Dance classes in some EU countries are subject to different VAT rates depending on whether the dance style is considered artistic or entertainment. In the UK, belly dancing and ceroc lessons are standard rated, but ballet is exempt.
Dance classes in some EU countries are subject to different VAT rates depending on whether the dance style is considered artistic or entertainment. In the UK, belly dancing and ceroc lessons are standard rated, but ballet is exempt.
Latest from the courts
In the First Tier Tribunal (FTT) case of Spani v HMRC [2023] UKFTT 00727 (TC) the issue was whether a claim under the DIY Housebuilders’ Scheme (the scheme) was valid.
Mr Spani appealed against HMRC’s decision to refuse a claim. It was rejected as the respondents concluded that the property was to be used for business purposes because Planning Permission was for a holiday let rather than residential own use. To claim under the scheme, the relevant the property must be used “otherwise than in the course of furtherance of business” – VAT Act 1994, section 35)
Background
The cottage was constructed in Seaford – within the Souths Down National Park and, in order to obtain planning consent, it was required to be made available for letting on a commercial basis for 140 days a year. The appellant contended that it was his primary residence in the UK and any letting (which was interrupted by covid in any case) was/would be incidental to this primary purpose.
The property was listed on Air BnB in order to satisfy the requirements of the planning consent, but the property had not been actively marketed and no lettings had taken place.
Mr Spani contended that the use of the cottage “falls far short of the HMRC’s position that it was the appellant’s intention to use the property for a wholly commercial purpose”. It was simply the appellant’s home in the UK and that an identical property built outside the National Park would not have the Planning Permission holiday let requirement.
Further, if it was a commercial enterprise, Mr Spani could have could have used another reclaim route, viz: registering for VAT and recovering an element of the input tax incurred.
Decision
The appeal was dismissed – The judge opined that “none of these events subsequent to the grant of the Planning Permission and completion certificate detract from the fact that the property was built to be a holiday let (as stipulated by the planning consent) and was therefore constructed in furtherance of a FHL* business”.
Additionally, the FTT stated that: it is plain that the appellant’s plan to live in the property within the FHL regulations does not (and cannot) alter the property into a dwelling… when there is the express prohibition placed on the property to be a dwelling.
The conclusion was that the property was built in furtherance of a business which prohibited a claim.
Commentary
Yet another case highlighting precise requirements of a claim under the scheme and HMRC’s strict application of the rules. Care must always be taken in such cases and we advise professional advice is sought prior to a submission of a claim.
More on similar cases here and here and Top Ten Tips for the scheme.
Whether a service is “related to land” is important because there are distinct rules for this type of supply compared to the General Rule. The place of supply (POS) of land related services is where the land is located, regardless of where the supplier or recipient belong.
The rule applies only to services which relate directly to a specific site of land. This means a service where the land is a central and essential part of the service or where the service is intended to legally or physically alter a property.
It does not apply if a supply of services has only an indirect connection with land, or if the land related service is only an incidental component of a more comprehensive supply of services.
What is land?
For the purpose of determining the POS, land (also called immoveable property in legislation) means:
What services directly relate to land?
HMRC provide the following examples:
The following HMRC examples are not deemed to be land related services:
These examples are mainly derived from case law and the department’s understanding of the legislation and they are not exhaustive.
The Reverse Charge
If an overseas supplier provides land related services in GB, the POS is GB and the reverse charge applies if the recipient is GB VAT registered.
If a GB supplier provides services directly related to land where the land is located outside GB, the POS is not GB. This means that there is a supply in another country. VAT rules in different countries vary (even across the EU) – some countries use the reverse charge mechanism, but others require the GB supplier to VAT register in the country of the POS (where the land is physically located).
The DIY Housebuilders’ Scheme is a tax refund mechanism for people who build, or arrange to have built, a house they intend to live in. It also applies to converting commercial property into a house(s). This puts a person who constructs their own home on equal footing with commercial housebuilders. There is no need to be VAT registered in order to make the claim.
One of the main problems was the very strict (and rigorously enforced) deadline of three months for the submission of the claim form. This is from completion of the build (usually this is when the certificate of practical completion is issued) or the building is inhabited, although it can be earlier if the certificate is delayed.
A case on when a house is considered to be complete here.
However, HMRC has announced that this deadline will be extended to six months from a date yet to be announced. This extension is welcome as it is often difficult to collect all the required information and documentation. In addition, the whole process will be digitised some time in the future which will also simplify the process.
The Scheme can be complex, but here is our Top Ten Tips for claimants.
You can use this form to change a business’:
If you take over someone else’s VAT responsibilities
You must use the form VAT484 to tell HMRC within 21 days if you take over the VAT responsibilities of someone who has died or is ill and unable to manage their own affairs.
You must include the details of the date of death or the date the illness started.
Failure to notify HMRC of changes may lead to penalties via The VAT Act 1994, section 69.
HMRC has, last week, set out the main reasons why online VAT registration applications submitted by agents are delayed. In such cases a caseworker is required to review the application and usually raise additional queries.
The “Top Five” reasons for delay
If an agent can avoid these, then the chances of a quick and successful registration is enhanced.
It is important to have all the business details available when completing the application. There can be difficulties when an application is started but set aside while more information is sought. There is only a seven-day limit once the process is underway.
This is the Principal Place of Business (PPOB) and should be where the day-to-day activities of the business take place. It is not the applicant’s residence (unless the business is run from home) or the agent’s address.
Bank details for VAT repayments must be:
If the entity is a partnership the account name may be in the name of a partner. If no UK account exists when the application is being made, this can be added later, but thus itself can cause issues.
These are cases where the applicant has chosen to provide identification documents by post. There is a facility to attach digital ID and this should be used wherever possible to avoid delays. Three items of ID are required: one a photo ID (passport or driving licence) and the other two non-photo documents (utility bills or birth certificates etc).
This is often when the business belongs overseas or does not yet have an Unique Taxpayer Reference (UTR). Again, it is preferrable to have all this information to hand before the process is started.
Information which an agent needs
Previously HMRC has commented on delays and set out these additional common errors:
And I will add; do not forget form VAT5L when registering a business which is involved in land and property transactions.
Healthcare services – an overview
I have noticed that I am receiving more and more queries in this area and HMRC does appear to be taking an increased interest in healthcare entities. This is hardly surprising as it can be complex and there are some big numbers involved.
(This article refers to doctors, but applies equally to most healthcare professional entities including; opticians, nurses, osteopaths, chiropractors, midwives, dentists etc.)
The majority of the services provided by doctors’ practices are VAT free. Good news one would think; no need to charge VAT and no need to deal with VAT records, returns and inspections.
However, there is one often repeated question from practices; “How can we reclaim the VAT we are charged?” This is particularly relevant if a practice intends to spend significant amounts on projects such as property construction or purchase.
The first point to make is that if a practice only makes exempt supplies (of medical services) it is not permitted to register for VAT and consequently cannot recover any input tax. Therefore we must look at the types of supplies that a practice may make that are taxable (at the standard or zero rate). If any of these supplies are made it is possible to VAT register regardless of their value. Of course, if taxable supplies are made, the value of which exceeds the current turnover limit of £85,000 in a rolling 12-month period, registration is mandatory.
Examples of supplies of services and goods which may be taxable are:
So what does VAT registration mean?
Once you join the “VAT Club” you will be required to file a VAT return on a monthly of quarterly basis. You may have to issue certain documentation to patients/organisations to whom you make VATable supplies. You may need to charge VAT at 20% on some services. You will be able to reclaim VAT charged to you on purchases and other expenditure subject to the partial exemption rules – see below. You will have to keep records in a certain way (see MTD) and your accounting system needs to be able to process specific information.
Because doctors usually provide services which attract varying VAT treatment, a practice will be required to attribute VAT incurred on expenditure (input tax) to each of these categories. Generally speaking, only VAT incurred in respect of zero-rated and standard-rated services may be recovered. In addition, there will always be input tax which is not attributable to any specific service and is “overhead” eg; property costs, professional fees, telephones etc. VAT registered entities which make both taxable and exempt supplies are deemed “partly exempt” and must carry out calculations on every VAT return.
Partial Exemption
Once the calculations described above have been carried out, the resultant amount of input tax which relates to exempt supplies is compared to the de-minimis limits (broadly; £625 per month VAT and not more than 50% of all input tax). If the figure is below these limits, all VAT incurred is recoverable regardless of what activities the practice is involved in. More details here.
VAT registration in summary
Benefits
Drawbacks
Please contact us if any of the above affects you or your clients.
HMRC has published updated guidance for agents registering business for VAT. Broadly, the new document covers what information agents require, which may be summarised as:
Limited companies
If an agent is registering a limited company client, they must have a Company Registration Number and a Corporation Tax Unique Taxpayer Reference (UTR) to complete the VAT registration process.
Individuals and partnerships
These applications do not need to have a Self-Assessment UTR to register for VAT, but if they do, it must be supplied.
An agent will be asked to verify the entity it is registering, therefore it is prudent to obtain the basic history and background of the applicant’s business before starting the process. Cleary this is good practice generally!
This article considers when and how to deregister from VAT and the consequences of doing so.
General points
Deregistration may be mandatory or voluntary depending on circumstances. Although it may be attractive for certain businesses too deregister if possible, this is not always the case. The main reason to remain registered is to recover input tax on purchases made by a business. This is particularly relevant if that business’ sales are:
Businesses which make sales to the public (B2C) are usually better off leaving the VAT club even if this means not being able to recover input tax incurred.
A business applies for deregistration online through its VAT account, or it can also complete a form VAT7 to deregister by post.
NB: These rules apply to businesses belonging in the UK. There are different rules for overseas business which are outside the scope of this article.
The Rules
Compulsory deregistration
A business must deregister if it ceases to make taxable supplies. This is usually when a business has been sold, but there may be other circumstances, eg; if a business starts to make only exempt supplies, or a charity stops making business supplies and continues with only non-business activities or when an independent body corporate joins a VAT group. In such circumstances there is a requirement to notify HMRC within 30 days of ceasing to make taxable supplies.
We have seen, on a number of occasions, HMRC attempting to compulsorily deregister a business because either; it has not made any taxable supplies (although it has the intention of doing so) or it is only making a small amount of taxable supplies. In the first example, as long as the business can demonstrate that it intends to make taxable supplies in the future it is entitled to remain VAT registered. This is often the position with; speculative property developers, business models where there is a long lead in period, or business such as exploration/exploitation of earth resources.
Voluntary deregistration
A business may apply for deregistration if it expects its taxable turnover in the next twelve to be below the deregistration threshold. This is currently £83,000. It must be able to satisfy HMRC that this is the case. Such an application may be made at any time and the actual date of leaving the club is agreed with HMRC. It should be noted that when calculating taxable income, certain supplies are excluded. These are usually exempt supplies but depending on the facts, other income may also be ignored.
Consequences of deregistration
A deregistered business is required to submit a final VAT return for the period up to and including the deregistration date. This is called a Period 99/99 return.
From the date of deregistration a business must stop charging VAT and is required to keep its VAT records for a minimum of six years. It is an offence to show VAT on invoices when a business is not VAT registered.
Once deregistered a business can no longer recover input tax. The sole exception being when purchases relate to the time the business was VAT registered. This tends to be VAT on invoices not received until after deregistration, but were part of the business’ expenses prior to deregistration. Such a claim is made on a form VAT427
An often overlooked VAT charge is the self-supply of assets on hand at the date of deregistration. A business must account for VAT on any stock and other assets it has on this date if:
These assets will include items such as; certain land and property (usually commercial property which is subject to an option to tax or is less than three year old), un-sold stock, plant, furniture, commercial vehicles, computers, equipment, materials, etc, but does not include intangible assets such as patents, copyrights and goodwill. The business accounts for VAT on the market value of these assets but cannot treat this as input tax, thus creating a VAT cost.
We usually advise that, if commercially possible, assets are sold prior to deregistration. This avoids the self-supply hit and if the purchaser is able to recover the VAT charged the position is VAT neutral to all parties, including HMRC. It is worth remembering that the self-supply only applies to assets on which VAT was charged on purchase and that there is a de minimis limit. We counsel that care is taken to ensure planning is in place prior to deregistration as it is not possible to plan retrospectively and once deregistered the position is crystallised.
HMRC will automatically re-register a business if it realises it should not have cancelled (eg; the anticipated turnover exceeds the deregistration threshold). It will be required to account for any VAT it should have paid in the meantime.
An option to tax remains valid after a registration has been cancelled. A business must monitor its income from an opted property to see whether it exceeds the registration threshold and needs to register again.
If a business owns any capital items when it cancels its registration, it may, because of the rules about deemed supplies (see self-supply above) have to make a final adjustment in respect of any items which are still within the adjustment period. This adjustment is made on the final return.
A business will have two months to submit its final return after it deregisters. On this return the business must account for all outstanding VAT on supplies made and received prior to deregistration. This applies even if it has not been paid. However, it can also reclaim any VAT provided that you have the VAT invoices. If some of the outstanding VAT relates to bad debts a business may claim relief.
If a business is partly exempt its final adjustment period will run from the day following its last full tax year to the date of deregistration. If a business has not incurred any exempt input tax in its previous tax year, the final adjustment period will run from the first day of the accounting period in the final tax year in which it first incurred exempt input tax to the date of deregistration.
If a business deregisters it leaves this scheme the day before its deregistration date. It must, therefore, account for output tax on its final VAT return for sales made on the last day of registration (which must be accounted for outside of the scheme).
If your customers issue VAT invoices on your behalf under self-billing arrangements (or prepare authenticated receipts for you to issue) a deregistering business must tell them immediately that it is no longer registered. They must not charge VAT on any further supplies you make. There are financial penalties if a business issues a VAT invoice or a VAT-inclusive authenticated receipt for supplies it makes after its registration has been cancelled.
A business can claim relief on bad debts it identifies after it has deregistered, provided it:
No claim may be made more than four years from the date when the relief became claimable.
Summary
As may be seen, there is a lot to consider before applying for voluntary deregistration, not all of it good news. Of course, apart from not having to charge output tax, a degree of administration is avoided when leaving the club, so the pros and cons should be weighed up. Planning at an early stage can assist in avoiding in nasty VAT surprises and we would always counsel consulting an adviser before an irrevocable action is taken. As usual in VAT, if a business gets it wrong there may be an unexpected tax bill as well as penalties and interest.
If any of the following details of a business’ registration changes, HMRC must be notified on form VAT484:
The relevant guidance has been updated to reflect the new requirement that such changes must be notified within 30 days of the change taking place. Failure to do so will result in penalties.
Other changes
HMRC must be notified at least 14 days in advance if a business changes its bank details.
A person must tell HMRC within 21 days if they take over the VAT responsibilities of someone who has died or is ill and unable to manage their own affairs. Use form VAT484 and post it to the address on the form.
If you join or leave a VAT group, you must first cancel your VAT registration. You will need to use the group’s VAT number once you’ve joined it. The VAT group should tell HMRC about the new member.
You need to tell HMRC if the structure of the business changes, eg; incorporation or a Transfer Of a Going Concern.