The sale of ostriches is zero rated, but kangaroos are standard rated. Both are sold as food.
Category Archives: VAT- Output Tax
VAT annual statistics updated
HMRC has updated its publication on the VAT official statistics from 2023 to 2024. It covers information on VAT receipts in the UK, statistics on the trader population and VAT registrations. The tables and commentary have been updated to reflect recent receipts.
Headlines
- total VAT receipts in the financial year 2023 to 2024 increased by 7% to £168 billion compared to £158 billion in 2022 to 2023
- the VAT population in 2023 to 2024 was 2,178,950, with 238,176 new registrations and 273,768 de-registrations in-year
- total net VAT liability in 2023 to 2024 was £173 billion
- the wholesale and retail sector was the largest contributor to net VAT liability (32%) with a total of £55 billion
- traders with an annual turnover of greater than £10 million paid 75% of total net VAT liability (£130 billion).
VAT: Whether an online tool an ‘examination service’? The Generic Maths case.
Latest from the courts.
In the Generic Maths Limited First Tier Tribunal case the issue was whether the appellant’s product; ‘ConquerMaths’ amounted to examination services so to be exempt via The VATA 1994, Schedule 9, Group 6, Item 3.
Background
Generic Maths provided an online tool which was intended to be of benefit to students or their parents/teachers. The following facts concerning ConquerMaths were found:
- it does not lead to any qualifications
- users can drop in and out of the offering (unlike the way they might have to proceed if following a course leading to a qualification)
- it includes many hundreds of available diagnostic tests that test students’ knowledge of the principles that will be taught on the various subjects
- several short tutoring videos are included, although the number of videos is small in comparison to the number of diagnostic tests
- the average user spends 75 minutes on diagnostic tests compared to five minutes on videos
- the appellant’s witnesses described the product as diagnostic assessments, formative assessments, and summative assessments
- in addition to the diagnostic tests, the product includes worksheets in an exam format. Pupils are encouraged to complete these offline and then feed the results into the system
The issue
Simply put; was the product predominantly a tool that provides assessments enabling those using the product to determine what level of maths ability the student has reached and identify any gaps in knowledge and therefore an exempt supply since it falls into the category “examination services”? Or, as HMRC contended, was it an online mathematical tutorial tool which was standard rated as it was a composite supply the predominant element of which was education and that the supply was not one of examination services? (There was no argument that these were exempt educational services).
The tests
The FTT considered that the correct test for determining the nature of the appellant’s supplies was an objective test, based on how they would be characterised by the typical consumer. On that basis, ConquerMaths was a teaching product designed to improve maths understanding, not an examination service.
Additionally, if the correct test was rather a functional test, the result would be the similar.
Decision
The Tribunal did not consider that the product was a supply of examination services within Item 3. It found that the assessment had been made using best judgment by HMRC and accordingly that the appeal should be dismissed.
Commentary
This is probably the correct decision, although the examination and education exemptions are open to interpretation. Care should be taken by taxpayers that the exemption is correctly applied. Although the definition of examination services is wider than formal public examinations, it was not wide enough to encompass ConquerMaths.
VAT Planning: design and build
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.
A VAT Did you know?
Grass seed is zero-rated, but turf is standard rated.
VAT Success Stories
Investment company
HMRC denied claims for input tax incurred on costs relating to the potential acquisition of an overseas business and threatened to deregister the plc as it was not, currently, making taxable supplies. Additionally, HMRC contended that even if VAT registration was appropriate, the input tax incurred did not relate to taxable supplies and was therefore blocked.
We were able to persuade HMRC that our client had a right to be VAT registered because it intended to make taxable supplies (supplies with a place of supply outside the UK which would have been taxable if made in the UK) and that the input tax was recoverable as it related to these intended taxable supplies (management charges to the acquired business). This is a hot topic at the moment, but we were able to eventually demonstrate, with considerable and detailed evidence that there was a true intention.
This meant that UK VAT registration was correct and input tax running into hundreds of thousands of pounds incurred in the UK was repaid to our client.
Restaurant
We identified and submitted a claim for a West End restaurant for nearly £300,000 overpaid output tax. We finally agreed the repayment with HMRC after dealing with issues such as the quantum of the claim and unjust enrichment.
Developer
Our property developing client specialises in very high-end residential projects in exclusive parts of London. They built a dwelling using an existing façade and part of a side elevation. We contended that it was a new build (zero rated sale and no VAT on construction costs and full input tax recovery on other costs). HMRC took the view that it was work on an existing dwelling so that 5% applied and input tax was not recoverable. After site visits, detailed plans, current and historical photograph evidence HMRC accepted the holy grail of new build. The overall cost of the project was tens of millions.
Charity
A charity client was supplying services to the NHS. The issue was whether they were standard rated supplies of staff or exempt medical services. We argued successfully that, despite previous rulings, the supplies were exempt, which benefited all parties. Our client was able to deregister from VAT, but not only that, we persuaded HMRC that input tax previously claimed could be kept. This was a rather pleasant surprise outcome. We also avoided any penalties and interest so that VAT did not represent a cost to the charity in any way. If the VAT was required to be repaid to HMRC it is likely that the charity would have been wound up.
Shoot
A group of friends met to shoot game as a hobby. They made financial contributions to the syndicate in order to take part. HMRC considered that this was a business activity and threatened to go back over 40 years and assess for output tax on the syndicate’s takings which amounted to many hundreds of thousands of pounds and would have meant the shoot could not continue. We appealed the decision to retrospectively register the syndicate.
After a four-year battle HMRC settled on the steps of the Tribunal. We were able to demonstrate that the syndicate was run on a cost sharing basis and is not “an activity likely to be carried out by a private undertaking on a market, organised within a professional framework and generally performed in the interest of generating a profit.” – A happy client.
Chemist
We assisted a chemist client who, for unfortunate reasons, had not been able to submit proper VAT returns for a number of years. We were able to reconstruct the VAT records which showed a repayment of circa £500,000 of VAT was due. We successfully negotiated with HMRC and assisted with the inspection which was generated by the claim.
The message? Never accept a HMRC decision, and seek good advice!
VAT: Construction Services Reverse Charge – New HMRC Manual
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:
- VATREVCON05000 – Data Protection
- VATREVCON10000 – Introduction: contents
- VATREVCON20000 – Scope of the construction reverse charge: contents
- VATREVCON30000 – How the construction reverse charge works: contents
- VATREVCON40000 – Compliance issues: contents
A VAT Did you know?
Oils and fats used for animal food is zero-rated, unless it is waste oil from a fish and chip shop – which is standard rated… even if it is used to feed animals.
VAT treatment of lost, stolen, damaged or destroyed goods
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.
More on illegal activities here.
VAT: Are hair transplants ‘medical care’? – The Advanced Hair Technology Ltd case
Latest from the courts
In the Advanced Hair Technology Ltd First-Tier Tribunal (FTT) case the issue was whether hair transplants are exempt supplies of medical care, or were they for ‘cosmetic’ purposes and consequently standard rated?
Background
Advanced Hair Technology Ltd (AHT) was a medical practice trading as The Farjo Hair Institute which specialised in hair restoration surgery. It treated conditions related to hair loss, in particular androgenetic alopecia (AGA). Dr Farjo who carried out the work is qualified is a medical practitioner with the Royal College of Surgeons. The output tax which HMRC deemed due was circa £2,500,000.
The sole issue was what AHT provided covered by the definition ‘medical care’?
Legislation
The VAT Act 1994, Schedule 9, Group 7, item 1 covers services which are for the primary purpose of protecting, restoring, or maintaining health: “medical care”.
Contentions
AHT argued that it was treating patients for medical conditions, as opposed to providing aesthetic surgery and consequently, its supplies were exempt. The appellant explained that several patients believed that hair loss had affected their self-confidence and so the surgery improved their overall health (which includes a mental health element). Furthermore, the surgery helps to protect the skin from future photodamage, minor trauma and thermal insult.
HMRC contended that none of the patients had any recorded prior psychiatric conditions, eg; depression or anxiety, nor had any stated that they were looking to benefit from the surgery beyond it improving their appearance and confidence. Additionally, no recipients of the treatment said that they were seeking any of the above physical protections.
Therefore, the treatment was a standard rated cosmetic procedure.
Decision
The meaning of ‘medical care’ was considered by the Court of Appeal in its decision in Mercy Global [2023] EWCA Civ 1073.
The court agreed with HMRC that a “principal purpose” test must be applied in all cases.
The evidence before the FTT was that by the age of 70 at least 80% of caucasian men suffer from hair loss as a result of AGA, and this is part of the normal process of aging. AGA is not considered a medical condition but rather a symptom.
AHT’s contention that the procedures serve a therapeutic purpose related to psychological issues was dismissed due to a lack of evidence from qualified practitioners. This reinforced the FTT’s view that the treatments were primarily cosmetic, rather than for medical reasons because altering one’s physical appearance was for aesthetic purposes.
The relevant supplies were therefore outside the exemption.
The appeal was dismissed.
Commentary
The judgment provides some guidance on the interpretation of the definition of medical care for the purposes of the exemption and follows similar recent cases which we covered here:
The concept of the “provision of medical care” does not include medical interventions carried out for a purpose other than that of diagnosing, treating and in so far as possible, curing diseases or health disorders and it is the purpose of the medical intervention rather than merely the qualifications of the person providing it that is key in determining the VAT liability.
There has been an ongoing debate as to what constitutes medical care. Over 20 years ago I was advising a large London clinic on this very point and much turned on whether patients’ mental health was improved by undergoing what many would regard as cosmetic procedures. We were somewhat handicapped in our arguments by the fact that many of the patients were lap dancers undergoing breast augmentation on the direction of the owner of a certain club…
It is worth remembering that not all services provided by a medically registered practitioner are exempt. The question of whether the medical care exemption is engaged in any given case will turn on the particular facts .
Interestingly, the judge here stated that the medical exemption may apply to some patients whose hair loss was a result of trauma caused by cancer treatment.