Category Archives: VAT Claim

VAT Registration

By Marcus Ward 4 January 2022

VAT Basics

A business must register for VAT with HMRC if its VAT taxable turnover is more than £90,000 in a 12 month period.

Taxable Turnover

Taxable turnover means the total value of everything that a business sells that is not exempt or outside the scope of VAT.

Registration is mandatory if turnover exceeds the current registration threshold in a rolling 12-month period. This is not a fixed period like the tax year or the calendar year – at the end of every month a business is required to calculate income (not profit) over the past year.

A business may also register voluntarily, which may be beneficial if it wants to reclaim input tax it has incurred.

Catches

There are some transactions that must be included in the turnover calculation which can easily be missed:

goods a business hired or loaned to customers

business goods used for personal reasons

goods which were bartered, part-exchanged or given as gifts

services a business receives from suppliers in other countries which are subject to a reverse charge

building work over £100,000 a business did for itself

zero-rated items (these are still taxable although no VAT is charged)

Timing

A business must register within 30 days of the end of the month when it exceeded the threshold. The effective date of registration (EDR) is the first day of the second month after a business goes over the threshold.

Future test

A business must mandatorily register for VAT if it expects its VAT taxable turnover to be more than £90,000 in the next 30-day period. This may be because of a new contract or a other known factors.

Registration exception

If a business has a one-off increase in income it can apply for a registration ‘exception’. If its taxable turnover goes over the threshold temporarily it can write to HMRC with evidence showing why the taxable turnover will not exceed the deregistration threshold (currently £88,000 in the next 12 months). HMRC will consider an exception and write confirming if a business will receive one. If not, HMRC will compulsory register the business for VAT.

Transfer of a going concern (TOGC)

If a VAT-registered ongoing business is purchased the buyer must register for VAT from the purchase date. It cannot wait until its turnover exceeds the threshold.

Businesses outside the UK

If a business belongs outside the UK, there is a zero threshold. It must register as soon as it supplies any goods and services to the UK (or if it expects to in the next 30 days).

Late registration

If a business registers late, it must pay the VAT due from when it should have registered (the EDR). Further, it will receive a penalty depending on how much it owes and how late the registration is. The rates based on the VAT due are:

up to 9 months late – 5%
between 9 and 18 months – 10%
over 18 months = 15%.

How to register

A business can register online. By doing this it will register for VAT and create a VAT online account via which it will submit VAT returns.

Between application and receiving a VAT number

During the wait, a business cannot charge or show VAT on its invoices until it receives a VAT number. However, it will still be required to pay the VAT to HMRC for this period. Usually, a business will increase its prices to allow for this and tell its customers why. Once a VAT number is received, the business can then reissue the invoices showing the VAT.

Purchases made before registration

There are time limits for backdating claims for input tax incurred before registration. These are:

four years for goods still on hand at the EDR
six months for services

Once registered

A business’ VAT responsibilities. From the EDR a business must:

charge the right amount of VAT
pay any VAT due to HMRC
submit VAT Returns
keep appropriate VAT records and a VAT account
follow the rules for ‘Making Tax Digital for VAT’
keep business details up to date (there are penalties for failing to inform HMRC of changes)

VAT groups

VAT grouping is a facilitation measure by which two or more entities can be treated as a single taxable person (a single VAT registration). There are pros and cons of grouping set out here.

VAT: Input tax recovery. The Mpala Mufwankolo case

By Marcus Ward 15 November 2021

Latest from the courts

In the First Tier Tribunal (FTT) case of Mr Mufwankolo the dispute was whether the appellant was able to recover VAT charged by the landlord of the property from which he ran his business – a licenced retail outlet on Tottenham High Road.

Background

The landlord had opted to tax the commercial property and charged VAT on the rent. The appellant was a sole proprietor; however, the lease was in the name of Mr Mufwankolo’s wife, and the rent demands showed her name and not that of the sole proprietor. It was contended by the appellant, but not evidenced, that the lease had originally been in both his and his wife’s names, despite his wife being the sole signatory.

The issues

Could the appellant recover input tax?

Did the business receive the supply?
Was there appropriate evidence?

It was clear that the business operated from the relevant property and consequently, in normal circumstances, the rent would be a genuine cost component of the business.

The Decision

The FTT found that there was no entitlement to an input tax claim and the appeal was dismissed. The lease was solely in the wife’s name and the business was the applicant as a sole proprietor. (There was an obvious potential for a partnership and an argument that a partnership was originally intended was advanced. The status of registration was challenged in 2003, but, crucially, not pursued).

It was possible for the property to be sub-let by the wife to the husband, however, this did not affect the VAT treatment as matters stood. Additionally, there was no evidence that the appellant actually paid any of the rent, as this was done by the tenant. There were no VAT invoices addressed to the sole proprietor.

Given the facts, there was no supply to the appellant, so there was no input tax to claim, and the issue of acceptable evidence fell away.

It was a certainty that the appeal could not succeed.

Commentary

There were a number of ways that this VAT cost could have easily been avoided had a little thought been given to the VAT arrangements. An oversight that created an avoidable tax hit.

A helpful guide to input tax considerations here: Care with input tax claims.

Legislation

The VAT Act 1994 Section 3 – Taxable person

The VAT Act 1994 Section 4 – Taxable supply

The VAT Act 1994 Section 24 (1) – Input tax

The VAT Act 1994 Section 24 (6) – Input tax claim evidence

VAT: HMRC to end making payable orders to NETPs

By Marcus Ward 9 November 2021

HMRC will stop issuing payable orders to overseas non-established taxpayers (NETP – taxpayers who are registered for UK VAT but do not have a business address here). The system automatically issued a payable order if a NETP was due a repayment.

Background

HMRC has received notifications and complaints from taxpayers advising that they can no longer cash their payable orders in their country or their bank. The impact of Brexit and COVID19 has seen an increase in banks/countries no longer accepting payable orders. Consequently, HMRC were sending repayments to NETPs with the knowledge they may not be able to cash them.

New Gform

To address this issue HMRC has created a Gform that will enable NETPs to send their bank account information in order that the issue of a payable order can be avoided and a Clearing House Automated Payment System (CHAPS) payment made instead.

Access

HMRC systems do not currently have CHAPS functionality or the ability to store overseas bank information. However, once a NETP has completed the form, which is accessed via the Government Gateway HMRC will set a lock on the taxpayer’s record to prevent the payable order being automatically issued. NETPs will then receive their repayments directly into their bank account without the need to visit their bank to cash a payable order.

Information required

Information requested on the Gform will include:

VAT registration number
address
email address
bank account information
payable order information if necessary

VAT: DIY housebuilders can make more than one claim – The Ellis case

By Marcus Ward 18 October 2021

Latest from the courts

In the First Tier Tribunal (FTT) case of Andrew Ellis and Jane Bromley [2021] TC08277, the issue was whether a person constructing their own house can make more than one claim for VAT incurred.

Background

The DIY Housebuilder’s Scheme enables a DIY housebuilder to recover VAT incurred on the construction of a house in which the constructor will live. Details here.

In this case, the specific issue was whether, despite the HMRC guidance notes on the scheme claim form explicitly stating that only one claim can be made, whether two claims may be submitted and paid by the respondent.

The appellant constructed a house over a period of five years (he was a jobbing builder and the work was generally only undertaken at weekends and holidays). To aid cash flow, an initial claim was made, followed by a second two years later.

The relevant legislation is The VAT Act 1994 section 35.

Decision

The appeal was allowed. The FTT found that HMRC’s rule that only one claim could be made under the DIY housebuilder’s scheme was ultra vires and that multiple claims should be permitted.

The judge stated that “…there is no express indication that only one claim may be made. Like many provisions, section 35 VATA is drafted in the singular. Drafting in the singular is an established technique to assist in clarity and to enable the proposal to be dealt with succinctly. As there is no express indication to the contrary in section 35 VATA, section 6 Interpretation Act 1978 applies to confirm that the reference to “a claim” in section 35 VATA must be read as including “claims”.

Commentary

This is good news for claimants who often must wait a number of years for a house to be built and therefore carry the VAT cost until the end of the project.

This case presumably means that it is possible to make claims as the project progresses and there is no need to wait until completion.

We await comment on this case from HMRC, but it is hoped that clarification will be forthcoming on whether the result of this case will be accepted.

VAT: Are freemasons’ aims philosophical, philanthropic, or civic? The United Grand Lodge case

By Marcus Ward 4 October 2021

Latest from the courts

In the First Tier Tribunal (FTT) case of United Grand Lodge of England (UGLE) the issue was whether subscriptions paid by members of the freemasons are exempt via The VAT Act 1994, Schedule 9, Group 9, section 31, item 1(e) “Subscriptions to trade unions, professional and other public interest bodies” which exempts membership subscriptions paid to a non-profit making organisation which has objects which are of a political, religious, patriotic, philosophical, philanthropic or civic nature.

Background

So, in this case, for the subscriptions to be exempt, freemasonry’s aims must be philosophical, philanthropic, or civic. UGLE submitted input tax claims on the basis that its subscription income was exempt and HMRC declined to make the repayments.

An organisation which has more than one main aim can still come within the exemption if those aims are all listed and described in the legislation. The fact that the organisation has other aims which are not set out in law does not mean that its services to members are not exempt provided that those other aims are not main aims. If, however, the organisation has a number of aims, all equally important, some of which are covered by the exemption, and some of which are not, then the services supplied by the organisation to its members are wholly outside the exemption.

The contentions

The respondents stated that the aims were not UGLE’s sole main aim or aims, and, even if they were, the aims were not in the public domain.

UGLE claimed that its sole main aim was philosophical in nature; or, in the alternative, the main aims, taken together, were of a philosophical, philanthropic, or civic nature and it did not have any other main aims.

Decision

The appeal was dismissed. The judge decided that the supplies made by UGLE in return for subscription payments were properly standard rated.

It was common ground that the motives of the members in joining the organisation are irrelevant.

It was accepted that since 2000 freemasonry has become more outward looking and since then has become more involved in charitable work among those, and for the benefit of those, who are not freemasons or their dependants. That said, the judge was not satisfied that the charitable works of individual freemasons, such as volunteering to give time to a local charity, were undertaken by them as freemasons rather than simply as public-spirited members of the community.

It was found that UGLE did have aims of a philosophical, philanthropic and civic nature (the promotion of all aspects of the practice of freemasonry and charity was central to UGLE’s activities). However, it was not accepted that these were UGLE’s main or primary aims. At least 48% of payments made by UGLE were to freemasons and their dependants and in the FTT’s judgment such support remained one of the main aims of freemasonry and thus of UGLE. The importance of providing support for freemasons and their dependants who are in need is a central tenet of freemasonry – The duty to help other freemasons is clearly set out in the objects of the four central masonic charities. The evidence showed that the provision of relief to freemasons and their dependants was the more important than donations to good causes unconnected with freemasonry.

Civic aims

There was nothing in the evidence which indicates any civic aim. UGLE cannot be said to be an organisation that has aims pertaining to the citizen and the state. Indeed, freemasons are prohibited from discussing matters of religion and politics in lodges.

Consequently, as one of UGLE’s main aims could not be described as philosophical, philanthropic, or civic, its membership subscriptions were standard rated. Making payments to freemasons was more akin to self-insurance, rather than philanthropic in nature.

VAT: Farm in business? The Babylon case

By Marcus Ward 21 September 2021

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:

Is the activity a serious undertaking earnestly pursued?
Is the activity an occupation or function, which is actively pursued with reasonable or recognisable continuity?
Does the activity have a certain measure of substance in terms of the quarterly or annual value of taxable supplies made?
Is the activity conducted in a regular manner and on sound and recognised business principles?
Is the activity predominantly concerned with the making of taxable supplies for a consideration?
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).

Refunds of UK VAT for non-UK businesses and EU VAT for UK businesses

By Marcus Ward 14 September 2021

HMRC has published updated guidance VAT Notice 723A which sets out how a business established outside the UK can claim a refund of VAT incurred here, and how to reclaim VAT incurred in the EU VAT if a business is established in the UK.

More details of how to make post-Brexit VAT claims here.

VAT: Partial Exemption -What Is It? What do I need to know?

By Marcus Ward 21 July 2021

VAT Basics

As part of our guides to VAT basics, we take a brief look at partial exemption and how it affects a business.

The first point to make is that partial exemption is often complex and costly. In some cases it may be avoided by planning and in others it is a fact of life for a business which needs to be managed properly.

Background

The VAT a business incurs on its expenditure is called input tax. For most businesses this is reclaimed from HMRC on VAT returns if it relates to standard rated or zero rated sales (referred to as “taxable supplies”) that that business makes. Exempt supplies are not to be confused with non-business income which are dealt with under a different regime.

However, a business which makes exempt sales may not be in a position to recover all of the input tax which it incurred. A business in this position is called partly exempt. Generally, any input tax which directly relates to exempt supplies is irrecoverable. In addition, an element of that business’ general overheads, e.g.; 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.

Input tax which falls within the overheads category must be apportioned according to a so called; partial exemption method. The “Standard Method” requires a comparison between the value of taxable and exempt supplies made by the business. The calculation is; the percentage of taxable supplies of all supplies multiplied by the input tax to be apportioned which gives the element of VAT input tax which may be recovered. Other partial exemption methods (so called Special Methods) are available by specific agreement with HMRC. A flowchart which illustrates the Standard Method of apportionment is below.

partial exemption flowchart1

Which businesses are affected?

Any business which receives income from the following sources may be affected by partial exemption:

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.

* Most businesses which do not routinely make exempt supplies usually encounter exemption in the area of land and property and it is an easy trap to fall into not to consider VAT when involved in property transactions. This is one area where VAT planning may be of assistance as it is possible in most situations to deliberately choose to add VAT to an exempt supply to avoid a loss of input tax. This is known as the option to tax, and it is considered in more detail here.

De Minimis relief

There is however 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 to be 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 and one half of all input tax for the year.

As a result, after using the partial exemption method, should the input tax fall below £7,500 (£625 per month) and 50% of all input tax for a year it is recoverable in full. This calculation is required every quarter (for businesses which render returns on a quarterly basis) with a review at the year end, called an annual adjustment carried out at the end of a business’ partial exemption year. The quarterly de minimis is consequently £1,875 of exempt input tax which represents spending of under £10,000 net; not a huge amount.

Should the de minimis limits be breached, all input tax relating to exempt supplies is irrecoverable.

The value for the de minimis limit has been in place for over 25 years (when it was increased by a huge £25 per month) and it is rather ridiculous that it has not been increased to reflect inflation. This, coupled with the fact that the VAT rate has increased significantly means that the relief which was once very useful for a business has withered away to such an extent that partial exemption catches even very small businesses which I am sure goes against the original purpose of the relief.

In summary – for a business exemption is a burden not a relief. It represents a real cost in terms of tax payable, time and other resources, in addition to uncertainty. We often find that this is an area which HMRC examine closely and one which benefits from proactive negotiation with HMRC.

VAT: Land and property – “simplification” ahead?

By Marcus Ward 19 July 2021

HMRC has issued a call for evidence in respect of land exemption. HMRC acknowledges the complexity of the existing VAT rules on land and property and would like to hear views from businesses on the application of the current rules, and whether these rules could be simplified.

The application of VAT on land and property transactions is complicated. A range of different rates and exemptions can apply depending on the facts and circumstances of individual situations and the precise treatment of a transaction or project is often open to interpretation.

Complexity

The paper identifies a number of reasons why this area is extremely complicated:

over the years the amount of legislation has increased, and the land VAT exemption now contains fifteen exceptions and twenty-six sets of notes
some businesses can be required to make several separate decisions before the VAT liability of their supply can be established. Eg; once a business has established that it is supplying land (not always straightforward) it then has to consider whether that supply falls within one of the exceptions to the exemption. If it does fall within one of the exceptions, it then has to consider a number of conditions to establish whether it is excluded from that exception
businesses may spend a disproportionate amount of time and money to establish the correct liability of their land supplies. This can also cause additional burdens for HMRC to assure compliance of these businesses
the development of new markets and services that did not exist when VAT was introduced
the impact of precedent case law (both UK and EU)
the uncertainty of establishing when an exempt supply of land becomes a taxable supply of facilities

The Option to Tax

The option to tax legislation enables a business to tax some supplies of land that would otherwise be treated as exempt from VAT. The usual rationale behind making such a choice is to be able to recover the VAT incurred on costs and overheads of a business, or to meet the conditions of a Transfer of a Going Concern (TOGC).

Suggestions

The document then suggests some ideas for simplification:

removing the ability to opt and making all relevant transactions exempt
removing the option to tax and making all land and property taxable at a reduced rate
making all commercial land and property taxable at the standard rate with an option to exempt

The first suggestion would result in many businesses incurring irrecoverable input tax which would be a direct cost, so this appears very unattractive.

The second seems a better option, but would bring new housing into the VAT net and I doubt that this would play out very well with the public.

The final suggestion would certainly simplify matters but would add VAT costs to entities which cannot recover any/all input tax, eg; charities, financial service providers, insurance companies, education bodies, health and welfare organisations and cultural services.

The document states that “The Government wants UK businesses to operate in the best possible environment and remain both productive and competitive”.

It remains to be seen whether the suggestions above (or other proposals put forward) will achieve this, but removing choices for a business (regardless of whether simplification is actually realised) is rarely a good idea and I wonder if simplification could be reached in other ways. If you have an interest in this area, please respond to this call as input is valuable for all parties.

Responses should be sent by 3 August 2021 by email to landsimplification@hmrc.gov.uk.

VAT: Day-care services by private bodies are taxable

By Marcus Ward 22 June 2021

Latest from the courts

Following the Supreme Court decisions in Life Services Ltd and The Learning Centre (Romford) Ltd HMRC have published guidance in Revenue & Customs Brief 9 (2021).

NB: This guidance applies to bodies in England and Wales only – Scotland and Northern Ireland have different rules.

The relevant cases concerned the VAT liability of day-care services provided by private bodies to vulnerable adults in England. They confirmed that HMRC’s interpretation of the legislation is correct; that providers of day-care must be charities, public bodies or regulated by the relevant authority (“approved, licensed, registered or exempted from registration by any Minister or other authority pursuant to a provision of a public general Act”) in order to be able to exempt these services.

The legislation is: The VAT Act 1994, Schedule 9, group 7, item 9.

It is understood that there were a significant number of claims stood behind the Supreme Court cases and these will now fail.

HMRC state that providers who have not accounted for VAT on supply of these services must do so with immediate effect.

Commentary

This is a further example of the VAT complexity in the provision of health and welfare services. It has always been an area ripe for disputes and such bodies and their advisers would be prudent to review the tax treatment of their supplies. There are usually two discrete areas of potential problems; whether services are business or non-business, and if business – do they fall within the various exemptions found at Schedule 9, group 7, items 1 to 11.