- Changes to the DIY Housebuilders’ Scheme
- DIY Housebuilders’ Scheme – deadline for claims extended
- The Spani case
- The Dunne case
- The Ellis case
The following article provides help with Scheme claimants:
The following article provides help with Scheme claimants:
Latest from the courts
In the The Prudential Assurance Company Limited (Pru) Court of Appeal (CoA) case the issues were the “difficult” questions in respect of the relationship between the VAT grouping rules and the time of supply (tax point) legislation. Is VAT is applicable on a continuous supply of services where these services were supplied while the companies were VAT grouped, but invoices were issued after the supplier left the VAT group?
Background
Pru was at the relevant time carrying on with-profits life and insurance business. Silverfleet Capital Limited (Silverfleet) provided Pru with investment management services. Under an agreement dated 30 August 2002, the consideration which Silverfleet received for its services comprised a management fee calculated by reference to the amount of investments made during the period in which services were provided and performance fees, payable in the event that the performance of certain funds exceeded a set benchmark rate of return.
When Silverfleet was rendering its investment management services, Pru was the representative member of a VAT group of which Silverfleet was also a member. However, in 2007 a management buy-out was effected, as a result of which Silverfleet ceased to be a member of Pru’s VAT group. It also ceased to provide management services to Pru.
During 2014 and 2015, the hurdle rate set under the 2002 agreement was passed. Silverfleet accordingly invoiced Prudential at various dates between 2015 and 2016 for fees totalling £9,330,805.92 (“the Performance Fees”) plus VAT at 20%.
The Issues
The CoA considered whether the Performance Fees are subject to VAT.
The First-tier Tribunal (FTT) decided the point in favour of Pru. However, HMRC succeeded in an appeal to the Upper Tribunal (UT). In a decision that decision, the UT concluded that VAT was chargeable on the Performance Fees.
In its decision, the FTT queried whether regulation 90 of the VAT Regulations went so far as to direct that Silverfleet’s services had not been provided within a VAT group and had been “supplied in the course or furtherance of a business that in the VAT group world was not being carried on”. Further, the FTT was “unable to see what feature distinguishes [Prudential’s] case from that of the taxpayer in [B J Rice & Associates v Customs and Excise Commissioners]”.
In contrast, the UT considered that, pursuant to regulation 90 of the VAT Regulations, Silverfleet’s services were to be treated as having been supplied when invoiced and, hence, at a time when Silverfleet and Prudential were no longer members of the same VAT group. That being so, section 43 of VATA 1994 was not, in the UT’s view, in point. The UT also considered that the FTT had erred in regarding itself as bound by B J Rice & Associates v Customs and Excise Commissioners [1996] STC 581 (“B J Rice”) to allow the appeal. Unlike Mr Rice, the UT said in its decision, Silverfleet “was not entirely outside the scope of VAT when the Services were rendered, but rather it was subject to a specific set of assumptions and disregards”.
Pru contended that Silverfleet should not be considered to have made the supply in the course or furtherance of any business carried on by it. The business will instead be assumed to have been carried on by Pru. This was important because if VAT was applicable to the services Pru would not be in a position to recover it (in full at least) due to partial exemption which represented a large VAT cost.
Unsurprisingly, HMRC considered that output tax was due because at the tax point, Silverfleet as no longer part of the VAT group.
Legislation
The VAT Act 1994, section 43 lays down the rules in respect of VAT groups, and The VAT Regulations 1995, regulation 90 makes provision with respect to the time at which continuous supplies of services are to be treated as supplied for VAT purposes.
Section 43 explains that any supply by one member of a VAT group to another is to be “disregarded” and that “any business carried on by a member of the group shall be treated as carried on by the representative member”. Does this mean that no VAT is chargeable on an intra-group supply regardless of whether the supplier has left the group by the time consideration for the supply is the subject of a VAT invoice and paid? Or is section 43 inapplicable in respect of continuous supplies insofar as the consideration is invoiced and received only after the supplier is no longer a member of the VAT group because regulation 90 provides for the services to be treated as supplied at the time of the invoice or payment?
Decision
The appeal was dismissed and HMTC’s assessment was upheld. It was not possible to disregard the supply as intra-group and the tax point rules for the continuous supply of services meant that it was a taxable supply. The decision was not unanimous, with the decision by the judges being a 2:1 majority.
Commentary
This was a close decision and highlights the necessity of considering the interaction between VAT groups and tax points and the implications of timings. The case makes interesting reading in full (well, for VAT people anyway!) for the technical discussions and the disagreement between the judges.
VAT basics
Proforma invoices (proformas) are preliminary documents usually sent to buyers in advance of a delivery of goods/provision of services. Proformas will typically describe details of the purchase of goods/services and other important information, such as the terms of the transaction. Proformas are not “official” documents and represent an informal agreement. Usually, requesting a proforma represents a more serious interest on the part of a buyer than a quote – a buyer is generally committed to making a purchase but want to understand the details before proceeding with the approval process and making a binding agreement with the seller. They are therefore a useful business tool and use of them may result in a beneficial cashflow position for VAT (please see below).
Proforma translates from Latin as “for the sake of form”, and this provides an indication that the document is provisional or a step in a process.
It is also worth noting that the use of proformas is not mandatory.
The difference between an invoice and a proforma
Invoices (also called commercial invoices, VAT invoices or tax invoices) are distinct from proformas. They may contain similar information but serve different purposes. It is important to avoid confusing the two, since only invoices are legal documents; that is, they evidence a transaction and is the document on which VAT may be claimed. An invoice must contain certain information and there are specific legal obligations for providing them.
It is a matter of law whether an invoice is valid and when they must be issued. A proforma is not required to follow any set form, apart from the facts that they must not have an invoice number and must state that it is a proforma invoice. We also recommend that a proforma does not show the supplier’s VAT number for the avoidance of doubt.
Contents of a proforma
Proformas can be considered as “dummy invoices” and they are prepared by the seller usually to provide details of:
However, there are no set formats for proformas.
Use for buyer
The purpose of a proforma is to provide the buyer with an accurate and complete good faith estimate they can use to decide whether or not to go ahead with a transaction. It also avoids surprises when the actual tax invoice is issued.
VAT implications
The main distinctions are that, compared to a tax invoice, a proforma:
Very broadly, the tax point (time of supply) this is the earliest of; invoice date, receipt of payment, goods transferred or services completed. The tax point fact is helpful in tax planning for suppliers. Broadly, using proformas, requests for payment, or similar documents rather than issuing an invoice, defers a tax point and consequently when VAT is payable to HMRC. This is especially relevant to businesses which provide ongoing services (known as continuous supplies of services).
Please contact us if you require more information on the commercial use of proformas.
Further to my article on eInvoicing, I thought it may be helpful if I compiled a Glossary of terms used in connection with the subject. These definitions have been compiled from various sources and I have tried to keep them as “non-techy” as possible.
Accounts Payable Automation (APA)
An automated management of accounts payable by dealing with invoices received and payments sent. It requires integration of the invoicing process with accounting software.
Accounts Receivable Automation (ARA)
As APA but for accounts receivable (dealing with invoices sent and payments received).
Acknowledgement Of Receipt
The acknowledgement of receipt of an EDI message – the syntax and semantics are checked, and a corresponding acknowledgement is sent by the receiver.
Advanced Electronic Signature
A digital signature based on an advanced certificate uniquely identifying the signer. The signature keys are used with a high level of confidence by the signatory, who has sole control of the signing key.
Agreed Format
The electronic data format that businesses have agreed to treat as the data format of the original electronic invoice for tax purposes.
Audit Trail
The system which traces the detailed transactions relating to any item in an accounting record.
Authentication
The process of verifying a claim that a system entity or system resource has a certain attribute value.
Authenticity Of Origin
Assurance of the identity of the supplier or issuer of the invoice and that the document is the true original.
B2B
B2C
Biller Portal
Invoice providers’ web portal where invoice receivers can log on with a username/password to check and manage their invoices.
Billing Service Provider
A provider offering services to senders and receivers which involves the sending, collection and administrative processing of eInvoices.
Certification Service Provider
An entity which issues digital certificates or provides services related to electronic signatures.
Clearance
A tax authority approval being a precondition for the validity of a document.
Clearance Model
A tax authority is involved in the invoice data exchange between the vendor and the customer as a third party. It allows the tax authorities a real-time insight into the business transactions. The eInvoice must be approved by the tax authority before being sent to the recipient.
Continuous Transaction Controls (CTC Reporting)
Obligations requiring a taxpayer to submit relevant data to the relevant tax authority before, or shortly after, a transaction.
Data Integrity
Checks that data has not been changed, destroyed, or lost in an unauthorised or accidental manner.
Digital Certificate
A file or electronic password that proves the authenticity of a device, server, or user via cryptography and the public key infrastructure.
Digital Reporting Requirements (DRR)
The obligation for a taxable person to submit digital data on their transactions to HMRC.
Digital Signature
A technique used to validate the authenticity and integrity of a digital document, message or software.
eAccounting
The requirement for a taxable person to submit digital business records to a tax authority platform.
eArchiving
Storing electronic documents as evidence for a prescribed period of time according to the relevant HMRC regulations.
Electronic Data Interchange (EDI)
An intercompany communication of business documents in a standard format. EDI is a standard electronic format that replaces paper-based documents such as purchase orders or invoices.
eInvoice
Details here.
eReceipt
Electronically issued customer receipts.
EU eInvoicing
Details/how to here.
Format
The method of presentation of electronic data in an electronic document.
Four Corner Model
A process where suppliers and customers have one or several service providers that ensure the correct processing between them.
Invoicing Directive
The eInvoicing Directive which requires EU entities to receive and process all electronic invoices – compliant with the European standard.
Mandatory eInvoicing
The obligatory use of eInvoicing by business which is imposed by the country’s authorities. Around 80 countries mandate eInvoicing.
Pan-European Public Procurement On-Line (Peppol)
An EDI protocol, designed to simplify the purchase-to-pay process between government bodies and suppliers. It facilitates electronic ordering, invoicing and shipping between government organisations and businesses.
Periodical Transaction Reporting
An obligation for a taxpayer to submit transactional data on a monthly, quarterly or annual basis.
QR Code
eInvoice verification which allows users to verify the authenticity of an eInvoice based on the QR code appearing on it. The QR code is used to provide information related to a particular invoice.
Qualified Electronic Signature
An electronic signature which is compliant with EU Regulation 910/2014 for electronic transactions within the internal European market. It enables verification of the authorship of a declaration in electronic data exchange over long periods of time.
Post Audit eInvoicing
An invoice is sent to the tax authorities only after the transaction has been completed. The business must guarantee the authenticity and integrity of the invoice and archive the document to satisfy audit requirements. This is being overtaken by the Clearance Model (above).
Readability
The ability of a tax administration to interpret the content of an eInvoice.
Real-time reporting
An obligation for a taxpayer to submit fiscal data to a tax authority platform immediately, or shortly after, a transaction.
Transactional Data
Information that is captured from transactions. It records the time of the transaction, the place of supply, the value of the supply, the payment method, discounts if any, and other quantities and qualities associated with the transaction.
Three Corner Model
A process where invoice senders and receivers are connected via a single service provider for the sending and receiving of messages.
Two Corner Model
A process where invoice senders and receivers are connected directly for the sending and receiving of messages.
UN/CEFACT
The United Nations’ Centre for Trade Facilitation and Electronic Business has a global remit to secure the interoperability for the exchange of information between private and public sector entities.
Unstructured Invoice Document
An invoice that is created manually or automatically from a system and is not in a database. An Unstructured Document may contain data, but the data is not organised in a fixed format. Consequently, it is difficult to find and capture the data for use.
VAT Listing
An obligation for a business to submit VAT transactional data according to a domestic format. The data includes: information on values and recipients, as well as data which is required to be included on an invoice. The data are submitted on a periodic basis, often jointly with the VAT return.
Web Payment
An online service that manages the transfer of funds from a customer to the merchant of an e-commerce website.
Web Publication
A method of exchanging invoices with a buyer by placing an original electronic invoice on an agreed web site, in a secure closed environment operated by the supplier.
The rules for sending, receiving and storing VAT invoices in an electronic format.
What is an eInvoicing?
eInvoicing is the transmission and storage of invoices in an electronic format without duplicate paper documents. The format may be a structured format such as XML or an unstructured format such as PDF.
The benefits of eInvoicing
eInvoicing offers significant advantages over paper invoices. The electronic transmission of documents in a secure environment usually provides for:
Currently, a business does not have to use eInvoicing, but if it does, in conjunction with paper invoices, (a so-called dual system) it can only do this for a short period, ie; if eInvoicing is being trialled.
It is not necessary to inform HMRC that a business is using eInvoicing.
Requirements
eInvoices must contain the same information as paper invoices.
A business may eInvoice where the “authenticity of the origin”, “integrity of invoice data”, and “legibility” can be ensured, and the customer agrees to receive eInvoices
A business is free to select a method of ensuring the above requirements. Examples of ensuring authenticity and integrity include:
HMRC accepts a variety of eInvoice message formats, including:
The eInvoices must be transmitted in a secure environment, using industry-accepted authenticity and security technologies, including, but not limited to: http-s, SSL, S-MIME and FTP.
A business will need to demonstrate that it has control over:
The same rules apply to storage of eInvoices as to paper invoices. A business must normally keep copies of all invoices for six years.
HMRC Access
HMRC may request access to:
HMRC must be able to take copies of information from the system.
If a business cannot meet the conditions for transmission and storage of eInvoicing, it will have to issue paper invoices.
A key feature of the place of supply rules is the distinction between B2B (business to business) and B2C (business to consumer) supplies. The distinction is important because it determines, inter alia, whether GB VAT is applicable to a supply made by a GB supplier.
Status of the customer:
To apply the B2B treatment a GB supplier must obtain evidence that the customer has business activities. If the supplier cannot obtain any evidence, they should apply B2C treatment.
A supplier needs to identify where his customer belongs in order to establish the place of supply.
VERY broadly, depending on the nature of the supply, the rule of thumb is that a B2B service is GB VAT free (it is subject to a reverse charge by the recipient as it is deemed to be “supplied where received”) but a B2C service is generally subject to GB VAT, regardless of the place of belonging of the recipient. There are exceptions to these rules however, such as the use and enjoyment provisions, land related services, hire of transport and admission to events.
Further to our guide to the recovery of input tax on motoring expenses we are often asked about the specifics of a business acquiring a motor car. So, this article sets out the different rules.
Purchase of a car
If a business purchases a car outright, regardless of how this is funded, no input tax is claimable at all. However, If the taxpayer is either a taxi or driving instructor business, VAT falls to be 100% recoverable.
Hire Purchase (HP)
This is treated as a supply of goods as the ownership of the car passes at the end of the agreement. Similarly, to an outright purchase, input tax is blocked for all taxpayers except taxi and driving instructor businesses.
Lease hire
If the car is ‘qualifying car’, and is returned at the end of the agreement it is a supply of services; a lease. There is a specific rule which means that 50% of the VAT is recoverable on the rental payments if it is used for business purpose. The 50% block is to cover the private use of the car. Again, a 100% reclaim is possible if it is to be used for hire with a driver for carrying passengers or providing driving instruction.
The 50% block applies to all the VAT on charges paid for the rental of the car. This includes:
Personal Contract Purchase (PCP)
This is a little more complex because a PCP can either be treated as a supply of goods (the car), or a supply of services (a lease) depending on the terms of the contract. The following treatment is based on the Mercedes Benz Financial Services case.
The difference between services or goods:
This distinction depends on the level of the final payment. This is known as the Guaranteed Minimum Future Value (GMFV).
Services
Goods
The distinction
It is often difficult to distinguish between services and goods in relation to PCP cars. We find that the wording of contracts is often arcane and unhelpful (and not particularly drafted with VAT in mind). If the supply is not determinable by reference to the agreement documentation, a simple and practical solution is to consider the invoice. Broadly, if it is a lease the supplier will charge VAT on the monthly payments, but a purchase would mean VAT is charged in full up front at the tax point.
Input tax on repairs
If a vehicle is used for business purposes, there is a 100% reclaim of the VAT charged on repairs and maintenance as long as the business paid for the work and the vehicle is used for some business purposes. It does not matter if the vehicle is used for some private motoring or if a business has chosen not to reclaim input tax on road fuel.
Record keeping is a rather dry subject, but it is important not to destroy records which HMRC may later insist on seeing! I have looked at what VAT records a business is required to keep here, but how long must they be kept for?
This is seemingly a straightforward question, but as is usual with VAT there are some ifs and buts.
The basic starting point
The usual answer is that VAT records must be kept for six years. However, there are circumstances where that limit is extended and also times when it may be reduced. Although the basic limit is six years, unless fraud is suspected, HMRC can only go back four years to issue assessments, penalties and interest.
Variations to the six year rule
One Stop Shop (OSS)
If a business is required to use the OSS then its records must be retained for ten years (and they should be able to be sent to HMRC electronically if asked).
Capital Goods Scheme (CGS)
If a business has assets covered by the CGS, eg; certain property, computers, aircraft and ships then adjustments will be required up to a ten year period. Consequently, records will have to be retained for at least ten years in order to demonstrate that the scheme has been applied correctly.
Land and buildings
In the case of land and buildings you might need to keep documents for 20 years. We advise that records are kept this long in any event as land and buildings tend to be high value and complex from a VAT perspective, However, it is necessary in connection with the option to tax as it is possible to revoke an option after 20 years.
Transfer Of a Going Concern (TOGC)
This is more of a ‘who” rather than a what or a how long. When a business is sold as a going concern, in most circumstances the seller of the business will retain the business records. When this happens, the seller must make available to the buyer any information the buyer needs to comply with his VAT obligations. However, in cases where the buyer takes on the seller’s VAT registration number, the seller must transfer all of the VAT the records to the buyer unless there is an agreement with HMRC for the seller to retain the records. If necessary, HMRC may disclose to the buyer information it holds on the transferred business. HMRC do this to allow the buyer to meet his legal obligations. But HMRC will always consult the seller first, to ensure that it does not disclose confidential information.
How can a business cut the time limits for record keeping?
It is possible to write to HMRC and request a concession to the usual time limits. HMRC generally treat such a request sympathetically, but will not grant a concession automatically. If a concession is granted there is still a minimum allowance period of preservation which is in line with a business’ commercial practice.
Computer produced records
Where records are stored in an electronic form, a business must be able to ensure the records’ integrity, eg; that the data has not changed, and the legibility throughout the required storage period. If the integrity and legibility of the stored electronic records depends on a specific technology, then the original technology or an equivalent that provides backwards compatibility for the whole of the required storage period must also be retained.
How to keep records
HMRC state that VAT records may be kept on paper, electronically or as part of a software program (eg; bookkeeping software). All records must be accurate, complete and readable.
Penalties
If a business’ records are inadequate it may have to pay a record-keeping penalty. If at an inspection HMRC find that records have deliberately been destroyed your they will apply a penalty of £3,000 (this may be reduced to £1,500 if only some of the records are destroyed). In addition, there will be questions about why they have been destroyed!
Following my last article on charging Electric Vehicles (EVs) I have been asked about the rules on recovering VAT incurred by a business on such costs.
The current rules are:
VAT incurred by businesses when charging EVs can be recovered on the business use of those vehicles, where they are charged at work or at public charging premises.
A business can also recover the VAT for charging EVs if it is a sole proprietor or a partner in a partnership business, and it charges the EV for business purposes at home.
A business must calculate how much of the cost of charging its EV is for business use and how much is for private use by keeping mileage records. The normal input tax rules then apply.
If an employee charges an EV (whether a company vehicle or not) at a public charging point, the supply of electricity is made to the company or employer. The business can recover the VAT on the cost of charging the electric vehicle, subject to the normal rules.
Again, the employer must keep detailed mileage records to calculate how much of the charging cost is used for business and private purposes.
However, where an employee charges an EV (whether a company vehicle or not) at home, the overall supply of electricity is made to the employee and not the employer. The employer is not entitled to recover the VAT on the cost of charging the electric vehicle.
NB: We understand that HMRC’s view on this may be soon be challenged.
Current developments
Hybrid cars are treated as either petrol or diesel cars for VAT purposes. The rules on input tax for petrol and diesel vehicles are here.
VAT Basics
There can be confusion about credit notes and how they are used and accounted for, so I thought it worthwhile to pull together, in one place, an overview of the subject.
What are credit notes for?
A VAT credit note is a document issued by a supplier to a customer. It amends or corrects a previously issued invoice. Invoices are documents which evidence a taxable supply. The credit note is documentary evidence of a change to that supply, or of a decrease in the consideration for that supply. A reduction in consideration may be as a result of; cancellation, discount, refund, prompt payment, bulk order or other commercial reasons.
The information given on a credit note is the basis for establishing the adjusted VAT figure on the supply of taxable goods or services. It also enables the customer to adjust the figures for the total VAT charged to them on their purchases.
If a business issues a credit note showing a lesser amount of VAT than is correct, it is liable for the deficiency.
Legislation
The UK Law that covers credit notes is found in VAT Regulations 1995, Regulations 15, 24 and 38 of. Regulation 24A defines the term “increase (or decrease) in consideration”.
Conditions of a valid credit note
Requirements for a credit note to be considered valid:
HMRC also require for credit notes to:
Accounting
HMRC has issued guidance on how to correct VAT errors and make adjustments or claims – VAT Notice 700/45.
When you issue a credit note you must adjust:
The accounts or supporting documents must make clear the nature of the adjustment and the reason for it.
Where the adjustment is not in respect of an error in the amount of VAT declared on a VAT return, you should make any VAT adjustment arising from the issue or receipt of a credit or debit note in the VAT account in the accounting period in which the decrease in price occurs.
This will be the accounting period where the refunded amount is paid to the customer.
If you have charged an incorrect amount of VAT and have already declared it on a VAT return you can only correct an error in your declaration by adopting the appropriate method of error correction procedures.
Credits and contingent discounts
When a business allows a credit or contingent discount to a customer who can reclaim all the tax on the relevant supply, it does not have to adjust the original VAT charge – provided both it and its customer agree not to do so. Otherwise, both parties should both adjust the original VAT charge. A business should issue a credit note to its customer and keep a copy.
Prompt payment discounts
If the discount is taken up within the specified time you may adjust the consideration and amount of VAT accounted for by issuing a credit note. If you choose not to use a credit note, the original invoice must have the following information:
VAT rate change
Where a VAT invoice showed VAT at the old higher rate, then a credit note should be issued for the element of overcharged VAT. However, there is no way to charge VAT at the lower rate if:
In such circumstances, VAT cannot be saved by issuing a credit note for the old VAT invoice and then issuing a new invoice charging VAT at the lower rate.
The deadline for issuing a credit note following a rate change is 45 days. Any credit notes issued after this 45-day deadline are invalid, so the old higher rate would apply to the affected supplies.
Case law – further reading
There is a significant amount of case law on credit notes as this is an area that often creates disputes. Some of the most salient cases are:
NB: A business can only reduce the output VAT on its return if it has made an actual refund. This could be by making a payment to the customer or offsetting the credit against other invoices.
Finally
Failing to issue a credit note is a mistake that needs to be corrected under the error correction procedures.