Food for wild birds is zero rated, while food for caged birds is at 20%.
Monthly Archives: December 2020
VAT – A Christmas Tale
Well, it is Christmas…. and at Christmas tradition dictates that you repeat the same nonsense every year….
Dear Marcus
My business, if that is what it is, has become large enough for me to fear that HMRC might take an interest in my activities. May I explain what I do and then you can write to me with your advice? If you think a face to face meeting would be better, I can be found in most decent sized department stores from mid-September to 24 December.
First of all, I am based in Greenland, but I do bring a stock of goods, mainly toys, to the UK and I distribute them. Am I making supplies in the UK?
If I do this for philanthropic reasons, am I a charity, and if so, does that mean I do not pay VAT?
The toys are of course mainly for children and I wonder if zero rating might apply? I have heard that small T shirts are zero rated so what about a train set – it is small and intended for children. Does it matter if adults play with it? My friend Rudolph has told me that there is a peculiar rule about gifts. He says that if I give them away regularly and they cost more than £150 I might have to account for VAT. Is that right?
My next question concerns barter transactions. Dads often leave me a food item such as a mince pie and a drink and there is an unwritten rule that I should then leave something in return. If I’m given Tesco’s own brand sherry, I will leave polyester underpants but if I’m left a glass of Glenfiddich I will be more generous and leave best woollen socks. Have I made a supply and what is the value please? My feeling is that the food items are not solicited so VAT might not be due and, in any event; isn’t food zero-rated, or is it catering? Oh, and what if the food is hot?
Transport is a big worry for me. Lots of children ask me for a ride on my airborne transport. I suppose I could manage to fit twelve passengers in. Does that mean my services are zero-rated? If I do this free of charge will I need to charge air passenger duty? Does it matter if I stay within the UK, or the EU? My transport is the equivalent of six horsepower and if I refuel with fodder in the UK will I be liable for fuel scale charges? After dropping the passengers off I suppose I will be accused of using fuel for the private journey back home. Somebody has told me that if I buy hay labelled as animal food I can avoid VAT but if I buy the much cheaper bedding hay I will need to pay VAT. Please comment.
May I also ask about VAT registration? I know the limit is £85,000 per annum but do blips count? If I do make supplies at all, I do nothing for 364 days and then, in one day (well night really) I blast through the limit and then drop back to nil turnover. May I be excused from registration? If I do need to register should I use AnNOEL Accounting? At least I can get only one penalty per annum if I get the sums wrong.
I would like to make a claim for input tax on clothing. I feel that my red clothing not only protects me from the extreme cold, but it is akin to a uniform and should be allowable. These are not clothes that I would choose to wear except for my fairly unusual job. If lady barristers can claim for black skirts, I think I should be able to claim for red dress. And what about my annual haircut? That costs a fortune. I only let my hair grow that long because it is expected of me.
Insurance worries me too. You know that I carry some very expensive goods on my transport. Play Stations, Mountain Bikes, i-pads and Accrington Stanley replica shirts for example. My parent company in Greenland takes out insurance there and they make a charge to me. If I am required to register for VAT in England will I need to apply the Reverse Charge? This seems to be a daft idea if I understand it correctly. Does it mean I have to charge myself VAT on something that is not VATable and then claim it back again?
And what about Brexit? I know the UK has already left the EU, but des this affect me? What about distance selling? How do I account for supplies to and from the EU? Do I have to queue at Dover?
Next, you’ll be telling me that Father Christmas isn’t real……….
HAPPY CHRISTMAS EVERYBODY!
VAT stats
HMRC has published the official VAT statistics for 2019/20
The headlines are:
- Total VAT receipts in 2019-20 decreased by 1.5% from the previous financial year. There was a downward impact on receipts from the VAT deferral measure which took effect from 20 March 2020.
- The Wholesale and Retail sector continued to be the largest contributor to net home VAT liabilities.
- 62% of total net home VAT declared was paid by traders with an annual turnover greater than £10 million.
- Incorporated companies accounted for the largest share of the VAT population and annual taxable turnover. This group accounted for 72% of traders, and 91% of annual taxable turnover in 2019-20.
- Sole proprietors were the second largest group in terms of VAT population; this group accounted for 16% of VAT traders. However, the annual taxable turnover declared by this group only accounted for 1% of the total for 2019-20.
- The Professional, Scientific and technical activities sector increased by £860 million (5%), the largest year-on-year change.
- The Real Estate Activities sector decreased by £530 million (12%) and the Construction sector decreased by £160 million (3%) year-on-year, although both sectors remain in the top ten sectors in terms of contribution to VAT liabilities.
- 46.7% of traders declared annual turnover below the VAT registration threshold.
- More than half of net home VAT payments are accounted for by traders in the top 0.5% in 2019-20.
VAT – How to apply for a non-statutory clearance
One would think that it would be a relatively straightforward matter to write to HMRC to obtain a ruling (non-stat clearance) on a matter. Surely a taxpayer ought to be able to set out the issue, describe the transaction, provide a tax analysis and ask HMRC whether they consider the proposed VAT treatment appropriate. Well, of course, it is not as simple as that (this is VAT after all).
So, what are the issues and what hurdles must be cleared before HMRC engage with a written query?
Checklist
First, there is a checklist which a business must consider and include in a non-stat clearance. Inter alia, this list includes:
- Information about the transaction(s)
- The reasons why the business is undertaking the transaction
- The relevant facts about the transaction, set out chronologically as transaction steps,
- The answer sought – set out your view of the tax consequences of the transaction
- Any details that are contingent, eg; on future events or the consent of others
- Information about commercial background
- Explain the significance of the tax result in achieving the desired outcome
- Explain why you chose this form of transaction over another that could achieve the same commercial result, where you have considered alternative forms
- Information about legal points
- Outline the specific legislation at issue
- Why you believe the application of the legislation is open to possible different interpretations, summary of those different interpretations, and why the tax consequences are uncertain, including reference to our published guidance or to case law
- Any legal advice you have already received, and you are content to disclose
- Details of how you intend to use the clearance, such as for public documents
- Information about the disclosure of a tax avoidance scheme that covers all or part of the transaction
Failure to address any items on the checklist usually means no determination will be forthcoming.
An applicant must also set out what HMRC guidance (including internal guidance) legislation, case law and other information has been considered. We find it helpful to reproduce the full checklist (as HMRC advise) and provide a comprehensive response to each point in order to avoid a straightforward refusal to respond.
Genuine uncertainty
One of the main reasons HMRC refuses to provide a non-stat clearance is that it considers that there is no genuine uncertainty; in other words, “go and look at the guidance”. This is very unhelpful after time and effort, and fees cost has gone into the application. The fact that an application is required to set out what guidance etc has been considered, and why it is ambiguous in the relevant circumstances does not seem to carry very much weight. I find it is unhelpful to say, “if it wasn’t uncertain, we wouldn’t be writing to you”! We recommend that a full explanation of the genuine uncertainty is provided to forestall such a HMRC refusal to reply.
Chances
Experience insists that it is difficult to obtain a non-stat clearance which is of any value. Quite often, HMRC will reply saying that their letter is not a non-stat clearance, but then go on to address (at least) some of the issues. This sometimes provides a degree of comfort. An approach that I sometimes adopt is to say, “we believe this to be the correct VAT treatment, and one we will apply to the transaction unless you advise otherwise with reasons”. This sometimes creates a reaction.
HMRC guidance
Details of obtaining a non-stat clearance here.
Address
I find that applications are looked at quicker if they are emailed: nonstatutoryclearanceteam.hmrc@hmrc.gsi.gov.uk. However, there is a 2mb size limit which is often unhelpful. If emailing, an applicant should state that you confirm that you understand and accept the risks involved in using email (otherwise this can cause delays).
Postal address
HM Revenue & Customs, Non-Statutory Clearance Team, S0563. 5th Floor, Saxon House, 1 Causeway Lane, Leicester , LE1 4AA
What HMRC will not rule on
- Incomplete information
- When there is no genuine uncertainty
- When they consider it planning advice, or approval of a planning arrangements
- HMRC believes that the intention is to avoid tax
- There is a statutory clearance applicable to the transaction
- Whether activities constitute a business
- Whether a transaction represents a Transfer Of a Going Concern (TOGC).
Reliance
Even if a business does obtain a determination, is it possible to rely on it? The answer is no (well, not always). I consider this here.
Summary
It is understandable that a business wants certainty on a transaction, and it ought to be able to rely on HMRC for confirmation of its own analysis, but obtaining such an opinion is fraught with difficulties, frustrations and (genuine) uncertainty. It seems that HMRC will go to lengths to avoid giving a decision, but they are not reticent in penalising a taxpayer once a business has made a decision, applied it, and HMRC subsequently disagree with the VAT analysis.
A wholly unacceptable situation.
VAT: New registration checking service
The Government has launched a website for checking UK VAT numbers as EU VIES will no longer be available post Brexit.
This service can be used to check:
- if a UK VAT registration number is valid
- the name and address of the business the number is registered to
If you are a UK VAT-registered business, you can also use this service to prove when you have checked the validity of a UK VAT number.
VAT: Exporting and importing businesses -prepare for Brexit
New rules from 1 January 2021.
GOV.UK has published new guidance from the Department for International Trade.
The guidance sets out what a business will need to do 1 January 2021. It will be updated if anything changes.
It covers:
Exporting to and importing from the EU
Exporting to and importing from non-EU countries
All business with goods crossing the new border will need to understand and prepare for the changes.
How to deal with VAT debt
In the current climate many businesses are struggling to make payments to HMRC. This clearly can have serious consequences and reduced income due to the Covid 19 coronavirus adds more problems.
This article looks at how to manage a VAT debt position; what can be done, and what not to do.
The first, and most important point to make is; do not ignore a tax debt. It will not go away and, in VAT there is, in most cases a four-year limit for assessing tax, but once assessed or declared, there is no time bar for collecting the debt.
HMRC look for a taxpayer to be taking steps to make a payment, or for a disclosure of the reason funds are unavailable. If HMRC’s Debt Management & Banking team have no idea of the cause of non-payment they will assume that the matter is being ignored and the full force of their powers are likely to be invoked. For background on HMRC’s VAT recovery procedures and powers see here. It is no surprise to learn that the extent of their powers is sweeping and formidable.
Is the VAT debt correct?
The first step is to establish whether a VAT debt is accurate. If it is a result of a normal return, then ensure the declaration is correct. If it is the result of an assessment by HMRC, always challenge it. In the majority of cases, we can assist with getting an assessment reduced or removed completely. A debt may be made up of a combination of; actual VAT, surcharges, penalties and interest
Time To Pay (TTP)
Such an arrangement with HMRC enables a debt to be spread over a period of time. This is usually, but not always, the most beneficial course of action. The process is that the taxpayer submits a proposal for settling the debt over a set period (a “best offer”) in instalments. HMRC may accept the offer, refuse it outright or make a “counter-offer”.
Matters to consider when submitting a VAT TTP proposal:
- The shorter the payment period proposed the more likely HMRC is to accept
- The sooner a TTP proposal is made the better
- HMRC is unlikely to agree a TTP longer than 12 months and most are for a significant shorter period
- An offer of an up-front payment also increases the chance of agreement
- An agreed TTP avoids penalties for late payment (as long as it is adhered to, otherwise penalties will apply)
- If payments are missed HMRC will withdraw from the TTP and the entire debt (plus penalties and interest) will become due immediately
- A TTP will avoid HMRC using its debt collection powers
- HMRC is likely to request sight of; cash flow forecasts, management accounts and company cash reserve details to evidence a ‘best offer”
- Also, information on; management of costs, potential sale of assets, availability of loans, other debts, ability to pay future VAT liabilities may be requested
- A business with a history of previous TTPs is less likely to be able to agree a new one
- If a formal TTP cannot be agreed, it is still beneficial for a business to make payments as and when they can be afforded. This keeps HMRC onside and may make discussions about future payment more fruitful
What HMRC expect
HMRC look for various ways a business can raise funds to pay a VAT debt, these include:
- Sale of assets
- Anticipated income, eg; large customer payment, contract or other demonstrable future income
- Bank or similar loans (including family members)
- Charge on home
- Alternative fundraising methods
The Debt Management & Banking staff have experience and knowledge of these methods and also use credit agencies.
Summary
It is always important to talk to HMRC. An ongoing dialogue can improve the debt situation and avoid HMRC taking unilateral action – which is nearly always detrimental to a business. Check that the debt is correct. Consider a TTP arrangement or alternative ways to raise funds. Talk to your advisers.
A debt is often the result of an assessment and penalties. A look at penalties (and how to avoid them) here and an article on how to survive HMRC’s enforcement powers here.
What VAT CAN’T you claim?
VAT Basics
The majority of input tax incurred by most VAT registered businesses may be recovered. However, there is some input tax that may not be. I thought it would be helpful if I pulled together all of these categories in one place:
Blocked VAT Claims
A brief overview
- No supporting evidence
In most cases this evidence will be an invoice (or as the rules state “a proper tax invoice)” although it may be import, self-billing or other documentation in specific circumstances. A claim is invalid without the correct paperwork. HMRC may accept alternative evidence, however, they are not duty bound to do so (and rarely do). So ensure that you always obtain and retain the correct documentation.
- Incorrect supporting evidence
Usually this is an invalid invoice, or using a delivery note/statement/pro forma in place of a proper tax invoice. To support a claim an invoice must show all the information set out in the legislation. HMRC are within their rights to disallow a claim if any of the details are missing. A full guide is here.
- Input tax relating to exempt supplies
Broadly speaking, if a business incurs VAT in respect of exempt supplies it cannot recover it. If a business makes only exempt supplies it cannot even register for VAT. There is a certain easement called de minimis which provide for recovery if the input tax is below certain prescribed limits. Input tax which relates to both exempt and taxable activities must be apportioned. More details of partial exemption may be found here.
- Input tax relating to non-business activities
If a charity or NFP entity incurs input tax in connection with non-business activities this cannot be recovered and there is no de minimis relief. Input tax which relates to both business and non-business activities must be apportioned. Business versus non-business apportionment must be carried out first and then any partial exemption calculation for the business element if appropriate. More details here.
- Time barred
If input tax is not reclaimed within four years of it being incurred, the capping provisions apply and any claim will be rejected by HMRC.
- VAT incurred on business entertainment
This is always irrecoverable unless the client or customer being entertained belongs overseas. The input tax incurred on staff entertainment costs is however recoverable.
- Car purchase
In most cases the VAT incurred on the purchase of a car is blocked. The only exceptions are for when the car; is part of the stock in trade of a motor manufacturer or dealer, or is used primarily for the purposes of taxi hire; self-drive hire or driving instruction; or is used exclusively for a business purpose and is not made available for private use. This last category is notoriously difficult to prove to HMRC and the evidence to support this must be very good.
- Car leasing
If a business leases a car for business purposes it will normally be unable to recover 50% of the VAT charged. The 50% block is to cover the private use of the car.
- A business using certain schemes
For instance, a business using the Flat Rate Scheme cannot recover input tax except for certain large capital purchases, also there are certain blocks for recovery on TOMS users
- VAT charged in error
Even if you obtain an invoice purporting to show a VAT amount, this cannot be recovered if the VAT was charged in error; either completely inappropriately or at the wrong rate. A business’ recourse is with the supplier and not HMRC.
- Goods and services not used for a business
Even if a business has an invoice addressed to it and the services or goods are paid for by the business, the input tax on the purchase is blocked if the supply is not for business use. This may be because the purchase is for personal use, or by anther business or for purposes not related to the business.
- VAT paid on goods and services obtained before VAT registration
This is not input tax and therefore is not claimable. However, there are exceptions for goods on hand at registration and services received within six months of registration if certain conditions are met.
- VAT incurred by property developers
Input tax incurred on certain articles that are installed in buildings which are sold or leased at the zero rate is blocked. Details here.
- Second hand goods
Goods sold to you under one of the VAT second-hand schemes will not show a separate VAT charge and no input tax is recoverable on these goods.
- Transfer of a going concern (TOGC)
Assets of a business transferred to you as a going concern are not deemed to be a supply for VAT purposes and consequently, there is no VAT chargeable and therefore no input tax to recover.
- Disbursements
A business cannot reclaim VAT when it pays for goods or services to be supplied directly to its client. However, in this situation the VAT may be claimable by the client if they are VAT registered. For more on disbursements see here.
- VAT incurred overseas
A business cannot reclaim VAT charged on goods or services that it has bought from suppliers in other EU States. Only UK VAT may be claimed on a UK VAT return. There is however, a mechanism available to claim this VAT back from the relevant VAT body in those States. However, in most cases, supplies received from overseas suppliers are VAT free, so it is usually worth checking whether any VAT has been charged correctly.
Input tax incurred on expenditure is one of the most complex areas of VAT. It also represents the biggest VAT cost to a business if VAT falls to be irrecoverable. It is almost always worthwhile reviewing what VAT is being reclaimed. Claim too much and there could well be penalties and interest, and of course, if a business is not claiming as much input tax as it could, this represents a straightforward cost.