Wigs for teddy bears are subject to Customs Duty, but the Upper Tribunal ruled that ‘realistic” hearts used for a Build-A-Bear toy are duty free.
Category Archives: Planning
VAT – A beginner’s practical guide
VAT Basics
I am often asked if there is a VAT beginner’s guide, I find HMRC guidance generally unhelpful for someone without a tax background, so, here is all the basic information you may need in one place.
What is VAT?
Value Added Tax (VAT) is a tax charged on most business transactions made in the UK. It is charged on goods and services and is an ad valorem tax, which means it is proportionate to the value of the supply made.
All goods and services that are VAT rated (at any rate including zero) are called “taxable supplies”. VAT must be charged on taxable supplies from the date a business first needs to be registered. The value of these supplies is called the “taxable turnover”.
Exempt items
VAT does not apply to certain services because the law says these are exempt from VAT. These include some; financial services, property transactions, insurance education and healthcare. Supplies that are exempt from VAT do not form part of the taxable turnover.
The VAT rates
There are currently three rates of VAT in the UK:
- 20% (standard rate) – Most items are standard rate unless they are specifically included in the lower rate categories.
- 5% (reduced rate) – this applies to applies to certain items such as domestic fuel and power, installation of energy-saving materials, sanitary hygiene products and children’s car seats.
- 0% (zero rate) – applies to specified items such as food, books and newspapers, children’s clothing, exports, new houses and public transport.
VAT registration
A business is required to register for, and charge VAT, if:
- the taxable turnover reaches or is likely to reach a set limit, known as the VAT registration threshold
- a VAT registered business has been acquired as a going concern (TOGC)
- potentially; goods or services have been purchased VAT free from non-UK countries (a self-supply)
Registration limit
The current VAT registration threshold is £90,000. If at the end of any month the value of taxable supplies made in the past twelve months is more than this figure a business MUST VAT register. A business can opt to register for VAT if its taxable turnover is less than this. Please note that taxable turnover is the amount of income received by a business and not just profit. If a business does not register at the correct time it will be fined.
Future test
Additionally, if, at any time there are reasonable grounds to expect that the value of the taxable supplies will be more than the threshold in the next thirty days alone a business must register immediately.
What are the exceptions?
VAT is not chargeable on:
- taxable supplies made by a business which is not, and is not required to be, registered for VAT
- zero rated supplies
- supplies deemed to be made outside the UK
- exempt supplies
What if a business only makes exempt or zero-rated supplies?
Exempt
If a business only makes exempt supplies, it cannot be registered for VAT. If a business is registered for VAT and makes some exempt supplies, it may not be able to reclaim all of its input tax.
Zero-rated
If a business only supplies goods or services which are zero-rated, it does not have to register for VAT, but, it may do so if it chooses – this is usually beneficial.
What is input tax and output tax?
Input tax is the VAT a business pays to its suppliers for goods and services. It is VAT on goods or services coming into a business. In most cases, input tax is the VAT that registered businesses can reclaim (offset against output tax).
Output tax is the term used to describe the VAT charged on a business’ sales of goods or services. Output tax is the VAT a business collects from its customers on each sale it makes.
A full guide to VAT jargon here
Is there anything that will make VAT simpler for a small business?
There are a number of simplified arrangements to make VAT accounting easier for small businesses. These are:
- Cash Accounting Scheme
- Annual Accounting Scheme
- Flat Rate Scheme
- Margin schemes for second-hand goods
- Global Accounting
- VAT schemes for retailers
- Tour Operators’ Margin Scheme
- Bad Debt Relief
Details may be found here and here and here.
VAT calculation
- A business adds VAT to the value of sales it makes to other businesses or customers
- The VAT amount is reached by multiplying the sale amount by the VAT rate percentage, then adding that to the value of the sale.
- The total of the VAT on sales for a VAT period is output tax
- For a VAT period, a business will total all VAT it has been charged by suppliers (eg; stock, repairs, rent, and general business expenses etc) – this is input tax.
- On the VAT return for the period, the amount payable or reclaimable to HMRC is the output tax less input tax.
Records
A business must keep complete, up-to-date records that enable it to calculate the correct amount of VAT to declare on its returns. VAT records must be kept for at least six years, because a business will need to show them to HMRC when asked.
It is acceptable for ordinary business records to be the basis for VAT accounts. A business will need records of sales and purchases (and any adjustments such as credit notes) including details of how much VAT the business charged or paid. If trading internationally, records of imports and exports/dispatches and acquisitions with all overseas territories, including the EU must be recorded. VAT records must show details of any supplies a business has given away or taken for personal use.
VAT records must also include all invoices you have received and issued. Invoice requirements here
Records will also need to include a VAT account, showing how total input tax and output tax has been calculated to include in your VAT returns.
It is vital to ensure that the VAT records are accurate. Failure to do so can lead to significant tax penalties
MTD
For certain business, the new MTD rules apply and certain software must be used. Details here
Time of supply (tax point)
It is important to establish the time VAT is due. Full details here
VAT returns
A VAT registered business must submit returns on a regular basis (usually quarterly or monthly). A VAT return summarises a business’ sales and purchases and the VAT relating to them. All the information a business requires must be in its VAT records, specifically a VAT account.
Return requirements include:
- sales total (excluding VAT)
- output tax – this also includes VAT due on any other taxable transactions, eg; barters, non-monetary consideration, goods taken for personal use
- value of purchases (excluding VAT)
- input tax claimable
- total of VAT payable/claimable
A box by box guide to returns here.
Online VAT returns are due one month and seven days after the end of the VAT period. Payment of any VAT owed is due at the same time, although HMRC will collect direct debit payments three days later.
I have to charge myself VAT?!
VAT Basics
I have to charge myself VAT? How comes?!
Well, normally, the supplier is the person who must account to the tax authorities for any VAT due on the supply. However, in certain situations, the position is reversed and it is the customer who must account for any VAT due. Don’t get caught out!
Here are just some of the situations when you have to charge yourself VAT:
Purchasing services from abroad
These will be obtained free of VAT from an overseas supplier. What is known as the ‘reverse charge’ procedure must be applied. Where the reverse charge procedure applies, the recipient of the services must act as both the supplier and the recipient of the services. On the same VAT return, the recipient must account for output tax, calculated on the full value of the supply received, and (subject to partial exemption and non-business rules) include the VAT charged as input tax. The effect of the provisions is that the reverse charge has no net cost to the recipient if he can attribute the input tax to taxable supplies and can therefore reclaim it in full. If he cannot, the effect is to put him in the same position as if had received the supply from a UK supplier rather than from one outside the UK. Thus creating a level playing field between purchasing from the UK and overseas.
Accounting for VAT and recovery of input tax.
Where the reverse charge procedure applies, the recipient of the services must act as both the supplier and the recipient of the services. On the same VAT return, the recipient must
- account for output tax, calculated on the full value of the supply received, in Box 1;
- (subject to partial exemption and non-business rules) include the VAT stated in box 1 as input tax in Box 4; and;
- include the full value of the supply in both Boxes 6 and 7.
Value of supply: The value of the deemed supply is to be taken to be the consideration in money for which the services were in fact supplied or, where the consideration did not consist or not wholly consist of money, such amount in money as is equivalent to that consideration. The consideration payable to the overseas supplier for the services excludes UK VAT but includes any taxes levied abroad.
Time of supply: The time of supply of such services is the date the supplies are paid for or, if the consideration is not in money, the last day of the VAT period in which the services are performed.
Deregistration
Any goods on hand at deregistration with a total value of over £1,000 on which input tax has been claimed are subject to a self supply. This is a similar mechanism to a reverse charge in that the goods are deemed to be supplied to the business by the business and output tax is due. However, in these circumstances it is not possible to recover any input tax on the self supply.
Flat Rate Scheme
There is a self supply of capital items on which input tax has been claimed when a business leaves the flat rate scheme (and remains VAT registered).
Domestic Reverse Charge (DRC)
The DRC makes supplies of standard or reduced rated construction services between construction or building businesses subject to the domestic DRC, which means that the recipient of the supply will be liable to account for VAT due, instead of the supplier. Consequently, the customer in the construction industry receiving the supply of construction services will be required to pay the VAT directly to HMRC rather than paying it to the supplier. It will be able to reclaim this VAT subject to the normal VAT rules. The RC will apply throughout the supply chain up to the point where the customer receiving the supply is no longer a business that makes supplies of construction services (a so-called end user, see below). More here.
Mobile telephones and computer chips
In order to counter missing trader intra-community fraud (‘MTIC’), supplies of mobile telephones and computer chips which are made by one VAT registered business to another and valued at £5,000 and over are subject to the reverse charge. This means that the purchaser rather than the seller is responsible for accounting for VAT due.
Road fuel and power for private use
When business fuel is used privately, self-supply charges apply based on HMRC’s published road fuel scale charges, applied per vehicle per quarter.
Alternatively, businesses can maintain detailed mileage records for actual business use percentage calculations.
Land and buildings…. and motor cars
There are certain circumstances where land and buildings must be treated as a self supply… but that is a whole new subject in itself… as is supplies in the motor trade.
Even if the result of a self-supply or reverse charge is VAT neutral HMRC is within its rights to assess and levy penalties and interest in cases where the charge has not been applied; which always seems unfair. However, more often than not simple accounting entries will deal with the matter…. if the circumstances are recognised and it is remembered to actually make the entries!
VAT: Error corrections – two new updates and a helpful flowchart
VAT Notice 700/45 How to correct VAT errors and make adjustments or claims has been updated. The Notice sets out how to amend a business’ VAT records if errors have been made, how to correct errors on VAT returns, and how to claim a refund if VAT declarations have been overstated. The changes are:
- information on how and when to correct VAT errors
- what happens if corrections are not made
- information about claiming input tax
- more information about how underpayments and overpayments are paid
- HMRC’s response time after receiving an error correction
- clarification of the unjust enrichment rules
- the reimbursement scheme
- how HMRC repays interest owed on overpayments
Additionally, HMRC’s guidance: Check how to tell HMRC about VAT return errors has been updated.
This guidance explains the requirements for updating a VAT return, and how to make a correction online or tell HMRC in writing about errors. The update states that it is no longer possible to correct errors on VAT returns using form VAT652.
Basically, the guidance sets out how to report errors of £10,000 or more (net of all errors). This broadly comes down to using the online service or adjusting a current VAT return.
Please see our flowchart on error reporting Error Reporting Flowchart
VAT Land & Property: Who opts to tax? – Authorised signatories
HMRC has published Public Notice 742A . Changes were made in connection to authorised signatories, in particular; corporate bodies, overseas entities and powers of attorney. It is important to establish who can sign an option to tax (OTT) form VAT1614A as getting it wrong may invalidate an OTT with potentially very expensive consequences.
A guide to the OTT here.
It seems an appropriate time to look at who can sign an OTT form. HMRC guidance states:
“The person responsible for making the decision and notifying the option to tax depends on the type of legal entity holding (or intending to hold) the interest in the land or building, and who within that entity has the authority to make decisions concerning VAT. In most cases it will be the sole proprietor, one or more partners (or trustees), a director or an authorised administrator. If you have appointed a third party to notify an option to tax on your behalf, HMRC requires written confirmation that the third party is authorised to do so.”
Some specific situations:
Beneficial owners
In cases where there is both a beneficial owner and a legal owner of land or buildings for VAT purposes it is the beneficial owner who is making the supply of the land or building. It is therefore the beneficial owner who should OTT. This may not be the case where the beneficiaries are numerous, such as unit trusts and pension funds. In these cases, the person deemed to be making the supply is the trustee who holds the legal interest and receives the immediate benefit of the consideration.
Joint owners
Joint ownership is where two entities purchase land or buildings together, or one party sells a share in property to another party. Usually, a supply may only be made by both entities together. The two entities should OTT together as a single option and register for VAT account for output tax as a single entity (usually a partnership even if it is not a partnership for any other purpose.).
Limited partnerships
Under the Limited Partnership Act 1907 every limited partnership must be registered with Companies House. A limited partnership is made up of one or more general partners, who have unlimited liability, and one or more ‘limited’ partners, who are not liable for debts and obligations of the firm. A limited partner is unable to take part in the management.
If there is only one general partner and one or more limited partners, the general partner is treated as a sole proprietor for VAT registration purposes. If there are two or more general partners and one or more limited partners, the general partners are treated as a partnership. It is the general partners who should OTT.
Limited liability partnerships (LLPs)
An LLP has separate legal status from its members and is able to enter into contracts in its own right. An LLP is a body corporate and is may register for VAT. If the partnership decides to OTT, one or more members, as the authorised signatory must sign the notification.
Authorised persons for particular legal entities
In order for an OTT to be notified effectively, it must be signed and dated by an authorised person who possesses the legal capacity to notify a decision.
List of authorised signatories
| Legal entity | Authorised persons |
| Sole trader (proprietor) | Owner of the business |
| Trust | Trustee (or partner if VAT2 is completed) |
| Partnership (UK) | Any partner (on VAT2) |
| Partnership (Scotland) | Any partner |
| Limited partnership (UK) | General partner |
| Limited partnership (Scotland) | General partner |
| Limited Liability Partnership | Designated member or member |
| Unincorporated Association | Chairperson, treasurer, trustee or company secretary |
| Limited company | Company director or company secretary |
| Community Interest Company (CIC) | Company director or company secretary |
| Charitable Incorporated Organisation | Director, chairperson, treasurer, trustee, or company secretary |
| Community Benefit Society | Chairperson, treasurer, trustee or company secretary |
| Local Authority | Section 151 officer (or Section 95 officer in Scotland), town clerk, head of finance, or treasurer |
| VAT group | Director or company secretary of the group member that owns the property |
| Government department | Nominated VAT liaison officer or finance manager (or a person senior to either) |
| Corporate body acting as a director, trustee or company secretary | Any office holder or employee authorised by the corporate body (as long as the corporate body itself has authorisation from the owner the property) |
| Overseas entity | Director or manager |
| Power of attorney | Anyone granted a power of attorney to administer or manage the tax affairs of the owner of a property |
Commentary
An invalid OTT may result in, among other things:
- Input tax recovery being barred
- A potential Transfer of a Going Concern (TOGC) becoming subject to VAT
- VAT registration being denied
- Unwanted complexity in transactions with the potential for a deal to be aborted
- Costs in unwinding the VAT position (if firefighting is possible)
- Uncertainty
- Delays in transactions
- A dispute between two sides to a transaction
- Past input tax being the subject of clawback
- The Capital Goods Scheme (CGS) being triggered resulting in VAT costs and complexity
- HMRC levying penalties and interest
It is important to get the, seemingly simple, process of OTT right, and right first time!
A VAT Did you know?
Popcorn is standard rated. DIY popcorn – corn which is popped in a microwave is VAT free. Don’t be lazy! 🍿
VAT & Import Duty
HMRC has updated its Guidance on How to claim a repayment of import duty and VAT if you have overpaid
It sets out how to check time limits and how to claim for importers, agents, freight forwarders or express operators. It also explains how to use the Customs Declaration Service or form C285 as an individual.
It covers:
- who can apply
- when to apply
- how to apply
- what you need — Customs Declaration Service
- apply online — Customs Declaration Service
- what you will need — C285 form
- apply online — C285 form
- what happens after the application
VAT: What is a TOGC? Why is it important?
Normally the sale of the assets of a VAT registered business will be subject to VAT at the appropriate rate. A TOGC, however is the sale of a business including assets which must be treated as a matter of law, as “neither a supply of goods nor a supply of services” by virtue of meeting certain conditions. It is always the seller who is responsible for applying the correct VAT treatment and will be required to support their decision.
Where the sale meets the conditions, the supply is outside the scope of VAT and therefore VAT is not chargeable.
The word ‘business’ has the meaning set out in The VAT Act 1994, section 94 and ‘going concern’ has the meaning that at the point in time to which the description applies, the business is live or operating and has all parts and features necessary to keep it in operation, as distinct from its being only an inert aggregation of assets.
TOGC Conditions
The conditions for VAT free treatment of a TOGC:
- 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
- Where the transfer includes property which is standard-rated, either because the seller has opted to tax it or because it is a ‘new’ or uncompleted commercial building the purchaser must opt to tax the property and notify this to HMRC no later than the date of the supply. This may be the date of completion or, if earlier, the date of receipt of payment or part payment (eg; a deposit). There are additional anti-avoidance requirements regarding the buyer’s option to tax
Please note that the above list has been compiled for this article from; the legislation, HMRC guidance and case law. Specific advice must be sought.
Property transfer
The sale of a property may qualify for TOGC if the above tests are met. Usually, but not exclusively, a TOGC sale is the sale of a tenanted building when the sale is with the benefit of the existing lease(s) – (the sale of a property rental business rather than of the property itself). Another example of a property TOGC is where a property under construction is sold (a development business). As may be seen, timing with a property TOGC is of utmost importance. For example, an option to tax one day late will invalidate TOGC treatment. A guide to land and property.
What purpose do the TOGC rules serve?
The TOGC provisions are intended to simplify accounting for VAT when a business changes hands. The main purposes are to:
- relieve the buyer from the burden of funding VAT on the purchase, helping businesses by improving their cash flow and avoiding the need to separately value assets which may be liable at different rates or are exempt and which have been sold as a whole
- protect government revenue by removing a charge to tax and entitlement to input tax where the output tax may not be paid to HMRC, for example, where a business charges tax, which is claimed by the new business but not paid by the selling business
What if it goes wrong?
TOGC treatment is not optional. A sale is either a TOGC or it isn’t. It is a rare situation in that the VAT treatment depends on; what the purchaser’s intentions are, what the seller is told, and what the purchaser actually does. All this being outside the seller’s control.
Add VAT when TOGC treatment applies:
Often, the TOGC point can be missed, especially in complex property transactions.
The addition of VAT is sometimes considered a “safe” VAT position. However, output tax will have been charged incorrectly, which means that when the buyer claims VAT shown on the relevant invoice, this will be disallowed. This can lead to;
- potential penalties and interest from HMRC
- the buyer having to recover the VAT payment (often the seller, having sold a business can be difficult to track down and then obtain payment from)
- significant cash flow issues (HMRC will need to be repaid the input tax claim immediately)
- if a property sale, SDLT is likely to be overpaid
Sale treated as a TOGC when it is a taxable supply:
When VAT free TOGC treatment is applied to a taxable supply (possibly as one, or more of the TOGC conditions are not met) then there is a tax underdeclaration. The seller will be assessed by HMRC and penalties and interest are likely to be levied. There is then the seller’s requirement to attempt to obtain the VAT payment from the buyer. Similarly to above, this is not always straightforward or possible and it may be that the contract prohibits additional payment. There is likely to be unexpected funding issues for the buyer if (s)he does decide to make the payment.
Considering the usually high value of sales of businesses, the VAT cost of getting it wrong can be significant.
Summary
This is a complex area of the tax and an easy issue to miss when there are a considerable number of other factors to consider when a business is sold. Extensive case law (example here and changes to HMRC policy here) insists that there is often a dichotomy between a commercial interpretation of a going concern and HMRC’s view. I sometimes find that the buyer’s intentions change such that the TOGC initially applied becomes invalid when the change in the use of assets (from what was notified to the seller) actually takes place. HMRC is not always sympathetic in these situations. One of the questions I am often asked is: “How long does the buyer have to operate the business after purchase so that TOGC treatment applies?” Unsurprisingly, there is no set answer to this and HMRC do not set a specific period. My view, and it is just my view, is that an absolute minimum time is one VAT quarter.
Contracts are important in most TOGC cases, so it really pays to review them from a VAT perspective.
I very strongly advise that specialist advice is obtained in cases where a business, or property is sold. And yes, I know I would say that!
VAT: HMRC launches new online interactive tool for compliance checks
HMRC has introduced a new interactive tool which aims to help taxpayers with compliance checks.
The new free online Interactive Compliance Guidance tool can help businesses understand HMRC compliance checks. It aims to provide information and support about compliance checks (VAT inspections).
The tool provides information to help taxpayers understand:
- HMRC compliance checks
- why HMRC has requested specific information or documents
- how to request extra support due to health or personal circumstances
- how to appoint someone to act on your behalf
- what to do if you disagree with a decision made by HMRC
- how to pay a tax assessment or penalty.
It brings together existing compliance guidance and videos in one place, making it easier to find and navigate the appropriate information.
More on VAT inspections – How do HMRC choose which businesses to visit and what is “Connect”? here.
VAT: Tax representatives and tax agents – what is the difference and why it is important
VAT Basics
A Non-Established Taxable Person (NETP) may be required to appoint a tax representative or tax agent if they make taxable supplies in the UK. The term NETP is used to describe a person who is liable to be registered for VAT under the VAT ACT 1994 Schedule 1a. A NETP must register for VAT as soon as it makes its first taxable supply in the UK, or when it expects to make taxable supplies here within the next 30 days, that is; there is no turnover limit for a NETP.
A NETP is a business which has no place of belonging in the UK. So, what is the difference between a representative and agent, and does the NETP get a choice?
Tax representative
A representative maintains the NETP’s VAT records, submits VAT returns and accounts for UK VAT on behalf of the NETP and dels with communication with HMRC. A representative is jointly and severally liable for any VAT debts incurred by the NETP.
A NETP may only appoint one person at a time to act on its behalf, although a tax representative may act for more than one NETP.
Tax agent
An agent carries out a similar role to a representative, however, the important difference is that HMRC cannot hold an agent responsible for any of NETP’s VAT debts. HMRC reserve the right not to deal with any particular agent. In some circumstances, if HMRC deem think it necessary, it will insist that a tax representative is appointed.
As long as HMRC has not directed (see below) a NETP to appoint a tax representative, it can appoint an agent to deal UK VAT affairs. Any arrangement made will be subject to whatever contractual agreement the NETP and agent decide. In some circumstances, if HMRC think it is necessary, it may still insist that a tax representative is appointed.
Distinction
The tax representative and the tax agent both act on behalf of a NETP. However, while the tax agent operates in the name of the NETP, the tax representative operates in its own name. Consequently, a tax representative is personally committed to pay HMRC and must be accredited beforehand. Contracts between representatives/agents need to be clear on this point and fees charged for this work should reflect the difference in responsibilities. Should the NETP fail to pay VAT, penalties and interest due, HMRC will collect these directly from the tax representative, so, in effect, the tax representative represents a monetary insurance for HMRC.
Direction
HMRC can direct some NETPs to appoint a tax representative who must be:
- based in the UK
- fit and proper
this is via VAT Act 1994, section 48(1).
HMRC may choose to require some form of security from a NETP whether or not there has been any direction regarding the appointment of a representative.
Not appointing a tax representative or agent
If a NETP does not wish to appoint a tax representative or agent, and HMRC has not directed them to appoint a tax representative, it must meet all its obligations under UK VAT law itself. This includes, inter alia:
- registering for VAT
- keeping comprehensive record of all transactions in relation to business in the UK
- keeping records required to complete VAT returns
- producing records to HMRC for inspection
- paying the right amount of tax on time
Post Brexit
For UK businesses making overseas supplies:
Businesses established within the EU are exempted from appointing a tax representative in other Member-States (MS) as international tax assistance is compulsory within the EU (the local tax administration can request assistance from the country of establishment to recover the money directly from the business). Since Brexit, the UK became a third country, so this rule does not apply, and MS have the choice to make the appointment of a tax representative compulsory for UK businesses. Most MS have done so, the notable exception being Germany.
New guidance for registration of a NETP here.