Category Archives: VAT Invoices

VAT Planning: design and build

By Marcus Ward 6 May 2025

Planning

The construction of a new house, and the materials used by the contractor to build it, are zero-rated. However, architect and other building professional fees, eg; surveyors, supervisors, engineers, project or construction management and consultants, are always standard rated; even in respect of a new build.

This will represent an absolute VAT cost to:

individuals
entities which will rent the house(s) after completion
housing associations (in some circumstances)
certain entities which are not in business
any entity which will use the building(s) for other exempt purposes
entities which do not sell the house(s) – so onward zero-rating is not possible
any entity which cannot recover all of its input tax for various reasons

Aims

If it is not possible to structure matters so that these fees can be recovered (there are a number ways to do this, but not all will be available to all parties) then advisers need to consider ways to remove the VAT charge – this may also be preferable for cashflow purposes even if full input tax recovery is possible.

VAT Planning

Design and build – the steps

the housebuilder creates a separately VAT registered design and build company (newco)
newco purchases the professional services and construction services and incurs the VAT on these (the construction element is zero-rated)
these supplies are incorporated into a single onward supply of zero-rated design and build services to the housebuilder (a bundle) – the professional services are a cost component of the construction
zero rating applies to the supply to the housebuilder as the predominant supply of the bundle is the construction of new dwellings
newco recovers the input tax incurred on professional fees etc, as it relates to an onward taxable supply
newco is in a repayment position and HMRC refunds the VAT incurred on the costs – often after a pre-cred query

It is also possible to use an independent design and build company, or engage a contractor to carry out both the design and construction elements of the project with a similar result.

Considerations

It is important to implement the planning correctly. This means that appropriate contracts must be in place, the operation is carried out on sound business principles (actual supplies are made and it is not simply the moving of money).

Arrangements

In order to evidence the proper commerciality of the structure, it is important to bear in mind that:

appropriate contracts are in place
proper invoicing is required
the arrangements are at arm’s length
a profit for newco would emphasise the commercial aspect
all parties’ accounts reflect the transactions
newco combines all of its costs (including overheads/admin etc) and supplies them to the housebuilder as part of a single package of zero-rated design and build services
newco acts as principal and not agent (that the professional services are not disbursements)
the newco and the housebuilder are not in the same VAT group
care should be taken if loans are required (they may compromise arm’s length and genuine commercial contentions)

HMRC’s view

In HMRC’s Internal Guidance Manual VCONST02720 it states that:

“Zero-rating the construction of buildings: services excluded from zero rating: design and build

Architectural or design services supplied as part of a design and build contract can be treated as part of the zero-rated supply of construction services.

A typical design and build contract will require the contractor to complete the design for the works and complete the construction of the works.

In such circumstances HM Revenue & Customs (HMRC) sees the design element as a cost component of the construction and not as a separate supply of architectural services which would be liable to VAT at the standard rate”.

Consequently, this planning is recognised and accepted by HMRC, however, it is important that it is applied effectively so it is difficult for HMRC to challenge.

VAT: Construction Services Reverse Charge – New HMRC Manual

By Marcus Ward 8 April 2025

The Construction Reverse Charge (RC) background details here.

HMRC has recently published its VAT Reverse Charge for Building and Construction Services Manual.

It includes:

how it works
which services are covered
the supplies of materials
the supplies of labour and/or staff
who needs to apply it
practical issues such as invoicing and adjustments to consideration
compliance issues

The contents of the new manual are:

VAT treatment of lost, stolen, damaged or destroyed goods

By Marcus Ward 24 March 2025

Is output tax due on goods that, for various reasons, cannot be sold, or are sold at a discount?

HMRC says that the VAT treatment depends on whether or not there was actually a supply of goods, what happened to them, who was responsible for them at the time and whether a VAT invoice was issued. The value of any supply will also need to recognise any credit given to the customer.

So, as often is the case with the tax, the answer is: “It depends”. So, let’s look at the categories to find out:

Lost goods

This depends on who lost the goods.

Sometimes a business will sell goods to a customer, but they did not receive them because they went astray. This could happen, for example, if goods are lost in the post.

customer is responsible for loss

If the customer is responsible for any losses before the goods are delivered, then VAT is due on the full amount of the sale.

supplier responsible for loss

If the supplier is responsible for any losses before the goods are delivered, then the way VAT is dealt with will depend on whether an invoice has been issued.

If an invoice has been issued, output tax is due on the amount invoiced, less the value of any credit given to the customer. So, if credit has been given a full refund, no VAT will be due.

If no invoice has been issued, there is no VAT due. This is because nothing has been supplied. It is prudent to make a note in the business records that the goods were lost an no invoice was raised.

Stolen goods

If goods are stolen from a business’ premises no VAT is due – as long as any customer has not been invoiced. HMRC are very likely to examine such circumstances as it is sometimes used as an ‘excuse’ for underdeclarations. Consequently, we always advise businesses to hold as much evidence as possible to support a claim that theft has taken place.

Goods stolen from a supplier’s premises after they have been sold to a customer- If the contract with the customer means that they are responsible for the goods while they are on the supplier’s premises – there has been a supply and output tax is due.

If the customer is not responsible for the goods when they are stolen, then if:

a VAT invoice issued – VAT is due on the amount invoiced (but subject to subsequent amendment to the quantum)
no invoice has been issued – there is no VAT due because there is no supply

NB: If cash is stolen from a business, this does not reduce the value of output tax on any supply.

Fraud

If goods are lost due to fraud it can be difficult to demonstrate or evidence. To avoid paying output tax on goods lost to a fraud a business is required to:

report the incident to the police
contact HMRC and give them the case details – this will entail providing a crime or case reference number given by the police. HMRC will consider each case and advise appropriately

Damaged goods

Damaged goods may be sold on at a discounted price, or they might have some scrap value. Output tax is due on whatever income is received for the goods sold. If an insurer makes a payment in respect of the damage, no VAT is due on this income.

Destroyed goods

If goods are destroyed such that they cannot be sold, and these are handed over (or what is left of them) to the insurer, no VAT is due on the disposal. Furthermore, there is no output tax due on any money received from the insurer. HMRC will need to see evidence of the insurance claim, and details of any insurance payment, on their next inspection of the business.

Records

Maintaining meticulous records is crucial for VAT compliance and it is very likely that such issues will be examined closely on HMRC inspections. This is because unexpected reductions in output tax will usually trigger enquiries. Input tax claims for the original purchase of the goods will be unaffected, so any mark-up type exercise will flag up the discrepancy.

VAT: e-invoicing consultation published

By Marcus Ward 13 February 2025

HMRC and the Department for Business and Trade have published their UK e-invoicing consultation paper.

Background to this development here and here.

E-invoicing is the digital exchange of invoice information directly between buyers’ and suppliers’ financial systems, even if these systems are different. The outcome is an invoice which is automatically written into the buyer’s financial system without manual processing.

E-invoicing automates the exchange of invoices between buyers and suppliers. The government says that increased e-invoicing uptake may support economic growth, business productivity, improve business cashflow and reduce errors in tax returns. It has the potential to both support businesses and tax administration.

The consultation aims to understand how e-invoicing aligns with businesses and their customers. Responses from businesses of all sizes – whether they use e-invoicing or not – as well as interest groups, representative bodies, industry bodies and individuals are encouraged.

The purpose of the consultation is to seek input on how the government can support the increased adoption of e-invoicing. The main points are:

different models of e-invoicing
whether to take a mandated or voluntary approach to e-invoicing
what scope of mandate might be most appropriate in the UK and for businesses
whether e-invoicing should be complemented by real time digital reporting

This would be a significant change to VAT and all businesses should understand the impact.

More on VAT in the Digital Age (ViDA), including Real-time digital reporting here.

VAT: Input tax claims – alternative evidence

By Marcus Ward 12 February 2025

What can be used to make a claim?

It is well known that in order to claim input tax on expenditure a business is required to have a valid tax invoice to support it. But what if there is no VAT invoice? Can HMRC accept any other evidence to support a claim? Well, the answer is yes… sometimes.

HMRC has discretion provided by legislation: VAT Regulations 1995/2518 Reg 29(2). Specifically, the wording most relevant here is “…such other documentary evidence of the charge to VAT as the Commissioners may direct.” Broadly, a business must hold the correct evidence before being able to exercise the right to deduct.

Where claims to deduct VAT are not supported by a valid VAT invoice HMRC staff are required to consider whether there is satisfactory alternative evidence of the taxable supply available to support deduction. HMRC staff should not simply refuse a claim without giving reasonable consideration to such evidence. HMRC has a duty to ensure that taxpayers pay no more tax than is properly due. However, this obligation is balanced against a duty to protect the public revenue.

Full details of tax invoices here.

What HMRC consider

HMRC staff are required to work through the following checklist:

Does the business have alternative documentary evidence other than an invoice (for example a supplier statement)?
Does the business have evidence of receipt of a taxable supply on which VAT has been charged?
Does the business have evidence of payment?
Does the business have evidence of how the goods/services have been consumed or evidence regarding their onward supply?
How did the business know the supplier existed?
How was the business relationship with the supplier established? For example: How was contact made?
Does the business know where the supplier operates from (have staff visited?)
How did the business contact them?
How does the business know the supplier can supply the goods or services?
If goods, how does the business know they are not stolen?
How does the business return faulty supplies?

Outcome

If the responses to the above tests are credible, HMRC staff should exercise their discretion to allow the taxpayer to deduct the input tax. Overall, HMRC is required to be satisfied that sufficient evidence is held by the business which demonstrates that VAT has been paid on a taxable supply of goods or services received by that business and which were used by that business for its taxable activities

Challenge HMRC’s decision

A business may only challenge HMRC’s decision not to allow a claim (did not exercise its discretion) if it acted in an unfair or unreasonable way. In these cases, the onus is on the taxpayer to demonstrate that HMRC have been unreasonable in not using the available discretion. This is quite often a difficult thing to do.

Case law

Not surprisingly, there is significant case law on this subject. The most relevant and recent being the Upper Tribunal (UT) cases of James Boyce Scandico Ltdv and Wasteaway Shropshire Limited.

Tips

If possible, always obtain a proper tax invoice from a supplier, and don’t lose it! The level of evidence required when no invoice is held usually depends on the value of the claim. There would be a difference between persuading an inspector that £20 input tax on stationery is recoverable and the claiming of £200,000 VAT on a property purchase is permissible. As always in VAT, if you get it wrong and claim VAT without the appropriate evidence there is likely to be a penalty to pay.

If you, or your clients are in dispute with HMRC on input tax claims, please contact us.

VAT on private school fees – new webinar

By Marcus Ward 16 December 2024

HMRC have released a recorded webinar about VAT on private school fees — what you need to do, and when and how to register.

It covers:

if you should register for VAT as an education provider
when you should register for VAT
how to register for VAT
what you need to charge VAT on
how and what to reclaim VAT on

VAT in the Digital Age (ViDA)

By Marcus Ward 16 December 2024

EU Member States (MS) recently agreed the much-discussed ViDA package. Since Brexit, this does not directly affect the UK, however, it is an important pointer to the future and where we are all heading, so it will impact the UK in some ways.

The ViDA package (or a version of the finalised package) was first discussed in 2022 and has gone through a tortuous process before all MS agreed it.

What is ViDA?

ViDA aims to tackle what have been identified as three main challenges:

Real-time digital reporting

The new system introduces real-time digital reporting for cross-border trade, based on e-invoicing. It will give MS the information they need to increase the fight against VAT fraud, especially carousel fraud. The VAT Gap – the difference between expected and actual VAT revenue, has been widening across the EU over a number of years.

It is said that the move to e-invoicing will help reduce VAT fraud by up to €11 billion a year and bring down administrative and compliance costs for EU businesses by over €4.1 billion per year over the next ten years. It should ensure that existing national systems converge across the EU, and this should pave the way for EU countries that wish to introduce national digital reporting systems for domestic trade.

VAT Schemes Guide – Alternative ways of accounting for tax

By Marcus Ward 5 November 2024

VAT Basics

There are a number of VAT Schemes which are designed to simplify accounting for the tax. They may save a business money, reduce complexity, avoid the need for certain documentation and reduce the time needed to deal with VAT. Some schemes may be used in combination with others, although I recommend that checks are made first.

It is important to compare the use of each scheme to standard VAT accounting to establish whether a business will benefit. Some schemes are compulsory and there are particular pitfalls for businesses using certain schemes.

I thought that it would be useful to consider the schemes all in one place and look at their features and pros and cons.

These schemes reviewed here are:

Cash Accounting Scheme
Annual Accounting Scheme
Flat Rate Scheme
Margin schemes for second-hand goods
Global Accounting
VAT schemes for retailers

Cash Accounting Scheme

Normally, VAT returns are based on the tax point (usually the VAT invoice date) for sales and purchases. This may mean a business having to pay HMRC the VAT on sales which customers have not yet paid for.

The VAT cash accounting scheme (CAS) instead bases reporting on payment dates, both for purchases and sales. A business will need to ensure its records include payment dates.

A business is only eligible for CAS if its estimated taxable turnover is no more than £1.35m, and can then remain in the scheme as long as it remains below £1.6m.

Advantages

usually beneficial for cash flow especially if its customers are slow to pay
output tax is not payable at all if a business has a bad debt (other bad debt relief here)

Disadvantages

it is generally not beneficial for a repayment business (one which reclaims more VAT than it pays, eg; an exporter or supplier of zero rated goods or services)
it is not usually beneficial if a business purchases significant amounts of goods or services on credit

Annual Accounting Scheme

The Annual Accounting Scheme allows a business to pay VAT on account, in either nine monthly or three quarterly payments. These instalments are based on VAT paid in the previous year. It is then required to complete a single, annual VAT return which is used to calculate any balance owed by the business or due from HMRC.

A business is eligible for the scheme if its estimated taxable turnover is no more than £1.35m and is permitted to remain in the scheme as long as it remains below £1.6m.

Advantages

reduces paperwork as only the need to complete one return instead of four (although it does not remove the requirement to keep all the normal VAT records and accounts)
improves management of cash flow

Disadvantages

not suitable for repayment businesses as they would only receive one repayment at the end of the year
if turnover decreases, the interim payments may be higher than under standard accounting

Flat Rate Scheme

The Flat Rate Scheme (FRS) is designed to assist smaller businesses reduce the amount of time and complexity required for VAT accounting. The FRS removes the need to calculate the VAT on every transaction. Instead, a business pays a flat rate percentage of its VAT inclusive turnover. The percentage paid is less than the standard VAT rate because it recognises the fact that no input tax can be claimed on purchases. The flat rate percentage used is dependent on a business’ trade sector.

A business is eligible for this scheme if its estimated taxable turnover in the next year will not exceed £150,000. Once using the scheme, a business is permitted to continue using it until its income exceeds £230,000.

If eligible, a business may combine the FRS with the Annual Accounting Scheme, additionally, there is an option to effectively use a cash basis so there is no need to use CAS. Unfortunately, changes to the scheme rules regarding ” limited cost traders” mean that the scheme has become less attractive.

Advantages

depending on trade sector and circumstances, may result in a real VAT saving
simplified record keeping; no requirement to separate gross, VAT and net in accounts
fewer rules; no issues with input tax a business can and cannot recover on purchases
certainty of knowing how much of income is payable to HMRC

Disadvantages

no reclaim of input tax incurred on purchases
limited cost traders impact
if a business buys a significant amount from VAT registered businesses, it is likely to result in more VAT due
likely to be unattractive for businesses making zero-rated or exempt sales because output tax would also apply to this hitherto VAT free income
low turnover limit

Margin Scheme for Second Hand Goods

A business normally accounts for output tax on the full value of its taxable supplies and reclaims input tax on its purchases. However, if a business deals in second-hand goods, works of art, antiques or collectibles it may use a Margin Scheme. This scheme enables a business to account for VAT only on the difference between the purchase and selling price of an item; the margin. It is not possible to reclaim input tax on the purchase of an item and there will be no output tax if no profit is achieved (however, if an item is sold for less than the purchase price, a business cannot offset losses against the profits of other items to reduce the overall VAT liability).

There is a special margin schemes for auctioneers and a variation of the Margin Scheme (Global Accounting) is considered below.

Advantages

usually beneficial if buying from (non-VAT registered) members of the public
purchaser will not see a VAT charge
although no input tax claimable on purchases of scheme items, VAT may be claimed in the usual way on overheads and other fees etc

Disadvantages

record keeping requirements are demanding and closely checked, eg; stock records and invoices which are required for both purchases and sales
cannot be used for items purchased on a VAT invoice
can be complex and create a cost if goods exported
although no VAT due on sales if a loss is made, there is no set-off of the loss

Global Accounting

The problem with the Second Hand Goods Scheme is that full details of each individual item purchased and sold has to be recorded. Global Accounting is an optional, simplified variation of the Second Hand Margin Scheme. It differs from the standard Margin Scheme in that rather than accounting for the margin achieved on the sale of each individual item, output tax is calculated on the margin achieved between the total purchases and total sales in a particular accounting period.

Advantages

simplified version of the Margin Scheme
record keeping requirements reduced
losses made on sales reduce VAT payable
beneficial for businesses which buy and sell bulk volume, low value eligible goods

Disadvantages

cannot be used for; aircraft, boats, caravans, horses or motor vehicles
similar to Margin Scheme disadvantages apart from loss set off

VAT Schemes for Retailers

It is usually difficult for retailers to issue an invoice for each sale made, so various retail schemes have been designed to simplify VAT. The appropriate scheme for a business depends on whether its retail turnover (excluding VAT) is; below £1m, between £1m and £130m and higher.

Smaller businesses may be able to use a retail scheme with CAS and Annual Accounting but it cannot combine a Retail Scheme with the FRS. However, retailers may choose to use the FRS instead of a Retail Scheme.

Using standard VAT accounting, a VAT registered business must record the VAT on each sale. However, via a Retail Scheme, it calculates the value of its total VAT taxable sales for a period, eg; a day, and the proportions of that total that are taxable at different rates of VAT; standard, reduced and zero.

According to the scheme a business uses it then applies the appropriate VAT fraction to that sales figure to calculate the output tax due. A business may only use the Retail Scheme for retail sales and must use the standard accounting procedures for other supplies. A business must still issue a VAT invoice to any customer who requests one. It is a requirement of any scheme choice that HMRC must consider it fair and reasonable.

A business can join a retail scheme at the beginning of any VAT period and HMRC does not need to be notified.

Examples of Retail Schemes

Apportionment
Direct calculation
The point of sale scheme

The required calculations vary for each scheme.

NB: There are special arrangements for caterers, retail pharmacists and florists.

Advantages

no requirement to issue an invoice for each sale
most schemes are relatively simple to administer once set up. Technology assists in a helpful way with EPOS systems
simplifies record keeping

Disadvantages

it is usual for each line sold to need to be coded correctly for VAT liability
smaller businesses without state of the art technology may be at a disadvantage
time and resources required to set up and maintain systems
in some cases the calculation depends on staff “pressing the right button”
often complex calculations and record keeping
very precise and complicated rules
lack of understanding by a number of inspectors
complexity increases the risk of misdeclaration

Overall

As may be seen, there are a lot of choices for a business to consider, especially a start-up. Choosing a scheme which is inappropriate may result in VAT overpayment and a lot of unneeded record keeping and administration. There are real savings to be made by using a beneficial scheme, both in terms of VAT payable and staff time. There are also some schemes which are compulsory, like the Tour Operators’ Margin Scheme (TOMS).

We are happy to review a business’ circumstances and calculate what schemes would produce the best outcome.

Please contact us if you require further information.

VAT: Pre-registration activities

By Marcus Ward 2 October 2024

This article looks at the period of activity before a business VAT registers: How to deal with sales and what input tax may be recovered.

VAT Registration

The obligation to VAT register here and the pros and cons of voluntary registration here.

Sales

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 relevant invoices showing VAT.

Purchases

Purchases made before registration:

Only the legal entity which actually purchased the goods or services and has applied to VAT register is entitled to input tax recovery.

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

four years for goods on hand at the time of the Effective Date of Registration (EDR), or that were used to make other goods on hand at the EDR. This includes both stock for resale or fixed assets
six months for services

Input tax can only be reclaimed if the pre-registration expenditure related to the taxable supplies made, or to be made, by the newly VAT registered business (whether these supplies are subject to subsequent output tax or whether they were made pre-registration but would have been taxable if the business was VAT registered).

The only VAT return on which such input tax is recoverable is the first.

Tip

When a business applies for registration, there is an opportunity to backdate the EDR. The provision for taxpayers to negotiate an earlier date is contained in The VAT Act 1994, Schedule 1, 9. This option should be considered if there is additional VAT that would become recoverable. This will mean that the first return will be longer than the normal quarterly or monthly returns.

The limit for backdating EDR is four years.

Irrecoverable VAT

Input tax cannot be reclaimed on:

goods that have been completely consumed before registration, eg; fuel, electricity or gas
goods that have been sold before registration
goods or services which relate to exempt supplies made, or to be made, by the registered business (see below)
services which related to goods disposed of before registration

NB: Businesses are not required to reduce the VAT deducted in respect of pre-registration use of fixed assets. Eg; input tax incurred on a van purchased three years before registration and used before and after registration would be recoverable in full.

The “usual” rules for input tax also apply to pre-registration claims; that is, some VAT is never reclaimable, see here.

Specific circumstances

There are special rules for partially exempt businesses and for businesses that have non-business income and for the purchase of certain items (see below) covered by the Capital Goods Scheme (CGS).

Included in the CGS are:

taxable land, property purchases of £250,000 or over
refurbishment or civil engineering works costing £250,000 or over
computer hardware costing £50,000 or over (single items, not networks)
aircraft, ships, and other vessels costing £50,000 or more

NB: The partial exemption de minimis limit does not apply to input tax incurred pre-registration.

Pre-incorporation

A limited company cannot register for VAT until it is formally incorporated. Goods or services may have been supplied to the directors or employees setting up the company before then.

A company can claim input tax on those goods and services if the it relates directly to the taxable business to be carried on by it following incorporation and registration for VAT. The six-month (services) four-year (goods) limits also apply to pre-incorporation claims.

Documentation

Any claim must be supported by a valid VAT invoice for each item. If this documentation is not available, there is a possibility that HMRC will accept alternative evidence.

Legislation

The right to deduct input tax as above is covered by The VAT general Regulations 1995, reg 111.

UK e-invoicing initiative and consultation

By Marcus Ward 30 September 2024

The future for e-invoicing

On 23 September 2024, the Government announced plans to encourage an increased use of e-invoicing among businesses and government departments to reduce administrative burdens, enhance cash flow, boost productivity, and minimise tax filing errors.

E-invoicing is a long-accepted form of commercial data exchange and is becoming important for regulatory authorities.

HMRC will initiate a consultation process to gather feedback on fostering investment in e-invoicing. The consultation date has not yet been specified, but we recommend that businesses should prepare for potential mandatory e-invoicing. This consultation will seek input from businesses on how HMRC can support investment in and uptake of e-invoicing.

The initiative reflects global trend towards e-invoicing and HMRC’s focus on digital transformation.

Further information on, and a glossary for, e-invoicing here.