Tag Archives: VAT-repayment

What is a VAT Loan? – Business finance

By   8 August 2024
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Although, ideally, a business puts aside the VAT it collects from its customers (output tax charged) to pay its monthly, quarterly, or annual VAT bill, cashflow management can be difficult, especially for small or seasonal businesses with limited cash reserves. There are some things a business can do to mitigate the impact of VAT and one of these is a VAT loan.

Failure to pay VAT on time can lead to penalties and interest which could add to a business’ financial woes.

A VAT loan is a product which provides a short-term financing option to pay VAT on time. The loan covers the VAT amount due during each payment period, which allows a business to spread the VAT cost over a longer time instead of paying it up front in one hit.

Furthermore, there is no need to use up an existing bank facility. A VAT Loan gives a business an alternate financial option to utilise.

How it works

A business can apply for a VAT loan from a bank or other lender. It is usually deemed to be a secured business loan so assets must be put up as security. Once approved, the lender will pay it directly to HMRC. Repayment periods are typically between three months and a year.

The whole process does not usually take long as it is designed to be more streamlined than a standard loan. The money is usually paid to HMRC within days. Evidence of turnover and good credit history will be required, along with usual proof of ID and bank statements etc. Sometimes additional arrangement charges are made along with the interest.

Eligibility

A business must:

VAT bridging loans

There are generally two types of VAT loan: a standard VAT loan and VAT bridging loans. VAT bridging loans differ in that they are specifically a short-term option to assist a business bridge its cashflow gap between making a VAT payment, eg; for a significant purchase, usually property, and recovering this amount from HMRC as a repayment, which can take months (depending when the purchase was made in a VAT quarter and how quickly HMRC make the refund).

Finding a lender

 It is usually advisable to look for a lender who offers VAT loans specifically and compare interest rates, terms, fees etc.

A quick Google produces many VAT loan products to compare.

Downsides

As VAT loans are short term, the interest rates are often higher than other business loans. Additionally, the loan repayments and fees increase strains on a business’ financial commitments.

 

This is a brief overview on the mechanism and does not constitute financial advice. Businesses should seek their own financial counsel. Before signing any loan agreements, you should seek independent financial advice to better understand if a VAT loan you are considering is the right one for you.

VAT: New guidance on repayment interest

By   2 February 2023
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HMRC has published new guidance on repayment interest – in cases where HMRC is late in settling a repayment claim for overpaid VAT.

If HMRC is late in paying an amount representing a repayment, ie; when a return shows more input tax than output tax, or a claim is made for VAT previously overpaid, a business may be entitled to repayment interest on the VAT that it is owed. From 1 January 2023 repayment interest replaced the repayment supplement.

Amount of interest

Repayment interest is paid at the Bank of England base rate minus 1%, with a minimum rate of 0.5%.

Start date

VAT already paid to HMRC

The day after the later of these two dates:

  • when the VAT was paid to HMRC
  • the payment deadline for your accounting period

VAT not paid to HMRC

The day after the later of these two dates:

  • the payment deadline for the accounting period
  • when the VAT return or claim was submitted

End date

Repayment interest ends when HMRC either repays the VAT or sets it off against a different VAT or tax amount that is deemed to be owed.

Notes

  • any retrospective claims are subject to the unjust enrichment rules
  • repayment interest is not due if there are any outstanding VAT returns
  • HMRC will not pay interest on early payments of VAT
  • if payment on account businesses pay instalments that exceed VAT owed, repayment interest begins on the date the return was due
  • in cases where HMRC demand a VAT security, and it is not paid, no repayment interest will be due

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.

VAT: New penalties and interest for late returns and payments

By   4 November 2022
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Further to my article on the introduction of changes to penalties for late filing and payments of VAT and follow up guidance, the forthcoming introduction on 1 January 2023 has focussed attention on how they will impact certain businesses.

Late returns

Many businesses who have had to deal with the “old” default surcharge regime realised that it could be disproportionate and create unfair outcomes. The new penalties are, in my view, fairer, and, the changes bring some welcome features and some which are less so.

The good news is that the introduction of the new rules mean that businesses will start with a clean slate, regardless of their position under the default surcharge mechanism – there is no carry over form one set of rules to another.

However, for the first time, late rendering of returns can incur penalties and interest if the returns are either:

  • nil, or
  • repayment

In the previous regime when “non-payment” returns were filed late, this did not trigger a default.

Nil returns

Businesses which did not carry out any activity in the prescribed period, eg; intending traders, businesses temporary closed, or at the end of their life will have to recognise that a late nil return will now trigger points.

Repayment returns

Again, businesses which typically submit repayment returns, such as; new build constructors, exporters, and any business supplying zero rated goods or services will have to recognise tardy submissions will now affect them.

We understand that HMRC is aware of the impact on this sector and is planning to communicate with these businesses to make them aware of the new changes.

An additional point;  from 1 March 2021 the Domestic Reverse Charge was introduced for the construction industry. As a result, an increased number of builders found themselves in a repayment position and will now need to ensure timely returns to avoid penalties.

Late payments – penalties and interest

The new late payment penalties regime will replace the default surcharge, which served as a combined late submission and late payment sanction.

Under the new rules, there will be two separate late payment penalties.

The first penalty has two separate elements:

  1. 2% of the VAT unpaid at day 15
  2. a further 2% of the VAT unpaid at day 30

The second penalty is triggered from day 31. This is charged daily and is based on an annual rate of 4% of any outstanding amount. 

If all outstanding VAT is paid within 15 days of the due date, no late-payment penalty will arise. Although here will however still be late payment interest.

Interest

From 1 January 2023, HMRC will charge late-payment interest from the day a VAT payment is overdue to the day the VAT is paid, calculated at the Bank of England base rate plus 2.5%.

Time-to-Pay arrangements

HMRC offers the option of requesting a Time To Pay arrangement. This will enable a business to stop a penalty from accruing any further by approaching HMRC and agreeing a schedule for paying their outstanding tax.

Period of familiarisation

HMRC say that to give businesses time to get used to the changes, it will not be charging a first late payment penalty for the first year from 1 January 2023 until 31 December 2023, if the tax is paid in full within 30 days of the payment due date.

Appeals

It is anticipated that the number of appeals against late filing/payments will be reduced because of the more proportional approach of the new rules. However, it is still possible to appeal if a taxpayer considers the imposition of penalties and interest is unfair. An appellant needs a reasonable excuse to succeed.

Action

Advisers should ensure that clients affected by the new rules, specifically repayment business and those submitting nil returns, are aware of the impact. I know that a lot of these are habitual late filers and some “save up” returns for when they need a cash injection.

It will also be prudent for advisers to monitor penalty points accrued. We understand that HMRC is looking at how this information could be made available to agents and taxpayers. We expect more details about this in the coming months, including how software can be used to display points.

Repayment supplement

The new system may be fairer, however, the withdrawal of the repayment supplement is not! More details here. (I am still quite cross!)

VAT – Work on farm buildings

By   29 September 2022
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I am quite often asked if there are any VAT reliefs for farming businesses carrying out work to farm buildings.

Indeed, there are some areas of the VAT rules which may be of assistance to owners of farms and farm buildings. Clearly, the best position is to avoid VAT being charged in the first place. If this is not possible, then we need to consider if the VAT may be recovered.

Repairs and Renovations of Farmhouses

The following guidelines apply to businesses VAT registered as sole proprietors or partnerships. Where the occupant of the farmhouse is a director of a limited company (or a person connected with the director of the company) it is unlikely that any VAT incurred on the farmhouse may be recovered. The following notes are provided by HMRC after consultations with the NFU:

  • Where VAT is incurred on repairs, maintenance and renovations, 70% of that VAT may be recovered as input tax provided the farm is a normal working farm and the VAT-registered person is actively engaged full-time in running it. Where farming is not a full-time business for the VAT-registered person, input tax claimable is likely to be between 10%–30% on the grounds that the dominant purpose is a personal one.
  • Where the building work is more associated with an alteration (eg; building an extension) the amount that may be recovered will depend on the purpose for the construction. If the dominant purpose is a business one then 70% may be claimed. If the dominant purpose is a personal one HMRC would expect the claim to be 40% or less, and in some cases, depending on the facts, none of the VAT incurred would be recoverable.

Other farm buildings

As a general rule, when VAT is incurred on non-residential buildings, then, as long as they are used for business purposes, it would be expected that 100% of the VAT is recoverable. Care should be taken if any buildings are let and it may be that planning is necessary in order to achieve full recovery.

It should be noted that if any work to a building which is not residential results in the building becoming residential, eg; a barn conversion, then the applicable VAT rate should be 5%. If the resulting dwelling is sold then generally the 5% VAT is recoverable. If the dwelling is to be lived in by the person converting it; the VAT incurred may be recovered, but the mechanism is outside the usual VAT return and a separate claim can be made. In these circumstances it is not necessary for the “converter” to be VAT registered.

As may be seen, in many cases it will be necessary to negotiate a percentage of recovery with HMRC.  We can assist with this, as well as advising on VAT structures and planning to ensure as much input tax as possible is either not chargeable to you, or is recoverable.

Claiming VAT incurred overseas

By   20 July 2022
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A UK VAT registered business is able to recover VAT it incurs in the EU. However, this is not done on the UK VAT return, but rather by a mechanism known as an “13th Directive” claim (Thirteenth Council Directive 86/560/EEC of 17 November 1986).

Via this procedure a UK business reclaims overseas VAT from the tax authority in the country it was incurred. This is different to the Retail Export Scheme.

Who can claim?

Any UK business which has a certificate of status and meets the following conditions:

The conditions

  • the UK business has not undertaken any business which would require it to register for VAT in the country in which the claim relates
  • a business must not have any fixed establishment, seat of economic activity, place of business or other residence (place of belonging) in the country of refund
  • a VAT invoice is obtained
  • the VAT was incurred for goods or services which give rise to the right of deduction (see below)

VAT not claimable

The following rules must be applied to a claim, and some claims are specifically refused:

Partial exemption

A business must apply the appropriate recovery rate for purchases using its partial exemption method.

Non-business expenses

Expenditure incurred in another country which relates to non-business activities is not claimable under the refund scheme.

Non-refundable supplies

VAT on the following supplies cannot be claimed

  • incorrectly invoiced
  • goods purchased which are subsequently exported

Further, the “usual” rules that apply to a UK VAT claim must be followed.

I have summarised what VAT is not claimable in each EU Member State here.

Minimum claim

Each country has a set minimum claim, but it is mainly around the €50 pa figure.

Time limit

Deadlines to request a refund are not standard and vary country to country. However, they are mainly 30 June or 30 September, and the claims are on a calendar year basis year (it is possible to make quarterly claims which have different deadlines).

How to make a claim

Claimants must send an application to the national tax authority in the country where the VAT was incurred.

Unfortunately, since Brexit, the claims procedure is more complex. There is no longer a single portal and the procedure to request refunds is not standard across the EU. A business needs to research the country specific information on VAT using links provided on the EU Taxation site and a claim for each country must be sent using the procedure set out by that country.

Full rules and procedure to follow can be found in Directive 86/560/EEC

Please note: Some countries require that a claim to be filed by a tax representative authorised by the local tax administration.

Time limits for the country of refund to process an application

The country of refund must notify the applicant of its decision to approve or refuse the application within four months of the date they first received the application.

Payment method

The refund will be paid in the country of refund or, at the applicant’s request, in any Member State. In the latter case, any bank charges for the transfer will be deducted by the country of refund from the amount to be paid to the applicant.

Penalties

All countries take a very serious view of incorrect or false applications. Refunds claimed incorrectly on the basis of incorrect or false information can be recovered and penalties and interest may be imposed, and further refund applications suspended.

Claims refused

If the country of refund refuses an application fully or partly it must notify a claimant of the reasons for refusal.

If this happens an appeal against the decision may be made using the appeals procedure of that country.

Interest on delayed applications

Interest may be payable by the country of refund if payment is made after the deadline. 

Claims on UK VAT returns

VAT incurred overseas must not be claimed on a UK VAT return.  If it is, it is liable to an assessment, penalties and interest levied in the UK by HMRC.

VAT: HMRC to end making payable orders to NETPs

By   9 November 2021
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HMRC will stop issuing payable orders to overseas non-established taxpayers (NETP – taxpayers who are registered for UK VAT but do not have a business address here). The system automatically issued a payable order if a NETP was due a repayment.

Background

HMRC has received notifications and complaints from taxpayers advising that they can no longer cash their payable orders in their country or their bank. The impact of Brexit and COVID19 has seen an increase in banks/countries no longer accepting payable orders. Consequently, HMRC were sending repayments to NETPs with the knowledge they may not be able to cash them.

New Gform

To address this issue HMRC has created a Gform that will enable NETPs to send their bank account information in order that the issue of a payable order can be avoided and a Clearing House Automated Payment System (CHAPS) payment made instead.

Access

HMRC systems do not currently have CHAPS functionality or the ability to store overseas bank information. However, once a NETP has completed the form, which is accessed via the Government Gateway HMRC will set a lock on the taxpayer’s record to prevent the payable order being automatically issued. NETPs will then receive their repayments directly into their bank account without the need to visit their bank to cash a payable order.

Information required

Information requested on the Gform will include:

  • VAT registration number
  • address
  • email address
  • bank account information
  • payable order information if necessary

VAT: DIY housebuilders can make more than one claim – The Ellis case

By   18 October 2021
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Latest from the courts

In the First Tier Tribunal (FTT) case of Andrew Ellis and Jane Bromley [2021] TC08277, the issue was whether a person constructing their own house can make more than one claim for VAT incurred.

Background

The DIY Housebuilder’s Scheme enables a DIY housebuilder to recover VAT incurred on the construction of a house in which the constructor will live. Details here.

In this case, the specific issue was whether, despite the HMRC guidance notes on the scheme claim form explicitly stating that only one claim can be made, whether two claims may be submitted and paid by the respondent.

The appellant constructed a house over a period of five years (he was a jobbing builder and the work was generally only undertaken at weekends and holidays). To aid cash flow, an initial claim was made, followed by a second two years later.

The relevant legislation is The VAT Act 1994 section 35.

Decision

The appeal was allowed. The FTT found that HMRC’s rule that only one claim could be made under the DIY housebuilder’s scheme was ultra vires and that multiple claims should be permitted.

The judge stated that “…there is no express indication that only one claim may be made. Like many provisions, section 35 VATA is drafted in the singular. Drafting in the singular is an established technique to assist in clarity and to enable the proposal to be dealt with succinctly.  As there is no express indication to the contrary in section 35 VATA, section 6 Interpretation Act 1978 applies to confirm that the reference to “a claim” in section 35 VATA must be read as including “claims”.

Commentary

This is good news for claimants who often must wait a number of years for a house to be built and therefore carry the VAT cost until the end of the project.

This case presumably means that it is possible to make claims as the project progresses and there is no need to wait until completion.

We await comment on this case from HMRC, but it is hoped that clarification will be forthcoming on whether the result of this case will be accepted.

VAT: Unjust enrichment. The Deluxe case

By   13 January 2021
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Latest from the courts

In the Deluxe Property Holdings Limited High Court case (Deluxe) the issue was whether a VAT claim needed to be passed back to the supplier after a correction – whether the unjust enrichment applied.

Background

Deluxe employed SCL Construction Limited (SCL) to carry out building works. SCL raised invoices in respect of the construction of student accommodation at 20%. It was, however, common ground that the works were in fact zero-rated. SCL recovered the overcharged VAT from HMRC via a VAT Act 1994 Section 80 claim. SCL undertook to repay the amount of VAT to Deluxe via section 10 of VAT Notice 700/45. Without such written reimbursement undertaking, HMRC would have been entitled to refuse the claim. SCL did not make the payment to Deluxe.

Issue

The issue between the parties was whether:

  • SCL holds the accounting credit obtained from HMRC on trust for Deluxe, or;
  • the claim is only in debt, in which case SCL sought to set-off such the claim against other monies that it alleges are owed by Deluxe

Decision

The court ruled that SCL had undertaken to reimburse its customer all of the amount credited by HMRC without any deduction, for whatever purpose. Further, SCL had undertaken that it could not use the credit for any other purpose. It was a payment made by HMRC for the sole and express purpose of allowing SCL to reimburse the mistakenly charged VAT to Deluxe and was clearly intended to restrict SCL’s freedom of disposal so that the credit was to be exclusively used for the stated purpose without set-off.

Although SCL gave its undertaking to HMRC rather than to Deluxe to pass on the money, it held the repayment on trust for Deluxe and gave rise to a Quistclose Trust*

Additionally, a constructive trust arose because it would be unacceptable for SCL to derive a benefit of the VAT repayment.

The court found that SCL has acted in breach of trust and is liable as trustee to restore the trust fund and transfer to Deluxe the balance of the trust property without offsetting it against amounts that it claimed it was owed by Deluxe.

Commentary

This is a logical and expected decision and the reasoning is helpful for similar disputes.

*  A trust may arise where one person, A, advances money to another, B, on the understanding that B is not to have the free disposal of the money and that it may only be applied for the purpose stated by A. The effect of the trust is to reserve in A the beneficial interest in the money, so providing him with some proprietary security for his advance.