A reminder
The twice delayed introduction of the Domestic Reverse Charge (DRC) for the construction industry will be introduced from the first of next month and affected businesses need to have the necessary procedures in place – as it won’t be deferred again.!
Details of the scheme here and here.
Please contact us if you have any queries.
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:
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.
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.
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.
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.
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 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
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.
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.
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?
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.
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.
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 Basics
A quick look at Postponed Accounting (PA) and what it means for a business after Brexit
Pre-Brexit (if one remembers such halcyon days) acquisitions from other Member States crossed the UK border without any formalities as there was free movement of goods within all of the EU.
Now that GB is a third country, it is unable to take advantage of the benefits of a single market, so acquisitions become imports and are required to be declared when imported. However, gov.uk has announced he return of PA in an attempt to simplify matters.
PA
PA is accounting for import VAT on a VAT return means a business declares and recovers import VAT on the same return, rather than having to pay it upfront and recover it later. This means neutral cash flow; which is to be welcomed.
The normal rules about what VAT can be reclaimed as input tax will apply.
PA also has the advantage that imported goods are not delayed at the entry port while VAT paperwork and payment is completed. Of course, as experience has demonstrated; there may be other reasons for delays to imports and exports.
Who can use PA?
From 1 January 2021, if a business is registered for VAT in the UK, it will be able to account for import VAT on its return for goods it imports into:
There will be no changes to the treatment of VAT for the movement of goods between Northern Ireland and the EU.
A business does not need approval to account for import VAT on its returns.
How does PA work practically?
VAT is payable on imports of over £135 arriving into the GB from any country in the world, which now includes the EU. Practically, PA is similar to the current Reverse Charge. Output and input VAT is accounted for on the same VAT return.
When completing a customs declaration a business may choose how to account for VAT on its return.
If the Customs Handling of Import and Export Freight (CHIEF) system is used:
On the declaration, the following needs to be entered:
If the Customs Declaration Service is used:
The VAT registration is entered number at header level in data element 3/40.
Returns
Using someone to import goods on your behalf
If a business uses a third party to import goods on its behalf (eg; a freight forwarder, customs agent, or fast parcel operator) it will need to inform them how it wants to account for VAT on those imports, so that they can complete the customs declaration correctly.
Alternatives
The use of PA is optional. The alternative is to pay VAT on goods when they enter the UK. This means the use of the “usual” C79 certificates sent by HMRC on which input tax may be reclaimed (rather than any other documentation, eg; invoices).
Northern Ireland
Goods moved to NI from the EU are not impots (NI remains part of the EU, so the old rules on acquisitions still apply and no import VAT is due).
Customs Duty
Alongside additional border formalities, Customs Duties may be payable on certain goods. This Duty is not reclaimable like VAT. Most of the complexities of Customs Duty relate to the rules of origin.
Commentary
PA is a relief for businesses importing from the EU. It is a simple system and will be familiar to any business which applies Reverse Charges. With all the varying changes applying post-Brexit, this is one area which should not affect a business importing from the EU in terms of port delays or negative cash flow. To date, there is no evidence on how well the system is working, but anecdotally, I understand that this part of Brexit changes has not thrown up any issues, unlike other problems which have been widely reported. I stand to be corrected though.
Gov.uk has provided a new tool to check a business’ EORI number. (This used to be an EC resource now not available due to Brexit).
A guide to EORI here
A business may need to demonstrate to HMRC that it has carried out proper due diligence in certain cases.
Contact
If you have queries, or would like to obtain specific EORI advice, contact the HMRC EORI team using the online form
Access
Who has access to an EORI number?
The general public can access limited data, When a business is notified of its EORI number, it will be asked whether it objects to this data being published on the site.
HMRC has published two new sets of guidance for international post users and importing merchandise in baggage. The changes are mainly due to Brexit.
HMRC has published new guidance for international post users.
The notice explains what happens when a business imports or exports goods by post through Royal Mail or Parcelforce Worldwide.
The arrangements set out in the notice do not apply when a full declaration on a single administrative document (SAD – Form C88) is required.
The information about sending a package overseas has been updated. This relates to the new need to compete a customs declaration for goods sent to the EU.
The guidance covers commercial goods (also known as Merchandise in Baggage) which will be used, or sold by a business, where:
A person must declare all commercial goods. There is no duty-free allowance for goods brought into GB to sell or use in a business.
My guide to importing and exporting post Brexit here.
TOMS is complex, time consuming, potentially costly and a major headache for tour operators. It does aim to simplify VAT accounting as it avoids businesses having to VAT register in every EU Member State in which it provides services.
But, are there changes ahead? The European Commission has published a Factual summary report which looks at TOMS. The consultation was to gather evidence in order to evaluate the scheme in terms of ;
Since Brexit, HMRC have stated that TOMS still applies in the UK, but supplies in the EU which were previously VATable were now zero rated. The result is that only supplies in the UK are subject to VAT on the margin achieved. The future is unclear however. There is no longer a level playing field between the UK and other EU countries as UK operators’ have an advantage. The potential outcomes(to my mind) are:
The rules of TOMS are not currently fully harmonised and there are variations in the way EU Member States treat non-EU travel companies (such as the UK now). There are also differences in the services which are, and are not, covered by TOMS. Watch this space…
As Brexit is all completely finished * * hollow laugh * * I look at what overseas businesses operating in the UK need to know in respect of compliance.
What is fiscal representation?
It is a safeguard for the authorities responsible for VAT in the EU (and UK). If it is not possible to collect tax from the taxable person, they can go to the representative who is usually jointly and severally responsible for the debt.
Each EU Member State has its own rules on representatives, but here I look at what overseas businesses need to do in the UK, and what the responsibilities are for a business acting in such a role. A representative must meet a set of tests to ensure that it is fit and proper in order for it to be allowed to act in a representative capacity.
In most cases, overseas businesses with no place of belonging in the UK register as a Non-Established Taxable Person (NETP).
Choices
If a business is a NETP, it will have a choice in how it registers and accounts for VAT in the UK (although in certain circumstances, HMRC have the power to direct a business appoint a tax representative).
Deal with UK VAT itself
In most cases an overseas business can deal with VAT without third party assistance. However, it must be able to:
Tax representative
A NETP may appoint a tax representative who:
A NETP is obliged to provide all of the information required to fulfil its obligations.
Tax Agent
A NETP may appoint a tax agent to act on its behalf. Such an arrangement will be subject to whatever contractual agreement the NETP and the agent decide. The significant difference to a tax representative is that HMRC cannot hold the agent responsible for any of the NETP’s VAT debts. This is clearly a better position for a UK business acting on behalf of a NETP. HMRC can decide not to deal with any particular agent appointed. Also, in some circumstances, if HMRC think it is necessary, it may still insist that a tax representative is appointed – this is usually in cases where there is a risk to the revenue. Additionally, HMRC can ask for a financial security.
As with the appointment of tax representatives a NETP:
It is possible to appoint an employee to act as a VAT agent.
Penalties
As is to be expected, get any of the above wrong and there are penalties!
Food for wild birds is zero rated, while food for caged birds is at 20%.
HMRC has published the official VAT statistics for 2019/20
The headlines are:
One would think that it would be a relatively straightforward matter to write to HMRC to obtain a ruling (non-stat clearance) on a matter. Surely a taxpayer ought to be able to set out the issue, describe the transaction, provide a tax analysis and ask HMRC whether they consider the proposed VAT treatment appropriate. Well, of course, it is not as simple as that (this is VAT after all).
So, what are the issues and what hurdles must be cleared before HMRC engage with a written query?
Checklist
First, there is a checklist which a business must consider and include in a non-stat clearance. Inter alia, this list includes:
Failure to address any items on the checklist usually means no determination will be forthcoming.
An applicant must also set out what HMRC guidance (including internal guidance) legislation, case law and other information has been considered. We find it helpful to reproduce the full checklist (as HMRC advise) and provide a comprehensive response to each point in order to avoid a straightforward refusal to respond.
Genuine uncertainty
One of the main reasons HMRC refuses to provide a non-stat clearance is that it considers that there is no genuine uncertainty; in other words, “go and look at the guidance”. This is very unhelpful after time and effort, and fees cost has gone into the application. The fact that an application is required to set out what guidance etc has been considered, and why it is ambiguous in the relevant circumstances does not seem to carry very much weight. I find it is unhelpful to say, “if it wasn’t uncertain, we wouldn’t be writing to you”! We recommend that a full explanation of the genuine uncertainty is provided to forestall such a HMRC refusal to reply.
Chances
Experience insists that it is difficult to obtain a non-stat clearance which is of any value. Quite often, HMRC will reply saying that their letter is not a non-stat clearance, but then go on to address (at least) some of the issues. This sometimes provides a degree of comfort. An approach that I sometimes adopt is to say, “we believe this to be the correct VAT treatment, and one we will apply to the transaction unless you advise otherwise with reasons”. This sometimes creates a reaction.
HMRC guidance
Details of obtaining a non-stat clearance here.
Address
I find that applications are looked at quicker if they are emailed: nonstatutoryclearanceteam.hmrc@hmrc.gsi.gov.uk. However, there is a 2mb size limit which is often unhelpful. If emailing, an applicant should state that you confirm that you understand and accept the risks involved in using email (otherwise this can cause delays).
Postal address
HM Revenue & Customs, Non-Statutory Clearance Team, S0563. 5th Floor, Saxon House, 1 Causeway Lane, Leicester , LE1 4AA
What HMRC will not rule on
Reliance
Even if a business does obtain a determination, is it possible to rely on it? The answer is no (well, not always). I consider this here.
Summary
It is understandable that a business wants certainty on a transaction, and it ought to be able to rely on HMRC for confirmation of its own analysis, but obtaining such an opinion is fraught with difficulties, frustrations and (genuine) uncertainty. It seems that HMRC will go to lengths to avoid giving a decision, but they are not reticent in penalising a taxpayer once a business has made a decision, applied it, and HMRC subsequently disagree with the VAT analysis.
A wholly unacceptable situation.