Category Archives: Small Businesses

VAT Single and Multiple Supplies

By Marcus Ward 11 May 2021

Accounting for VAT can be problematic when the supply of goods and services consist of multiple components. In such cases it is necessary to consider whether each component of the supply should be assessed independently or whether the components should be dealt with as one.

Precise treatment is not specifically addressed in UK or European Law and instead a decision is made based upon a review of the essential features of the transaction. For instance, a meal on an airplane is a normal feature of the zero rated travel provided and is not considered a separate standard rated supply to the travel itself. Conversely a meal on a river cruise is a separate supply to that of the zero rated cruise itself and as such is a separate standard rated supply.

A single price is not therefore a decisive indicator of a single supply. Instead what needs to be considered is whether there is just one principal supply or several distinct independent supplies that are provided.

Through the development of case law and HMRC guidance the following situations have been clarified. I have written about the most important, recent cases here, here, here, here and here.

The 50% rule

If a distinct supply represents 50% or more of the overall cost it can not be considered ancillary to the principal supply. In such cases an apportionment will usually be required.

Postal charges

VAT on postage follows the treatment of VAT on the main supply. For example, for mail order items the postage on book is zero rated, whereas the postage on a printer is standard rated.

There are however situations where postage is treated as a separate supply to the goods if, for example, the postage is not expected and is an additional request by the customer.

Subscriptions

If there is one particular reason for the subscription then the fee is considered to be one single supply. If there are separate reasons for the subscription then the fee should be proportioned accordingly and the appropriate VAT treatment should be applied to each element of the supply.

Printed matter

Usually books, newspapers, magazines and music are zero rated whilst items seen as stationery such as membership cards and notebooks are standard rated. For materials supplied with items that can be used independently then there are two supplies, for example a film supplied with a magazine.

A package test can also be applied, where if there are more zero rated items then standard rated items the entire package becomes zero rated, or vice versa.

Two part tariffs

If there are two payments relating to a single supply, the two payments are treated as one and the VAT treatment follows that of the one supply.

Supplies involving land

Services provided on land tend to be viewed as one complete supply. The land aspect is not usually a separate service that the customer receives and instead allows the main service to be provided.

One instance where this may not apply is service charges, which may need to be apportioned if they contain independent supplies such as rent and cleaning. Independent supplies are made if the customer can choose which of the services they would like.

Summary

Card Protection Plan Ltd has become a landmark case in determining the VAT treatment for single and multiple supplies. In this case the ECJ ruled that standard rated handling charges were not distinct from the supply of exempt insurance. It was noted that ‘a supply that comprises a single service from an economic point of view should not be artificially split’. Notably many subsequent court decisions have since followed this outcome thereby suggesting a general lean towards viewing cases as single supplies where there are reasonable grounds to do so.

VAT: New Road Fuel Scale Charges

By Marcus Ward 7 May 2021

HMRC has updated the valuation table: Road Fuel Scale Charges (RFSC) from 1 May 2021 to 30 April 2022 here.

RFSC

If a business reclaims VAT incurred on road fuel, it will be required recognise the private use element of the fuel.

The RFSC simplifies accounting for VAT on the private use of fuel by motorists. The RFSC is calculated according to a car’s CO2 emissions and the fixed charge is added to output VAT, on the VAT return (in effect, the business supplies to fuel to the individual). The use of this charge is optional, the alternative is to keep detailed mileage records.

A quick RFSC calculator/ready-reckoner is here.

A VAT did you know?

By Marcus Ward 29 April 2021

Wigs for teddy bears are subject to duty, but in a recent Upper Tribunal case it was ruled that ‘realistic” hearts used for a Build-A-Bear toy are duty free.

New rules of origin for goods

By Marcus Ward 27 April 2021

Brexit update

HMRC has published updated, detailed guidance for the rules of origin for goods moving between the UK and EU.

It is important to understand the impact of the rules and how they impact a business. Specifically, to ensure advantage is taken of zero tariffs when dealing with cross-border goods. The rules apply to both imports and exports and clearly, incurring unnecessary tariffs is to be avoided if possible.

Background

The UK moved to trading based on a new Free Trade Agreement (FTA) – the Trade and Cooperation Agreement (TCA) between the UK and the EU post-Brexit.

To export tariff-free under the TCA, goods must meet the UK-EU preferential rules of origin. This means that there must be a qualifying level of processing in the country of export to access zero tariffs. This applies to EU origin goods imported and moving through the UK from a Member State to another EU Member State, as well as goods imported from the Rest of World.

These rules are set out in the TCA and determine the origin of goods based on where the products or materials (or inputs) used in their production come from. Their purpose is to ensure that preferential tariffs are only given to goods that originate in the UK or EU and not from third countries.

VAT: Is a car wash a car park? The RK Fuels Ltd case

By Marcus Ward 26 April 2021

Latest from the courts

New EC VAT rate database

By Marcus Ward 8 April 2021

The European Commission has issued a new tool which enables businesses to check on the VAT rate for specific supplies. It is based on commodity codes but there are drop down menus for detailed descriptions. The tool covers both goods and services. There are both a simple and advanced search functions and the database also covers other taxes:

Personal Income Tax
Corporate Tax
Other Direct Taxes
Alcohol
Energy Products
Real Estate
Tobacco
Social Security Contributions

VAT: Treatment of transactions involving cryptoassets. New guidance

By Marcus Ward 8 April 2021

Further to my articles on cryptoassets and Bitcoin HMRC have published an updated Cryptoassets Manual CRYPTO40000 which sets out its interpretation of trading in cryptocurrencies.

It covers:

economic activity
supplies of tokens
exchanges
exemption
value
case law
betting and gaming
other taxes; CGT, CT, CTCG, Income Tax, NIC and Stamp Taxes

Any business dealing in any way with cryptoassets needs to understand the VAT and other tax implications of services to, and by it.

VAT – Top 10 Tax Point Planning Tips

By Marcus Ward 25 March 2021

VAT Tax Point Planning

If a business cannot avoid paying VAT to the HMRC, the next best thing is to defer payment as long as legitimately possible. There are a number of ways this may be done, dependent upon a business’ circumstances, but the following general points are worth considering for any VAT registered entity.

A tax point (time of supply) is the time a supply is “crystallised” and the VAT becomes due to HMRC and dictates the VAT return period in which VAT must be accounted for. Very broadly, this is the earliest of; invoice date, receipt of payment, goods transferred or services completed (although there are quite a few fiddly bits to these basic rules as set out in the link above).

The aims of tax point planning

1. Deferring a supplier’s tax point where possible. It is sometimes possible to avoid one of these events or defer a tax point by the careful timing of the issue of a tax invoice.

2. Timing of a tax point to benefit both parties to a transaction wherever possible. Because businesses have different VAT “staggers” (their VAT quarter dates may not be the co-terminus) judicious timing may mean that the recipient business is able to recover input tax before the supplier needs to account for output tax. This is often important in large or one-off transactions, eg; a property sale.

3. Applying the cash accounting scheme. Output tax is usually due on invoice date, but under the cash accounting scheme VAT is only due when a payment is received. Not only does this mean that a cash accounting business may delay paying over VAT, but there is also built in VAT bad debt relief. A business may use cash accounting if its estimated VAT taxable turnover during the next tax year is not more than £1.35 million.

4. Using specific documentation to avoid creating tax points for certain supplies. If a business supplies ongoing services (called continuous services – where there is no identifiable completion of those services) if the issue of a tax invoice is avoided, VAT will only be due when payment is received (or the service finally ends). More details here.

5. Correctly identifying the nature of a supply to benefit from certain tax point rules. There are special tax point rules for specific types of supplies of goods and services. Correctly recognising these rules may benefit a business, or present an opportunity for VAT planning.

6. Generate output tax as early as possible in a VAT period, and incur input tax as late as possible. This will give a business use of VAT money for up to four months before it needs to be paid over, and of course, the earlier a claim for repayment of input tax can be made – the better for cashflow.

7. Planning for VAT rate changes. Rate changes are usually announced in advance of the change taking place. There are specific rules concerning what cannot be done, but there are options to consider when VAT rates go up or down.

8. Ensure that a business does not incur penalties for errors by applying the tax point rules correctly. Right tax, right time; the best VAT motto! Avoiding penalties for declaring VAT late is obviously a saving.

9. Certain deposits create tax points, while other types of deposit do not. It is important to recognise the different types of deposits and whether a tax point has been triggered by receipt of one. Also VAT planning may be available to avoid a tax point being created, or deferring one.

10. And finally, use duty deferment for imports. As the name suggests, this defers duty and VAT to avoid it having to be paid up front at the time of import.

Always consider discussing VAT timing planning for your specific circumstances with your adviser. It should always be remembered that it is usually not possible to apply retrospective VAT planning as VAT is time sensitive, and never more so than tax point planning.

I have advised a lot of clients on how to structure their systems to create the best VAT tax point position. Any business may benefit, but I’ve found that those with the most to gain are; professional firms, building contractors, tour operators, hotels, hirers of goods and IT/internet businesses.

VAT: Certificate of Status

By Marcus Ward 16 March 2021

Claiming VAT in another country

If a UK business wishes to claim VAT incurred in a country outside the UK it will need a Certificate of Status (a “Certificate of Status of Taxable Person”). This certificate, known as a VAT66A, may be obtained from HMRC and certifies that an entity is in business (engaged in an economic activity).

Changes from 8 March 2021

HMRC has announced HMRC changes to the way it issues VAT66As to UK businesses. From 8 March 2021, HMRC will send the certificate by email. A small, but helpful nod to 21^st Century technology. A business must first complete an informed consent form before HMRC will correspond by email. The VAT66A only lasts for 12 months, so it is prudent to set a reminder to renew.

However, and there is usually a however, some countries require a “wet stamped” document to support a claim, in which case, HMRC will continue to issue these by post. It makes sense to check what actual documentation each country in which a claim is made requires, as it does vary. It is usually also necessary to make a claim in the language of the country in which the VAT was incurred.

Who can request a certificate of status?

The authorised persons (director or secretary) of the businesses which is registered in the UK for VAT, or an agent which has a letter of authority from a UK VAT-registered business – form 64-8 to act on its behalf.

Requesting a certificate

Send an email to vat66@hmrc.gov.uk with “VAT certificate of status request” in the subject line and the following information:

business name
VAT registration number
business address
applicant’s name and role in the business
contact telephone number
the country (or countries) where the VAT refund claim is being made
number of certificates required (one for each country in which a claim is to be made)
if the certificate should be sent to you by post or by email

Agent application

Write ‘VAT certificate of status – agent request’ in the subject line of the email, and provide the following information:

agent’s name
agent’s business address
the name of the business to which the certificate relates
an attachment with a letter of authority from an authorised signatory of the business you are requesting a certificate for – a list of authorised signatories here; VAT Notice 742A
VAT registration number of the business
business address
the country (or countries) where the VAT refund claim is being made
the number of certificates required
if the certificate should be sent by post or by email to you or the business you are requesting a certificate for

HMRC say that a certificate will be sent within 15 working days of an application.

Oh for the days of a single electronic application to HMRC which covered all 27 Member States…

VAT: Changes to late returns and payments penalties announced

By Marcus Ward 8 March 2021

HMRC have announced changes to the penalties applied to failure to submit VAT returns on time. Similar changes will be made for late payment penalties. it is anticipated that these changes will apply from 1 April 2022. Changes will also be made to the way interest is charged.

The new penalty regime replaces the existing default surcharges. The new penalties use a points based system . Businesses will no longer receive an automatic financial penalty if they make a late return. Instead, it will incur penalty points for missed obligations before a financial penalty is levied.

Penalties for late submission of returns

VAT registered businesses will receive a point every time they miss a submission deadline. At a certain threshold of points, a financial penalty of £200 will be charged and the business will be notified. A penalty will be charged for that failure and every subsequent failure to make a submission on time, but the points total will not increase.

The penalty thresholds will be:

Annual returns – 2 points
Quarterly returns – 4 points
Monthly returns – 5 points

Points expiry

Points will have a lifetime of two years calculated from the month after the month in which the failure occurred.

However, points will not expire when a business is at the penalty threshold to ensure an achievement of a period of compliance to reset the points.

Penalties for late payment and interest harmonisation

The new Late Payment Penalties regime will replace the the Default Surcharge, which served as a combined late submission and late payment sanction.

There are two late payment penalties applicable; a first penalty and then an additional or second penalty, with an annualised penalty rate.

First Penalty

A business will not incur a penalty if the outstanding tax is paid within the first 15 days after the due date. If VAT remains unpaid after Day 15, the business incurs the first penalty. This penalty is set at 2% of the tax outstanding after Day 15. If any of this tax is still unpaid after Day 30, the penalty increases to 4% of the tax outstanding after Day 30.

Second Penalty

If tax remains unpaid on Day 31, a business will begin to incur an additional penalty on the VAT that remains outstanding. It accrues on a daily basis, at a rate of 4% per annum on the outstanding amount. This additional penalty will stop accruing when the taxpayer pays the tax that is due.

Time-to-Pay arrangements

HMRC offers the option of requesting a Time To Pay arrangement. This will enable a business to stop a penalty from accruing any further by approaching HMRC and agreeing a schedule for paying their outstanding tax.

Interest Harmonisation

HMRC will charge interest on tax that is outstanding after the due date, regardless of whether any Late Payment Penalties have been charged. Interest will apply from the date the payment was due until the date on which it is paid. It will be calculated as simple interest at a rate of 2.5% + the Bank of England base rate.

Where a business has overpaid tax, HMRC will pay Repayment Interest on any VAT due to be repaid either from the last day the payment was due to be received or the day it was received, whichever is later, until the date of repayment. Interest will be paid at the Bank of England base rate less 1% (with a minimum rate of 0.5%).

Reviews and appeals

Businesses will be able to challenge a point or penalty through both an internal HMRC review process and an appeal to the courts (in a similar way to assessments for VAT are challengeable).

More on late returns here and on late payments here.