Category Archives: Valuation

VAT: What is consideration and why is it important?

By   18 March 2022
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VAT Basics

Consideration – background

There is no definition of consideration in legislation. The meaning was originally taken from contract law, but after the European Court of Justice ruled that the term is to be given the Community meaning and is not to be variously interpreted by Member States the UK adopted that approach.

The expression “consideration” means everything received in return for the supply of goods or the provision of services, including incidental expenses (packing, transport, insurance etc). Consideration is a payment for the supply of goods or services. It is usually a payment in money, but can also be of a “non-monetary” nature, such as goods or services supplied in return.

The phrase “in return for the supply” is interpreted to mean that there must be a direct link between the supply and the consideration.

Therefore, in order that a supply for a consideration can be made, there must be at least two parties and a written or oral agreement between them under which something is done or supplied for the consideration. There is a direct link between the supply and the consideration because the supplier expects something in return for his supply and would not fulfil his obligation unless he thought that payment would be forthcoming.

Profit

It is important to recognise that the concept of consideration and profit are wholly different, and the fact that a business makes no profit on a supply does not mean that there is no consideration for it. Whether payment yields a profit or loss is immaterial and has no bearing on whether or not it is consideration for VAT purposes. 

Importance

If consideration is not recognised, or undervalued, a business can expect HMRC assessments and penalties. Overstating consideration will result in an overpayment of tax.

if there is no consideration, there is no supply.

Consideration hallmarks

  • Consideration is defined widely to bring within the tax everything which the taxable person receives as consideration for the goods or services supplied.
  • The consideration must be capable of being expressed in money.
  • There must be some form of bargain or transaction between the parties.
  • A payment should be related to what the payer receives although the fact that people pay the same amount for varying benefits does not stop it from being consideration.

Consequently, if the provision of goods or services is incapable of being expressed in money, it is not consideration and is outside the scope of VAT.

Indicators of no consideration

  • The absence of any consensual element on the part of the payer.
  • A lack of control by the payer over the services provided.

Valuation of consideration

This may seem obvious, but as the amount of case law demonstrates, this is not always the case. The starting point is:

Monetary consideration

Monetary consideration includes cash and payment by cheque, credit card, bank transfer, contactless payment, deduction from pay, etc. This is set out in The VAT Act 1994, section 19(2).

Non-monetary consideration

Non-monetary consideration includes goods or services supplied as payment, for example in a “barter” (including part exchange) agreement. Services provided include the giving up of a right, refraining from doing something, agreeing to suffer some loss etc in return for the supply. At first sight these may appear to be merely conditions of an agreement, but are in fact consideration for a supply. If the supply is for a consideration not consisting or not wholly consisting of money, its value shall be taken to be such amount in money as, with the addition of the VAT chargeable, is equivalent to the consideration. Where a supply of any goods or services is not the only matter to which a consideration in money relates, the supply is deemed to be for such part of the consideration as is properly attributable to it.

In determining the taxable amount, the only advantages received by a supplier that are relevant are those obtained in return for making the supply should be recognised.  Non-monetary consideration has the value of the alternative monetary payment that would normally have been given for the supply.

What is not consideration

Donations

If a monetary donation is freely given, it is not consideration for any supply and so is outside the scope of VAT. In this situation, the donation has to be unconditional, and the following points dictate whether this is the case.

  • Does the donor receive anything in return for the payment?
  • Are there any conditions attached to the payment?
  • What will the payments be used for?
  • If the donor does not benefit directly, does any third party receive a benefit?
  • Is there a contract and what are the terms and conditions?

Donations must be contrasted to sponsorship.

It is necessary to distinguish between donations and sponsorship payments. Whereas a donation means the donor does not expect anything in return, sponsorship involves the sponsor receiving identifiable benefits. These benefits may include advertising, publicity or use of facilities and any sponsorship payment is within the scope of VAT.

Open Market Value

The VAT Act 1994, section 19 (5) states that “…the open market value of a supply of goods or services shall be taken to be the amount that would fall to be taken as its value …if the supply were for such consideration in money as would be payable by a person standing in no such relationship with any person as would affect that consideration”.

Difficult areas

Commonly, areas which give rise to VAT consideration problems include, but are not limited to:

  • when consideration is provided in return for supplies of differing VAT liabilities
  • Special Valuation Provisions in The VAT Act 1994, Schedule 6
  • supplies to staff or goods for own use
  • discounts and special offers (eg; persons providing selling or introductory services to traders who receive goods for a reduced cash payment, or BOGOF)
  • barter transactions – when each supply has a different value
  • part-exchange
  • apportionment of monetary consideration
  • separate/composite supplies
  • supplies between connected parties
  • direct selling structures
  • gifts, prizes, and reward goods.
  • imports
  • prompt payment discounts
  • deemed supplies
  • non-business use of business assets or of services supplied to a business
  • reverse charges
  • reduced rate accommodation
  • supplies expressed in foreign currencies
  • transfer pricing
  • business gifts/samples
  • caravans sold with contents
  • self supplies
  • club membership benefits
  • correspondence courses
  • opticians and hearing aid dispensers (exempt services vs standard rated goods)
  • rebates/refunds
  • disbursements
  • tour operators (TOMS)
  • partial exemption

Further reading

For purposes of research or interest, the following cases on consideration are worth reading:

Staatssecretaries van Financien v Cooperatieve Aardapplenbewarr-plaats ((1981) ECR 445; (1981) – The Dutch Potato case for ease!

BAZ Bausystem Gmbh v Finanzamt Munchen Fur Korperschaften

Apple & Pear Development Council (APDC), (ECJ (1988) STC 221; (1988)2 CMLR 394)

Tolsma C-16/93 (1994 STC 509)

Naturally Yours Cosmetics Ltd

Empire Stores Ltd



VAT: Bad Debt Relief. The Regency Factors case

By   7 February 2022
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Latest from the courts

In the Regency Factors plc Court Of Appeal (CoA) case the issue was the validity of the appellant’s claim for Bad Debt Relief (BDR) on amounts it had not received after the issue of an invoice.

Technical

BDR is a mechanism which goes some way to protect a business from payment defaulters. Under the normal rules of VAT, a supplier is required to account for output tax, even if the supply has not been paid for (however, the use of cash accounting or certain retail schemes removes the problem of VAT on bad debts from the supplier). The specific relief for unpaid VAT is via the BDR scheme.

A guide to BDR here.

Commentary on the Upper Tribunal (UT) hearing in this case here.

Background

In the CoA case the issue was whether the appellant met the conditions in The VAT General Regulations 1995, Reg 168 for claiming BDR via The VAT Act 1994, section 36.

Regency provided a factoring service to its clients for which it is paid a fee. VAT invoices for those fees were issued to clients when the invoices which are being factored are assigned to Regency for collection.

Regency appealed against a decision of the Upper Tribunal (UT) which dismissed Regency’s appeal against VAT assessments made by HMRC to withdraw BDR which Regency had claimed in its VAT returns.

The UT held that the BDR claim was not valid because

  • there was no bad debt; and
  • Regency had failed to comply with the procedural requirements for the making of a claim. 

Regency appealed against the decision of the UT on the second point.

Decision

The CoA decided that as Regency’s record keeping was insufficient to support a BDR claim. Specifically, although it did keep the records required by Regulation 168 (2), it did not keep a single VAT BDR account which is required by Regulation 168 (3). The ruling commented that this requirement was a legitimate feature of the scheme as it enables an inspector to check the claim easily. It is not acceptable for a claimant to simply have a pile of unsorted documents which may, or may not, evidence a valid claim.

The court also said that it was possible for HMRC to allow a discretionary claim (clearly, they did not use that discretion in this case) and that the legal requirement was not a barrier to Regency making a proper BDR claim. The appeal was dismissed.

“In short, Regency had the opportunity to prove its claim for bad debt relief in the FTT… but it failed to do so. It is not entitled to a second opportunity”.

Commentary

As always with VAT, accurate record-keeping is essential. As the tax is transaction based, it is vital to keep comprehensive evidence of those transactions and associated payments. Failure to do so may result in:

  • assessments and penalties
  • give HMRC the opportunity to refuse otherwise legitimate input tax recovery
  • refuse other VAT claims (in this case BDR).
  • confusion and uncertainty which often creates costs in time and other resources, and extended relations with HMRC, which is in no business’ interest.

If Regency had taken “one step further” with its record keeping, BDR would have been paid by HMRC.

VAT: Valuation

By   15 November 2021
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Further to my article on apportionment valuation and case review here and Transfer Pricing valuation I thought it useful to consider HMRC’s internal guidance on its approach to valuation.

Sometimes a single monetary consideration may represent payment for two or more supplies at different VAT rates. In such cases, a business is required to allocate a “fair proportion” of the total payment to each of the supplies. This requirement is set out at in The VAT Act 1994, Section 19(4).

“Where a supply of any goods or services is not the only matter to which a consideration in money relates, the supply shall be deemed to be for such part of the consideration as is properly attributable to it.”

Although this section requires an apportionment of the consideration to be performed, it does not prescribe the methods by which this is to be achieved. The most common methods are based upon the costs incurred in making the supplies or the usual selling prices of the supplies.

Examples of methods that have been found to be of general application are contained in VAT Notice 700 para 8. A business is not obliged to adopt any of these suggested methods, and HMRC may accept alternative proposals provided that they achieve a fair and reasonable result that can be supported by valid calculation.

Some sectors have special methods called margin schemes to determine apportionment of the monetary consideration. Details of these found in their notices and guidance. The schemes include:


Basics

Before it is possible to perform an apportionment calculation, there are four basic questions that need to be addressed to determine whether an apportionment is appropriate and if so, what supplies it relates to.

  1. Is there more than one supply?
  2. Is there a single consideration?
  3. Can any part of the payment be treated as outside the scope of VAT?
  4. What are the liabilities of the supplies in question?

The issue of whether there is a single or multiple supply has created problems from the outset of the tax.  The volume of case law illustrates that each decision is based on the facts of each case and there cannot be a one-size fits all approach to this issue. The most important and recent cases are here:

Card Protection Plan Ltd 

Stocks Fly Fishery

Metropolitan International Schools

The Ice Rink Company Ltd 

General Healthcare Group Limited

VAT: Farm in business? The Babylon case

By   21 September 2021
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Latest from the courts

In the Upper Tribunal (UT) case of Babylon Farm Ltd (the farm) the issue was whether the appellant was in business and consequently was able to recover certain input tax.

Background

Yet another case on whether there was any business activity in a company. Please see here, here, here and here for previous cases on this issue. The farm sold hay which it cut from another person’s fields to a connected party. The value of the one-off annual sale was £440 pa. The appellant also contended that it was also undertaking preparatory acts for the new business activities and that it would be able to levy management charges. Another new business activity was the creation of an investment and insurance product.

The farm built a new barn on which it claimed input tax of £19,760.

HMRC considered that no business was being carried on and decided to deregister the farm thus refusing to pay the input tax claim. The farm challenged this decision and contended that taxable supplies were being made, and there was also an intention to make taxable supplies in the future.

Legislation

Paragraph 9 of Schedule 1 of the VAT Act 1994 requires HMRC to be satisfied that a person is either making taxable supplies or is carrying on a business and intends to make such supplies in the course or furtherance of a business in order to be registered for VAT. There are a number of tests set out in case law (mainly The Lord Fisher case) to establish whether a person is in business:

  1. Is the activity a serious undertaking earnestly pursued?
  2. Is the activity an occupation or function, which is actively pursued with reasonable or recognisable continuity?
  3. Does the activity have a certain measure of substance in terms of the quarterly or annual value of taxable supplies made?
  4. Is the activity conducted in a regular manner and on sound and recognised business principles?
  5. Is the activity predominantly concerned with the making of taxable supplies for a consideration?
  6. Are the taxable supplies that are being made of a kind which, subject to differences of detail, are commonly made by those who seek to profit from them?

Decision

The appeal was dismissed. The farm was not in business and could not recover input tax on the costs of the new barn.

The judge stated that he could see no legal basis for the farm to be in business. The hay that the farm sold was taken from the customer’s own land and therefore belonged to him already. It was also noted that no invoices were raised, no payment for the hay had been made for a number of years and the single customer was a director of Babylon Farm Limited so the farm was not operating in an open market. The sale of hay had not been conducted on a basis that followed sound and recognised business principles or on a basis that was predominantly concerned with the making of taxable supplies for consideration. As a consequence, the farm was not operating as a business during the relevant period.

On the intention point; neither of the intended activities had yet resulted in any chargeable services being provided and both were to be carried on through companies that had been formed for these purposes (not the farm). Both businesses remained at a formative stage and neither company has generated any revenue. This was insufficient to retain the VAT registration.

Commentary

The decision was hardly a surprise and one wonders how it reached the UT. HMRC were always going to challenge an input tax claim of that quantum with no output tax (and such a low value of sales which may not have been made in any event).

New VAT rate for hospitality

By   13 August 2021
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A reminder that a new VAT rate of 12.5% comes into force on 1 October 2021.

This is the first time this rate has been used and affected businesses should ensure that they are prepared.

The government announced on 8 July 2020 that it intended to legislate to apply a temporary 5% reduced rate of VAT to certain supplies relating to certain hospitality, supplies.

The reduced rate was initially introduced to last for a temporary period between 15 July 2020 and 12 January 2021. This period was subsequently extended to 31 March 2021.

The government then announced at Budget 2021 that the temporary reduced rate will be extended for a further six-month period at 5% until 30 September 2021.

A new reduced rate of 12.5% will then be introduced which will end on 31 March 2022. The scope of the relief will remain unchanged.

From 1 April 2022 the usual 20% standard rate will apply, unless there are further government concessions.

The 12.5% applies to

  • hospitality: supplies in the course of catering including supplies of hot and cold food and drink to be consumed on the premises and supplies of hot takeaway food and drink to be consumed off the premises
  • accommodation: the provision of hotel and holiday accommodation, pitch fees for caravan parks and tents and related facilities
  • attractions: admission to attractions not covered by the cultural exemption.

The VAT Fractions

This is used to calculate the VAT element of a VAT inclusive figure.

5% = 1/21

12.5% = 1/9

20% = 1/6

Deposits

If a deposit is received, output tax will be calculated on the VAT rate in place at the time the deposit is received.

Other Issues

If a business supplies hospitality services and goods, but also makes sales not covered by the new rate, eg; alcohol, it must be able to identify the values at the different rates.

Does your accounting package have a defined 12.5% tax rate? It may be necessary to add this new rate to your software package.

VAT: Input tax recovery – whether a taxable supply. The Door Specialist case

By   9 June 2021
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Latest from the courts

In the First Tier Tribunal case of The Door Specialist Limited (TDSL) the issue was whether an HMRC assessment for overclaimed input tax was correct.

Background

The appellant recovered input tax on the import of goods (doors). The company did not sell the doors, but simply gave the goods (no consideration provided) to a separate company called Just Doors (JD).  It was JD who made the sales of the doors to third party customers.  TDSL and JD were under common ownership but no VAT group in place at the relevant time. TDSL was VAT registered as it made separate, unrelated taxable supplies of property rental

Arguments

HMRC contended that as there was no onward taxable supply of the doors by TDSL, no input tax was recoverable per The VAT Act 1994 section 24 (1). TDSL relied on HMRC’s published guidance (Notices 700 and 700/7) in relation to gifts and proposed that it would be proper to assess for output tax on the “supply” to JD rather than denying the input tax claim.  

Issues

The issues may therefore be summarised as whether;

  • the relevant goods were used for the purpose of any economic activity by TDSL
  • the doors could be treated as business gifts as contended by the applicant such that the input tax was recoverable.

Further cases on economic activity/business here, here and here

Decision

It was decided that as there was no direct and immediate link between the purchase of the goods and any onward taxable supply in the course of business or economic activity by TDSL (as required by the outcome of the cases of BAA Ltd JDI International Leasing Ltd) the disallowance of the input tax was appropriate. The advancement of the business gifts contention did not assist the taxpayer as this was not an economic activity in itself. The appeal was therefore dismissed.

 Commentary

A clear example of not considering the VAT implications when carrying out transactions. This tax cost could have easily been avoided if TDSL had sold the doors to JD. As both parties were fully taxable, there would have been no VAT hit. Business gifts and promotional activities are also often a complex area of VAT and as one former colleague once remarked “If you have a marketing department you have a VAT issue”.

VAT: What is open market value? The Jupiter case

By   11 May 2021
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Latest from the courts

In the First Tier tribunal (FTT) case of Jupiter Asset Management Group Ltd the issue was the value of management services to an associated third party VAT group.

Background

The value is important because if HMRC believe that a supply between two connected parties (as defined by The Income and Corporation Taxes Act 1988 Section 839) is undervalue and the recipient cannot recover the relevant input tax in full, it is permitted via The VAT Act 1994, Schedule 6, PART 2, para 1 (1) to substitute open market value (OMV) by way of a Notice.

This paragraph is specifically intended to counter tax avoidance. If a supply between connected persons is made below open market value for a legitimate reason that the trader can substantiate, and which is unconnected with avoidance HMRC has the discretion not to issue a Notice. In Jupiter, HMRC directed that OMV be used to calculate the charge as it considered that value was too low and issued an assessment for underdeclared output tax.

Decision

In the absence of comparable supplies, OMV was to be determined by reference to:

  • the full cost of making the supplies;
  • the full cost included the costs incurred on goods and services used in making the supplies and general overhead costs the input tax in respect of which had been recovered
  • the remuneration paid to the executive directors to the extent that that remuneration related to activities performed by the executive directors in making the supplies of the management services

Consequently, the appeal against the output tax assessment was dismissed.

Commentary

An expected outcome, but ne which emphasises that care should be taken with transactions between connected parties, management charges and inter-company charges in general. This is even more relevant since the decision in the Norseman Gold plc case

VAT: Treatment of transactions involving cryptoassets. New guidance

By   8 April 2021
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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: Uber Supreme Court case

By   23 February 2021
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Latest from the courts

As many would have heard, the Supreme Court has ruled that individuals driving taxis are “workers” rather than third party contractors. Although not a VAT case, it has This decision has highlighted a number of VAT issues.

Agent versus principal

The main matter in VAT terms is; which party is making the supply? This is often a point of dispute with HMRC, especially with taxi businesses, driving schools, the operation of online platforms, travel and accommodation, and many other types of businesses. It is one of the most common areas of disagreement as many cases have demonstrated, eg; here, here, here, and here.

The difference

VAT legislation does not define agency for the purposes of the tax.

As is often the case in these types of arrangements, there are some matters that point towards a business acting as agent, and others indicating that the proper VAT treatment is that of principal. The important difference, of course, being whether output tax is due on the “commission” received by an agent (20% in Uber’s case), or on the full payment made to it by the end user.

Uber contended that the drivers were independent contractors who work under contracts made directly with the customers and are not employees. Thus, they (Uber) acted as agent. One main argument advanced by them was that the drivers were free to work for other businesses (although in reality this was very unlikely due to the market share held by Uber).

Contract

It also demonstrates both the importance of a contract (or lack of one in Uber’s case), and how all parties act in relation to it. There have been many VAT cases on how much weight should be given to a written agreement versus what the relevant parties actually agree, how they act, how the services are performed and what the customer thinks is the position (who [s]he thinks is providing the service).

Decision

Finding that the drivers work for, and under contracts with, Uber, the following aspects supported its decision – Uber sets the fare, the terms are set by Uber and drivers have no input, Uber restricts communications between driver and passenger, and Uber exercises significant control over the way in which the services are delivered.

Update

A similar decision has been made in the Dutch courts in the Deliveroo case.

Next steps

Commentary

We wait to hear how HMRC will proceed as a result of this case. There is a chance that it may attack taxi firms which they have previously accepted as agent on the grounds that they are principals – providing the service via their ‘employees/workers” and so assessing output tax on the full value of the fare paid.

VAT – Disbursements Q & As

By   22 February 2021
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Disbursements

A very common query regarding VAT is “I pass on charges incurred on behalf of my client/customer – do I add VAT?”  In other words, does the payment qualify as a disbursement?

Does it matter if the original supply has VAT on it?

Yes. Whether a payment is a disbursement is only a practical issue if the charge involved is initially VAT free since, if it were VATable, there would be no benefit to the final customer in passing the charge on “in the same state”.  The points below assume that the charge in question is VAT free, eg; statutory fees (land registry, stamp duty, search fees, MOTs etc) insurance, financial products etc although benefits may also be obtained if the original supply is reduced rated.

So only if a supply is a disbursement can I pass it on in the “same state; ie; VAT free?

Yes

So when can I pass on a payment VAT free? 

A disbursement is passed on without any alteration (eg; not marked up or changed in any way) and the supply must be to the final customer by the original provider.  If the supply is VAT free then the recovery of the costs is also VAT free.  The passing on of the payment from the final customer to the supplier is done as agent.  Therefore, in these circumstances, a supplier may be acting as principal for part of a supply, and agent for another part.  The disbursement should not appear on the “agent’s” VAT return.

When do I have to add VAT onto a supply which is originally VAT free?

When the onward supply is not a disbursement.

A distinction must be drawn between a necessary cost component of a supplier making a supply and a disbursement.  An example is zero-rated travel.  A supplier may incur a train fare in providing his service, but that is a cost component for him and not a disbursement, so VAT would be added to any onward charge.  It is clear that the supplier is not actually supplying train travel to his customer, but is consuming the cost in providing his overall VATable service.

What are the rules for treating a payment as a disbursement?

The following criteria must be met by a supplier to establish whether it qualifies as a disbursement:

  • you acted as the agent of your client when you paid the third party
  • your client actually received and used the goods or services provided by the third party
  • your client was responsible for paying the third party
  • your client authorised you to make the payment on their behalf
  • your client knew that the goods or services you paid for would be provided by a third party
  • your outlay will be separately itemised when you invoice your client
  • you recover only the exact amount which you paid to the third party, and
  • the goods or services, which you paid for, are clearly additional to the supplies which you make to your client on your own account.

What if I get it wrong?

If you add VAT to a properly VAT free disbursement HMRC will treat the amount shown on the invoice as VAT.  However, it will not permit the recipient of the supply to recover input tax (as it is not VAT) thus creating an actual VAT cost. if you treat a supply as a VAT free disbursement when it actually forms part of your taxable supply, HMRC will issue and assessment and potentially penalties and interest.  Unfortunately, I have seen this course of action taken a number of times and the amounts of VAT involved were significant.

Please contact us if you have any queries on this matter.  Sometimes the matter is less than straightforward and getting it wrong can be very expensive for a business. If you have been charged VAT on what you believe to be a VAT free disbursement, it may also be worth challenging your supplier.

The latest case law on disbursements here Brabners LLP