All swans belong to either; the Queen, the Dyers Company or the Vintners Company and it is illegal to kill them for food. As a result, because they are rarely eaten, the sale of a swan is subject to VAT at the standard rate.
Monthly Archives: May 2021
VAT Schemes Guide – Alternative ways of accounting for tax
There are a number of VAT Schemes which are designed to simplify accounting for the tax. They may save a business money, reduce complexity, avoid the need for certain documentation and reduce the time needed to deal with VAT. Some schemes may be used in combination with others, although I recommend that checks should be made first.
It is important to compare the use of each scheme to standard VAT accounting to establish whether a business will benefit. Some schemes are compulsory and there are particular pitfalls for certain businesses using certain schemes.
I thought that it would be useful to consider the schemes all in one place and look at their features and pros and cons.
These schemes reviewed here are:
- Cash Accounting Scheme
- Annual Accounting Scheme
- Flat Rate Scheme
- Margin schemes for second-hand goods
- Global Accounting
- VAT schemes for retailers
Cash Accounting Scheme
Normally, VAT returns are based on the tax point (usually the VAT invoice date) for sales and purchases. This may mean a business having to pay HMRC the VAT due on sales that its customers have not yet paid for.
The VAT cash accounting scheme instead bases reporting on payment dates, both for purchases and sales. A business will need to ensure its records include payment dates.
A business is only eligible for the Cash Accounting Scheme if its estimated taxable turnover is no more than £1.35m, and can then remain in the scheme as long as it remains below £1.6m.
Advantages
- Usually beneficial for cash flow especially if its customers are slow paying
- Output tax is not payable at all if a business has a bad debt
Disadvantages
- Is generally not beneficial for a repayment business (one which reclaims more VAT than it pays, eg; an exporter or supplier of zero rated goods or services)
- Not usually beneficial if a business purchases significant amounts of goods or services on credit
Annual Accounting Scheme
The Annual Accounting Scheme allows a business to pay VAT on account, in either nine monthly or three quarterly payments. These instalments are based on VAT paid in the previous year. It is then required to complete a single, annual VAT return which is used to calculate any balance owed by the business or due from HMRC.
A business is eligible for the scheme if its estimated taxable turnover is no more than £1.35m and is permitted to remain in the scheme as long as it remains below £1.6m.
Advantages
- Reduces paperwork as only the need to complete one return instead of four (Although it does not remove the requirement to keep all the normal VAT records and accounts)
- Improves management of cash flow
Disadvantages
- Not suitable for repayment businesses as they would only receive one repayment at the end of the year
- If turnover decreases, the interim payments may be higher than under standard accounting
Flat Rate Scheme
The Flat Rate Scheme is designed to assist smaller businesses reduce the amount of time and complexity required for VAT accounting. The Flat Rate Scheme removes the need to calculate the VAT on every transaction. Instead, a business pays a flat rate percentage of its VAT inclusive turnover. The percentage paid is less than the standard VAT rate because it recognises the fact that no input tax can be claimed on purchases. The flat rate percentage used is dependent on a business’ trade sector.
A business is eligible for this scheme if its estimated taxable turnover in the next year will not exceed £150,000. Once using the scheme, a business is permitted to continue using it until its income exceeds £230,000.
If eligible, a business may combine the Flat Rate Scheme with the Annual Accounting Schemes, additionally, there is an option to effectively use a cash basis so there is no need to use the Cash Accounting Scheme. New rules regarding ” limited cost traders” mean that the scheme has become less attractive.
Advantages
- Depending on trade sector and circumstances may result in a real VAT saving
- Simplified record keeping; no requirement to separate out gross, VAT and net in accounts
- Fewer rules; no issues with input tax a business can and cannot recover on purchases
- Certainty of knowing how much of income is payable to HMRC
Disadvantages
- No reclaim of input tax incurred on purchases
- Limited cost traders impact
- If a business buys a significant amount from VAT registered businesses, it is likely to result in more VAT due
- Likely to be unattractive for businesses making zero-rated or exempt sales because output tax would also apply to this hitherto VAT free income
- Low turnover limit
Margin Scheme for Second Hand Goods
A business normally accounts for output tax on the full value of its taxable supplies and reclaims input tax on its purchases. However, if a business deals in second-hand goods, works of art, antiques or collectibles it may use a Margin Scheme. This scheme enables a business to account for VAT only on the difference between the purchase and selling price of an item; the margin. It is not possible to reclaim input tax on the purchase of an item and there will be no output tax if no profit is achieved. There is a special margin schemes for auctioneers. A variation of the Margin Scheme is considered below.
Advantages
- Usually beneficial if buying from (non-VAT registered) members of the public
- Purchaser will not see a VAT charge
- Although no input tax claimable on purchases of scheme items, VAT may be claimed in the usual way on overheads and other fees etc
Disadvantages
- Record keeping requirements are demanding and closely checked, eg; stock records and invoices which are required for both purchases and sales
- Cannot be used for items purchased on a VAT invoice
- Can be complex and create a cost if goods exported
- Although no VAT due on sales if a loss is made, there is no set-off of the loss
Global Accounting
The problem with the Second Hand Goods Scheme is that full details of each individual item purchased and sold has to be recorded. Global Accounting is an optional, simplified variation of the Second Hand Margin Scheme. It differs from the standard Margin Scheme in that rather than accounting for the margin achieved on the sale of each individual item, output tax is calculated on the margin achieved between the total purchases and total sales in a particular accounting period.
Advantages
- Simplified version of the Margin Scheme
- Record keeping requirements reduced
- Losses made on sales reduce VAT payable
- Beneficial for businesses which buy and sell bulk volume, low value eligible goods
Disadvantages
- Cannot be used for; aircraft, boats, caravans, horses or motor vehicles
- Similar to Margin Scheme disadvantages apart from loss set off
VAT Schemes for Retailers
It is usually difficult for retailers to issue an invoice for each sale made, so various retail schemes have been designed to simplify VAT. The appropriate scheme for a business depends on whether its retail turnover (excluding VAT) is; below £1m, between £1m and £130m and higher.
Smaller businesses may be able to use a retail scheme with Cash Accounting and Annual Accounting but it cannot combine a Retail Scheme with the Flat Rate Scheme. However, retailers may choose to use the Flat Rate Scheme instead of a Retail Scheme.
Using standard VAT accounting, a VAT registered business must record the VAT on each sale. However, via a Retail Scheme, it calculates the value of its total VAT taxable sales for a period, eg; a day, and the proportions of that total that are taxable at different rates of VAT; standard, reduced and zero.
According to the scheme a business uses it then applies the appropriate VAT fraction to that sales figure to calculate the output tax due. A business may only use the Retail Scheme for retail sales and must use the standard accounting procedures for other supplies. It must still issue a VAT invoice to any VAT registered customer who requests one. It is a requirement of any scheme choice that HMRC must consider it fair and reasonable.
Examples of Retail Schemes
- Apportionment
- Direct calculation
- The point of sale scheme
There are special arrangements for caterers, retail pharmacists and florists.
Advantages
- No requirement to issue an invoice for each sale
- Most schemes are relatively simple to administer once set up. Technology assists in a helpful way with EPOS systems
- Simplifies record keeping
Disadvantages
- It is usual for each line sold to need to be coded correctly for VAT liability
- Smaller businesses without state of the art technology may be at a disadvantage
- Time and resources required to set up and maintain systems
- In some cases the calculation depends on staff “pressing the right button”
- Often complex calculations and record keeping
- Very precise and complicated rules
- Lack of understanding by a number of inspectors
- Complexity increases the risk of misdeclaration
Overall
As may be seen, there are a lot of choices for a business to consider, especially a start-up. Choosing a scheme which is inappropriate may result in VAT overpayment and a lot of unneeded record keeping and administration. There are real savings to be made by using a beneficial scheme, both in terms of VAT payable and staff time.
We are happy to review a business’ circumstances and calculate what schemes would produce the best outcome.
Please contact us if you require further information.
VAT Single and Multiple Supplies
Accounting for VAT can be problematic when the supply of goods and services consist of multiple components. In such cases it is necessary to consider whether each component of the supply should be assessed independently or whether the components should be dealt with as one.
Precise treatment is not specifically addressed in UK or European Law and instead a decision is made based upon a review of the essential features of the transaction. For instance, a meal on an airplane is a normal feature of the zero rated travel provided and is not considered a separate standard rated supply to the travel itself. Conversely a meal on a river cruise is a separate supply to that of the zero rated cruise itself and as such is a separate standard rated supply.
A single price is not therefore a decisive indicator of a single supply. Instead what needs to be considered is whether there is just one principal supply or several distinct independent supplies that are provided.
Through the development of case law and HMRC guidance the following situations have been clarified. I have written about the most important, recent cases here, here, here, here and here.
The 50% rule
If a distinct supply represents 50% or more of the overall cost it can not be considered ancillary to the principal supply. In such cases an apportionment will usually be required.
Postal charges
VAT on postage follows the treatment of VAT on the main supply. For example, for mail order items the postage on book is zero rated, whereas the postage on a printer is standard rated.
There are however situations where postage is treated as a separate supply to the goods if, for example, the postage is not expected and is an additional request by the customer.
Subscriptions
If there is one particular reason for the subscription then the fee is considered to be one single supply. If there are separate reasons for the subscription then the fee should be proportioned accordingly and the appropriate VAT treatment should be applied to each element of the supply.
Printed matter
Usually books, newspapers, magazines and music are zero rated whilst items seen as stationery such as membership cards and notebooks are standard rated. For materials supplied with items that can be used independently then there are two supplies, for example a film supplied with a magazine.
A package test can also be applied, where if there are more zero rated items then standard rated items the entire package becomes zero rated, or vice versa.
Two part tariffs
If there are two payments relating to a single supply, the two payments are treated as one and the VAT treatment follows that of the one supply.
Supplies involving land
Services provided on land tend to be viewed as one complete supply. The land aspect is not usually a separate service that the customer receives and instead allows the main service to be provided.
One instance where this may not apply is service charges, which may need to be apportioned if they contain independent supplies such as rent and cleaning. Independent supplies are made if the customer can choose which of the services they would like.
Summary
Card Protection Plan Ltd has become a landmark case in determining the VAT treatment for single and multiple supplies. In this case the ECJ ruled that standard rated handling charges were not distinct from the supply of exempt insurance. It was noted that ‘a supply that comprises a single service from an economic point of view should not be artificially split’. Notably many subsequent court decisions have since followed this outcome thereby suggesting a general lean towards viewing cases as single supplies where there are reasonable grounds to do so.
VAT: What is open market value? The Jupiter case
Latest from the courts
In the First Tier tribunal (FTT) case of Jupiter Asset Management Group Ltd the issue was the value of management services to an associated third party VAT group.
Background
The value is important because if HMRC believe that a supply between two connected parties (as defined by The Income and Corporation Taxes Act 1988 Section 839) is undervalue and the recipient cannot recover the relevant input tax in full, it is permitted via The VAT Act 1994, Schedule 6, PART 2, para 1 (1) to substitute open market value (OMV) by way of a Notice.
This paragraph is specifically intended to counter tax avoidance. If a supply between connected persons is made below open market value for a legitimate reason that the trader can substantiate, and which is unconnected with avoidance HMRC has the discretion not to issue a Notice. In Jupiter, HMRC directed that OMV be used to calculate the charge as it considered that value was too low and issued an assessment for underdeclared output tax.
Decision
In the absence of comparable supplies, OMV was to be determined by reference to:
- the full cost of making the supplies;
- the full cost included the costs incurred on goods and services used in making the supplies and general overhead costs the input tax in respect of which had been recovered
- the remuneration paid to the executive directors to the extent that that remuneration related to activities performed by the executive directors in making the supplies of the management services
Consequently, the appeal against the output tax assessment was dismissed.
Commentary
An expected outcome, but ne which emphasises that care should be taken with transactions between connected parties, management charges and inter-company charges in general. This is even more relevant since the decision in the Norseman Gold plc case
VAT: New Road Fuel Scale Charges
HMRC has updated the valuation table: Road Fuel Scale Charges (RFSC) from 1 May 2021 to 30 April 2022 here.
RFSC
If a business reclaims VAT incurred on road fuel, it will be required recognise the private use element of the fuel.
The RFSC simplifies accounting for VAT on the private use of fuel by motorists. The RFSC is calculated according to a car’s CO2 emissions and the fixed charge is added to output VAT, on the VAT return (in effect, the business supplies to fuel to the individual). The use of this charge is optional, the alternative is to keep detailed mileage records.
A quick RFSC calculator/ready-reckoner is here.