Tag Archives: input-tax

VAT: DIY Housebuilder Scheme updated

By Marcus Ward 16 April 2024

HMRC has updated its guidance for DIY Housebuilders.

The scheme enables people who build, or convert properties into dwellings for their own use to recover VAT incurred on the project.

New centralised HMRC website to manage imports and VAT

By Marcus Ward 15 April 2024

HMRC guidance

HMRC has published a website Manage your import duties and VAT accounts, which provides a centralised place from which businesses importing goods can manage payment and guarantee accounts, manage and view authorities, and download duty deferment statements, import VAT certificates, postponed import VAT statements, and notification of adjustment statements. The website can only be accessed via the Government Gateway.

From this site a business can:

view and manage its cash account (top up and withdraw funds)
set up a Direct Debit for, and top up a duty deferment account
request older statements and certificates
view and manage a general guarantee account
manage the email address linked to an account
access secure messages from HMRC related to the account
set up, manage or view account authorities

Downloads are also available for:

duty deferment statements
import VAT certificates (C79)
postponed import VAT statements
notification of adjustment statements

To use the service a business must be subscribed to the Customs Declaration service.

VAT and influencers

By Marcus Ward 14 March 2024

A Warning

There has been a great deal of debate on the subject of VAT and influencers, with HMRC issuing assessments for underdeclared output tax on “gifts” received by them.

What is an influencer?

An influencer is someone who has certain power to affect the purchasing decisions of others because of their; authority, knowledge, position, or relationship with their audience. These individuals are social relationship assets with which brands can collaborate to achieve their marketing objectives.

In recent years the growth of social media means that influencers have grown in importance. According to recent statistics, the projected number of global social media users in 2023 was 4.89 billion. This is a 6.5% rise from the previous year.

What is the VAT issue?

Business gifts to influencers

A business is not required to account for VAT on certain dealings if they meet certain conditions. For free gifts, the condition is that the total cost of all gifts to the same person is less than £50 in a 12-month period. Further, if the goods are “free samples” – used for marketing purposes and provided in a quantity that lets potential customers test the product, then the £50 rule does not apply. If an influencer receives free gifts or samples, there are no VAT implications for them.

HMRC Action

However, we understand that HMRC has decided that, in the majority of cases, the supply of goods to influencers were not ‘free gifts” but rather consideration for a taxable supply of marketing or advertising. They were also not considered free samples as, generally, influencers would not be in the position to test the goods, having no expertise in the field. It is also concluded that influencers, in most cases were “in business“.

The payment for the marketing, promotion or advertising services (the VAT treatment is similar, regardless of how the services are categorised) is by way of the supply of goods, rather than monetary consideration. That is; consideration is flowing in both directions. Consequently, output tax is due on this amount if the influencer is, or should be, VAT registered.

What is the value of the supply?

Non-monetary consideration

Non-monetary consideration includes goods or services supplied as payment, for example in a “barter” (including part exchange) agreement. If the supply is for a consideration not consisting or not wholly consisting of money, its value shall be taken to be such amount in money as, with the addition of the VAT chargeable, is equivalent to the consideration. Where a supply of any goods or services is not the only matter to which a consideration in money relates, the supply is deemed to be for such part of the consideration as is properly attributable to it.

In determining the taxable amount, the only advantages received by a supplier that are relevant are those obtained in return for making the supply should be recognised. Non-monetary consideration has the value of the alternative monetary payment that would normally have been given for the supply.

VAT Registration

If an influencer receives gifts valued at over £90,000 in any 12-month period, or these gifts plus other monetary consideration, VAT registration is mandatory.

VAT registration HMRC update

By Marcus Ward 20 February 2024

HMRC has updated VAT Notice 700/1 – Who should register for VAT. The publication explains when a business must register for VAT, and how to do it.

The changes are to para 2.7 – Specified Supplies which sets out what needs to be included during the application process when describing business activities.

Businesses affected

Those that supply; finance, insurance services, or investment gold to customers in countries outside the UK, or make supplies of insurance or finance services which are directly linked to the export of goods outside the UK.

Specified Supplies

These are supplies which would be exempt from VAT if they were made in the UK, but are treated as taxable if made outside the UK.

Benefit to business

A business making Specified Supplies may register for VAT on a voluntary basis and claim UK input tax incurred in making those supplies. We strongly recommend that all businesses in the above categories consider registering in the UK.

The amendment

If a business is registering because it makes Specified Supplies, it must ensure that it clearly states ‘SPECIFIED SUPPLIES’ in the free-text box when asked to describe the business activities during the application process. Failure to do this will likely cause delays and create additional HMRC queries.

VAT and BIK – Double cab pick-ups

By Marcus Ward 15 February 2024

VAT and BIK – Double cab pick-ups

The changes to benefit-in-kind tax purposes from 1 July 2024 means that double cab pick-up trucks will no longer be classified as vans but as cars. This brings them into line with the VAT treatment of these vehicles, so here we look at the VAT rules:

HMRC and the Society of Motor Manufacturers and Traders (SMMT) have agreed how the one tonne payload test will be applied in practice to double cab pick-ups.

Cars are treated quite differently for VAT purposes from commercial vehicles:

most ordinary business cars are subject to a block on input tax recovery which is a proxy for taxing the private use of the car
the private use of commercial vehicles is taxed either by means of an input tax apportionment or a periodic output charge on actual private use
a business that converts a commercial vehicle into a car becomes liable to an output tax charge on a “self-supply” of the vehicle to itself para 14 Notice 700/57.

SMMT members will take steps to make dealers aware of the ex-works payloads of their double cab models.

Vehicles are not treated as cars for VAT purposes if they have a payload of one tonne or more. Payload is the difference between a vehicle’s maximum gross weight and its kerbside weight. In practice the change mainly affects those vehicles generally described as double cab pick-ups.

Given the different treatment of cars and commercial vehicles it is important for manufacturers, distributors, dealers, and business customers to know the payload of any double cab vehicle which is bought.

It is especially important to be aware that by adding accessories to the ex-works model they may, by lowering the payload of the vehicle, convert it into a car. This would make the vehicle liable to the self-supply charge. Such conversions are most likely to occur with double cabs that have an ex-works payload of 1000 to 1050 kg.

Accessories fitted by dealers or customers

HMRC will, with one exception, ignore as de minimis the addition of accessories. The exception is the addition of a hard top consisting of metal, fibreglass or similar material, with or without windows. In practice this means that a manufacturer, dealer or customer can fit any accessory to the vehicle, other than a hard top, and still rely upon its payload as being the ex-works payload. HMRC will accord all hardtops a generic weight of 45kgs.

In order to provide simplicity and certainty, HMRC and the SMMT have agreed to simplify the treatment of these vehicles. Full details of the agreement can be found at para 23 Notice 700/57 – Administrative agreements entered into with trade bodies.

Please see the recent The Three Shires Trailers case on input tax recovery and the self-supply of cars/commercial vehicles.

UPDATE!

Double-cab pickups go back to being vans, not cars for BIK (only). A week after the new guidance that classified double-cab pickups as cars rather than vans, the HMG has now reversed this decision on 19 February 2024.

VAT: Input tax claim on Land Rovers. The Three Shires Trailers case

By Marcus Ward 9 February 2024

Latest from the courts

In the Three Shires Trailers Limited First Tier Tribunal (FTT) case the issues were whether an input tax claim on the purchase of two Land Rover Discoveries was appropriate when they were converted from commercial vehicles to cars, or was a self-supply triggered?

Background

The vehicles were commercial vehicles when purchased and input tax was recovered. Subsequently, they were converted by the addition of three fold up seats with seat belts behind the driver seat and removing materials which had blacked out the rear windows which reclassified them as cars. This would have subjected them to an input tax block if purchased in that state.

The purpose of buying the vehicles was for the transport of trailers to customers, the collection of trailers from suppliers and to enable personnel of the appellant to attend trade fairs all over the country.

Technical

“A Motor Car” is defined as:

“any motor vehicle of a kind used on public roads which has three or more wheels and either:

(a) is constructed or adapted solely or mainly for the carriage of passengers; or

(b) has to the rear of the driver’s seat roofed accommodation which is fitted with side windows or which is constructed or adapted for the fitting of side windows…”

Issues

The appellant stated that the vehicles were used only for business purposes. Employees were not permitted to use the vehicles for private purposes and did not do so. The vehicles were kept at the business’s premises. He also explained that the vehicles were not converted to cars, if they were cars, they were qualifying cars and if they were non-qualifying cars, the use was only temporary, and they were converted back to commercial vehicles.

Initially, HMRC disallowed the claim because the vehicles became cars and subject to the input tax block.

Subsequently, HMRC’s case was that the vehicles had been converted from commercial vehicles to non-qualifying cars which triggers an irreversible self-supply under Article 5 of the Value Added Tax (Cars) Order 1992 so output tax equalling the claimed input tax was due.

Decision

The FTT decided that, at the time when the vehicles were acquired, they were indisputably commercial vehicles and the appellant was entitled to deduct the input tax on them.

The judge found that, after conversion, the vehicles were intended for use, and were used, only for business purposes. The appellant did not intend that the vehicles should be used for private purposes and so far as he was aware, there was no private use. The vehicles were therefore qualifying motor vehicles eligible for input VAT recovery. No output tax was due on a self-supply.

The appeal was allowed.

Commentary

Another case on the recovery of input tax on car purchases and the difference between commercial vehicles and cars. It is notoriously difficult to persuade HMRC that there is no private use of cars, but it is possible.

Repayment interest on VAT credits or overpayments – Update

By Marcus Ward 6 February 2024

HMRC has updated its guidance on when repayment interest is due.

If a business has claimed more input tax than it has declared output tax (a repayment return) HMRC will repay the difference by making a VAT repayment. HMRC will also repay any VAT that has been overpaid in error. Repayments are usually made within 30 days. The 30 days starts from the day HMRC receives the VAT Return and ends the day your repayment is approved (not the day it is received). HMRC does not count days taken to check the return is accurate and legitimate, and to correct any errors or omissions, as part of this 30-day period.

If HMRC is late in paying, a business may be entitled to repayment interest on any VAT that it is owed. For accounting periods starting on or after 1 January 2023, repayment interest replaces the repayment supplement.

A business, or its agent can track a VAT repayment online.

Update

Information on eligibility criteria for repayment interest on overpayments and start dates when VAT is not paid to HMRC has been amended. Information on repayment interest end dates when HMRC sets it off against your debts has also been updated.

Small businesses/start ups: Should I register for VAT voluntarily?

By Marcus Ward 1 February 2024

VAT Basics – voluntary registration

Why?

OK, so why would a business choose to VAT register when it need not? Let’s say its turnover is under the VAT registration limit of £85,000, isn’t it just best to avoid the VATman if at all possible?

Planning

This is not an article which considers whether a business MUST register, but rather it looks at whether it is a good idea to register on a voluntary basis if it is not compulsory. The first time a business would probably consider VAT planning.

Decision

As a general rule of thumb; if you sell to the public (B2C) then probably not. If you sell to other VAT registered businesses (B2B) then it is more likely to be beneficial.

If you sell B2B to customers overseas it is almost certain that VAT registration would be a good thing, as it would if you supply zero rated goods or services in the UK. This is because there is no output tax on sales, but full input tax recovery on costs; VAT nirvana! A distinction must be made between zero rated supplies and exempt supplies. If only exempt supplies are made, a business cannot register for VAT regardless of level of income.

Compliance

Apart from the economic considerations, we have found that small businesses are sometimes put off VAT registration by the added compliance costs (especially since MTD) and the potential penalties being in the VAT club can bring. Weighed against this, there is a certain kudos or prestige for a business and it does convey a degree of seriousness of a business undertaking. We also come across situations where a customer will only deal with suppliers who are VAT registered.

The main issue

The key to registration is that, once registered, a business may recover the VAT it incurs on its expenditure (called input tax). So let us look at some simple examples of existing businesses for comparison:

Examples

Example 1

A business sells office furniture to other VAT registered business (B2B)

It buys stock for 10,000 plus VAT of 2,000

It incurs VAT on overheads (rent, IT, telephones, light and heat etc) of 2,000 plus 400 VAT

It makes sales of 20,000

If not registered, its profit is 20,000 less 12,000 less 2400 = 5600

If VAT registered, the customer can recover any VAT charged, so VAT is not a disincentive to him

Sales 20,000 plus 4000 VAT (paid to HMRC)

Input tax claimed = 2400 (offset against payment to HMRC)

Result: the VAT is neutral and not a cost, so profit is 20,000 less 12,000 = 8000, a saving of 2400 as compared to the business not being registered. The 2400 clearly equals the input tax recovered on expenditure.

Example 2

A “one-man band” consultant provides advice B2B and uses his home as his office. All of his clients are able to recover any VAT charged.

He has very few overheads that bear VAT as most of his expenditure is VAT free (staff, train fares, use of home) so his input tax amounts to 100.

He must weigh up the cost (time/admin etc) of VAT registration against reclaiming the 100 of input tax. In this case it would probably not be worthwhile VAT registering – although the Flat Rate Scheme may be attractive.

Example 3

A retailer sells adult clothes to the public from a shop. She pays VAT on the rent and on the purchase of stock as well as the usual overheads. The total amount she pays is 20,000 with VAT of 4000.

Her sales total 50,000

If not VAT registered her profit is 50,000 less 24,000 = 26,000

If VAT registered she will treat the value of sales as VAT inclusive, so of the 50,000 income 8333 represents VAT she must pay to HMRC. She is able to offset her input tax of 4000.

This means that her profit if VAT registered is 50,000 less the VAT of 8333 = 41,667 less the net costs of 20,000 = 21,667

Result: a loss of 4333 in profit.

As may be seen, if a business sells to the public it is nearly always disadvantageous to be voluntarily VAT registered. It may be possible to increase her prices by circa 20%, but for a lot of retailers, this is unrealistic.

Intending traders

If a business has not started trading, but is incurring input tax on costs, it is possible to VAT register even though it has not made any taxable supplies. This is known by HMRC as an intending trader registration. A business will need to provide evidence of the intention to trade and this is sometimes a stumbling block, especially in the area of land and property. Choosing to register before trading may avoid losing input tax due to the time limits (very generally a business can go back six months for services and four years for goods on hand to recover the VAT). Also cashflow will be improved if input tax is recovered as soon as possible.

Action

Careful consideration should be given to the VAT status of a small or start-up business. This may be particularly relevant to start-ups as they typically incur more costs as the business begins and the recovery of the VAT on these costs may be important. In most cases it is also possible to recover VAT incurred before the date of VAT registration.

This is a basic guide and there are many various situations that require further consideration of the benefits of voluntary VAT registration. We would, of course, be pleased to help.

VAT: Fuel and power HMRC update

By Marcus Ward 10 January 2024

HMRC has updated its VAT Notice 701/19 from 5 January 2024.

Sections 2, 3 and 5 have been amended to include information about the VAT treatment of charging of electric vehicles (EVs) when using charging points.

VAT: What is a proforma invoice and how can it be used?

By Marcus Ward 11 December 2023

VAT basics

Proforma invoices (proformas) are preliminary documents usually sent to buyers in advance of a delivery of goods/provision of services. Proformas will typically describe details of the purchase of goods/services and other important information, such as the terms of the transaction. Proformas are not “official” documents and represent an informal agreement. Usually, requesting a proforma represents a more serious interest on the part of a buyer than a quote – a buyer is generally committed to making a purchase but want to understand the details before proceeding with the approval process and making a binding agreement with the seller. They are therefore a useful business tool and use of them may result in a beneficial cashflow position for VAT (please see below).

Proforma translates from Latin as “for the sake of form”, and this provides an indication that the document is provisional or a step in a process.

It is also worth noting that the use of proformas is not mandatory.

The difference between an invoice and a proforma

Invoices (also called commercial invoices, VAT invoices or tax invoices) are distinct from proformas. They may contain similar information but serve different purposes. It is important to avoid confusing the two, since only invoices are legal documents; that is, they evidence a transaction and is the document on which VAT may be claimed. An invoice must contain certain information and there are specific legal obligations for providing them.

It is a matter of law whether an invoice is valid and when they must be issued. A proforma is not required to follow any set form, apart from the facts that they must not have an invoice number and must state that it is a proforma invoice. We also recommend that a proforma does not show the supplier’s VAT number for the avoidance of doubt.

Contents of a proforma

Proformas can be considered as “dummy invoices” and they are prepared by the seller usually to provide details of:

the issuing business’s name, address, and contact details
customer’s name and address
date of issue
length of time the pricing is valid
the goods/services requested, including quantities, type, and physical specifications
pricing, including individual costs as well as the total amount to be charged
terms of sale, including eg; shipping and delivery dates
payment terms
whether VAT is applicable

However, there are no set formats for proformas.

Use for buyer

The purpose of a proforma is to provide the buyer with an accurate and complete good faith estimate they can use to decide whether or not to go ahead with a transaction. It also avoids surprises when the actual tax invoice is issued.

VAT implications

The main distinctions are that, compared to a tax invoice, a proforma:

does not create a tax point
the recipient is unable to recover input tax on a proforma

Very broadly, the tax point (time of supply) this is the earliest of; invoice date, receipt of payment, goods transferred or services completed. The tax point fact is helpful in tax planning for suppliers. Broadly, using proformas, requests for payment, or similar documents rather than issuing an invoice, defers a tax point and consequently when VAT is payable to HMRC. This is especially relevant to businesses which provide ongoing services (known as continuous supplies of services).

Please contact us if you require more information on the commercial use of proformas.