HMRC has updated its guidance to businesses on VAT. The helpful instruction includes: email updates, videos and seminars which cover such subjects as:
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:
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:
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.
HMRC updated Notice 700 on 9 June 2023.
Changes
VAT MOSS references to credit notes for supplies of digital services, the annual accounting scheme, and monthly tax periods have been removed.
Updates also reflect the introduction of VAT late submission and late payment penalties, as well as the new interest regime in paragraphs 2.7, 19.9, 21.1, 21.2.1, 21.6, 27.1 and 28.
HMRC has, last week, set out the main reasons why online VAT registration applications submitted by agents are delayed. In such cases a caseworker is required to review the application and usually raise additional queries.
The “Top Five” reasons for delay
If an agent can avoid these, then the chances of a quick and successful registration is enhanced.
It is important to have all the business details available when completing the application. There can be difficulties when an application is started but set aside while more information is sought. There is only a seven-day limit once the process is underway.
This is the Principal Place of Business (PPOB) and should be where the day-to-day activities of the business take place. It is not the applicant’s residence (unless the business is run from home) or the agent’s address.
Bank details for VAT repayments must be:
If the entity is a partnership the account name may be in the name of a partner. If no UK account exists when the application is being made, this can be added later, but thus itself can cause issues.
These are cases where the applicant has chosen to provide identification documents by post. There is a facility to attach digital ID and this should be used wherever possible to avoid delays. Three items of ID are required: one a photo ID (passport or driving licence) and the other two non-photo documents (utility bills or birth certificates etc).
This is often when the business belongs overseas or does not yet have an Unique Taxpayer Reference (UTR). Again, it is preferrable to have all this information to hand before the process is started.
Information which an agent needs
Previously HMRC has commented on delays and set out these additional common errors:
And I will add; do not forget form VAT5L when registering a business which is involved in land and property transactions.
As a consequence of the change in the Bank Of England base rate from 3% to 3.5%, HMRC’s interest rates for late payment and repayment will also increase.
These changes will come into effect on:
The HMRC publication Information on the interest rates for payments will be updated shortly.
HMRC interest rates are set in legislation and are linked to the Bank of England base rate. Late payment interest is set at base rate plus 2.5%. Repayment interest is set at base rate minus 1%, with a lower limit, or “minimum floor” of 0.5%.
With news that HMRC is testing a new electronic submission portal – the Secure Data Exchange Service (SDES) system for overseas businesses to recover VAT incurred in the UK, I thought it timely to look at the process. Especially as the deadline is 31 December 2022 for VAT incurred between 1 July 2021 and 30 June 2022.
The SDES is currently being tested. However, it is available to businesses to make claims, but during the testing period a claimant will need to email HMRC to request access.
Access to SDES request
Claimants wishing to use SDES, are required to email newcastle.oru@hmrc.gov.uk and should include:
HMRC says it will contact the requestor within 15 calendar days to start the registration process and provide registration guidance.
Any queries on the registration process, may be addressed to the Overseas Repayment Unit on 0300 322 9279
If it goes wonky
HMRC states that during testing there may be times when SDES be stopped without notice. If it is stopped, claimants will be told by HMRC updating its online guidance. Further: If the service is stopped, it will not affect the claims that have already been submitted through it.
The alternative to claiming during testing is the good old-fashioned paper claims.
Claims in the UK
A non-UK based business may make a claim for recovery of VAT incurred in the UK. Typically, these are costs such as; employee travel and subsistence, service charges, exhibition costs, tooling, imports of goods, training, purchases of goods in the UK, and clinical trials etc.
Who can claim?
The scheme is available for any businesses that are:
What cannot be claimed?
The usual rules that apply to UK business claiming input tax also apply to claims from overseas. Consequently, the likes of; business entertainment, car purchase, non-business use and supplies used for exempt activities are usually barred.
Amount
There is no maximum claim amount, but for most periods of less than twelve months a minimum of £130 of VAT must be claimed. For annual claims or for periods less than three months ending on 30 June, the VAT must be at least £16.
Process
The business must obtain a Certificate Of Status (CoS) from its local tax or government department to accompany a claim.
The CoS must be the original and contain the:
The CoS is only valid for twelve months. Once it has expired you will need to submit a new CoS.
HMRC has previously announced (RCB 12 – 2018) that it is taken a firmer stance on what constitutes an acceptable CoS.
Claim form
The application form is a VAT65A and is available here Original invoices which show the VAT charged must be submitted with the claim form and CoS. Applications without a certificate, or certificates and claim forms received after the deadline are not accepted by HMRC. It is possible for a business to appoint an agent to register to enable them to make refund applications on behalf of that business.
Deadline
Claim periods run annually up to 30 June and must be submitted by 31 December of the same year. With the usual Christmas rush and distractions, it may be easy to overlook this deadline and some claims may be significant. Unfortunately, this is not a rapid process and even if claims are accurate and the supporting documents are in all in order the claim often takes some time to be repaid. Although the deadline is the end of the year HMRC say that it will allow an additional three months for submission of a CoS (only).
Payment
Refunds are made within six months of a “satisfactory application”.
Further information is available here HMRC guidance.
Further to my article on the introduction of changes to penalties for late filing and payments of VAT and follow up guidance, the forthcoming introduction on 1 January 2023 has focussed attention on how they will impact certain businesses.
Late returns
Many businesses who have had to deal with the “old” default surcharge regime realised that it could be disproportionate and create unfair outcomes. The new penalties are, in my view, fairer, and, the changes bring some welcome features and some which are less so.
The good news is that the introduction of the new rules mean that businesses will start with a clean slate, regardless of their position under the default surcharge mechanism – there is no carry over form one set of rules to another.
However, for the first time, late rendering of returns can incur penalties and interest if the returns are either:
In the previous regime when “non-payment” returns were filed late, this did not trigger a default.
Nil returns
Businesses which did not carry out any activity in the prescribed period, eg; intending traders, businesses temporary closed, or at the end of their life will have to recognise that a late nil return will now trigger points.
Repayment returns
Again, businesses which typically submit repayment returns, such as; new build constructors, exporters, and any business supplying zero rated goods or services will have to recognise tardy submissions will now affect them.
We understand that HMRC is aware of the impact on this sector and is planning to communicate with these businesses to make them aware of the new changes.
An additional point; from 1 March 2021 the Domestic Reverse Charge was introduced for the construction industry. As a result, an increased number of builders found themselves in a repayment position and will now need to ensure timely returns to avoid penalties.
Late payments – penalties and interest
The new late payment penalties regime will replace the default surcharge, which served as a combined late submission and late payment sanction.
Under the new rules, there will be two separate late payment penalties.
The first penalty has two separate elements:
The second penalty is triggered from day 31. This is charged daily and is based on an annual rate of 4% of any outstanding amount.
If all outstanding VAT is paid within 15 days of the due date, no late-payment penalty will arise. Although here will however still be late payment interest.
Interest
From 1 January 2023, HMRC will charge late-payment interest from the day a VAT payment is overdue to the day the VAT is paid, calculated at the Bank of England base rate plus 2.5%.
Time-to-Pay arrangements
HMRC offers the option of requesting a Time To Pay arrangement. This will enable a business to stop a penalty from accruing any further by approaching HMRC and agreeing a schedule for paying their outstanding tax.
Period of familiarisation
HMRC say that to give businesses time to get used to the changes, it will not be charging a first late payment penalty for the first year from 1 January 2023 until 31 December 2023, if the tax is paid in full within 30 days of the payment due date.
Appeals
It is anticipated that the number of appeals against late filing/payments will be reduced because of the more proportional approach of the new rules. However, it is still possible to appeal if a taxpayer considers the imposition of penalties and interest is unfair. An appellant needs a reasonable excuse to succeed.
Action
Advisers should ensure that clients affected by the new rules, specifically repayment business and those submitting nil returns, are aware of the impact. I know that a lot of these are habitual late filers and some “save up” returns for when they need a cash injection.
It will also be prudent for advisers to monitor penalty points accrued. We understand that HMRC is looking at how this information could be made available to agents and taxpayers. We expect more details about this in the coming months, including how software can be used to display points.
Repayment supplement
The new system may be fairer, however, the withdrawal of the repayment supplement is not! More details here. (I am still quite cross!)
Peanuts in shells are zero rated, salted peanuts are standard rated.
HMRC has published a new Factsheet CC/FS69 which sets out compliance checks to be made to avoid penalties for Making Tax Digital (MTD).
Under MTD, VAT-registered businesses must keep certain records digitally and file their VAT returns using compatible software.
The Factsheet covers:
Penalties
HMRC levy penalties for MTD for the following actions:
These penalties apply in addition to existing penalties and interest charged for a range of misdemeanours from late returns to deliberate underdeclarations.
HMRC has updated VAT Notice 700/63 – Electronic Invoicing in respect of “information required on a tax invoice” (para 3.2).
The Notice sets out what a business needs to do if it is sending, receiving and storing VAT invoices in an electronic format.
Electronic invoicing offers many advantages over traditional paper invoices. The rapid electronic transmission of documents in a secure environment may provide for:
A business does not need to inform, nor seek permission from, HMRC to use electronic invoicing.
We advise that any business periodically reviews its use of any invoicing system to ensure that:
If a business cannot meet HMRC’s conditions for transmission and storage of electronic invoicing, it must issue paper invoices.
There are penalties for incorrect invoices or systems.