Tag Archives: zero-rate

VAT Flat Rate Scheme – beware the hidden costs

By Marcus Ward 5 November 2015

VAT Basics

Anything that makes VAT easier and that can even reduce the amount payable must be a good thing….right?

The Flat Rate Scheme (FRS) was introduced to simplify VAT accounting for small businesses (with an annual turnover under £150,000) and does away with the concept of input and output tax. Instead a flat rate is applied to a business’ VAT inclusive turnover. This means a business in the FRS cannot reclaim any VAT incurred on its purchases, but a lower (than 20%) rate of VAT is applied to its VAT inclusive income.

Additionally, there is an option to only account and pay VAT when the business itself has been paid by its customers; doing away with VAT bad debt issues and improving cashflow.

Now this certainly has its attractions in terms of reducing the administrative burden and some business find that it reduces the amount of VAT payable. However care should be taken to select the appropriate business category/rate. A simple exercise to compare VAT declared under the “normal” rules to that due under the FRS is clearly prudent. But, as with all things VAT, there can be a catch.

The two drawbacks to the scheme

1) If a business incurs a significant amount of input tax then, unless the flat rate percentage benefit outweighs the loss of input tax, then the FRS is not for them.

2) If a business makes any supplies at the zero rate, or that are exempt, or outside the scope of VAT this income is also included in the turnover for the FRS. The result is then that VAT has to be accounted for on sales that would be VAT free under the normal VAT rules.

This is a bad thing!

Examples of businesses which need to be particularly aware are ones which:

– Export goods or services

– Provide goods or services cross-border to other EC member States

– Sell books, food, or children’s clothes

– Build new homes

– Provide transport

– Let property

– Are charities or Not For Profit entities

– Provide financial or insurance services or brokerage

– Provide health and/or welfare services

– Provide education and/or training

– Offer subscriptions to membership organisations

– Provide sport services

– Are usually in a repayment position with HMRC

(This list is not exhaustive).

The FRS should certainly be considered for smaller businesses especially start-ups; since a first year discount is available for those that are in their first year of VAT registration. These get a one per cent reduction in the flat rate percentage until the day before their first anniversary of becoming VAT registered.

It is important for advisers to consider whether a client would benefit from being in the FRS, or indeed, whether continuation of the scheme remains advantageous to the business.

The VAT flat rates

The VAT flat rate you use depends on the type of business. If the rate changes, a business must apply the new rate from the date it changes. Also, if the nature of a taxpayer’s business changes it is important to review its FRS position.

The applicable rates here

The detailed rules of the FRS here

VAT – Proof of evidence of Intra-EC supplies

By Marcus Ward 23 September 2015

A B2B supply of goods from one Member State to another (a dispatch) is VAT free (with the recipient dealing with acquisition tax in the Member State of receipt). However, in order to VAT free treatment to apply evidence that the goods have moved cross-border must be provided and satisfy the authorities in the Member State of dispatch.

The level of evidence and type of documents required to support the right to VAT free treatment varies significantly between Member States. This has led to confusion and difficulties for businesses.

As a result the EC VAT Expert Group* have, this week, produced a paper (paper 46) named “‘Proof of evidence of Intra-EU supplies’” Here: 46 – Proof of IC Supplies

As well as identifying the wide discretion afforded to Member States as to the type of documents required, it notes that this discretion and lack of clarity often leads to disproportionate compliance burdens for businesses involved in the cross border supply of goods. This also results in the fundamental principle of fiscal neutrality and the free movements of goods being impaired.

In summary

The Group’s findings may be summarised:

Diversity of documentation

Most Member States rely on a myriad of documents which may not be listed in national legislation. Such diversity is a problem and may require businesses to provide documentary evidence that cannot be reasonably obtained. This practice does not reconcile with principles established by the ECJ. The paper adds that tax authorities tend to focus on certain formalities and not permit alternative evidence.

Local initiatives

The paper notes that based on Article 131 of the VAT Directive, and often in light of the fight against fraud, tax authorities are introducing local initiatives. The compatibility of these with the EC framework may be questioned and is causing increasing burdens and costs on legitimate taxpayers.

Importance given by tax authorities to the “knowledge test”

The paper considers that the level of demand from tax authorities to document intra-EC trade should not be upgraded because of fraud cases. Documentary evidence is of a type fraudsters would typically provide. The wide margin of interpretation left to tax authorities and judges regarding concepts such as “good faith” means that further guidance may be required. This, however, should not extend up to a requirement for suppliers to show evidence to authorities that their customers acted in good faith.

Diversity of practices; timing versus legal certainty

The diversity of approaches across EC Member States generates costs and increase risks for businesses operating in different Member States.

Conclusion

The paper considered some recent ECJ case law on cross-border transactions and concluded VAT free treatment should be granted to the supplier when:

1) It demonstrates that the transaction meets the substantive criteria of that provision, namely that it is entered into with another taxable person in a Member State other than that in which dispatch or transport of the goods begins. This would be done with the supplier holding at least three non-contradictory documents or elements certifying the transport or dispatch to another Member State.

2) In this context, a reasonable customer assessment could be expected from taxpayers when tax authorities audit whether the transactions are taking place in the context of fraud and/or abuse.

Next Steps

It is recommended that new guidance could be adopted in an Implementing Regulation or an explanatory note to the relevant Articles in the VAT Directive could be prepared by the Commission.

It will be interesting to see if these recommendations are adopted. It would make life a lot more straightforward for businesses who trade cross-border in the EC. Although the UK has one of the most practical regimes in this respect, even genuine movements of goods from the UK can result in an unexpected and unwelcome VAT charge because of a lack of specific documentation.

* The VAT Expert Group assists and advises the European Commission on VAT matters. Details here

VAT Reliefs for Charities. A brief guide.

By Marcus Ward 3 August 2015

Charity and Not For Profit entities – a list of VAT reliefs.

Unfortunately, charities have to contend with VAT in much the same way as any business. However, because of the nature of a charity’s activities, VAT is not usually “neutral” and becomes an additional cost. VAT for charities often creates complex and time consuming technical issues which a “normal” business does not have to consider.

There are only a relatively limited number of reliefs specifically for charities and not for profit bodies, so it is important that these are taken advantage of. These are broadly:

Advertising services received by charities;
Purchase of qualifying goods for medical research, treatment or diagnosis;
New buildings constructed for residential or non-business charitable activities;
Self-contained annexes constructed for non-business charitable activities;
Building work to provide disabled access in certain circumstances;
Building work to provide washrooms and lavatories for disabled persons;
Supplies of certain equipment designed to provide relief for disabled or chronically sick persons;

There are also special exemptions available for charities:

Income from fundraising events;
Admissions to certain cultural events and premises;
Relief from “Options to Tax” on the lease and acquisition of buildings put to non-business use.
Membership subscriptions to certain public interest bodies and philanthropic associations;
Sports facilities provided by non-profit making bodies;

The reduced VAT rate (5%) is also available for charities in certain circumstances:

Gas and electricity in premises used for residential or non-business use by a charity;
Renovation work on dwellings that have been unoccupied for over two years;
Conversion work on dwellings to create new dwellings or change the number of dwellings in a building;
Installation of mobility aids for persons aged over 60.

Although treating certain income as exempt from VAT may seem attractive to a charity, it nearly always creates an additional cost as a result of the amount of input tax which may be claimed being restricted. Partial exemption is a complex area of the tax, as are calculations on business/non-business activities which fundamentally affect a charity’s VAT position. I strongly advise that any charity seeks assistance on dealing with VAT to ensure that no more tax than necessary is paid. Charities have an important role in the world, and it is unfair that VAT should represent such a burden and cost to them.

VAT – Are e-books books? Update on ECJ’s decision 5 March 2015

By Marcus Ward 5 March 2015

Books are zero rated for VAT purposes, but only (currently) if they are of the traditional dead tree variety. The zero rating does not extend to e-books which are standard rated for VAT. There has been a long standing argument between EC Member States (and between other interested parties) that similar content should not be taxed at different rates solely depending on the method of delivery. This argument is about to be tested in the courts. The UK is not permitted by the EC to extend its current zero rating for printed matter, however, it is expected that the contention in this case will be that the inclusion of new products will not extend the zero rating, but rather the development of technology has created a supply that should be covered by the existing zero rating legislation.

If it is accepted by the courts that all types of book should attract the same rate of VAT, it may mean that the rate will be equalised upwards. So, by the end of the year we could be looking at VAT of 5% being added to books, newspapers and other printed matter which was hitherto VAT free – A “tax on learning” as previous protests had it when there was a threat to tax free books.

UPDATE

The European Court of Justice (ECJ) has today ruled that France and Luxembourg must raise their reduced VAT rates on sales of e-book. This will conclude ongoing disputes (see above) between EC countries over whether e-books may be treated similarly to printed books at the nil or reduced rates. The UK and Germany were the main protagonists in challenging those Member States where e-books have been treated the same as printed versions.

Initially, Luxembourg and France began reclassifying e-books at the same rate as printed books – 3% and 5.5% in 2012. Subsequently, Italy and Malta joined them at the start of 2015, reducing the rates to 4% and 5%.

These rates where challenged by the UK and Germany who asked the EC to impose rules to ensure that e-books could not take advantage of the printed book rates. Today, the ECJ published its ruling, stating that since e-books do not have the same physical characteristics as printed books and therefore cannot benefit from the printed book reduced VAT rules.

This decision does seem to go against common sense,but the ECJ’s hands were somewhat tied by the VAT rules which were introduced before e-books existed.

VAT on residential developments

By Marcus Ward 20 February 2015

Should work on existing residential property have the same VAT treatment as new build housing?

The UK cannot create a new zero rate, however, should, say, the reduced rate apply to extensions/redevelopment?

And if so, where should the line be drawn?

Article from Property Week here

VAT – Hard or soft? Stiff or floppy?

By Marcus Ward 12 November 2014

Sssshh at the back, this is important!

Whether cakes and biscuits go hard or soft when stale helps to determine whether they are indeed cakes or biscuits (cakes go hard, biscuits go soft). This is the difference between VAT at 20% and zero rating for some products.

Whether printed matter is stiff or floppy can also result in either 20% or zero rated treatment. In this case, for single sheet products, eg; leaflets; limp is good and hard can result in the VAT hit.

What did you think I was talking about? Stop making your own jokes up!

VAT Invoices – A Full Guide

By Marcus Ward 28 August 2014

The subject of invoices is often misunderstood and can create serious issues if mistakes are made. VAT is a transaction tax, so primary evidence of the transaction is of utmost importance. Also, a claim for input tax is not valid unless it is supported by an original valid invoice; no other documentation is acceptable. HMRC can, and often do, reject input claims because of an inaccurate invoice. There are a lot of misconceptions about invoices, so, although a rather dry subject, it is very important and I thought it would be useful to have all the information in one place, so here is my guide:

Obligation to provide a VAT invoice

With certain limited exceptions a VAT registered person must provide the customer with an invoice showing specified particulars including VAT in the following circumstances.

(a) He makes a supply of goods or services in the UK (other than an exempt supply) to a taxable person.

(b) He makes a supply of goods or services to a person in another EC country for the purposes of any business activity carried on by that person. But no invoice is required where the supply is an exempt supply which is made to a person in another EC country which does not require an invoice to be issued for the supply. (Because practice varies widely across the EC, HMRC guidance is that businesses should be guided by their customers as to whether invoices are required for exempt supplies.)

(c) He receives a payment on account from a person in another EC country in respect of a supply he has made or intends to make.

Exceptions

The above provisions do not apply to the following supplies.

• Zero-rated supplies (other than supplies for acquisition by a person registered in another EC country, see (b) above).

• Supplies where the VAT charged is excluded from credit under VATA 1994, s 25(7) (eg business entertaining and certain motor cars) although a VAT invoice may be issued in such cases.

• Supplies on which VAT is charged but which are not made for a consideration. This includes gifts and private use of goods.

• Sales of second-hand goods under one of the special schemes. Invoices for such sales must not show any VAT.

• Supplies that fall within theTour Operators’ Margin Scheme(TOMS). VAT invoices must not be issued for such supplies.

• Supplies where the customer operates a self-billing arrangement.

• Supplies by retailers unless the customer requests a VAT invoice.

• Supplies by one member to another in the same VAT group.

• Transactions between one division and another of a company registered in the names of its divisions.

• Supplies where the taxable person is entitled to issue, and does issue, invoices relating to services performed in fiscal and other warehousing regimes.

Documents treated as VAT invoices

Although not strictly VAT invoices, certain documents listed below are treated as VAT invoices either under the legislation or by HMRC.

(1) Self-billing invoices

Self-billing is an arrangement between a supplier and a customer in which the customer prepares the supplier’s invoice and forwards it to him, normally with the payment.

(2) Sales by auctioneer, bailiff, etc.

Where goods (including land) forming part of the assets of a business carried on by a taxable person are, under any power exercisable by another person, sold by that person in or towards satisfaction of a debt owed by the taxable person, the goods are deemed to be supplied by the taxable person in the course or furtherance of his business.

The particulars of the VAT chargeable on the supply must be provided on a sale by auction by the auctioneer and where the sale is otherwise than by auction by the person selling the goods. The document issued to the buyer is treated as a VAT invoice.

(3) Authenticated receipts in the construction industry.

(4) Business gifts

Where a business makes a gift of goods on which VAT is due, and the recipient uses the goods for business purposes, that person can recover the VAT as input tax (subject to the normal rules). The donor cannot issue a VAT invoice (because there is no consideration) but instead may provide the recipient with a ‘tax certificate’ which can be used as evidence to support a deduction of input tax. The tax certificate may be on normal invoicing documentation overwritten with the statement:

“Tax certificate – No payment is necessary for these goods. Output tax has been accounted for on the supply.”

Full details of the goods must be shown on the documentation and the amount of VAT shown must be the amount of output tax accounted for to HMRC.

Invoicing requirements and particulars

A VAT invoice must contain certain basic information.

A VAT invoice must show the following particulars.

(a) A sequential number based on one or more series which uniquely identifies the document.

The ‘invoice number’ can be numerical, or it can be a combination of numbers and letters, as long as it forms part of a unique and sequential series. Where there is a break in the series, eg; where an invoice is cancelled or spoiled and never issued to a customer, this is still acceptable as long as the relevant invoice is retained.

(b) The time of the supply, ie tax point.

(d) The name, address and registration number of the supplier.

(e) The name and address of the person to whom the goods or services are supplied.

(f) A description sufficient to identify the goods or services supplied.

(g) For each description, the quantity of the goods or extent of the services, the rate of VAT and amount payable, excluding VAT, expressed in any currency.

(h) The unit price.

This applies to ‘countable’ goods and services. For services, the countable element might be, for example, an hourly rate or a price paid for standard services. If the supply cannot be broken down into countable elements, the total VAT-exclusive price is the unit price.

(i) The gross amount payable, excluding VAT, expressed in any currency.

(j) The rate of any cash discount offered.

(k) The total amount of VAT chargeable expressed in sterling.

(l) Where the margin scheme forSECOND-HAND GOODSor theTOMS is applied, either a reference to the appropriate provision of EC Council Directive 2006/112/EC or the corresponding provision of VATA 1994 or any indication that the margin scheme has been applied.

The way in which margin scheme treatment is referenced on an invoice is a matter for the business and but we recommend:

• “This is a second-hand margin scheme supply.”

• “This supply falls under the Value Added Tax (Tour Operators) Order 1987.”

The requirement only applies to TOMS invoices in business to business transactions.

(m) Where a VAT invoice relates in whole or in part to a supply where the person supplied is liable to pay the VAT, either a reference to the appropriate provision of EC Council Directive 2006/112/EC or the corresponding provision of VATA 1994 or any indication that the supply is one where the customer is liable to pay the VAT.

This covers UK supplies where the customer accounts for the VAT (eg under the gold scheme or any reverse charge requirement under the missing trader intra-community rules). The way in which margin scheme treatment is referenced on an invoice is a matter for the business and we recommend: “This supply is subject to the reverse charge”.

Exempt or zero-rated supplies

Invoices do not have to be raised for exempt or zero-rated transactions when supplied in the UK. But if such supplies are included on invoices with taxable supplies, the exempt and zero-rated supplies must be totalled separately and the invoice must show clearly that there is no VAT payable on them.

Leasing of motor cars

Where an invoice relates wholly or partly to the letting on hire of a motor car other than for self-drive, the invoice must state whether the car is a qualifying vehicle

VAT invoices to persons in other EC countries

Unless HMRC allow otherwise, where a registered person provides a person in another EC country with

• A VAT invoice or,

• Any document that refers to a VAT invoice and is intended to amend it (eg a credit note)

It must show the following particulars.

(a) A sequential number based on one or more series which uniquely identifies the document.

(b) The time of the supply, ie tax point.

(d) The name, address and registration number of the supplier. The letters ‘GB’ must be shown as a prefix to the registration number.

(e) The name and address of the person to whom the goods or services are supplied.

(f) The registration number, if any, of the recipient of the supply of goods or services containing the alphabetical code of the EC country in which the recipient is registered

(g) A description sufficient to identify the goods or services supplied. Where the supply is of a new means of transport a description sufficient to identify it as such.

(h) For each description, the quantity of the goods or the extent of the services, and where a positive rate of VAT is chargeable, the rate of VAT and the amount payable, excluding VAT, expressed in sterling.

(i) The unit price.

(j) The gross amount payable, excluding VAT.

(k) The rate of any cash discount offered.

(l) Where the supply of goods is a taxable supply, the total amount of VAT chargeable expressed in sterling.

(m) where the margin scheme forSECOND-HAND GOODSor TOMS is applied, either a reference to the appropriate provision of EC Council Directive 2006/112/EC or the corresponding provision of VATA 1994 or any indication that the margin scheme has been applied.

The way in which margin scheme treatment is referenced on an invoice is a matter for the business and we recommend: “This is a second-hand margin scheme supply.” And: “This supply falls under the Value Added Tax (Tour Operators) Order 1987”.

The requirement only applies to TOMS invoices in business to business transactions.

(n) Where a VAT invoice relates in whole or in part to a supply where the person supplied is liable to pay the VAT, either a reference to the appropriate provision of EC Council Directive 2006/112/EC or the corresponding provision of VATA 1994 or any indication that the supply is one where the customer is liable to pay the VAT.

The way in which margin scheme treatment is referenced on an invoice is a matter for the business and we recommend the following indication:

“This supply is UK VAT free and subject to the reverse charge in the Member State of receipt”.

(o) Where the supply is an exempt or zero-rated supply, either a reference to the appropriate provision of EC Council Directive 2006/112/EC or the corresponding provision of VATA 1994 or any indication that the supply is exempt or zero-rated as appropriate.

For these purposes, an exempt supply is a supply that, if made in the UK, would be exempt under VATA 1994, Sch 9.

The way in which the intra-EC exempt or zero-rated treatment is referenced on an invoice is a matter for the business and we recommend: “This is an exempt supply.” And: “Zero-rated intra-EC supply.”

Retailers

Retailers may issue a “less detailed tax invoice” if a customer requests one. the supply must be for £250 or less (including VAT) and must show:

your name, address and VAT registration number
the time of supply (tax point)
a description which identifies the goods or services supplied
and for each VAT rate applicable, the total amount payable, including VAT and the VAT rate charged.

Summary

As may be seen, it is a matter of law whether an invoice is valid and there are no dispensations. Therefore it is important for a business to understand the position and for its system to be able to produce a valid tax invoice. As always, please contact us should you have any queries.

New house builds to be subject to 20% VAT?

By Marcus Ward 9 June 2014

Reports that a recently issued EC consultation document is proposing to harmonise VAT rates across Europe thus removing the UK’s zero rate have stirred up something of a hornet’s nest. Clearly, in this delicate (although slowly improving) climate for house builders an additional 20% cost could damage the market irrevocably adding £50,000 to the cost of a £250,000 house. Commentators in the trade have announced that it would be a disaster for new home buyers, the construction sector, and the UK economy in general.

However, are these reports in the national press all that they seem? Or is this another tabloid attack on the EC? Such consultation documents are issued regularly and they consider many aspects of VAT across the EC. An EC spokesman, when questioned about this issue, stated “the consultation was not pre-empting a move and considering VAT ‘in general’” Additionally, a spokesman for the Treasury announced “’The UK government has no intention of agreeing to such a proposal, and there is no consultation to change the zero tax rate”. Historically, UK authorities have fought doggedly to retain all of the UK’s zero rates because once they are removed, it is not possible under EC legislation, to reinstate them. The UK is unique in applying the zero rate to items such as food, new houses, books and newspapers and while it is not possible to widen or extend the scope of the zero rating, the UK is permitted, for the time being, to retain those which are in place. So, is there any truth in these “rumours”? It appears that the report was published by the Daily Mail, which in turn appears to have obtained the story from The Daily Express. Although there is a continuing will to harmonise VAT across the EC, I would be very surprised indeed if the UK was to be forced to standard rate new house builds. My personal view is that there appears to be a little mischief making here and the house building industry has enough to worry about rather than this imposed 20% price hike.

Please see here for our land and property services

Are e-books books?

By Marcus Ward 21 May 2014

Books are zero rated for VAT purposes, but only (currently) if they are of the traditional dead tree variety. The zero rating does not extend to e-books which are standard rated for VAT. There has been a long standing argument that similar content should not be taxed at different rates solely depending on the method of delivery. This argument is about to be tested in the courts. The UK is not permitted by the EC to extend its current zero rating for printed matter, however, it is expected that the contention in this case will be that the inclusion of new products will not extend the zero rating, but rather the development of technology has created a supply that should be covered by the existing zero rating legislation.

Added VAT Cost For Charities

By Marcus Ward 7 April 2014

Charities have a very hard time of it in terms of VAT, since not only do they have to contend with complex legislation and accounting (which other businesses, no matter how large or complicated do not) but VAT represents a real and significant cost.

By their very nature, charities carry out “non-business” activities which means that VAT is not recoverable on the expenses of carrying out these activities. Additionally, many charities are involved in exempt supplies which also means a restriction on the ability to recover VAT on attributable costs.

These two elements are distinct and require separate calculations which are often very convoluted. The result of this is that charities bear an unfair burden of VAT, especially so since the sector carries out important work in respect of; health and welfare, poverty, education and housing etc. Although there are some specific reliefs available to charities, these are very limited and do not, by any means, compensate for the overall VAT cost charities bear.

Another issue is legal uncertainty over what constitutes “business income” for charities, especially the VAT status of grants. It’s worth bearing in mind here the helpful comment in the EC case of Tolsma translated as: “…the question is whether services carried on by [a person] were carried on for the payment or simply with the payment”.

Many charities depend on donations which, due to the economic climate have fallen in value at a time when there is a greater demand on charities from struggling individuals and organisations.

What can be done?

Ensure any applicable reliefs are taken advantage of.
If significant expenditure is planned, ensure that professional advice is sought to mitigate any tax loss.
Review the VAT position to ensure that the most appropriate partial exemption methods and non-business apportionment is in place.
Review any land and property transactions. These are high value and some reliefs are available. Additionally it is possible to carry out planning to improve the VAT position of a property owning charity.
Review VAT procedures to ensure that VAT is declared correctly. Penalties for even innocent errors have increased recently and are incredibly swingeing.
Consider a VAT “healthcheck” which often identifies problems and planning opportunities.

We have considerable expertise in the not for profit sector and would be pleased to discuss any areas of concern, or advise on ways of reducing the impact of VAT on a charity.

Please click here for more information on our Charity Services