Tag Archives: vat-structure

Our New International Service – VAT, Customs Duty, Sales Tax

By Marcus Ward 1 August 2016

Due to a new strategic alliance, we are now able to offer a true worldwide tax, customs duty and excise service.

Gone are the days when you, or your clients, had to deal individually with representatives in different countries, or pay extremely high fees and receive less than immediate service from the big 4. We now act as a one stop shop for nearly every country in the world. Whether it be;

a sales tax issue in Texas
a dispute with the authorities in Romania
a Customs Duty problem with entering goods into Mumbai
appointing a tax representative in Hong Kong
a disagreement over tax with a customer in Switzerland, or
a requirement to file documents in Russia,

we can do this on your behalf.

Of course, we cover every EC Member State – which may be increasing important after Brexit.

We offer a comprehensive, immediate and very reasonably priced service with total transparency on cost and quick response times. We can handle all matters including; advice, structuring, support and compliance while dealing with language issues, understanding domestic legislation and dealing with the relevant authorities in each country. All advice is provided by our very experienced and highly qualified staff with a comprehensive network of contacts. We understand local practices and customs as well as the precise technical requirements. Our advice aims to remove uncertainty and provides a definitive view, rather than a business having to rely on hearsay, incomplete or outdated online information, or advice from a customer/supplier which may not be accurate – all of which we have seen in the past and which can lead to very expensive surprises.

Our service covers the ambit from a small business’ first time cross-border or overseas transaction, to the largest multi-national.

Please contact me should you, or your clients have any international issues, or if you, or they are dissatisfied with current advice in this respect. We can also act on behalf of other VAT consultancies which do not have worldwide coverage.

In a forthcomingt article we will consider International transactions and triggerpoints for when assistance may be required.

VAT After Brexit

By Marcus Ward 27 June 2016

There have been many articles anticipating what would happen to Indirect Tax if the UK left the EU. Now the deed has been done we thought it would be a good idea to summarise what we actually know. This can be done very succinctly; “not very much”.

UK VAT legislation derives from the Euro-wide Principal VAT Directive (“PVD”) and consequently has the largest European dimension of any tax.

There are many factors which will impact on the future of VAT in the UK. The main one being which model the UK follows for trading with the EU, or whether it can negotiate a completely new model. Very broadly, and without going over ground that I’m sure has been covered many times since the vote, the four options are:

Membership of the EEA
Negotiated bilateral agreement
Advanced Free Trade Agreement
WTO membership

Each option is likely to result in differing VAT scenarios for trade, reporting and compliance. Until we understand what agreements will be made, it is likely that VAT life will go on in much the same way as it has done without the need for businesses to make any changes. Without a crystal ball it is impossible to say what the implications for Indirect Tax are, however, it is more than likely that any business which is involved in the following areas should be prepared for significant changes in the future:

Dispatches to the EU or acquisitions from the EU. It is likely that these will become exports and imports
Supplies of services to the EU or the purchase of services from the EU
Expenses incurred in the EU
Distance Selling
Triangulation
Financial services and insurance
Tour Operators’ Margin Scheme (TOMS)
MOSS supplies
Outsourcing and offshoring

It is likely that a domestic government may wish to reverse certain ECJ decisions imposed on the UK with which it disagrees. Leaving the EU will allow the UK freedom to set its own VAT rates and introduce its own legislation, although, practically and politically, it is not anticipated that the UK model will differ too sharply from the existing rules. At this stage however, this is mainly guesswork.

So, with a lot of negotiations in prospect, we are holding fire until we have more concrete information. It could be a bumpy ride, but one which isn’t about to start for some time.

In the meantime, we will keep you informed about any proposals and the introduction of any definite changes.

Watch this space!

VAT Tax Point Planning – Applications for Payment

By Marcus Ward 13 June 2016

Further to my previous article on tax points, I look at a specific planning point.

General

Applications for payment can be used to defer the date when output tax is accountable to HMRC and avoids the supplier having to account (and pay) VAT if the relevant supply becomes a bad debt.

Approval

No formal approval to use applications for payment is required from HMRC. This is because this VAT planning simply uses the “Time of Supply” (tax point) legislation.

Technical

No output tax is due until a tax point is crystallised. Broadly speaking, for the supply of services, a tax point is created at the earlier of; invoice date, receipt of payment, or completion of the work. Consequently, in order to be of benefit, the services in question have to be a “continuous supply of services”. This is defined as “services are supplied for any period for a consideration the whole or part of which is determined or payable periodically or from time to time”. Therefore, if an application for payment is issued rather than an invoice, output tax is only due when payment is received. This means if the debt becomes bad, no VAT is payable on it so long as the service is continuous. An application for payment is only of benefit if there is ongoing work (continuous supply of services) since, as above, there is a tax point created when the job is complete, regardless of the invoicing or payment position. Another relevant issue is; that under the existing VAT legislation, there is no requirement to issue a proper VAT invoice to an unregistered client/customer (unless specifically requested to do so by the client).

Implementation

Sending applications for payment (rather than invoices) may be done on a job by job basis or for all services from a selected date – although, the benefit will only be obtained for those jobs which are continuous. The VAT accounting system is required to recognise and report receipts of fees rather than applications for payment or invoices raised (although if invoices are issued on the day payment is received the tax point will be the same date). Additionally, the system needs to be able to identify completion tax points since these cannot be deferred by the use of application for payment.

Documentation

A request for payment must clearly state; “This is not a VAT invoice” and it may also be helpful if it appears distinct from “usual” invoices. It should state that it is an application/request for payment. It is also helpful if it does not show the supplier’s VAT number.

Cons

If the recipient of the services is VAT registered, it may complicate their accounting and will delay the date on which input tax may be recovered. This should not affect individuals or non-VAT registered clients. As considered above, it will also affect the accounting for the supplier and may add complexity.

Summary

This is relatively simple, yet effective VAT planning. It cannot be challenged technically by HMRC, although the actual operation will be examined at an inspection.

Please contact me if this matter is of interest.

VAT Schemes Guide – Alternative ways of accounting for tax

By Marcus Ward 1 June 2016

There are a number of VAT Schemes which are designed to simplify accounting for the tax. They may save a business money, reduce complexity, avoid the need for certain documentation and reduce the time needed to deal with VAT. Some schemes may be used in combination with others, although I recommend that checks should be made first.

It is important to compare the use of each scheme to standard VAT accounting to establish whether a business will benefit. Some schemes are compulsory and there are particular pitfalls for certain businesses using certain schemes.

I thought that it would be useful to consider the schemes all in one place and look at their features and pros and cons.

These schemes reviewed here are:

Cash Accounting Scheme
Annual Accounting Scheme
Flat Rate Scheme
Margin schemes for second-hand goods
Global Accounting
VAT schemes for retailers
Tour Operators’ Margin Scheme

Cash Accounting Scheme

Normally, VAT returns are based on the tax point (usually the VAT invoice date) for sales and purchases. This may mean a business having to pay HMRC the VAT due on sales that its customers have not yet paid for.

The VAT cash accounting scheme instead bases reporting on payment dates, both for purchases and sales. A business will need to ensure its records include payment dates.

A business is only eligible for the Cash Accounting Scheme if its estimated taxable turnover is no more than £1.35m, and can then remain in the scheme as long as it remains below £1.6m.

Advantages

Usually beneficial for cash flow especially if its customers are slow paying
Output tax is not payable at all if a business has a bad debt

Disadvantages

Is generally not beneficial for a repayment business (one which reclaims more VAT than it pays, eg; an exporter or supplier of zero rated goods or services)
Not usually beneficial if a business purchases significant amounts of goods or services on credit

Annual Accounting Scheme

The Annual Accounting Scheme allows a business to pay VAT on account, in either nine monthly or three quarterly payments. These instalments are based on VAT paid in the previous year. It is then required to complete a single, annual VAT return which is used to calculate any balance owed by the business or due from HMRC.

A business is eligible for the scheme if its estimated taxable turnover is no more than £1.35m and is permitted to remain in the scheme as long as it remains below £1.6m.

Advantages

Reduces paperwork as only the need to complete one return instead of four (Although it does not remove the requirement to keep all the normal VAT records and accounts)
Improves management of cash flow

Disadvantages

Not suitable for repayment businesses as they would only receive one repayment at the end of the year
If turnover decreases, the interim payments may be higher than under standard accounting

Flat Rate Scheme

The Flat Rate Scheme is designed to assist smaller businesses reduce the amount of time and complexity required for VAT accounting. The Flat Rate Scheme removes the need to calculate the VAT on every transaction. Instead, a business pays a flat rate percentage of its VAT inclusive turnover. The percentage paid is less than the standard VAT rate because it recognises the fact that no input tax can be claimed on purchases. The flat rate percentage used is dependent on a business’ trade sector.

A business is eligible for this scheme if its estimated taxable turnover in the next year will not exceed £150,000. Once using the scheme, a business is permitted to continue using it until its income exceeds £230,000.

If eligible, a business may combine the Flat Rate Scheme with the Annual Accounting Schemes, additionally, there is an option to effectively use a cash basis so there is no need to use the Cash Accounting Scheme. There has been recent case law on the percentage certain businesses’ use for the FRS, so it is worth checking closely. There is a one percent discount for a business in its first year of trading.

Advantages

Depending on trade sector and circumstances may result in a real VAT saving
Simplified record keeping; no requirement to separate out gross, VAT and net in accounts
Fewer rules; no issues with input tax a business can and cannot recover on purchases
Certainty of knowing how much of income is payable to HMRC

Disadvantages

No reclaim of input tax incurred on purchases
If you buy a significant amount from VAT registered businesses, it is likely to result in more VAT due
Likely to be unattractive for businesses making zero-rated or exempt sales because output tax would also apply to this hitherto VAT free income
Low turnover limit

Margin Scheme for Second Hand Goods

A business normally accounts for output tax on the full value of its taxable supplies and reclaims input tax on its purchases. However, if a business deals in second-hand goods, works of art, antiques or collectibles it may use a Margin Scheme. This scheme enables a business to account for VAT only on the difference between the purchase and selling price of an item; the margin. It is not possible to reclaim input tax on the purchase of an item and there will be no output tax if no profit is achieved. There is a special margin schemes for auctioneers. A variation of the Margin Scheme is considered below.

Advantages

Usually beneficial if buying from (non-VAT registered) members of the public
Applies to EC cross-border sales
Purchaser will not see a VAT charge
Although no input tax claimable on purchases of scheme items, VAT may be claimed in the usual way on overheads and other fees etc

Disadvantages

Record keeping requirements are demanding and closely checked, eg; stock records and invoices which are required for both purchases and sales
Cannot be used for items purchased on a VAT invoice
Can be complex and create a cost if goods exported
Although no VAT due on sales if a loss is made, there is no set-off of the loss

Global Accounting

The problem with the Second Hand Goods Scheme is that full details of each individual item purchased and sold has to be recorded. Global Accounting is an optional, simplified variation of the Second Hand Margin Scheme. It differs from the standard Margin Scheme in that rather than accounting for the margin achieved on the sale of each individual item, output tax is calculated on the margin achieved between the total purchases and total sales in a particular accounting period.

Advantages

Simplified version of the Margin Scheme
Record keeping requirements reduced
Losses made on sales reduce VAT payable
Beneficial for businesses which buy and sell bulk volume, low value eligible goods

Disadvantages

Cannot be used for; aircraft, boats, caravans, horses or motor vehicles
Similar to Margin Scheme disadvantages apart from loss set off

VAT Schemes for Retailers

It is usually difficult for retailers to issue an invoice for each sale made, so various retail schemes have been designed to simplify VAT. The appropriate scheme for a business depends on whether its retail turnover (excluding VAT) is; below £1m, between £1m and £130m and higher.

Smaller businesses may be able to use a retail scheme with Cash Accounting and Annual Accounting but it cannot combine a Retail Scheme with the Flat Rate Scheme. However, retailers may choose to use the Flat Rate Scheme instead of a Retail Scheme.

Using standard VAT accounting, a VAT registered business must record the VAT on each sale. However, via a Retail Scheme, it calculates the value of its total VAT taxable sales for a period, eg; a day, and the proportions of that total that are taxable at different rates of VAT; standard, reduced and zero.

According to the scheme a business uses it then applies the appropriate VAT fraction to that sales figure to calculate the output tax due. A business may only use the Retail Scheme for retail sales and must use the standard accounting procedures for other supplies. It must still issue a VAT invoice to any VAT registered customer who requests one. It is a requirement of any scheme choice that HMRC must consider it fair and reasonable.

Examples of Retail Schemes

Apportionment
Direct calculation
The point of sale scheme

There are special arrangements for caterers, retail pharmacists and florists.

Advantages

No requirement to issue an invoice for each sale
Most schemes are relatively simple to administer once set up. Technology assists in a helpful way with EPOS systems
Simplifies record keeping

Disadvantages

It is usual for each line sold to need to be coded correctly for VAT liability
Smaller businesses without state of the art technology may be at a disadvantage
Time and resources required to set up and maintain systems
In some cases the calculation depends on staff “pressing the right button”

Tour Operators Margin Scheme (TOMS)

This simplifies cross-border supplies by fixing the place of supply where the tour operator is located (rather than applying the usual place of supply rules). Tour operators often buy goods and services from businesses in overseas countries and often cannot reclaim the associated input tax. The TOMS resolves this issue by permitting tour operators to calculate the VAT solely on the value they add. This is, in theory, similar to the Margin Scheme above. The scheme applies to any business that buys in and re-sells; travel, accommodation and certain other services as a principal. It not only affects the normal High Street travel companies, but entities such as; schools, hospitality companies, organisers of events etc. TOMS is compulsory and it applies to supplies made to/in in the UK as well as overseas.

Advantages

Avoids the need for the tour operator to VAT register in every country it makes supplies to/in
Effectively gives credit for input tax incurred overseas as well as the UK
No VAT shown on documents issued to clients

Disadvantages

Often complex calculations and record keeping
Very precise and complicated rules
Lack of understanding by a number of inspectors
Complexity increases the risk of misdeclaration

Overall

As may be seen, there are a lot of choices for a business to consider, especially a start-up. Choosing a scheme which is inappropriate may result in VAT overpayment and a lot of unneeded record keeping and administration. There are real savings to be made by using a beneficial scheme, both in terms of VAT payable and staff time.

We are happy to review a business’ circumstances and calculate what schemes would produce the best outcome.

Please contact us if you require further information.

 Marcus Ward Consultancy Ltd 2016

VAT – Apportionment issues: complex and costly

By Marcus Ward 24 May 2016

The dictionary definition of the verb to apportion is “to distribute or allocate proportionally; divide and assign according to some rule of proportional distribution”.

So why is apportionment important in the world of VAT and where would a business encounter the need to apportion? I thought that it might be useful to take an overall look at the subject as it is one of, if not the most, contentious areas of VAT. If affects both output tax declarations and input tax claims, so I have looked at these two areas separately. If an apportionment is inaccurate it will either result in paying too much tax, or risking penalties and additional attention from HMRC; both of which are to be avoided!

The overriding point in all these examples is that any apportionment must be “fair and reasonable”.

Supplies

The following are examples of where a business needs to apportion the value of sales:

Retail sales

Retailers find it difficult to account for VAT in the normal way so they use what is known as a retail scheme. There are various schemes but they all provide a formula for calculating VAT on sales at the standard, reduced and zero rate. This is needed for shops that sell goods at different rates, eg; food, clothing and books alongside standard rated supplies. As an example, in Apportionment Scheme 1 a business works out the value of its purchases for retail sale at different rates of VAT and applies those proportions to its sales.

Construction

A good example here is if a developer employs a contractor to construct a new building which contains retail units on the ground floor with flats above. The construction of the commercial part is standard rated, but the building of the residential element is zero rated. The contractor has to apportion his supply between the two VAT rates. This apportionment could be made with reference to floorspace, costs, value or any other method which provides a fair and reasonable result. The value of supplies relating to property is often high, so it is important that the apportionment is accurate and not open to challenge from HMRC. I recommend that agreement on the method used is agreed with HMRC prior to the supply in order to avoid any subsequent issues.

Property letting

Let us assume that in the construction example above, when the construction is complete, the developer lets the whole building to a third party. He chooses to opt to tax the property in order to recover the attributable input tax. The option has no effect on the residential element which will represent an exempt supply. Consequently, an apportionment must be made between the letting income in respect of the shops and flats.

Subscriptions

There has been a great deal of case law on whether subscriptions to certain organisations by which the subscriber obtains various benefits represent a single supply at a certain VAT rate, or separate supplies at different rates. A common example is zero rated printed matter with other exempt or standard rated supplies.

Take away

Most are familiar with the furore over the “pasty tax” and even with the U-turn, the provision of food/catering is often the subject of disputes over apportionment. Broadly; the sale of cold food for take away is zero rated and hot food and eat in (catering) is standard rated. There have been myriad cases on what’s hot and what’s not, what constitutes a premises (for eat in), and how food is “held out” for sale. The recent Subway dispute highlights the subtleties in this area. I have successfully claimed significant amounts of overpaid output tax based on this kind of apportionment and it is always worth reviewing a business’s position. New products are arriving all the time and circumstances of a business can change. A word of warning here; HMRC regularly mount covert observation exercises to record the proportion of customers eating in to those taking away. They also carry out “test eats” so it is crucial that any method used to apportion sales is accurate and supportable.

Opticians

Opticians have a difficult time of it with VAT. Examinations and advice services are exempt healthcare, but the sale of goods; spectacles and contact lenses, is standard rated. Almost always a customer/patient pays a single amount which covers the services as well as the goods. Apportionment in these cases is very difficult and has been the subject of disagreement and tribunal cases for many years; some of which I have been involved in. Not only is the sales value apportionment complex, but many opticians are partly exempt which causes additional difficulties. I recommend that all opticians review their VAT position.

Input tax recovery

Business/Non-Business (BNB)

If an entity is involved in both business and non-business activities, eg; a charity which provides free advice and also has a shop which sells donated goods. It is unable to recover all of the VAT it incurs. VAT attributable to non-business activities is not input tax and cannot be reclaimed. Therefore it is necessary to calculate the quantum of VAT attributable to BNB activities, that VAT which cannot be attributed is called overhead VAT and must be apportioned between BNB activities. There are many varied ways of doing this as the VAT legislation does not specify any particular method. Therefore it is important to consider all of the available alternatives. Examples of these are; income, expenditure, time, floorspace, transaction count etc.

Partial exemption

Similarly to BNB if a business makes exempt supplies, eg; certain property letting, insurance and financial products, it cannot recover input tax attributable to those exempt supplies (unless the value is de minimis). Overhead input tax needs to be apportioned between taxable and exempt supplies. The standard method of doing this is to apply the ratio of taxable versus exempt supply values to the overhead tax. However, there are many “special methods” available, but these have to be agreed with HMRC. Partial exemption is often complex and always results in an actual VAT cost to a business, so it is always worthwhile to review the position regularly. Exemption is not a relief to a business.

Attribution

In both BNB and partial exemption situations before considering overheads all VAT must, as far as possible, be attributed to either taxable or exempt and non-business activities. This in itself is a form of apportionment and it is often not clear how the supply received has been used by a business, that is; of which activity is it a cost component?

Business entertainment

At certain events staff may attend along with other guests who are not employed. The recovery of input tax in respect of staff entertainment is recoverable but (generally) entertaining non staff members is blocked. Therefore an apportionment of the VAT incurred on such entertainment is required.

Business and private use of an asset

If a company owns, say, a yacht or a helicopter and uses it for a director’s own private use, but it is chartered to third parties when not being used (business use) an apportionment must be made between the two activities. The most usual way of doing this is on a time basis. Apportionment will also be required in the example of a business owning a holiday home used for both business and private purposes. Input tax relating to private (non-business) use is always blocked.

Motoring expenses

It is common for a staff member to use a car for both business and private purposes. Input tax is only recoverable in respect of the business use so an apportionment is required. This may be done by keeping detailed mileage records, or more simply by applying the Road Fuel Scale Charge which is a set figure per month which represents a disallowance for private use.

The above examples are not exhaustive but I hope they give a flavour to the subject.

If your business apportions, or should apportion, values for either income or expenditure I strongly recommend a review on the method. There is often no “right answer” for an apportionment and I often find that HMRC impose unnecessarily harsh demands on a taxpayer. Additionally, many business are unaware of alternatives or are resistant to challenging HMRC even when they have a good case.

VAT – Latest from the courts; use and enjoyment provisions

By Marcus Ward 25 April 2016

Telefonica Europe Plc and Telefonica UK Limited

The VAT Use and Enjoyment provisions set out an additional layer of rules which establish the place of supply of certain services. They apply to; telecommunications and broadcasting services; electronically supplied services (for business customers); hired goods; and hired means of transport. Broadly, effective use and enjoyment takes place where a recipient actually consumes the services, regardless of any contractual arrangements, payment, or beneficial interest. The intention of this provision is to correct instances of distortion which remain as a result of considering only where the provider and the customer belong. HMRC give the example of supplies such as telecommunications services which are actually consumed outside the EC, to be subject to UK VAT. Of course, the converse is that it would be distortive for there to be no EC VAT on such services where they are consumed in the UK.

In the Upper Tribunal case of Telefonica Europe Plc and Telefonica UK Limited the dispute involved the way in which the appellant calculated the value of its mobile telephone services which were used and enjoyed outside the EC (and thus UK VAT free). Over a number of years Telefonica had an agreement with HMRC whereby the amount of outside the EC supplies was calculated by reference to revenue, ie; comparing call, text and data income relating to non-EC supplies to total income.

HMRC subsequently formed the view that this method of calculation was distortive because higher charges were made to non-EC users than EC consumers. HMRC proposed a “usage methodology” which used call times, texts sent and volume of data used. As may be expected, this resulted in a lower percentage of supplies that were outside the scope of UK VAT thus increasing HMRC’s VAT take.

The appellant contended that the usage methodology was contrary to EC and UK VAT legislation. Not surprisingly, the UTT rejected this argument, deciding that Telefonica had not established that HMRC’s proposal was unlawful.

So then the outcome would be expected to be that the usage methodology should be used, but no. It was decided that the most accurate method would be one based on the time a customer has access to the network outside the EC; which differs from both the usage and revenue methods.

This type of dispute is quite common and also appears regularly in partial exemption situations. There are nearly always alternative ways to view apportionment calculations and it pays to obtain professional advice; not only to ensure that a fair result is achieved, but as assistance with negotiations (which may avoid having to go to Tribunal).

VAT Worldwide update – Gulf Cooperation Council Countries

By Marcus Ward 7 April 2016

VAT introduction in the Gulf Cooperation Council countries.

The following countries have indicated that they intend to introduce a VAT system for the first time from 1 January 2018:

Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the United Arab Emirates.

This is a likely result of costly military campaigns and a drop in global oil prices. Although it has been agreed that, to limit smuggling and competitiveness, the countries aim to introduce the tax at the same time it is likely that some countries may defer implementation to a later date. It is thought that healthcare, education, social services and a limited list of food items will be excluded and that introductory rate will be 5%.

Tip: Businesses trading with customers and clients in these countries may need to review their tax obligations, budgets, contracts and other arrangements before the introduction of VAT.

VAT Self-billing. What is it? The pros and cons

By Marcus Ward 24 March 2016

Self-billing is an arrangement between a supplier and a customer. Both customer and supplier must be VAT registered. Rather than the supplier issuing a tax invoice in the normal way, the recipient of the supply raises a self-billing document. The customer prepares the supplier’s invoice and forwards a copy to the supplier with the payment.

If a business wants to put a self-billing arrangement in place it does not have to tell HMRC or get approval from them, but it does have to get its supplier or customer to agree to the arrangement and meet certain conditions.

The main advantage of self-billing is that it usually makes invoicing easier if the customer (rather than the supplier) determines the value of the purchase after the goods have been delivered or the services supplied. This could apply more in certain areas such as; royalties, the construction industry, Feed-In-Tariff, and scrap metal. A further benefit is that accounting staff will be working with uniform purchase documentation.

However, there is a high risk of errors, significant confusion and audit trail weaknesses. The wrong rate of VAT may easily be applied, documents can go missing, invoices may be raised as well as self-billing documents, the conditions for using self-billing may easily be breached (a common example is a supplier deregistering from VAT) and essential communication between the parties can be overlooked. As the Tribunal chairman in UDL Construction Plc observed: “I regard the self-billing procedure as a gross violation of the integrity of the VAT system. It permits a customer to originate a document which enables him to recover input tax and obliges his supplier to account for output tax. It goes without saying that such a dangerous procedure should be strictly controlled and policed.”

The rules

For the customer

You can set up self-billing arrangements with your suppliers as long as you can meet certain conditions, you’ll need to:

Enter into an agreement with each supplier
Review agreements with suppliers at regular intervals
Keep records of each of the suppliers who let you self-bill them
Make sure invoices contain the right information and are correctly issued. This means including all of the details that make up a full VAT invoice – details here

If a supplier stops being registered for VAT then you can continue to self-bill them, but you can’t issue them with VAT invoices (and you cannot claim any input tax). Your self-billing arrangement with that supplier is no longer covered by the VAT regulations.

The Agreement

A self-billing arrangement is only valid if your supplier agrees to put one in place. If you don’t have an agreement with your supplier your self-billed invoices won’t be valid VAT invoices – and you won’t be able to reclaim the input tax shown on them.

You’ll both need to sign a formal self-billing agreement. This is a legally binding document. The agreement must contain:

Your supplier’s agreement that you, as the self-biller, can issue invoices on your supplier’s behalf
Your supplier’s confirmation that they won’t issue VAT invoices for goods or services covered by the agreement
An expiry date – usually for 12 months’ time but it could be the date that any business contract you have with your supplier ends
Your supplier’s agreement that they’ll let you know if they stop being registered for VAT, get a new VAT registration number or transfer their business as a going concern
Details of any third party you intend to outsource the self-billing process to.

An example of an agreement here

Reviewing self-billing agreements

Self-billing agreements usually last for 12 months. At the end of this you’ll need to review the agreement to make sure you can prove to HMRC that your supplier agrees to accept the self-billing invoices you issue on their behalf. It’s very important that you don’t self-bill a supplier when you don’t have their written agreement to do so.

Records

If you are a self-biller you’ll need to keep certain additional records:

Copies of the agreements you make with your suppliers
The names, addresses and VAT registration numbers of the suppliers who have agreed that you can self-bill them

If you don’t keep the required records, then the self-billed invoices you issue won’t be proper VAT invoices.

Invoices

Once a self-billing agreement is in place with a supplier, you must issue self-billed invoices for all the transactions with them during the period of the agreement.

As well as all the details that must go on a full VAT invoice you will also need to include your supplier’s:

name
address
VAT registration number

All self-billed invoices must include the statement “The VAT shown is your output tax due to HMRC” and you must clearly mark each self-billed invoice you raise with the reference: ‘Self Billing’ (This rule has the force of law). Details required on invoice here

Input tax

You’ll only be able to reclaim the input tax shown on self-billed invoices if you meet all the record keeping requirements. When you can reclaim the input tax depends on the date when the supply of the goods or services takes place for VAT purposes. This is known as the the tax point, details here

For the supplier

If one of your customers wants to set up a self-billing arrangement with you, they will be required to agree to this with you in writing. If you agree, they’ll give you a self-billing agreement to sign.

The terms of the agreement are a matter between you and your customer, but there are certain conditions you’ll both have to meet to make sure you comply with VAT regulations:

Sign and keep a copy of the self-billing agreement
Agree not to issue any sales invoices to your customer for any transaction during the period of the agreement
Agree to accept the self-billing invoices that your customer issues
Tell your customer at once if you change your VAT registration number, deregister from VAT, or transfer your business as a going concern.

Accounting for output tax

The VAT figure on the self-billed invoice your customer sends you is your output tax.

You are accountable to HMRC for output tax on the supplies you make to your customer, so you should check that your customer is applying the correct rate of VAT on the invoices they send you. If there has been a VAT rate change, you will need to check that the correct rate has been used.

Tips

As a supplier, take care not to treat self-billed invoices as purchase invoices and reclaim the VAT shown as input tax
As a customer, carry out an instant check of VAT registration numbers here
As a supplier or customer regularly check that the conditions for self-billing continue to be met and ensure good communications
As a supplier or customer ensure that the documentation accurately reflects the relevant transactions and the correct VAT rate is applied
As a supplier or customer ensure that there is a clear audit trial and that all documentation is available for HMRC inspection
It is possible to use self-billing cross-border intra-EC, but additional rules apply.

Ten Questions every business should ask about VAT

By Marcus Ward 8 March 2016

1. Am I sure that a VAT inspection would not find any errors?

An inspection can result in significant assessments, penalties and interest, apart from a business becoming “known” to HMRC. Peace of mind is a valuable benefit for a business owner too!

2. Am I sure that I am reclaiming as much VAT as possible?

We often find that businesses miss out on recovering input tax, this clearly results in an actual cost.

3. Do I take full advantage all available VAT reliefs, customs exemptions and duty refund schemes?

Failure to do so will create a tax cost and may be putting a business in a less competitive position.

4. Am I up to date on the indirect tax developments in my key markets?

Indirect tax changes rapidly, and so does the market place. Being unaware of changes that affect you may result in VAT being overpaid, or penalties being levied if you have underdeclared tax. It may also put you at a competitive disadvantage.

5. Have I considered the impact of tax rate changes on my pricing and margin, and have I taken the necessary measures?

Budgeting is affected by VAT. Failure to consider indirect taxes may eat into profit.

6. Do I collect all the data about my customers and transactions that could be required by tax authorities?

As in many VAT circumstances, getting it wrong or missing something results in penalties.

7. Do I comply with all indirect tax requirements in the jurisdictions where I operate or where my customers belong?

VAT and GST does exist outside the UK and ignoring overseas indirect tax obligations may result in action being taken by foreign authorities which will prove to be very uncomfortable and expensive. It is important to understand the rules for indirect tax in each country/area you trade. Don’t get caught out.

8. Do I have the tools to analyse my indirect tax flows and data?

Allocating sufficient technical and human resources to VAT is important. Seeking professional advice at the appropriate time is also prudent.

9. Could changes in the way my business is structured or how transactions are organised improve my indirect tax position and/or reduce complexity?

Saving money and reducing tax complications must be near the top of every business’ wish list. Seeking professional advice on structuring a business or a transaction goes a long way to achieving this

10. Is my business using the right VAT scheme?

There are many special schemes that a business may use, from the Flat Rate Scheme to Margin Schemes. Most are optional, but some, like the Tour Operators’ Margin Scheme are compulsory. Choose the wrong one, or being unaware of a beneficial scheme could cost.

It is important to constantly monitor a business’ VAT position. The nature of trade changes, technology changes, case law changes and the VAT rules are constantly in a state of flux. It is easy to assume that everything is alright because it has always been done that way, but there may be significant exposures and missed opportunities out there. We offer services from a basic healthcheck to a full technical review. A review will let you rest easy in your bed if nothing else!

VAT – Residential Property Triggerpoints

By Marcus Ward 17 February 2016

VAT and property transactions are uneasy bedfellows at the best of times. Getting the tax wrong, or failing to consider it at all can result in a loss of income of 20% on a project, or forgoing all input tax incurred on a development. Even a simple matter of timing can affect a transaction to a seller’s detriment. Here I take a brief look at issues that can impact residential property transactions. It is important to recognise when VAT may affect a project so I hope that some of these triggerpoints may prove useful.

General points

The following are very general points on residential properties. No two cases are the same, so we strongly recommend that specific advice is obtained.

Refurbishing “old” residential properties

Broadly speaking, the VAT incurred on such work is not reclaimable as the end use of the property will be exempt (either sale or rent). There is no way round this as it is not possible to opt to tax residential dwellings. It may be possible to use the partial exemption de minimis limits if there are any other business activities in the same VAT registration. If this is the only activity of a business, it will not even be permitted to register for VAT. There are special rules if the number of dwellings change as a result of the work (see below).

New residential builds

The first sale (or the grant of a long lease 21 years plus) of a newly constructed dwelling by “the person constructing” is zero rated. This means that any VAT incurred on the construction is recoverable. Care should be taken if the new dwelling is let on a short term basis rather than/before being sold as this will materially affect input tax recovery. Advice should always be taken before such a decision is made as there is planning available to avoid such an outcome. VAT incurred on professional and legal costs of the development may also be recovered such as; architects, solicitors, advisers, agents etc. VAT registration is necessary in these cases and our advice is to VAT register at the earliest stage possible.

The construction of new dwellings is zero rated, along with any building materials supplied by the contractor carrying out the work. The zero rating also extends to sub-contractors. It is not necessary for a certificate to be provided in order to zero rate such building works.

Conversions

There are special rules for refurbishments which create a different number of dwellings (eg; dividing up a single house into flats, or changing the total number of flats in a block, or making one dwelling by amalgamating flats). Generally, it is possible for contractors to invoice for their building work at the reduced rate of 5%. This rate may also apply to conversions. A conversion is defined as work undertaken on a non-residential property, such as a barn, office or church, into one or more self-contained dwellings. Once converted the sale of the residential property will be zero rated and all of the input tax incurred on associated costs is recoverable (similar to a new build).

Renovation of empty residential premises

Reduced rating at 5% is also available for the renovation or alteration of empty residential premises. Such a premises is one that has not been lived in during the two years immediately before the work starts. HMRC will insist on documentary evidence that the property has been empty for that time.

Purchase of a commercial property intended for conversion

If it is intended to convert a commercial property into residential use and the vendor indicates that (s)he will charge VAT (as a result of the option to tax having been exercised) it is possible for the purchaser to disapply the option to tax by the issue of a certain document; form VAT 1614D. This means that the sale will become exempt. Advice should always be sought on this issue by parties on each side of the transaction as it very often creates difficulties and significant VAT and other costs (mainly for the vendor).

Mixed developments

If what is being constructed is a building that is only in part a zero-rated dwelling, a contractor can only zero-rate its work for the qualifying parts. For example, if a building containing a shop with a flat above is constructed, only the construction of the flat can be zero-rated. An apportionment must be made for common areas such as foundations and roof etc. The sale of the residential element when complete is zero rated and the sale of the commercial part will be standard rated if under three years since completion. If the commercial part is over three years old at the date of sale, or is rented rather than sold, the supply will be exempt with the option to tax available – details here. If an exempt supply is made, the recovery of input tax incurred on the development will be compromised and it is important that this recognised and planning put in place to avoid this outcome.

DIY building projects

There is a specific scheme for DIY Housebuilders to recover input tax incurred on the construction of a dwelling for the constructor to live in personally. Details here https://www.marcusward.co/?s=diy

Sale of an incomplete residential development

There are two possible routes to relief if a project is sold before dwellings have been completed (either new build or conversion). This can often be a complex area, however, there is some zero rating relief which may apply, and also it may be possible to apply TOGC (Transfer Of a Going Concern) treatment to the sale. In both cases, it is likely that input tax previously claimed by the developer should not be jeopardised.

Overview

There are VAT complications for the following types of transactions/developments and issues:

work on listed properties
definition of a dwelling
arrangements where consortiums or syndicates are used/profit share
transactions in connection with nursing or children’s homes or similar
“granny flats” in the garden of existing houses
work on charitable buildings/ for charities
converting specific commercial property into residential property – particularly ex-pubs
sales to Housing Associations
sales of “substantially reconstructed protected buildings”
buying VATable buildings
date of completion – zero rating cut off
supplies by members of VAT groups
definition of building materials
input tax on white goods and similar
alterations for people with disabilities
garages with dwellings
land supplied with a property
buying property with existing, continuing leases
beneficial owner versus legal owner supplies
change of intention (buying land/property with the intention of using it for one purpose, but the intention changes after purchase)
where professional/architect’s fees are incurred
planning gains
own use of a property
mobile homes
reverse premiums/surrenders/reverse surrenders re; leases
holiday lets
hotels
business use by purchaser/tenant
contract stage of a property purchase where VAT is potentially chargeable by vendor
timing of supplies
work re; schools, churches, village halls, hospitals, or any other “unusual” structures

This list is not exhaustive, but I hope it gives a broad idea of where VAT needs to be considered “before the event”. As always, I am available to assist.