplies the stabling and another, the hay to feed the animals. There are more complex examples, but the similar tests are applied to them too.

Artificially separated businesses which maintain the appearance of a single business

A simple example of this type of separation includes; pubs in which the bar and catering may be artificially separated. In most cases the customer will consider the food and the drinks as bought from the pub and not from two independent businesses. The relationship between the parties in such circumstances will be important here as truly franchised “shop within a shop” arrangements will not normally be considered artificial.

One person has a controlling influence in a number of entities which all make the same type of supply in diverse locations

In this type of separation a number of outlets which make the same type of supplies are run by separate companies which are under the control of the same person. Although this is not as frequently encountered as some of the other situations, the resulting tax loss may be significant.

The meaning of financial, economic and organisational links

Again each case will depend on its specific circumstances. The following examples illustrate the types of factors indicative of the necessary links, although there will be many others:

Financial links

  • financial support given by one part to another part
  • one part would not be financially viable without support from another part
  • common financial interest in the proceeds of the business

Economic links

  • seeking to realise the same economic objective
  • the activities of one part benefit the other part
  • supplying the same circle of customers

Organisational links

  •  common management
  • common employees
  • common premises
  • common equipment

HMRC often attack structures which were not designed simply to avoid VAT registration, so care should be taken when any entity VAT registers, or a conscious decision is made not to VAT register. Registration is a good time to have a business’ activities and structure reviewed by an adviser.

As with most aspects of VAT, there are significant and draconian penalties for getting registration wrong, especially if HMRC consider that it has been done deliberately to avoid paying VAT.

VAT – Land and Property Issues

By   23 May 2014
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Help!

Supplies relating to property may be, or have been; 20%, 17.5%, 15.%, 5%, zero-rated, exempt, or outside the scope of VAT – all impacting, in different ways, upon the VAT position of a supplier and customer. In addition, the law permits certain exempt supplies to be changed to 20% without the agreement of the customer. As soon as a supplier is provided with a choice, there is a chance of making the wrong one! Even very slight differences in circumstances may result in a different and potentially unexpected VAT outcome, and it is an unfortunate fact of business life that VAT cannot be ignored.

Why is VAT important?

The fact that the rules are complex, ever-changing, and the amounts involved in property transactions are usually high means that there is an increased risk of making errors. These often result in large penalties and interest payments plus unwanted attentions from the VAT man. Uncertainty regarding VAT may affect budgets and an unforeseen VAT bill (and additional SDLT) may risk the profitability of a venture.

Problem areas

Certain transactions tend to create more VAT issues than others. These include; whether a property sale can qualify as a VAT free Transfer Of a Going Concern, supplies involving Listed property and conversions of properties from commercial to residential use, whether to opt to a commercial property, the recovery of VAT charged on a property purchase, supplies between landlord and tenants, the Capital Goods Scheme, HMRC anti-avoidance rules and even seemingly straightforward VAT registration. Additionally, the VAT treatment of building services throws up its own set of VAT complications.

VAT Planning

The usual adage is “right tax, right time”. This, more often than not, means considering the VAT treatment of a transaction well in advance of that transaction taking place. Unfortunately, with VAT there is usually very little planning that can be done after the event. For peace of mind a consultation with me can steer you through the complexities and, if there are issues, to minimise the impact of VAT on a project. Assistance of a VAT adviser is usually crucial if there are any disputes with VAT inspectors.

For more information, please see our Land & Property services