Category Archives: HMRC Publications

VAT – Work on farm buildings

By   November 14, 2017

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

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

Repairs and Renovations of Farmhouses

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

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

Other farm buildings

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

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

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

VAT Simplification (We can but hope)

By   November 13, 2017

This month The Office Of Tax Simplification has published a document called “Value added tax: routes to simplification”. This includes 23 recommendations on how VAT may be simplified in the UK.   This is the first Office of Tax Simplification review to focus specifically on VAT and it takes a high level look at areas where simplification of either law or administration would be worthwhile.

The report specifically covers the following areas:

  • VAT registration threshold
  • VAT administration
  • Multiple rates
  • Partial exemption
  • Capital Goods Scheme
  • The option to tax
  • Special accounting schemes

The dominant issue that came out of the report is the level of turnover above which a business is required to pay VAT, known as the VAT threshold. At £85,000, the UK has the highest VAT threshold in the EU. The report considered a range of options for reform, in particular setting out the impact of either raising or lowering the threshold to avoid the current “cliff edge” position (many business restrict growth in order to avoid VAT registration, creating a “bunching” effect.  For example, lowering the threshold may create less drag on economic growth but would bring a larger number of businesses into the VAT system. Alternatively, a higher threshold could also result in less distortion but it would clearly raise less tax.

Legislation

It was noted that since the introduction of VAT in the UK, the relevant legislation has grown so that it is now spread across 42 Acts of Parliament and 132 statutory instruments while still retaining some of the complexities of the pre-1973 UK purchase tax system.

Brexit

The report notes that: unlike income taxes, the VAT system is largely prescribed by European Union rules, so Brexit may present an opportunity to consider areas which could be clarified, simplified, or just made easier. It is not clear at present how Brexit will unfold so this review does not embrace aspects of the VAT system which are part of the Brexit negotiations, such as financial services, or focus specifically on cross-border trade.

Recomendations

The summary of the 23 recommendations are reproduced here:

  1. The government should examine the current approach to the level and design of the VAT registration threshold, with a view to setting out a future direction of travel for the threshold, including consideration of the potential benefits of a smoothing mechanism.
  2. HMRC should maintain a programme for further improving the clarity of its guidance and its responsiveness to requests for rulings in areas of uncertainty.
  3. HMRC should consider ways of reducing the uncertainty and administrative costs for business relating to potential penalties when inaccuracies are voluntarily disclosed.
  4. HM Treasury and HMRC should undertake a comprehensive review of the reduced rate, zero-rate and exemption schedules, working with the support of the OTS.
  5. The government should consider increasing the partial exemption de minimis limits in line with inflation, and explore alternative ways of removing the need for businesses incurring insignificant amounts of input tax to carry out partial exemption calculations.
  6. HMRC should consider further ways to simplify partial exemption calculations and to improve the process of making and agreeing special method applications.
  7. The government should consider whether capital goods scheme categories other than for land and property are needed, and review the land and property threshold.
  8. HMRC should review the current requirements for record keeping and the audit trail for options to tax, and the extent to which this might be handled on-line.
  9. HMRC should establish a target to update guidance within a short, defined, period after a legal change or new policy takes effect.
  10. HMRC should explore ways to improve online guidance, making all current information accessible, and to gauge how often queries are answered by online guidance.
  11. HMRC should review options to reduce the uncertainty caused by the suspended penalty rules.
  12. HMRC should draw greater attention to the facility for extending statutory review and appeal time limits to enable local discussions to take place where appropriate.
  13. HMRC should consider ways in which statutory review teams can deepen engagement with business and adviser groups to increase confidence in the process, and for providing greater clarity about the availability and costs of alternative dispute resolution.
  14. HMRC should consider introducing electronic C79 import certificates.
  15. HMRC should consider options to streamline communications with businesses, including the process for making payments to non-established taxable persons.
  16. HMRC should looks at ways of enhancing its support to other parts of government (for example, in guidance) on VAT issues affecting their operations.
  17. HMRC should review its process for engaging with business and VAT practitioner groups to see if representation and effectiveness can be enhanced.
  18. HMRC should explore the possibility of listing zero-rated and reduced rate goods by reference to their customs code, drawing on the experience of other countries.
  19. HMRC should consider ways of ensuring partial exemption special methods are kept up to date, such as giving them a limited lifespan.
  20. The government should consider introducing a de minimis level for capital goods scheme adjustments to minimise administrative burdens.
  21. The government should consider the potential for increasing the TOMS de minimis limit and removing MICE businesses from TOMS.
  22. HMRC should consider updating the DIY House builder scheme to include clearer and more accessible guidance, increased time limits and recovery of VAT on professional services.
  23. HMRC should consider digitising the process for the recovery of VAT by overseas businesses not registered in the UK.

Next Steps

The Chancellor of the Exchequer must now respond to the advice given.

Commentary

A lot of the areas identified have long been crying out for changes and the recommendations appear eminently sensible and long overdue. As an example, the partial exemption de minimis limit has been fixed at £7500 pa for 23 years and consequently the value of purchases it covers has reduced significantly with inflation.  A complete read of the report with prove rewarding as it confirms a lot of beliefs that advisers have long suspected and highlights areas the certainly do require simplification. I am particularly pleased that the complexities of both partial exemption and TOMS have been addressed. Fingers crossed that these recommendations are taken seriously by the government and the Chancellor takes this advice on-board. I am however, not holding my breath. It is anticipated that the early indications of the government’s thinking may be set out in the next Budget.

VAT: The ECJ decides that bridge is NOT a sport

By   October 27, 2017

The English Bridge Union Limited (EBU) case

Further to my article on contract (or duplicate) bridge here which covered the Advocate General’s opinion that it could be considered a sport, the Court of Justice of the EU has ruled that it does not qualify as a sport and therefore certain supplies by The EBU are subject to UK VAT.

The court decided that “…the fact that an activity promotes physical and mental health is not, of itself, a sufficient element for it to be concluded that that activity is covered by the concept of ‘sport’ within the meaning of that same provision….

The fact that an activity promoting physical and mental well-being is practised competitively does not lead to a different conclusion. In fact, the Court has ruled that Article 132(1)(m) of Directive 2006/112 does not require, for it to be applicable, that the sporting activity be practised at a particular level, for example, at a professional level, or that the sporting activity at issue be practised in a particular way, namely in a regular or organised manner or in order to participate in sports competitions…

In that respect, it must also be noted that the competitive nature of an activity cannot, per se, be sufficient to establish its classification as a ‘sport’, failing any not negligible physical element.”

As my aged father has always said; it can only be sport if the players wear shorts and sweat…

He may not have been far off you know. I still have difficulty considering pub games as sport, but I am sure there will be many who think that darts and pool are indeed sport.  It is also interesting that, inter alia, HMRC consider; baton twirling, hovering (not “hoovering as I first read it) octopush, dragon boat racing and sombo as sport.

HMRC VAT information “out of date and flawed”

By   October 23, 2017

In a recent report published by the House of Commons Committee of Public Accounts, HMRC’s estimate of VAT lost in cases of online fraud and error is “out of date and flawed”. The report also recommends that HMRC get tougher with fraudsters and that it should work closer with online marketplaces. Additionally, it also states that HMRC should carry out an assessment of the fulfilment house industry.

This failure by HMRC means that honest businesses suffer as a result of fraudulent and ignorant set ups who can sell goods VAT free. These are usually overseas entities which have no intention of; registering for VAT, charging VAT in addition to the price of goods, and paying over this VAT to the authorities. Let us hope that HMRC do indeed use the significant powers it has in dealing with this type of unwanted activity.

Due Diligence Scheme

Note: There is a HMRC fulfilment house Due Diligence Scheme for overseas sellers being introduced in 2018. In the 2016 budget the Chancellor of the Exchequer announced that HMRC would be given more powers to deal with overseas sellers selling into the UK via marketplaces such as eBay and Amazon who do not pay UK VAT.

As HMRC states in VAT Notes 2017 Issue 1 published 10 May 2017  “More and more UK retail businesses have a presence online and are having to compete with thousands of overseas online sellers, some of which are evading VAT. This abuse has grown significantly and now costs the UK taxpayer £1 billion to £1.5 billion a year. HMRC is taking action to protect the thousands of UK businesses from this unfair competition.”

Assistance

If any overseas businesses who sell into the UK and would like advice on the UK VAT requirements – please contact us. We have experience of dealing with the authorities, including negotiation with HMRC on the retrospective VAT position and mitigation of the impact of any penalties and interest.

VAT HMRC Updates

By   October 12, 2017

HMRC has updated some of its guidance.  This includes: VAT manuals (HMRC internal guidance), VAT Notices and VAT Information Sheets and Revenue and Customs Briefs.

Full details here And a brief summary below:

VAT manuals

VAT Land and Property/Construction

VATLP24750 – Supplies between landlords and tenants; provision of finance for the purposes of the option to tax anti-avoidance legislation

VATLP23500 – Guidance on the option to tax anti-avoidance legislation

VCONST15250 and VCONST15610 – Guidance on the differences between care homes and a hospitals

VAT Education

VATEDU53400 – Guidance on “closely related goods” in relation to education services following the case of Brockenhurst College (please see here)

New and revised VAT Notices

702: imports

701/49: finance

700/45: how to correct VAT errors and make adjustments or claims

700/58: treatment of VAT repayment returns and supplements

702/7: import VAT relief for goods supplied onward to another country in the EC

714: zero rating young children’s clothing and footwear

New VAT Information Sheets and Revenue and Customs Briefs

VAT Information Sheets

Revenue and Customs Briefs

Please contact us if any of the above affects you , or you have any queries.

New Customs Bill White Paper – VAT implications

By   October 12, 2017

A new Customs Bill White Paper has been issued.

As a result of the Brexit vote new domestic legislation is due to enter Parliament later this autumn which will provide for most negotiated outcomes, as well as a contingency scenario.

This Bill will be referred to in this paper as the “Customs Bill”. The purpose of the White Paper is to set out the government’s approach to the Bill. It sets out how the current customs, VAT, and excise regimes operate for cross border transactions, why the Bill is necessary, and what the Bill will contain.

Unfortunately, although being “sold” as containing concrete details, unsurprisingly there is nothing particular of substance. I shall refrain from adding any political comments, but just to observe that any process will be confusing, complex, and very unhelpful for businesses.

Good luck everyone…

Recovering VAT on Staff Expenses

By   September 29, 2017

VAT on Staff Expenses – what is claimable?

Although the VAT rules normally prevent a business reclaiming input tax on supplies that are not made directly to it, there are certain circumstances when the rules are relaxed. Although rather a dry and basic area, experience insists that it creates many issues at inspections and is “low hanging fruit” for which HMRC may levy penalties. Some business decide not to recover VAT on such costs to avoid problems, but certain claims are permissible and may be worth significant sums if they have a number of employees.

 Subsistence Expenses

For instance, the VAT element of subsistence expenses paid to your employees may be treated as input tax. In order to qualify for this concession, employees must be reimbursed for their actual expenditure and not merely receive round sum allowances. These costs include hotels and meals.

VAT invoices (which may be made out to the employee) must also be obtained. The rule of thumb is that the employee must be more than five miles away from their place of employment and spend over five hours there (the so-called 5 mile/5 hour rule). A business cannot reclaim input tax if it pays an employees a flat rate for expenses.

Reimbursement for Road Fuel

The VAT legislation permits a business to treat as its own supply road fuel which is purchased by a non-taxable person whom it then pay for the actual cost of the fuel (usually through an expenses claim). This would therefore allow a business to recover input tax when it reimburses its employees for the cost of road fuel used in carrying out their employment duties.

A business is able to reclaim all the input tax on fuel if a vehicle is used only for business. There are three ways of claiming VAT if a business uses a vehicle for both business and private purposes.

  • reclaim all the VAT and pay the fuel scale charge – HMRC details here
  • only reclaim the VAT on fuel you use for business trips – this requires the retention of detailed mileage records
  • choose not to reclaim any VAT eg; if your business mileage is so low that the fuel scale charge would be higher than the VAT you can reclaim

If a business chooses not to reclaim VAT on fuel for one vehicle it cannot reclaim VAT on any fuel for vehicles used in the business.

Mileage Allowances

The legislation also enables you to reclaim the VAT element (or a reasonable approximation) of mileage allowances paid to employees.

Business entertainment

For details of this complex area please see here

Goods

Certain goods which are to be used in a business, eg; office supplies, the business may reclaim the input tax on purchases made by employees or directors. In all cases you’ll need a VAT invoice. Details required on a VAT invoice here

Mobile telephones

An element of mobile phone costs may be recovered. The VAT on the business use of the phone may be recovered, eg; if half of the mobile phone calls are private 50% of the VAT on the purchase price and the service plan can be recovered.

Work from home

If a person works from home an element of the costs may be recovered. As an example: if an office takes up 20% of the floor space in a house. A business may reclaim 20% of the VAT on utility bills.

Apportionment

A business must keep all records to support a claim and show how it arrived at the business proportion of a purchase of goods or services and it must also have valid VAT invoices in all cases.

VAT due on property search fees? Whether they are disbursements

By   September 25, 2017

Latest from the courts – Brabners LLP

In the First Tier Tribunal case of Brabners LLP (Brabners) the issue was whether an external search agency used by the appellant correctly treated its supplies as VAT free, and if this was the case, whether the VAT free treatment continued to the appellant’s clients by way of a disbursement.

This is an interesting case and may create historic difficulties for conveyancing solicitors.

Background

Brabners is a law firm with a real estate department. It offers conveyancing services, both to buyers and sellers, in relation to proposed property transactions, for both commercial and residential property. In order to fulfil certain legal requirements, it used an external third party entity to obtain online property searches. The Appellant stated that it uses the online system for the majority of its searches (as opposed to a postal search carried out by employees of a Local authority, or a personal search at the Local Authority’s premises). The online search is not carried out by the Appellant, but rather, a specialist online search agency (‘Searchflow’) engaged by Brabners. Searchflow obtained the required property searches from the Local Authority’s digitised or dematerialised files and registers, and passed those results back to Brabners.

Searchflow invoiced the appellant for the cost of obtaining access to documents without the addition of VAT. Brabners treated this as a disbursement and invoiced its clients for the same amount without VAT.

The issues were:

  • Should the supply by the search agency be subject to output tax?
  • Was there a Single or multiple supply?
  • Whether the charge to the end user of the services should be treated as a disbursement in respect of the search element
  • Which party consumed Searchflow’s services? (Brabners, or Brabners’ clients)

Note: the disbursement position is only (practically) relevant in this case if it was decided that the search fee was VAT free. Local Authorities now (from March 2017) charge VAT for searches, so the impact is only likely to impact on past situations.

Contentions 

The main thrust of the Brabners’ argument is that the firm was requested, or expressly authorised, to obtain a search on the client’s behalf. Consequently, this meant that the firm was simply acting as the client’s agent, and the report belongs to the client. Brabners, argued that the search fees qualified as a disbursement for the purposes of VAT, and were not part of the otherwise taxable supply. It also argued that this separate treatment is intelligible and sensible. HMRC formed the view that the relevant payments cannot be treated as a disbursement as all the tests to do so were not met.  For a guide to disbursements and the relevant tests please see here

Decision

The judge decided that the relevant expenses paid to Searchflow had been incurred by the appellant “in the course of making its own supply of services to” (its client) “and as part of the whole of the services rendered by it to” (its client). Therefore Brabners had consumed the service such that it could not be a disbursement. This point in this case proves academic as it was also, unsurprisingly, decided that Searchflow’s services were standard rated, so even if it were a disbursement, the VAT would still be payable by the appellant’s client.

 Consequences

All firms which carry out conveyancing should review the VAT treatment of searches. If they have erroneously treated similar transactions as disbursements in the past, this is likely to require correction. Clearly, HMRC will be alive to this decision and it is anticipated that legal firms will be the subject of close inspection.

This case may also mean that third party search entities may be issuing retrospective VAT invoices or work which was previously treated as VAT free. This needs to be recognised and arrangements in place to recover any input tax incurred.

We are able to assist conveyancing firms with a review of the VAT position in light of this case.

VAT – Do as HMRC say…. and if you do… they may still penalise you!

By   September 13, 2017

Can you rely on a VAT ruling received from HMRC when they have been provided with full information in writing?

You would like to think so wouldn’t you? And in the past, you have been able to.

However, the long standing protection from assessments for deemed underdeclared VAT as a result of incorrect advice or actions by HMRC has been withdrawn. This was commonly known as “Sheldon Statement” protection. HMRC now state that there are some circumstances in which their primary duty is to collect tax according to the statute and it may mean that they can no longer be bound by advice they have given.  Despite all the publicity of their National Help Line and Advice Centre, plus the clearance procedures introduced to assist taxpayers with their obligations, HMRC can still renege on their advice! Even if you are fortunate enough to actually get a decision from HMRC (which is increasingly difficult and frustrating) you can’t necessarily rely on it. This is the case even if you have provided full information in writing (as required) and made a comprehensive disclosure of your position.

This makes it even more important to avoid errors and the increased risk of VAT penalties and interest. Details of the penalty regime here

This leaves the question as to whom businesses can rely on for accurate, cost effective VAT saving advice and guidance on getting VAT right?  The answer, clearly, is to contact their friendly local VAT consultant…

VAT Public Notice 700 Updated

By   August 25, 2017

Notice 700: The VAT Guide has been updated.

This HMRC Notice is a “starting point” for general VAT information and provides a guide to all the main VAT rules and procedures. It also provides assistance with the problems faced by business and includes an index which helps users find further information by referring to a particular section or paragraph in one of HMRC’s other, more specialised publications. There have been over 30 changes to the Notice which was last updated in 2016.

A full list of changes is set out in the Notice, but the most salient are as follows:

  • Additional guidance on MOSS – para 4.8.4
  • Single and mixed supplies – para 8.1
  • Continuous supplies to connected persons – para 14.3.1
  • Various commentary on invoices (including electronic invoicing) – paras 16.6, 16.8, 17.7 17.8
  • Accounting schemes – para 19.2
  • Agents registered for VAT acting in their own name when the customer is not registered – para 1.2
  • Penalties for inaccuracies – para 27.3
  • Integrity of supply chains – para 27.5.2

The number of changes in just one year highlights the fast pace of the tax and the number of challenges which taxpayers have won. I cannot see this pace letting up in the future either.

As always, if you have any queries about the changes, please contact us.