Category Archives: Land & Property

VAT: TOMS – negative margin permitted? The Square case

By   31 January 2023
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Latest from the courts

In the First-Tier Tribunal (FTT) case of The Squa.re Limited (TSL) the issue was whether unsold inventory or inventory sold at a loss could affect the calculation of the Tour Operators’ Margin Scheme (TOMS).

Background

TSL provided serviced apartments to travellers. The company leased accommodation from the owners of the properties who were frequently, if not exclusively, private individuals who were not registered for VAT.

These leases were often for an extended period, eg; annual leases, such that the appellant is committed under the terms of the lease even where the accommodation cannot then be on supplied or not supplied for a profit.

The Issue

The issue was whether TOMS operated in such a way as to permit a negative calculation resulting in repayment to the appellant. HMRC issued an assessment because, while they accepted that there may be a zero margin on a TOMS supply, they considered that a negative margin was not permitted by the scheme. TSL maintained that a repayment of overdeclared output tax was appropriate if a loss was made (an “overall negative margin”) as TOMS does not exclude the possibility of a negative margin.

The dispute between the parties was a technical one only and concerned the interpretation of the statutory provisions implementing TOMS into UK law.

Legal

The domestic implementation of the TOMS is authorised by The Value Added Tax Act 1994, Section 53 and found in Value Added Tax (Tour Operators’) Order 1987 (SI1987/1806). Guidance is provided via Notice 709/5 and Sections 8 to 13 have the force of law.

Decision

The Tribunal determined that it was clear from the legislation that the taxable amount is concerned with the supply made, and not the VAT incurred on the various cost components. Under normal VAT accounting the output tax charged on supplies is calculated by reference to the consideration received by the supplier from the customer. There can realistically be no concept of negative consideration.

The FTT considered that there is no basis inherent within TOMS which would permit a calculation of a negative sum. There had been a supply (of a designated travel service) for a consideration, and it is the taxable amount of that supply which was to be determined. A negative taxable amount is a “conceptual impossibility”. A negative margin arises as a consequence of a lack of profitability, but VAT is a transaction tax and not a tax on profit.

When sold at a loss where the total calculation resulted in a negative margin the annual sum due by way of output tax would be nil (not a repayment).

Where the accommodation is not sold at all, the FTT noted that this cost represented a cost of doing business but, on the basis that there has been no onward supply, there is no supply which meets the definition of a designated travel service. The relevant accommodation is not for the direct benefit of any traveller so there is no supply and TOMS is irrelevant.

Whilst the FTT considered that were it the case that identified costs incurred in buying in goods and services which are not then the subject of an onward supply should be excluded from TOMS calculations, costs associated with the block booking of accommodation of the type incurred by TSL were to be included. Where such costs exceed the value obtained by onward supply, the negative margin forms part of the annual calculation. However, where the global calculation results in a negative margin the tax due for the year under TOMS is nil and there was no basis for a repayment to TSL.

There was no basis on which to permit an overall TOMS negative margin and the appeal was dismissed.

Commentary

Another demonstration of the complexities of TOMS and the potential pitfalls.

It may be useful to note that input tax claims are not permitted in TOMS calculations, however, any VAT incurred on any bought in, but unsold, services would not be excluded from recovery as there is no TOMS supply. The input tax on unsold inventory was a general cost of doing business and, as such, recoverable in the normal way. Consequently, there may be circumstances for businesses using TOMS where input tax incurred on unsold elements may be claimed outside of TOMS

VAT: Doctors and healthcare professionals

By   16 January 2023
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Healthcare services – an overview

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 including; opticians, nurses, osteopaths, chiropractors, midwives, dentists etc.)

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?” This is particularly relevant if a practice intends to spend significant amounts on projects such as property construction or purchase.

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 their value. 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 supplies 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 predominantly 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 the partial exemption rules – see below. You will have to keep records in a certain way (see MTD) 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. 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. More details here.

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, documentation and staff time
  • exposure to 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 tax cases
  • potentially dealing with the Capital Goods Scheme (CGS)
  • possible increased costs to the practice in respect of professional fees.

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

VAT Domestic Reverse Charge technical guide

By   12 December 2022
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An overview of the Domestic Reverse Charge (DRC) here.

HMRC has published amended guidance on the DRC. The main change involves the supply of scaffolding on zero-rated new build housing. The guidance confirms the change to HMRC’s previous policy and that there will be transitional period up to 1 February 2023 where businesses can use either reverse charge accounting or normal VAT rules.

VAT: Partial exemption de minimis relief

By   17 October 2022
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VAT Basics

The VAT a business incurs on running costs is called input tax. For most businesses this is reclaimed on VAT returns from HMRC if it relates to standard rated, reduced rated, zero rated or certain outside the scope sales that a business makes.

However, a business which makes exempt sales may not be in a position to recover all of the input tax which it incurred. This is because input tax which relates to exempt supplies is generally irrecoverable.

This may affect any business which is involved in:

  • Property letting and sales – generally all types of supply of land
  • Financial services
  • Insurance
  • Betting, gaming and lotteries
  • Education
  • Health and welfare
  • Sport, sports competitions and physical education
  • Cultural services

(This list is not exhaustive)

A business in this position is called partly exempt. (If a business is fully exempt, it can neither VAT register nor recover any VAT at all). Input tax which directly relates to exempt supplies is irrecoverable. In addition, an element of that business’ general overheads, eg; light, heat, telephone, computers, professional fees, etc are deemed to be, in part, attributable to exempt supplies and a calculation must be performed to establish the element which falls to be irrecoverable. Such apportionment is called a partial exemption standard method. There are a number of alternative methods that may be used (so called “special methods”) but these must be agreed with HMRC.

De Minimis

There is, however, a relief available for a business in the form of de minimis limits. Broadly, if the total of the irrecoverable directly attributable (to exempt suppliers) and the element of overhead input tax which has been established using a partial exemption method falls below de minimis, all of that input tax may be recovered in the normal way.

The de minimis limit is currently £7,500 per annum of input tax. As a result, after carrying out the partial exemption method should the result fall below £7,500 and half of the total input tax for a year it is recoverable in full. This calculation is required on a quarterly basis (for businesses which render returns on a quarterly basis) with a review of the year, called an annual adjustment carried out at the end of a business’ partial exemption year. The quarterly

VAT: Changes to the Option To Tax of land and buildings

By   11 October 2022
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Changes to the notification process

The Option To Tax (OTT) procedure generally turns an exempt supply of land and/or property into a taxable one. More details here.

HMRC have announced, following a recent trial, that its processing of OTTs has been amended to speed up the process.

Previously, when a business submitted an OTT (Form VAT1614A) HMRC would undertake certain checks to the notification before sending an acknowledgement. Now, HMRC will simply issue a receipt confirming that the OTT notification has been received without checking it.

It was, and remains, the taxpayer’s responsibility to ensure that the OTT is valid. The change removes the deemed uncertainty where taxpayers may have believed HMRC’s acceptance of the OTT confirmed that it was valid. Of course, it also reduces HMRC’s resources in processing the notifications and should result in quicker turnarounds. It is hoped that now HMRC will process notifications within 30 working days.

Changes to OTT forms

In addition to the changes to the process of notifying an OTT, HMRC has also removed the ‘print and post’ versions of the following forms:

VAT1614B: Stop being a relevant associate to an option to tax

VAT1614E: Notification of a real estate election

These can now only be completed online. Please note the online form can still be posted but it must be completed in full before it can be printed. The form can also be emailed to optiontotaxnationalunit@hmrc.gov.uk.

VAT: Fuel and Power Notice updated

By   4 October 2022
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HMRC Guidance: Fuel and power (VAT Notice 701/19)

This Notice has recently been updated. It now covers the VAT Reverse Charge measures for wholesale gas and electricity and construction services (Section 2) . There is more information about wholesale gas and electricity and using the VAT domestic Reverse Charge at section 3 of Notice 735: Domestic reverse charge procedure (VAT Notice 735).

Sections 4.1 and 4.3 now include more detail about hydrogen gas.

Brief overview

The reduced rate of VAT of 5% applies to supplies of fuel and power for qualifying use.

Qualifying use means:

  • fuel and power for domestic use
  • fuel and power for charity non-business use
  • fuel and power where the amount supplied does not exceed the small quantities, called the de minimis limits
  • fuel and power partly for qualifying use and partly for other purposes, where 60% or more of the supply is for qualifying use

Other supplies of fuel and power in the UK are standard rated.

VAT – Work on farm buildings

By   29 September 2022
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I am quite often asked if there are any VAT reliefs for farming businesses carrying out work to farm buildings.

Indeed, there are some areas of the VAT rules which may be of assistance to owners of farms and farm buildings. Clearly, the best position is to avoid VAT being charged in the first place. If this is not possible, then we need to consider if the VAT may be recovered.

Repairs and Renovations of Farmhouses

The following guidelines apply to businesses VAT registered as sole proprietors or partnerships. Where the occupant of the farmhouse is a director of a limited company (or a person connected with the director of the company) it is unlikely that any VAT incurred on the farmhouse may be recovered. The following notes are provided by HMRC after consultations with the NFU:

  • Where VAT is incurred on repairs, maintenance and renovations, 70% of that VAT may be recovered as input tax provided the farm is a normal working farm and the VAT-registered person is actively engaged full-time in running it. Where farming is not a full-time business for the VAT-registered person, input tax claimable is likely to be between 10%–30% on the grounds that the dominant purpose is a personal one.
  • Where the building work is more associated with an alteration (eg; building an extension) the amount that may be recovered will depend on the purpose for the construction. If the dominant purpose is a business one then 70% may be claimed. If the dominant purpose is a personal one HMRC would expect the claim to be 40% or less, and in some cases, depending on the facts, none of the VAT incurred would be recoverable.

Other farm buildings

As a general rule, when VAT is incurred on non-residential buildings, then, as long as they are used for business purposes, it would be expected that 100% of the VAT is recoverable. Care should be taken if any buildings are let and it may be that planning is necessary in order to achieve full recovery.

It should be noted that if any work to a building which is not residential results in the building becoming residential, eg; a barn conversion, then the applicable VAT rate should be 5%. If the resulting dwelling is sold then generally the 5% VAT is recoverable. If the dwelling is to be lived in by the person converting it; the VAT incurred may be recovered, but the mechanism is outside the usual VAT return and a separate claim can be made. In these circumstances it is not necessary for the “converter” to be VAT registered.

As may be seen, in many cases it will be necessary to negotiate a percentage of recovery with HMRC.  We can assist with this, as well as advising on VAT structures and planning to ensure as much input tax as possible is either not chargeable to you, or is recoverable.

VAT: Which entity receives a supply? The Star Services case

By   8 September 2022
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Latest from the courts

In the Star Services Oxford Limited (Star) First Tier Tribunal (FTT) case the issue was the identity of the entity receiving the supply, whether it held a valid tax invoice, and whether input tax could be claimed.

Background

The appellant claimed input tax incurred on rental payments to Oxford City Council. This was disallowed by HMRC on the grounds that the rental agreement was with Mr Latifi (a sole proprietor in a property rental business) and not the company which was VAT registered.

After the rental agreement was signed the business was incorporated and carried on a bed and breakfast activities from the premises, along with two separate sub-lets to third parties. One party paid rent to Star and one directly to Mr Latifi.

Contentions

HMRC argued that:

  • Mr Latifi and the Appellant are separate legal entities, both of whom are required to register for VAT separately if carrying on taxable business activities
  • the assessment was correct as the company was not entitled to an input tax credit as it was not the person who had incurred the liability
  • the Appellant did not hold a valid VAT invoice, which entitles it to deduct the input tax

Star contended:

  • there was a technical error in the lease agreement
  • the assessment was excessive
  • subsequent to the assessment, the lease was registered to the Appellant
  • the lease was acquired in Mr Latifi’s name because the Appellant did not exist at the time that the lease agreement was entered into. At the relevant time there was an innocent omission to transfer the lease from Mr Latifi’s name to the Appellant’s name, and the delay was caused by forgetfulness
  • a company may, under The VAT Act 1994 s. 24(6)(c) and if permitted by Regulations, claim input tax on the pre-incorporation supplies received for its business
  • the Appellant has accounted for the VAT (therefore there was no loss of tax)
  • the fact that Mr Latifi is beneficial owner of both “the company” (by virtue of controlling shares and directorship) and “the property” must have an impact on the decision to assess

Decision

The appeal was dismissed.

The Appellant was not entitled to claim input tax on the invoices and HMRC were correct to disallow input tax. It did not receive the supply and it did not hold a VAT invoice.

It was decided that the legal relationship was between Oxford City Council and Mr Latifi. This is because the lease agreement was between these parties and not the Appellant.

It was found that the rent from one sub-tenant was paid to Mr Latifi directly and is not accounted for by the Appellant and that the reassigned lease has no bearing on the property rental activities undertaken by Mr Latifi prior to the reassignment.

The rules on pre-incorporation supplies* do not apply in this case because Mr Latifi, as sole proprietor, and the Appellant, are separate legal entities, requiring separate VAT registration.

Interestingly, a recent case was relied on: In Tower Bridge GP Ltd the Court of Appeal ruled that absent a valid VAT invoice showing the supplier’s VAT number and the customer’s name, the right to deduct input tax on that invoice could not be exercised.

Summary

An unfortunate oversight was sufficient for HMRC to refuse the input tax claim. This case does have a whiff of unfairness about it, but by applying the letter of the law the outcome is unarguable. The contentions here are similar to those in the Aitmatov Academy case.

Another case of taking care with claims.

* A business may, generally, claim the VAT incurred on services it has purchased for its taxable business purposes during the six months prior to VAT registration .

The VAT Act 1994, s 24(6) (c) and The Value Added Tax Regulations 1995, Reg 111.

VAT: The importance of Transfer of a Going Concern rules. The Haymarket case

By   6 June 2022
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Latest from the courts

In the First Tier Tribunal (FTT) case of Haymarket Media Group Limited (Haymarket) the issue was whether the sale of Teddington TV Studios qualified as a VAT free Transfer of a Going Concern (TOGC).

Background

The site in question was subjected to an Option To Tax (OTT) by the supplier. The sale of the property was with the benefit of planning consent for the development of flats and houses on the site after demolition of the TV studios.

Subject of the appeal

The transferor/vendor had previously let a small building on the site to the purchaser’s advisers and, on this basis, the sale was structured to be a TOGC as a property rental business. HMRC raised an assessment as it considered that neither a property rental business, nor a property development business had been transferred.

Decision

The appeal was dismissed. The FTT found that, despite the short lived and minor letting, this did not constitute a business. Further, that even if this had been a business, the contract required vacant possession so a business could not have been continued.

The contention that a property development business was being carried on was also rejected. Despite significant costs being incurred by Haymarket in obtaining the planning permission, the intention* was always to sell the site to a developer, rather than the appellant carrying out the development itself (there was no meaningful work being carried out on the site). The fact that planning permission was obtained did not mean that there was an ongoing property development business which could be transferred.

* The importance of “intention” in VAT is considered here and here.

Technical

In order for a transaction to qualify for a VAT free TOGC, ALL of the following conditions must be met:

  • the assets must be sold as a business, or part of a business, as a going concern
  • 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 (HMRC guidance uses the words “intend to use…” which, in some cases may provide additional comfort)
  • there must be no break in trading
  • where the seller is a taxable person (VAT registered) the purchaser must be a taxable person already or immediately become, as a result of the transfer, a taxable person
  • where only part of a business is sold it must be capable of separate operation
  • there must not be a series of immediately consecutive transfers

In this case, the first, second and third tests was failed leaving the supply to be VAT-able as a result of the OTT.

More on the complex subject of TOGCs including case law here, here, here, and here.

Commentary

TOGCs are often a minefield for taxpayers and their advisers, especially if property is involved. Not only is land law and the relevant VAT legislation complex, but property transactions are usually high value, with a lot of VAT at stake (the VAT in this case was £17 million). Additionally, they are often “one-offs” and frequently outside the usual commercial expertise of people running the business. We strongly advise that comprehensive technical advice is always obtained when TOGC is mooted by one side or the other, particularly when the relevant asset is involved in property letting or development.