Kangaroo steak is sold as food in shops – food is zero-rated, but the sale of live kangaroos is standard rated.
Category Archives: VAT- Output Tax
Common VAT mistakes
VAT basics
None of us are perfect, and any business can make mistakes with VAT despite all intentions to take reasonable care. So what are the most common errors? Here’s a list of pitfalls to avoid:
Wrong rate of output tax charged
- The default position is that a supply is standard rated unless it is specifically reduced rated, zero-rated, exempt or outside the scope of UK VAT
Land and property transactions
- Misunderstanding the correct VAT treatment of a land and property transactions
- Not recognising VAT issues
- Issues with the Option To Tax
- TOGC issues
- A guide to triggerpoints here
Cross-border issues
- Failing to meet the requirements to zero-rate exports
- Incorrect import procedures
- Ignoring the reverse charge
Inter-company charges
- Misunderstanding the VAT treatment of management charges
Partial exemption
- Not recognising partial exemption
- Using an inappropriate method
- Failing to carry out the annual adjustment
- Failing to make Capital Goods Scheme adjustments
Business entertainment
- Different rules apply to the recovery of input tax on entertaining depending on the type of recipient, eg: clients, contacts, staff, partners and directors depending on the circumstances
Registration
- Late registration
- Exception from registration
- Misunderstanding pre-registration issues
- Failing to appreciate voluntary registration
- Deregistration issues
VAT groups
- Failing to VAT group when beneficial or failing to disband
- Recovery of input tax
- Timing of transactions
- Partial exemption issues
Tax points (Time Of Supply)
- Failing to recognise a tax point for output tax
- Incorrect treatment of deposits
- Incorrect treatment of forfeit deposits
- Recovery of input tax at incorrect time
Bad Debt Relief issues
- Failing to claim Bad Debt Relief
- Failing to repay a claim to HMRC when payment from customer is received
- Failing to repay input tax when a supplier is not paid (after six months)
Overseas issues
- Not recognising indirect tax obligations outside GB
- Not recovering VAT incurred overseas
- Place of supply misunderstandings
Claiming input tax without the correct documentation
- A guide to alternative evidence here
Recovering irreclaimable input tax
- A guide to what VAT is not claimable here
Return errors
- A box-by-box guide here
Business promotion schemes
- Incorrect treatment of vouchers, gifts and discounts
Composite or separate supplies
- Treating a composite supply as individual supplies, or vice-versa
Changes to a business
- Selling new products, acquisitions, share sales, disposals, re-structuring, and ceasing to trade can all have a VAT impact and this can be missed
Fuel and motoring costs
- Not applying Road Fuel Scale Charges correctly
- Incorrect input tax recovery on vehicle purchases/leases/repairs etc
Special schemes
- Failure to use the most suitable alternative schemes for accounting for VAT
One-off transactions
- Failing to recognise VAT issues of unusual or one-off transactions
Non-business (NB) and charitable activities
- Failure to recognise NB activities
- Failure to restrict input tax in connection with NB activities
Errors can lead to draconian penalties, and ignorance is not a defence.
A guide to VAT triggerpoints here .
VAT: Can Nitrous Oxide be zero-rated food? The Telamara case – no laughing matter
Latest from the courts
In the First-Tier tribunal (FTT) case of Telamara Limited the issue was whether Nitrous Oxide (N₂O) used exclusively for culinary use can be zero-rated.
Background
The appellant supplied N₂O canisters which were used as cream chargers. These were used for whipping cream and creating foams and mousses, and to infuse liquids. The relevant invoices described the product as; “Dairy products misc. Cream/beverage infusers 600 x 8g cylinder”. The chargers were not for medical use. The chargers were certified as Halal products.
Telamara’s customers were wholesalers and the units in which the chargers were sold were in boxes of 600. The packaging states that the contents of the chargers should not be inhaled. If consumed on its own N₂O is tasteless and all but imperceptible and its only effect is on the consistency of the whipped food.
The contentions
Telamara considered that the sale of the canisters should be zero-rated because they were for culinary use as food of a kind for human consumption via The VAT Act 1994, Schedule 8 VAT Act 1994, Group 1, Item 1. It was accepted that the N₂O would not be “eaten on its own” but it nevertheless was said to form an ingredient of all of the food substances into which it was incorporated by infusion or by use of the cream whipper, changing the state and nature of those foods. Furthermore, the appellant claimed unfairness because HMRC had been unable to provide clear guidance on the correct VAT treatment when the business started but HMRC subsequently became certain the supplies were standard rated.
Unsurprisingly, HMRC disagreed, formed a view that the supplies were not of food, and raised an assessment for the output tax it deemed to be due on the standard rated supplies.
Decision
The appeal was dismissed. It was found that the chargers were not food because N₂O:
- had no nutritional value
- is a food additive, not food
- does not add to the calories of food
- is odourless, colourless, and tasteless
- is a gas and therefore incapable of being either eaten or drunk
The Tribunal concluded that the gases were standard rated as they were not food of a kind used for human consumption. It concluded that no informed and broad-minded person considering whether the gases were food would conclude that they were.
Commentary
Yet another “Is it food?” case adding to a long list. The Tribunal helpfully set out (drawing from an extensive and thorough review of the very many cases which have considered the scope of zero-rating of food) the required exercise considering and weighing up the following factors to answer the question of whether something is food:
(1) Nutritional value
(2) Palatability
(3) Form of the product
(4) Manner of/directions for consumption
(5) Frequency of consumption
(6) Marketing
(7) Purpose of the product
(8) Range of uses
(9) Constituent ingredients
(10) Dictionary definition of food
Summary
Is it food? is not as a straightforward question as it may seem!
We recommend that any business which is involved in ‘food” or “food-like” products should undertake a review in light of this case. We can, of course, help with this .
VAT Bad Debt Relief Noticed updated
HMRC has updated VAT Notice 700/18 – Bad Debt Relief (BDR). The update covers how and when a claim may be made.
The Notice explains when a business is entitled to BDR and how to claim it.
If a business makes supplies of goods or services to a customer but it is not paid it may be able to claim relief from VAT on bad debts that it has incurred.
The conditions for claiming BDR are:
- a business must have accounted for the VAT on the supplies and paid it to HMRC
- a business must have written off the debt in its day-to-day VAT accounts and transferred it to a separate bad debt account
- the value of the supply must not be more than the customary selling price
- the debt must not have been paid, sold, or factored
- the debt must have remained unpaid for a period of six months after the later of the time payment was due and payable and the date of the supply
- the deadline is within four years and six months of the later of the date payment was due and payable or the date of supply
These rules have varied over the years, so it is worth checking on supplies made before 1 April 1989.
To claim BDR a business includes the amount of the VAT being claimed in box 4 of its VAT return which covers the date when the conditions to make a claim are fulfilled.
If BDR has been claimed and subsequently a payment is received for the supply, a business must repay HMRC the VAT element included in the payment.
VAT – A beginner’s practical guide
VAT Basics
I am often asked if there is a VAT beginner’s guide, I find HMRC guidance generally unhelpful for someone without a tax background, so, here is all the basic information you may need in one place.
What is VAT?
Value Added Tax (VAT) is a tax charged on most business transactions made in the UK. It is charged on goods and services and is an ad valorem tax, which means it is proportionate to the value of the supply made.
All goods and services that are VAT rated (at any rate including zero) are called “taxable supplies”. VAT must be charged on taxable supplies from the date a business first needs to be registered. The value of these supplies is called the “taxable turnover”.
Exempt items
VAT does not apply to certain services because the law says these are exempt from VAT. These include some; financial services, property transactions, insurance education and healthcare. Supplies that are exempt from VAT do not form part of the taxable turnover.
The VAT rates
There are currently three rates of VAT in the UK:
- 20% (standard rate) – Most items are standard rate unless they are specifically included in the lower rate categories.
- 5% (reduced rate) – this applies to applies to certain items such as domestic fuel and power, installation of energy-saving materials, sanitary hygiene products and children’s car seats.
- 0% (zero rate) – applies to specified items such as food, books and newspapers, children’s clothing, exports, new houses and public transport.
VAT registration
A business is required to register for, and charge VAT, if:
- the taxable turnover reaches or is likely to reach a set limit, known as the VAT registration threshold
- a VAT registered business has been acquired as a going concern (TOGC)
- potentially; goods or services have been purchased VAT free from non-UK countries (a self-supply)
Registration limit
The current VAT registration threshold is £90,000. If at the end of any month the value of taxable supplies made in the past twelve months is more than this figure a business MUST VAT register. A business can opt to register for VAT if its taxable turnover is less than this. Please note that taxable turnover is the amount of income received by a business and not just profit. If a business does not register at the correct time it will be fined.
Future test
Additionally, if, at any time there are reasonable grounds to expect that the value of the taxable supplies will be more than the threshold in the next thirty days alone a business must register immediately.
What are the exceptions?
VAT is not chargeable on:
- taxable supplies made by a business which is not, and is not required to be, registered for VAT
- zero rated supplies
- supplies deemed to be made outside the UK
- exempt supplies
What if a business only makes exempt or zero-rated supplies?
Exempt
If a business only makes exempt supplies, it cannot be registered for VAT. If a business is registered for VAT and makes some exempt supplies, it may not be able to reclaim all of its input tax.
Zero-rated
If a business only supplies goods or services which are zero-rated, it does not have to register for VAT, but, it may do so if it chooses – this is usually beneficial.
What is input tax and output tax?
Input tax is the VAT a business pays to its suppliers for goods and services. It is VAT on goods or services coming into a business. In most cases, input tax is the VAT that registered businesses can reclaim (offset against output tax).
Output tax is the term used to describe the VAT charged on a business’ sales of goods or services. Output tax is the VAT a business collects from its customers on each sale it makes.
A full guide to VAT jargon here
Is there anything that will make VAT simpler for a small business?
There are a number of simplified arrangements to make VAT accounting easier for small businesses. These are:
- Cash Accounting Scheme
- Annual Accounting Scheme
- Flat Rate Scheme
- Margin schemes for second-hand goods
- Global Accounting
- VAT schemes for retailers
- Tour Operators’ Margin Scheme
- Bad Debt Relief
Details may be found here and here and here.
VAT calculation
- A business adds VAT to the value of sales it makes to other businesses or customers
- The VAT amount is reached by multiplying the sale amount by the VAT rate percentage, then adding that to the value of the sale.
- The total of the VAT on sales for a VAT period is output tax
- For a VAT period, a business will total all VAT it has been charged by suppliers (eg; stock, repairs, rent, and general business expenses etc) – this is input tax.
- On the VAT return for the period, the amount payable or reclaimable to HMRC is the output tax less input tax.
Records
A business must keep complete, up-to-date records that enable it to calculate the correct amount of VAT to declare on its returns. VAT records must be kept for at least six years, because a business will need to show them to HMRC when asked.
It is acceptable for ordinary business records to be the basis for VAT accounts. A business will need records of sales and purchases (and any adjustments such as credit notes) including details of how much VAT the business charged or paid. If trading internationally, records of imports and exports/dispatches and acquisitions with all overseas territories, including the EU must be recorded. VAT records must show details of any supplies a business has given away or taken for personal use.
VAT records must also include all invoices you have received and issued. Invoice requirements here
Records will also need to include a VAT account, showing how total input tax and output tax has been calculated to include in your VAT returns.
It is vital to ensure that the VAT records are accurate. Failure to do so can lead to significant tax penalties
MTD
For certain business, the new MTD rules apply and certain software must be used. Details here
Time of supply (tax point)
It is important to establish the time VAT is due. Full details here
VAT returns
A VAT registered business must submit returns on a regular basis (usually quarterly or monthly). A VAT return summarises a business’ sales and purchases and the VAT relating to them. All the information a business requires must be in its VAT records, specifically a VAT account.
Return requirements include:
- sales total (excluding VAT)
- output tax – this also includes VAT due on any other taxable transactions, eg; barters, non-monetary consideration, goods taken for personal use
- value of purchases (excluding VAT)
- input tax claimable
- total of VAT payable/claimable
A box by box guide to returns here.
Online VAT returns are due one month and seven days after the end of the VAT period. Payment of any VAT owed is due at the same time, although HMRC will collect direct debit payments three days later.
I have to charge myself VAT?!
VAT Basics
I have to charge myself VAT? How comes?!
Well, normally, the supplier is the person who must account to the tax authorities for any VAT due on the supply. However, in certain situations, the position is reversed and it is the customer who must account for any VAT due. Don’t get caught out!
Here are just some of the situations when you have to charge yourself VAT:
Purchasing services from abroad
These will be obtained free of VAT from an overseas supplier. What is known as the ‘reverse charge’ procedure must be applied. Where the reverse charge procedure applies, the recipient of the services must act as both the supplier and the recipient of the services. On the same VAT return, the recipient must account for output tax, calculated on the full value of the supply received, and (subject to partial exemption and non-business rules) include the VAT charged as input tax. The effect of the provisions is that the reverse charge has no net cost to the recipient if he can attribute the input tax to taxable supplies and can therefore reclaim it in full. If he cannot, the effect is to put him in the same position as if had received the supply from a UK supplier rather than from one outside the UK. Thus creating a level playing field between purchasing from the UK and overseas.
Accounting for VAT and recovery of input tax.
Where the reverse charge procedure applies, the recipient of the services must act as both the supplier and the recipient of the services. On the same VAT return, the recipient must
- account for output tax, calculated on the full value of the supply received, in Box 1;
- (subject to partial exemption and non-business rules) include the VAT stated in box 1 as input tax in Box 4; and;
- include the full value of the supply in both Boxes 6 and 7.
Value of supply: The value of the deemed supply is to be taken to be the consideration in money for which the services were in fact supplied or, where the consideration did not consist or not wholly consist of money, such amount in money as is equivalent to that consideration. The consideration payable to the overseas supplier for the services excludes UK VAT but includes any taxes levied abroad.
Time of supply: The time of supply of such services is the date the supplies are paid for or, if the consideration is not in money, the last day of the VAT period in which the services are performed.
Deregistration
Any goods on hand at deregistration with a total value of over £1,000 on which input tax has been claimed are subject to a self supply. This is a similar mechanism to a reverse charge in that the goods are deemed to be supplied to the business by the business and output tax is due. However, in these circumstances it is not possible to recover any input tax on the self supply.
Flat Rate Scheme
There is a self supply of capital items on which input tax has been claimed when a business leaves the flat rate scheme (and remains VAT registered).
Domestic Reverse Charge (DRC)
The DRC makes supplies of standard or reduced rated construction services between construction or building businesses subject to the domestic DRC, which means that the recipient of the supply will be liable to account for VAT due, instead of the supplier. Consequently, the customer in the construction industry receiving the supply of construction services will be required to pay the VAT directly to HMRC rather than paying it to the supplier. It will be able to reclaim this VAT subject to the normal VAT rules. The RC will apply throughout the supply chain up to the point where the customer receiving the supply is no longer a business that makes supplies of construction services (a so-called end user, see below). More here.
Mobile telephones and computer chips
In order to counter missing trader intra-community fraud (‘MTIC’), supplies of mobile telephones and computer chips which are made by one VAT registered business to another and valued at £5,000 and over are subject to the reverse charge. This means that the purchaser rather than the seller is responsible for accounting for VAT due.
Road fuel and power for private use
When business fuel is used privately, self-supply charges apply based on HMRC’s published road fuel scale charges, applied per vehicle per quarter.
Alternatively, businesses can maintain detailed mileage records for actual business use percentage calculations.
Land and buildings…. and motor cars
There are certain circumstances where land and buildings must be treated as a self supply… but that is a whole new subject in itself… as is supplies in the motor trade.
Even if the result of a self-supply or reverse charge is VAT neutral HMRC is within its rights to assess and levy penalties and interest in cases where the charge has not been applied; which always seems unfair. However, more often than not simple accounting entries will deal with the matter…. if the circumstances are recognised and it is remembered to actually make the entries!
VAT Land & Property: Who opts to tax? – Authorised signatories
HMRC has published Public Notice 742A . Changes were made in connection to authorised signatories, in particular; corporate bodies, overseas entities and powers of attorney. It is important to establish who can sign an option to tax (OTT) form VAT1614A as getting it wrong may invalidate an OTT with potentially very expensive consequences.
A guide to the OTT here.
It seems an appropriate time to look at who can sign an OTT form. HMRC guidance states:
“The person responsible for making the decision and notifying the option to tax depends on the type of legal entity holding (or intending to hold) the interest in the land or building, and who within that entity has the authority to make decisions concerning VAT. In most cases it will be the sole proprietor, one or more partners (or trustees), a director or an authorised administrator. If you have appointed a third party to notify an option to tax on your behalf, HMRC requires written confirmation that the third party is authorised to do so.”
Some specific situations:
Beneficial owners
In cases where there is both a beneficial owner and a legal owner of land or buildings for VAT purposes it is the beneficial owner who is making the supply of the land or building. It is therefore the beneficial owner who should OTT. This may not be the case where the beneficiaries are numerous, such as unit trusts and pension funds. In these cases, the person deemed to be making the supply is the trustee who holds the legal interest and receives the immediate benefit of the consideration.
Joint owners
Joint ownership is where two entities purchase land or buildings together, or one party sells a share in property to another party. Usually, a supply may only be made by both entities together. The two entities should OTT together as a single option and register for VAT account for output tax as a single entity (usually a partnership even if it is not a partnership for any other purpose.).
Limited partnerships
Under the Limited Partnership Act 1907 every limited partnership must be registered with Companies House. A limited partnership is made up of one or more general partners, who have unlimited liability, and one or more ‘limited’ partners, who are not liable for debts and obligations of the firm. A limited partner is unable to take part in the management.
If there is only one general partner and one or more limited partners, the general partner is treated as a sole proprietor for VAT registration purposes. If there are two or more general partners and one or more limited partners, the general partners are treated as a partnership. It is the general partners who should OTT.
Limited liability partnerships (LLPs)
An LLP has separate legal status from its members and is able to enter into contracts in its own right. An LLP is a body corporate and is may register for VAT. If the partnership decides to OTT, one or more members, as the authorised signatory must sign the notification.
Authorised persons for particular legal entities
In order for an OTT to be notified effectively, it must be signed and dated by an authorised person who possesses the legal capacity to notify a decision.
List of authorised signatories
| Legal entity | Authorised persons |
| Sole trader (proprietor) | Owner of the business |
| Trust | Trustee (or partner if VAT2 is completed) |
| Partnership (UK) | Any partner (on VAT2) |
| Partnership (Scotland) | Any partner |
| Limited partnership (UK) | General partner |
| Limited partnership (Scotland) | General partner |
| Limited Liability Partnership | Designated member or member |
| Unincorporated Association | Chairperson, treasurer, trustee or company secretary |
| Limited company | Company director or company secretary |
| Community Interest Company (CIC) | Company director or company secretary |
| Charitable Incorporated Organisation | Director, chairperson, treasurer, trustee, or company secretary |
| Community Benefit Society | Chairperson, treasurer, trustee or company secretary |
| Local Authority | Section 151 officer (or Section 95 officer in Scotland), town clerk, head of finance, or treasurer |
| VAT group | Director or company secretary of the group member that owns the property |
| Government department | Nominated VAT liaison officer or finance manager (or a person senior to either) |
| Corporate body acting as a director, trustee or company secretary | Any office holder or employee authorised by the corporate body (as long as the corporate body itself has authorisation from the owner the property) |
| Overseas entity | Director or manager |
| Power of attorney | Anyone granted a power of attorney to administer or manage the tax affairs of the owner of a property |
Commentary
An invalid OTT may result in, among other things:
- Input tax recovery being barred
- A potential Transfer of a Going Concern (TOGC) becoming subject to VAT
- VAT registration being denied
- Unwanted complexity in transactions with the potential for a deal to be aborted
- Costs in unwinding the VAT position (if firefighting is possible)
- Uncertainty
- Delays in transactions
- A dispute between two sides to a transaction
- Past input tax being the subject of clawback
- The Capital Goods Scheme (CGS) being triggered resulting in VAT costs and complexity
- HMRC levying penalties and interest
It is important to get the, seemingly simple, process of OTT right, and right first time!
A VAT Did you know?
Popcorn is standard rated. DIY popcorn – corn which is popped in a microwave is VAT free. Don’t be lazy! 🍿
VAT & Import Duty
HMRC has updated its Guidance on How to claim a repayment of import duty and VAT if you have overpaid
It sets out how to check time limits and how to claim for importers, agents, freight forwarders or express operators. It also explains how to use the Customs Declaration Service or form C285 as an individual.
It covers:
- who can apply
- when to apply
- how to apply
- what you need — Customs Declaration Service
- apply online — Customs Declaration Service
- what you will need — C285 form
- apply online — C285 form
- what happens after the application
VAT: The United Carpets case – single of multiple supplies?
Latest from the courts
Yet more on composite or separate supplies. As a background to the issue please see previous relevant cases here here here and here. This is the latest the seemingly endless and conflicting series of cases on whether certain supplies are multiple or single.
In the First-Tier Tribunal case (FTT) of United Carpets (Franchisor) Limited (UC) the issue was whether the appellant made a single supply of flooring and fitting or whether there were two separate supplies
Background
UC is a retailer of flooring (including carpets, underlay, vinyl and wood flooring), as well as beds. A customer who purchased flooring from the appellant was given the option to have an independent, self-employed, fitter to carry out the fitting of the purchased flooring. Each store has a pool of fitters who take on fitting work referred to them by the appellant. If the customer chooses, the fitter will attend the customer’s home to fit the flooring, as directed by the customer. The fitter is then paid by the customer for that work, with the money being received and retained, in full, by the fitter.
The fitters are self-employed and they use their own tools, and drive their own vehicles. They also have their own public liability insurance and are not covered by any of the appellant’s insurance policies. They are not paid by the UC and are not on the UC’s payroll. Since they are self-employed, the fitters have no ongoing obligations to the appellant (or vice versa) and can take on referrals as they please. The appellant does not hold any formal records for the fitters and is not aware of how much the fitters earn by way of the referrals. The rates charged by the fitters are determined by the fitters themselves.
The appellant’s Terms and Conditions of Sale included the following statements:
“The carpet fitting and delivery services provided by the Installer are supplied under a separate contract from the supply of goods to the Customer by the Company (UC). The Company is not responsible for the delivery or fitting of the Goods to the Customer.
“Full payment for the fitting services is due upon fitting payable by cash or cheque directly to the Installer. As detailed on the invoice, payment for the carpet fitting is made directly to the Installer under a separate contractual agreement between the Customer and the Installer…”
The issue
Whether the supplies of fitting services made to customers following the referral to the fitter by UC were supplies made by the self-employed carpet fitters who performed the services, or by UC as a single supply of flooring and fitting such that output tax was due from UC on both the retail sales and the fitting fees.
Contentions
HMRC determined that the appellant had incorrectly treated the supply of carpet fitting and contended that it supplied fitting services via sub-contractors and assessed the appellant for output tax on the fitting fees. HMRC further contend that the appellant made those supplies as part of a single supply, comprising both the flooring and the fitting services. Assessments were raised to recover the deemed underdeclared output tax.
UC’s position is that the self-employed fitters were completely independent, and that the fitting services do not form a single supply. Consequently, VAT was only due on the retail sales and not the fitting income.
Decision
The FTT concluded that there were two separate supplies:
- the supply of goods by UC to the customer, and
- the supply of services by the fitter to the customer.
After a review of the contractual documentation and the economic and commercial reality, the court was satisfied that there were three agreements:
- between UC and the customer
- between UC and the fitter
- between the fitter and the customer
The fitter provided services to the end consumer who was liable to pay the fitter.
Consequently, the appeal was allowed, and the assessments were set aside.
A significant amount of case law was cited (a list too long to reproduce here) but included were the cases of: Secret Hotels 2 Limited v HMRC; All Answers Ltd v HMRC and Tolsma v Inspecteur der Omzetbelasting Leeuwarden which were considered and applied.
Commentary
Yet another case on the perennial composite/single supply issue. This case was more straightforward than many on this subject and the outcome was no surprise. It is essential that businesses that potentially deal with agent/principal matters or make supplies at different VAT rates consider their position. Both contracts, other documentation and the commercial reality need to be considered. We recommend that in such circumstances a review is carried out specifically to establish the proper VAT position .