Category Archives: Compliance

VAT: Latest from the courts – option to tax, TOGC and deposits

By Marcus Ward 26 March 2018

Timing is everything

The First Tier Tribunal (FTT) case of Clark Hill Ltd (CHL) illustrates the detailed VAT considerations required when selling property. Not only are certain actions important, but so is timing. If a business is one day late taking certain actions, a VAT free sale may turn into one that costs 20% more than anticipated. That is a large amount to fund and will obviously negatively affect cashflow and increase SDLT for the buyer, and may result in penalties for the seller.

The case considered three notoriously difficult areas of VAT, namely: the option to tax, transfers of going concerns and deposits.

Background

CHL owned four commercial properties which had opted to tax. CHL sold the freehold of these properties with the benefit of the existing leases. As a starting point VAT would be due on the sale because of the option. However, the point at issue here was whether the conditions in Article 5 of the Value Added Tax (Special Provisions) Order 1995 were met so that the sale could be treated as a transfer of a business as a going concern (TOGC) and could therefore be treated as neither a supply of goods nor a supply of services for VAT purposes, ie; VAT free. The point applied to two of the four sales. The vendor initially charged VAT, but the purchasers considered that the TOGC provisions applied. CHL must have agreed and consequently did not charge VAT. HMRC disagreed with this approach and raised an assessment for output tax on the value of the sale.

TOGC

In order that a sale may qualify as a TOGC one of the conditions is that; the assets must be used by the transferee in carrying on the same kind of business, whether or not as part of any existing business, as that carried on by the transferor in relation to that part. It is accepted that in a property business transfer, if the vendor has opted to tax, the purchaser must also have opted by the “relevant date”. If there is no option in place at that time HMRC do not regard it as “the same kind of business” and TOGC treatment does not apply.

Relevant date

If the purchaser opts to tax, but, say, one day after the relevant date, there can be no TOGC. The relevant date in these circumstances is the tax point. Details of tax points here

Basically put, a deposit can, in some circumstances, create a tax point. In this case, the purchaser had paid a deposit and, at some point before completion of the transfer of the property, the deposit had been received by the seller or the seller’s agent. The seller notified HMRC of the option to tax after a deposit had been received (in two of the relevant sales). The issue here then was whether a deposit created a tax point, or “relevant date” for the purposes of establishing whether the purchaser’s option to tax was in place by that date.

Decision

The judge decided that in respect of the two properties where the option to tax was not notified until after a deposit had been paid there could not be a TOGC (for completeness, for various other reasons, the other two sales could be treated as TOGCs) and VAT was due on the sale values. It was decided that the receipt of deposits in these cases created a relevant date.

Commentary

There is a distinction between opting to tax and notifying that option to HMRC which does not appear to have been argued here (there may be reasons for that). However, this case is a timely reminder that VAT must be considered on property transactions AND at the appropriate time. TOGC is an unique situation whereby the seller is reliant on the purchaser’s actions in order to apply the correct VAT treatment. This must be covered off in contracts, but even if it is, it could create significant complications and difficulties in obtaining the extra payment. It is also a reminder that VAT issues can arise when deposits are paid (in general) and/or in advance of an invoice being issued.

We recommend that VAT advice is always taken on property transactions ad at an early stage. Not only can situations similar to those in this case arise, but late consideration of VAT can often delay sales and can even cause such transactions to be aborted.

VAT: Are digital newspapers newspapers?

By Marcus Ward 14 March 2018

Are digital newspapers zero rated?

Background

A long running argument has reached the First Tier Tribunal (FTT) in the case of The News Corp case. The issue was whether digital versions of newspapers should share similar VAT treatment to traditional paper newspapers (in this case; The Times, The Sunday Times, The Sun and The Sun On Sunday) and therefore be zero rated.

Arguments

The contention by the appellant was that the digital editions of the titles are “newspapers” on the basis that they are the digital equivalent of the daily editions produced on ordinary newspaper printing paper (“newsprint”). In respect of the process of news-gathering and journalism, there is no distinction between the newsprint and digital editions. Content is produced by a single newsroom under a single editor. The website and tablet editors sit within the newsroom team and are part of the journalistic process. Thus, the manner in which the newsprint and digital editions are compiled is identical until the point at which the content is laid out for transposition onto the physical or digital medium. There was, therefore, essentially no difference in the journalistic content or news teams for the newsprint and digital editions. It was also submitted that Item 2 Group 3 of Schedule 8 of VATA 1994 (below) should be interpreted purposively. The purpose of the provision was to promote literacy, the dissemination of information and democratic accountability. There was, however, a further principle of statutory interpretation which formed an important part of the appellant’s case. This principle was that legislation once enacted had to be kept up-to-date with, technological advances so that a statutory provision is “always speaking”. This was important in the present case because digital editions of newspapers did not exist in 1973 when VAT was introduced.

HMRC argued simply, that they do not fall within the definition of “newspapers” which is confined to newsprint newspapers.

Decision

Unsurprisingly, the appeal was dismissed on the grounds that digital newspapers are not covered by the zero rating provision at VAT Act 1994, Schedule 8, Group 3, which zero rates, inter alia, “newspapers” (Item 2). Group 3 provides as follows:

“Group 3—Books, etc
Item No
1 Books, booklets, brochures, pamphlets and leaflets.
2 Newspapers, journals and periodicals.
3 Children’s picture books and painting books.
4 Music (printed, duplicated or manuscript).
5 Maps, charts and topographical plans.
6 Covers, cases and other articles supplied with items 1 to 5 and not
separately accounted for…”

This relief clearly relates to physical goods. Consequently, it was necessary to determine whether digital newspapers are goods or services (which would not be covered by Group 3). It was decided that the supply in question was of “electronically supplied services” and this fact was fatal to the appellant’s case. Therefore the standard rate applied if the place of supply of the services was in the UK.

The judge further noted (on the “always speaking” point) that EC legislation contains a “standstill” date of 1 January 1991 with regard to zero rating by EU Member States. Thus, the CJEU held that the scope of zero rating provisions cannot be extended beyond their 1991 limits and that they must be interpreted strictly. In the judge’s view, to extend Item 2 Group 3 beyond the supply of goods (newsprint newspapers) to cover the supply of services (digital newspapers) would be an impermissible expansion of the zero rating provisions.

So the answer is; digital newspapers are not newspapers.

VAT: Fulfilment Businesses – HMRC announce new rules

By Marcus Ward 12 March 2018

The Fulfilment Businesses (Approval Scheme) Regulations 2018

New regulations come into place on 1 April 2019 which will affect fulfilment businesses (entities which carry out the process of taking an order and executing it by making it ready for delivery to its intended customer, usually involving warehouse pickup, packaging, labelling, etc). These are known as The Fulfilment Businesses (Approval Scheme) Regulations 2018 and apply to businesses distributing goods to customers in the UK on behalf of suppliers based in countries outside the EU (third countries). The regulations set out that such businesses will be required to be approved by HMRC in order to carry on its activities. Voluntary registration will begin from 1 April 2018.

The rules cover:

how to register
how and when to make an application for approval
the obligations under the scheme (which include the requirement to carry out due diligence in respect of the third party suppliers and verifying a third country customer’s VAT registration number)
and, as always with VAT; the penalties for breaches of the regulations

The Finance (No. 2) Act 2017, section 49(1) provides that a person may not carry on a third country goods fulfilment business otherwise than in accordance with an approval given by the HMRC. A person carries on a third country goods fulfilment business if they meet the test set out in section 48 of the Finance (No. 2) Act 2017 . This test may be summarised as:

a person carries on a third country goods fulfilment business if the person, by way of business;
- stores third country goods which are owned by a person who is not established in a Member State, or
- stores third country goods on behalf of a person who is not established in a Member State,

at a time when the conditions below are met in relation to the goods.

The conditions are that:

there has been no supply of the goods in the United Kingdom for the purposes of VATA 1994, and
the goods are being offered for sale in the United Kingdom or elsewhere

Usually, but not always, these are goods purchased online. Goods are “third country” goods if they have been imported from a place outside the EU.

These regulations follow on from measures announced in 2016 which state that HMRC will direct certain representatives for overseas businesses to appoint a VAT representative with joint and several liability for online marketplaces. The measures enable HMRC to hold an online marketplace jointly and severally liable for the unpaid VAT of an overseas business that sells goods in the UK via that online marketplace.

These measures further strengthen HMRC’s hand in an area which they consider a substantial amount of VAT is lost to them.

Please contact us if these new rules affect you or your clients.

VAT: Making Tax Digital (MTD) New Regulations

By Marcus Ward 5 March 2018

The regulations for MTD have been published. These are known as The Value Added Tax (Amendment) Regulations 2018 and full details are available here

The Regulations set out that businesses to which the Regulations apply (see below) will be required to retain electronic records using functional compatible software and submit VAT returns via an Application Programming Interface (API) platform. HMRC has previously announced that acceptable software will include spreadsheets, but these will be required to be used in specific ways.

We are yet to see precise details of the relevant software and API platform, but it makes sense for VAT registered businesses to consider the implications of MTD and to plan for its introduction. 1 April 2109 seems a way off, but as always, it’s best not to wait until the last minute. We expect more information in the coming months and we will endeavour to keep you up to date.

Background

MTD for VAT will come into effect from 1 April 2019. From that date, businesses with a turnover above the VAT threshold (currently £85,000) will have to:

keep their records digitally (for VAT purposes only), and;
provide their VAT return information to HMRC through MTD functional compatible software

What is compatible software?

The VAT Notice defines “functional compatible software” as “a software program or set of compatible software programs the functions of
which include—recording and preserving electronic records in an electronic form; providing to HMRC information from the electronic
records and returns in an electronic form and by using the API platform; and receiving information from HMRC using the API platform in
relation to a person’s compliance with obligations under these Regulations which are required to be met by use of the software”.

Submission to HMRC may be either through linking/bridging software or via API enabling the spreadsheets to access HMRC APIs and report data to HMRC systems.

What HMRC say about MTD

MTD was introduced with the following comments:

“The government recognises that the majority of businesses want to get their tax right, but the latest tax gap figures published by HMRC show that too many otherwise compliant businesses find this hard, even some who use an agent to help them. As a result over £8 billion a year in tax is lost from avoidable taxpayer errors. This not only costs the public purse, it also causes businesses cost, uncertainty and worry when HMRC is forced to intervene to put things right.

HMRC wants to do more to help businesses get their tax right and MTD is a very important step in that direction. It will help businesses steer clear of avoidable errors, and give them a clearer view of their tax position in-year.

Businesses (including self-employed and landlords) will keep records of their income and expenditure digitally, and send summary updates quarterly to HMRC from their software (or app).

MTD will bring the tax system into line with what businesses and individuals now expect from other online service providers: a modern digital experience

MTD will help businesses get their tax and NICs right first time. That will reduce the likelihood of errors, giving businesses greater certainty

MTD is anticipated to take out around 10% of error on an ongoing basis, and give businesses a clearer view of their tax position in-year, enabling them to plan to meet their tax obligations at minimum cost and minimum disruption…”

Please contact us if you have any queries or would like to discuss MTD.

Imports – The jargon explained

By Marcus Ward 1 March 2018

The minefield of importing

VAT is only one consideration when importing goods.

Further to my article on proposed changes to imports and exports I have been asked what some terms used in the import of goods mean. So below is, what I hope, a helpful explanation of UK import terms.

We are happy to assist with any general queries and we provide a comprehensive Customs Duty service via our associates with specialised, in-depth knowledge of this complex area.

We recommend regular reviews of a business’ import procedures. This may highlight deficiencies but also provide opportunities to save money or improve cashflow.

Term	Description
Anti-Dumping Duty	A customs duty on imports providing a protection against the dumping of goods in the EU at prices substantially lower than the normal value
ATA carnet	An international customs document for temporary importation and exportation regulated under the terms of the ATA or Istanbul Convention
C 88 (SAD)	The UK version of the Single Administrative Document (SAD) for making import, export and transfer declarations
CAP	Common Agricultural Policy
CDS	Customs Declaration Service to be launched from August 2018. Replaces CHIEF
CFSP (Customs Freight Simplified Procedures)	Simplified procedure for the importation of third country goods including the simplified declaration procedure and local clearance procedure
CHIEF	(Customs Handling of Import and Export Freight). The Customs entry processing computer system. Soon to be replaced
CIE	Customs input of entries to CHIEF
Community	Member States of the European Union
Community Transit	A customs procedure that allows non EU goods on which duty has not been paid to move from one point in the EU to another
Countervailing duty	A customs duty on goods which have received government subsidies in the originating or exporting country
CPC (Customs Procedure Code)	A 7-digit code used on C88 (SAD) declarations to identify the type of procedure for which the goods are being entered and from which they came. Details of CPCs can be found in The Tariff
Customs charges	customs duties import VAT specific customs duty (previously CAP charges) Anti-Dumping Duty Countervailing Duty excise duties
Customs duty	An indirect tax that provides protection for Community industry. Raised on imported goods, it does not include excise duty or VAT
Customs warehouse	A system or place authorised by customs for the storage of non-Community goods under duty and/or VAT suspension
EU	European Union
EU Country	Member country of the European Union
Euro (€)	European currency unit
Excise duty	A duty chargeable, in addition to any customs duty that may be due, on certain goods listed in The Tariff, volume 1 part 12 paragraph 12.1
Free Circulation	Goods imported from outside the EU are in free circulation within the EU when: all import formalities have been complied with all import duties, levies and equivalent charges payable have been paid and have not been fully or partly refunded goods that originate in the EU are also in free circulation
Free Zone	A designated area into which non-EU goods may be moved and remain without payment of customs duty and/or VAT otherwise due at importation
INF6 (C1245)	Information sheet 6 is a document used when TA goods travel between EU Countries. It provides details of the goods at the time of their first entry to TA in the EU. It does not replace the C88 (SAD)
IP (Inward Processing )	A customs procedure providing relief from import duty on goods imported to the EU or removed from a customs warehouse, for process and export outside the EU
Member State	Member country of the European Union
PCC (Processing under Customs Control)	A system of import duty relief for goods imported or transferred from another customs regime for processing into products on which less or no duty is payable
Person established in the EU	In the case of a natural person, any person who is normally resident there. In the case of a legal person or an association of persons, any person that has, in the EU: its registered office its central headquarters or a permanent business establishment
Person established outside the EU	In the case of a natural person, any person who is not normally resident there. In the case of a legal person or an association of persons, any person that has, outside the EU its registered office its central headquarters or a permanent business establishment
Pre-entry	Notification to customs of your intention to export the goods by the submission of an entry
Preference	Arrangements which allow reduced or nil rates of customs duties to be claimed on eligible goods imported from certain non-EU countries
SAD (Single administrative document)	Document used throughout the EU for making import/export declarations – the UK version is Form C88
TA goods	Temporary Admission goods
Tariff	The Tariff consists of 3 volumes Volume 1 contains essential background information for importers and exporters, contact addresses for organisations such as Department for Business, Innovation and Skills, Department of Environment, Food and Rural Affairs and Forestry Commission. It also contains an explanation of Excise duty, Tariff Quotas and many similar topics Volume 2 contains the 16,000 or so Commodity Codes set-out on a Chapter by Chapter basis. It lists duty rates and other directions such as import licensing and preferential duty rates Volume 3 contains a box-by-box completion guide for C88 (SAD) entries, the complete list of Customs Procedure Codes (CPCs), Country / Currency Codes, lists of UK ports and airports both alphabetically and by their legacy Entry Processing Unit (EPU) numbers, and further general information about importing or exporting. The Tariff is available on an annual subscription and is also available at some larger libraries. You can buy the Tariff in printed and CD ROM formats or subscribe to the new e-service from the Stationary Service referred to in paragraph 1.5
Third country	Any country that is outside the Customs Territory of the EU

It is likely that some of these terms will change in the future and with the uncertainty of Brexit who knows what changes will be required.

Digitisation of the VAT Retail Export Scheme – Update

By Marcus Ward 23 February 2018

What is the VAT Retail Export Scheme (VAT RES)?

The VAT RES allows:

overseas visitors (generally, persons who live outside the EC) to receive a refund of VAT paid on goods exported to destinations outside the EC
retailers to zero-rate goods sold to entitled customers when they have the necessary evidence of export and have refunded the VAT to the customer

Such treatment is subject to a number of conditions:

the customer must be entitled to use the scheme
the goods must be eligible to be purchased under the scheme*
the customer must make the purchase in person and complete the form at the retailer’s premises in full
the goods must be exported from the ECby the last day of the third month following that in which the goods were purchased
the customer must send the retailer or the refund company evidence of export stamped by Customs on an official version of Form VAT 407, an approved version of Form VAT 407 or an officially approved invoice
the retailer or the refund company must not zero-rate the supply until the VAT has been refunded to the customer

Typically, a retailer will charge UK VAT to an overseas visitor until the visitor has returned the appropriate documentation which has been suitably stamped at the port of departure from the UK.

* Certain goods are excluded from VAT RES. These include; motor vehicles for personal export, boats sold to visitors who intend to sail them to a destination outside the EC, goods over £600 in value exported for business purposes, goods exported as freight or unaccompanied baggage, unmounted gemstones, bullion, goods consumed in the UK and goods purchased by mail order including those purchased over the Internet. (This list is not exhaustive).

Full details of VAT RES scheme here https://www.gov.uk/government/publications/vat-notice-704-vat-retail-exports/vat-notice-704-vat-retail-exports

VAT RES is a voluntary scheme and retailers do not have to operate it. Those who do must ensure that all the conditions set out in the above notice are met. In certain areas (such as the West End of London) businesses which offer VAT RES have a commercial/price advantage over those shops which do not.

So what is new?

HMRC has recently (this month) provided an update on their project to digitise the VAT RES system, to improve the efficiency for both retailers and travellers, and also to help reduce fraud. Details here

https://www.att.org.uk/sites/default/files/180213%20VAT%20Retail%20Export%20Scheme.pdf

We are able to advise further on this matter if required.

VAT: Latest from the courts – Hastings Insurance Place Of Supply

By Marcus Ward 22 February 2018

In the First Tier Tribunal (FTT) case of Hastings Insurance the issue was where was the place of supply (POS) of services?

The POS rules determine under which VAT regime the supply is treated, whether the associated input tax may be recovered and how the services are reported. Consequently, determining the POS for any supply is vitally important because getting it wrong may not only mean that tax is overpaid in one country, but it is not declared in the appropriate country so that penalties and interest are levied. Getting it wrong also means that the input tax position is likely to be incorrect; meaning that VAT can be over or underclaimed. The rules for the POS of services are notoriously complicated and even subtle differences in a business’ situation can produce a different VAT outcome.

Background

Hastings is an insurance services company operating in the UK. The appeal relates to whether the appellant was able to recover input tax it incurred in the UK which was attributable to supplies of; broking, underwriting support and claims handling services made to a Gibraltar based insurance underwriter (Advantage) which supplied motor insurance to UK customers through Hastings. In order to obtain credit for the relevant input tax, the supply to Advantage must have a POS outside the EU, eg: the recipient had a place of belonging in Gibraltar and not the UK. HMRC argued that Advantage belonged in the UK so that the input tax could not have been properly recoverable. Consequently, the issue was where Advantage “belonged” for VAT purposes.

The POS rules set out where a person “belongs”.

A taxable person belongs:

where it has a business establishment, or;
if different, where it has a fixed establishment, or;
if it has both a business establishment and a fixed establishment (or several such establishments), where the establishment is located which is most directly concerned with the supply

Further details on this point are explained here

Contentions

It was not disputed that Advantage had a business establishment in Gibraltar. The question was whether it also had a fixed establishment in the UK and, if so, whether the supplies of services were made to that fixed establishment rather than to its business establishment in Gibraltar. HMRC contended that Advantage had a fixed establishment in the UK which was “more directly concerned with the supply of insurance” such that the POS was the UK. This was on the basis that Advantage had human and technical resources in the UK which were actually used to provide its services to UK customers. Hastings obviously argued to the contrary; that Advantage had no UK fixed establishment and that services were supplied to, and by, Advantage in Gibraltar.

Technical

It may be helpful to look briefly at CJEU case law which considered what an establishment other than a business establishment is. It is: “characterised by a sufficient degree of permanence and a suitable structure in terms of human and technical resources”, where looking at the location of the recipient of the supply, “to enable it to receive and use the services supplied to it for its own needs” or, where looking at the location of the supplier, “to enable it to provide the services which it supplies”.

Decision

The FTT concluded that the input tax in dispute is recoverable because it was attributable to supplies made to Advantage on the basis that it belonged outside the EU (as interpreted in accordance with the relevant EU rules and case law). After a long and exhaustive analysis of the facts the summary was;

The appellant’s human and technical resources, through which it provided the services to Advantage, did not comprise a fixed establishment of Advantage in the UK, whether for the purposes of determining where Advantage made supplies of insurance or where the appellant made the supplies of its services.
Even if, contrary to the FTT’s view, those resources comprised a fixed establishment in the UK, there is no reason to depart from the location of Advantage’s business establishment in Gibraltar as the place of belonging/supply in the circumstances of this case.

Summary

If this case affects you or your clients it will be rewarding to consider the details of the arrangements which are helpfully set out fully in the decision. This was, in my opinion, a borderline case which could have been decided differently quiet easily. A significant amount of the evidence produced was deemed inadmissible; which is an interesting adjunct to the main issue in itself. Whether HMRC take this matter further remains to be seen. It is always worthwhile reviewing a business’ POS in depth and we are able to assist with this.

The ABC of VAT

By Marcus Ward 12 February 2018

VAT Basics

Jargon Buster

Unfortunately, VAT is littered with phrases, acronyms and jargon which can be impenetrable to people that have to deal with the tax. I have explained the main terms used below and tried to demystify the gobbledygook!

Accounting period

This is the period of time reported in your VAT Return, usually three months.

Acquisitions

Goods brought into the UK from other EC countries (different from goods brought into the UK from outside of the EC; which are known as imports).

Capital Goods Scheme (CGS)

A mechanism for spreading the input tax incurred on certain goods exceeding £50,000 or property exceeding £250,000 of standard-rated cost.

Consideration

Something that is done or given in exchange for something else. Consideration can be in monetary or non-monetary form. If there is no consideration there is no supply.

Corporate body

An incorporated body, eg; a limited company, limited liability partnership, friendly, industrial or provident society.

Distance sales

When a business in one EC country sells and ships goods directly to consumers in another EC country, eg; internet sales.

Exempt supply

A supply that is exempt from VAT by law eg; rent, insurance and financial services. It is not a taxable supply and generally does not allow the recovery of VAT incurred on associated expenditure.

Exports

Goods sent to countries outside of the EC.

Dispatches

Goods sent to another EC country.

Imports

Goods brought into the EC from countries outside of the EC.

Input tax

Refers to the VAT you pay on your purchases – goods or services you use when running your business.

Invoice

Document provided by a taxable person to customer/client. It must contain certain information.

New building

A commercial building less than three years old where a freehold disposal is compulsorily standard-rated.

Non-residential

A building not used as a dwelling.

Option to tax

Changes the supply of a commercial property from exempt to standard rated. This is done solely to recover or avoid input tax attributable.

Output tax

Refers to the VAT you charge on your sales which your clients/customers pay you.

Outside the scope of VAT

Goods and services that are completely outside the scope of VAT altogether, eg; taxes, supplies in other countries, TOGCs and wages paid to employees.

Partial exemption

A business which incurs input tax relating to both taxable and exempt activities is partially exempt and will probably not be able to recover all of its input tax.

Place of supply

The country where a supply of goods or services is deemed to be made for VAT purposes. This is the country in which VAT must be accounted for.

Reduced rate

The rate applied to essential goods and services, such as gas and electricity for residential purposes. Currently at 5%.

Registration

Being VAT registered – accounting for output tax on sales and recovering input tax. A business needs to VAT register when its turnover exceeds certain limits.

Self-billing

Where a customer raises a self-billing document and sends a copy to its supplier with its payment – rather than the supplier issuing an invoice.

Standard rate

A taxable supply subject to UK VAT at the current standard rate of 20%.

Supply

Providing goods or services in return for consideration, normally monetary.

Supply of goods

When exclusive ownership of goods passes from one person to another.

Supply of services

Supply, for consideration, of something provided which is not goods.

Tax period

(Also known as accounting period) The period of time covered by your VAT return. Usually quarterly or monthly.

Taxable person

Any business which supplies goods or services and is required to be registered for VAT. This includes; individuals, partnerships, companies, clubs, associations and charities etc.

Taxable supplies

Goods and services supplied by a taxable person which are liable to VAT at the standard, reduced or zero rate. They usually permit the recovery of VAT incurred on the costs incurred in making them.

Taxable turnover

Taxable turnover is the total value, net of VAT, of the taxable supplies you make in the UK within one year. It is used to establish whether registration is necessary.

Tax point (Time of supply)

The date when a business must account for VAT on supplies and when input tax may be reclaimed. This dictates on what VAT return the transaction is accounted for.

Transfer Of A Going Concern (TOGC)

A sale of a business which continues after transfer. This is a VAT free transaction if certain tests are met.

Zero-rated

Is a taxable supply but subject to UK VAT at a rate of 0%.

VAT Error Disclosure under £10,000 – Draft Letter To HMRC

By Marcus Ward 12 February 2018

Error Correction – belt and braces

If an error is discovered on a past VAT return it is only usually necessary to report it to HMRC (on form VAT652) if it is £10,000 (net of all errors) or more of VAT.

However, because of the current penalty regime it is important to ensure that any adjustment qualifies as an unprompted disclosure. Consequently, we recommend that a letter similar to that below is sent to HMRC in cases where errors below £10,000 have been adjusted on a current return.

“RE: Letter of disclosure; error on return for period XXXX

We disclose, (on behalf of our above named client), that the VAT return for the period XX/XX contained an inaccuracy.

Reason, eg; Due to a processing error, three sales invoicing totalling……

This resulted in the net VAT due for the period being understated by £XX

As the error is within the limits for correction on the next VAT return, this error has been corrected on the return for the period in which the error was discovered, namely the period XX/XX. No further action to correct the error is therefore necessary.

Please treat this letter as an unprompted disclosure of an inaccuracy. Alternatively, please advise me of any further details that you may require in order that that this letter may be treated as such.”

It is accepted that this course of action may prompt enquiries, but it is our view that that is preferable to having a potential ticking time bomb.

Please contact us should you have any queries on error disclosure.

VAT: Doctors and healthcare professionals

By Marcus Ward 29 January 2018

VAT and Doctors

I have noticed that I am receiving more and more queries in this area and HMRC does appear to be taking an increased interest in healthcare entities. This is hardly surprising as it can be complex and there are some big numbers involved.

(This article refers to doctors, but applies equally to most healthcare professional entities.)

The majority of the services provided by doctors’ practices are VAT free. Good news one would think; no need to charge VAT and no need to deal with VAT records, returns and inspections.

However, there is one often repeated question from practices; “How can we reclaim the VAT we are charged?”

The first point to make is that if a practice only makes exempt supplies (of medical services) it is not permitted to register for VAT and consequently cannot recover any input tax. Therefore we must look at the types of supplies that a practice may make that are taxable (at the standard or zero rate). If any of these supplies are made it is possible to VAT register regardless of the value of them. Of course, if taxable supplies are made, the value of which exceeds the current turnover limit of £85,000 in a rolling 12-month period, registration is mandatory.

Examples of services and goods which may be taxable are:

Drugs, medicines or appliances that are dispensed by doctors to patients for self-administration
Dispensing drugs against an NHS prescription (zero-rated)
Drugs dispensed against private prescriptions (standard-rated)
Medico legal services that are predominately legal rather than medical – for example negotiating on behalf of a client or appearing in court in the capacity of an advocate
Clinical trials or market research services for drug companies that do not involve the care or assessment of a patient
Paternity testing
Certain rental of rooms/spaces
Car parking
Signing passport applications
Providing professional witness evidence
Any services which are not in respect of; the protection, maintenance or restoration of health of a patient.

So what does VAT registration mean?

Once you join the “VAT Club” you will be required to file a VAT return on a monthly of quarterly basis. You may have to issue certain documentation to patients/organisations to whom you make VATable supplies. You may need to charge VAT at 20% on some services. You will be able to reclaim VAT charged to you on purchases and other expenditure subject to partial exemption rules (see below). You will have to keep records in a certain way and your accounting system needs to be able to process specific information.

Because doctors usually provide services which attract varying VAT treatment, a practice will be required to attribute VAT incurred on expenditure (input tax) to each of these categories. Generally speaking, only VAT incurred in respect of zero-rated and standard-rated services may be recovered. In addition, there will always be input tax which is not attributable to any specific service and is “overhead” eg; property costs, professional fees, telephones etc. There is a set way in which the recoverable portion of this VAT is calculated. VAT registered entities which make both taxable and exempt supplies are deemed “partly exempt” and must carry out calculations on every VAT return.

Partial Exemption

Once the calculations described above have been carried out, the resultant amount of input tax which relates to exempt supplies is compared to the de-minimis limits (broadly; £625 per month VAT and not more than 50% of all input tax). If the figure is below these limits, all VAT incurred is recoverable regardless of what activities the practice is involved in.

VAT registration in summary

Benefits

Recovery of input tax; the cost of which is not claimable in any other way
Potentially, recovery of VAT on items such as property, refurbishment and other expenditure that would have been unavailable prior to VAT registration
Only a small amount of VAT is likely to be chargeable by a practice
May provide opportunities for pre-registration VAT claims

Drawbacks

Increased administration, paperwork and staff time
Exposure to VAT penalties and interest
May require VAT to be added to some services provided which were hitherto VAT free
Likely that only an element of input tax is recoverable as a result of partial exemption
Uncertainty on the VAT position of certain services due to current EU cases
Potential increased costs to the practice in respect of professional fees.

Please contact us if any of the above affects you or your clients.