Category Archives: VAT Planning

Budget 2017 – VAT

By   8 March 2017
0

In today’s budget, the Chancellor of the Exchequer made the following announcements on VAT:

VAT Registration

The annual VAT registration limit has been increased from £83,000 to £85,000 in line with inflation.

The deregistration limit has been increased from £81,000 to £83,000.

Registration in respect of acquisitions from other Member States has also been increased to £85,000.

Notes:  The UK’s VAT registration threshold is the highest in the EU. Businesses trading below the threshold can choose to register voluntarily. This may be appropriate in order to recover input tax on purchases (where the addition of VAT on sales would not create issues).

It is understood that the increase in the threshold will prevent around 4,000 businesses from having to register for VAT by the end of the 2017 to 2018 financial year.

VAT: ‘Split Payment’ model

It was announced that: Some overseas traders avoid paying UK VAT, undercutting online and high street retailers and abusing the trust of UK consumers who purchase goods via online marketplaces. Building on the measures introduced in Budget 2016, the government will shortly publish a call for evidence on the case for a new VAT collection mechanism for online sales. This would harness technology to allow VAT to be extracted directly by the Exchequer from online transactions at the point of purchase. This is often referred to as a ‘Split Payment’ model. This is the next step in tackling the non-payment of VAT by some overseas traders selling goods online to UK consumers”.

Use and enjoyment provisions for business to consumer mobile phone services

The government will remove the VAT use and enjoyment provision for mobile phone services provided to consumers. The measure will bring those services used outside the EU within the scope of the tax. It will also ensure mobile phone companies can’t use the inconsistency to avoid UK VAT. This will bring UK VAT rules in line with the internationally agreed approach

Making Tax Digital for Business 

And that, in a nutshell, is all Philip Hammond had to say directly on VAT.  However, via the Making Tax Digital for Business (MTDfB) Policy Paper, it was announced that businesses, self-employed people and landlords will be required to start using the new digital service from:

  • April 2018 if they have profits chargeable to Income Tax and pay Class 4 National NICs and their turnovers are in excess of the VAT threshold
  • April 2019 if they have profits chargeable to Income Tax and pay Class 4 NICs and their turnovers are below the VAT threshold
  • April 2019 if they are registered for and pay VAT
  • from April 2020 if they pay Corporation Tax

Businesses, self-employed people and landlords with turnovers under £10,000 are exempt from these requirements.

It was further announced that a one year deferral from the mandating of MTDfB for unincorporated businesses and landlords with turnovers below the VAT threshold. This means that only those businesses with turnovers in excess of the VAT threshold with profits chargeable to Income Tax and that pay Class 4 NICs will be required to start using the new digital service from April 2018.

I suppose that we should be grateful that there were not too many changes to VAT announced (I’m sure there will be many more as a result of Brexit…….).

VAT Planning – The Four “A”s

By   6 March 2017
0

To a degree, VAT planning may be considered as something of an abstract concept.  It may be straightforward, or very complex, but what does all successful VAT planning have in common?  What process should be applied in order to get the right solution and to ensure that nothing is missed?   Well this is my technique and it helps me to focus on what is necessary:

The planning process may be broken down into four distinct elements:

Planning process – The four As

  • Ascertainment
  • Analysis
  • Alternatives
  • Action

One must initially obtain all relevant information and consider the appropriate legislation, case law and HMRC documents etc –

Ascertainment

In my experience, the most difficult part of this is obtaining all of the relevant information.  It is not always clear if you have received everything available – so it is often difficult to establish what is relevant and what is not.  The skill is asking the right questions of course.  Any competent VAT adviser should be able to “get the answer” if (s)he has the full picture.

Then one must analyse the information –

Analysis

Whether it is reading contracts closely, considering EC legislation, reviewing audit trails, searching case law, looking at documentation or carrying out calculations a full analysis is vital in the process of delivering accurate, useful and relevant advice.

The next step is to use the analysis to construct some various alternatives on how to proceed –

Alternatives

The most appropriate solution may present itself immediately, or various structures may need to be considered in detail in order to find some workable alternatives.  It is important not to miss anything at this point and to communicate properly with one’s client.  Consideration is required of a client’s attitude to, inter alia; complexity, risk, time invested and tax in general in order to properly tailor VAT advice.

Finally, consideration is given to the alternatives and a decision made on what action to take –

Action

This is another point at which good communication with one’s client is important.  The client needs to understand the technicalities, the risks, the impact on business, the resources required etc in order to make an informed decision.  A good adviser will also be aware of the appropriate level of assistance required with implementation. I also find it helps if the worst case scenario is explained in each alternative and the level of resistance from HMRC one is likely to encounter.  I also always bear in mind that most people do not “speak VAT jargon”, spend their waking hours studying indirect tax legislation or reviewing VAT cases, so clear and straightforward English is needed! (Also, I find my diagrams and flowcharts created at meetings a help, even if just to amuse clients with my artistic skills!)

The penalty regime…the dark side of VAT

By   20 February 2017
0
VAT Penalties

I have made a lot of references to penalties in other articles over the years. So I thought it would be a good idea to have a closer look; what are they, when are they levied, rights of appeal, and importantly how much could they cost if a business gets it wrong?

Overview

Making mistakes…

Broadly, a penalty is levied if the incorrect amount of VAT is declared, either by understating output tax due, overclaiming input tax, or accepting an assessment which is known to be too low.

Amount of penalty

HMRC detail three categories of inaccuracy. These are significant, as each has its own range of penalty percentages. If an error is found to fall within a lower band, then a lower penalty rate will apply. Where the taxpayer has taken ‘reasonable care,’ even though an error has been made, then no penalty will apply.

  • An error, when reasonable care not taken: 30%;
  • An error which is deliberate, but not concealed: 70%;
  • An error, which is deliberate and concealed: 100%.

Reasonable care

There is no definition of ‘reasonable care’. However, HMRC have said that they would not expect the same level of knowledge or expertise from a self-employed person, as from a large multi-national.

HMRC expect that, where an issue is unclear, advice is sought, and a record maintained of that advice. They also expect that, where an error is made, it is adjusted, and HMRC notified promptly. They have specifically stated that merely to adjust a return will not constitute a full disclosure of an error. Therefore a penalty may still be applicable. We advise that, even if an error is not required to be reported independently on a form VAT652 (usually if < £10,000 of VAT) a letter is sent to HMRC disclosing that the error has been adjusted on the return. We have a standard template available for this process.

What the penalty is based on

The amount of the penalty is calculated by applying the appropriate penalty rate (above) to the ‘Potential Lost Revenue’ or PLR. This is essentially the additional amount of VAT due or payable, as a result of the inaccuracy, or the failure to notify an under-assessment. Special rules apply where there are a number of errors, and they fall into different penalty bands.

Defending a penalty 

The percentage penalty may be reduced by a range of ‘defences”.  These are:

– Telling; this includes admitting the document was inaccurate, or that there was an under-assessment, disclosing the inaccuracy in full, and explaining how and why the inaccuracies arose;

– Helping; this includes giving reasonable help in quantifying the inaccuracy, giving positive assistance rather than passive acceptance, actively engaging in work required to quantify the inaccuracy, and volunteering any relevant information;

– Giving Access; this includes providing documents, granting requests for information, allowing access to records and other documents.

Further, where there is an ‘unprompted disclosure’ of the error, HMRC have power to reduce the penalty further. This measure is designed to encourage businesses to review their own VAT returns.

A disclosure is unprompted if it is made at a time when a person had no reason to believe that HMRC have discovered or are about to discover the inaccuracy. The disclosure will be treated as unprompted even if at the time it is made, the full extent of the error is not known, as long as fuller details are provided within a reasonable time.

HMRC have included a provision whereby a penalty can be suspended for up to two years. This will occur for a careless inaccuracy, not a deliberate inaccuracy. HMRC will consider suspension of a penalty where, given the imposition of certain conditions, the business will improve its accuracy. The aim is to improve future compliance, and encourage businesses which genuinely seek to fulfil their obligations. We have noticed that HMRC is increasingly using the penalty suspension mechanism.

Appealing a penalty 

HMRC have an internal reconsideration procedure, where a business should apply to in the first instance. If the outcome is not satisfactory, the business can pursue an appeal to the First Tier Tribunal. A business can appeal on the grounds of; whether a penalty is applicable, the amount of the penalty, a decision not to suspend a penalty, and the conditions for suspension.

The normal time limit for penalties to four years. Additionally, where there is deliberate action to evade VAT, a 20 year limit applies. In particular, this applies to a loss of VAT which arises as a result of a deliberate inaccuracy in a document submitted by that person.

These are just the penalties for making “errors” on VAT returns. HMRC have plenty more for anything from late registration to issuing the wrong paperwork.

Assistance

Our advice is always to check on all aspects of a penalty and seek assistance for grounds to challenge a decision to levy a penalty. We have a very high success rate in defending businesses against inappropriate penalties.  It is always worth running a penalty past us.

VAT Latest from the courts – Reverse Charge

By   13 February 2017
0

The First Tier Tribunal case of University Of Newcastle Upon Tyne is a useful reminder of the impact of the Reverse Charge.

A brief guide to the Reverse Charge is included below.

Background

As with many UK universities, Newcastle was keen to encourage applications to study from new students from overseas. This is an important form of income for the institution.  It used local (overseas) agents to recruit students. Some 40% of those students were studying as undergraduates, 40% as postgraduates on one year “taught” courses and 20% as postgraduate research students studying for doctorates.  In 2014 the University had agreements with more than 100 agents worldwide. The agents used their own resources to recruit students for universities around the world, including in the UK. The University entered into contractual arrangements with agents and paid commission to them. In 2008 the University paid agent commissions of £1.034m, rising to £2.214m in 2012.

The Tribunal was required to consider whether the services supplied by the agents were a single supply to University or separate supplies to both the University and students. If the entire supply is to the University then the Reverse Charge is applicable and, because the University is partly exempt, this would create a VAT cost to it. If the supplies are to both the students and the University, the Reverse Charge element would be less and the VAT cost reduced. (There were changes to the Place Of Supply legislation during the period under consideration, but I have tried to focus on the overall impact in this article.)

The University contended that agents made two supplies: a supply to the University of recruitment services and a supply to students of support services. The commission paid by the University should therefore be apportioned so as to reflect in part direct consideration paid by the University for supplies of services to it, and in part third party consideration for services supplied to the students. The supplies to students would not made in the UK and therefore were not subject to UK VAT.

Decision

After thorough consideration of all of the relevant material, the judge decided that the agents made a single supply of services to the University and make no supplies to students. This meant that the University must account for VAT on the full value of services received since 2010 under the Reverse Charge (although before 2010 different rules on place of supply applied).  Additionally,  it was decided the University was not entitled to recover as input tax VAT for which it is required to account by means of a Reverse Charge. There was no direct and immediate link between the commission paid to agents and any taxable output of the University or the economic activities of the University as a whole.

Commentary

It is understood that the way the University recruited students using overseas agents is common amongst most Universities in the UK, so this ruling will have a direct impact on them.  It was hardly a surprising decision, but underlines the need for all businesses to consider the impact of the application of the Reverse Charge.  Of course, the Reverse Charge will only create an actual VAT cost if a business is partly exempt, or involved in non-business activities.  The value of the Reverse Charge also counts towards the VAT registration threshold.  This means that if a fully exempt business receives Reverse Charge services from abroad, it may be required to VAT register (depending on value). Generally, this means an increased VAT cost. This situation may also affect a charity or a NFP entity.

The case also highlights the importance of contracts, documentation and website wording (should any more reminders be needed).  VAT should always be borne in mind when entering into similar arrangements. It may also be possible to structure arrangements to avoid or mitigate VAT costs if carried out at an appropriate time.

We can assist with any of the above and are happy to discuss this with you.

Guide – Reverse charge on services received from overseas
Normally, the supplier of a service 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.  This is known as the ‘Reverse Charge’ procedure.  Generally, the Reverse Charge must be applied to services which are received by a business in the UK VAT free from 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.
The outcome
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 the charge aims to avoid cross border VAT rate shopping. It is not possible to attribute the input tax created directly to the deemed (taxable) supply. 

VAT (GST) Introduction in India delayed

By   23 January 2017
0

It was recently announced that the Indian version of VAT: Goods & Services Tax – GST is intended to be rolled out across the country on 1 July 2017 rather than the previously announced date of April 2017. This is after details of how the income will be shared between various authorities has been agreed.

It is anticipated that GST will follow the European model and that the tax base will be comprehensive, as virtually all goods and services will be taxable, with minimum exemptions.  GST will incorporate and replace all the various central taxes such as: Central Excise Duty, Additional Excise Duty, Service Tax, Additional Custom Duty and Special Additional Duty as well as state-level taxes such as Value Added Tax or Sales Tax, Central Sales Tax, Entertainment Tax, Entry Tax, Purchase Tax, Luxury Tax.

The introduction of GST is likely to bring in significant changes to doing business in India or with Indian suppliers/customers cross-border.

Please contact us should you have any queries on this matter.

VAT Self-billing and latest from the courts

By   6 January 2017
0

Self-billing: where the customer issues the invoice (and how this can go wrong).

A recent case Court of Appeal case: GB Housley here has highlighted the inherent dangers of using the self-billing system.  Self-billing is a very useful mechanism for a lot of businesses, especially in respect of activities like royalties and scrap purchases where the supplier may not know (or know immediately) the value of the supply.  Before we look at the case, it may be useful to recap the rules for self-billing.

Self-billing is an arrangement between a supplier and a customer. Both customer and supplier must be VAT registered. The customer prepares the supplier’s invoice and forwards a copy to the supplier with the payment.  There is no requirement to notify HMRC or get approval for using the arrangement.

If you are the customer

You issue the documentation and you are able to reclaim as input tax the VAT shown on the self-billing invoice.

In order to set up self-billing arrangements with your supplier you are required to:

  • enter into an agreement with each supplier
  • review agreements with suppliers at regular intervals
  • keep records of each of the suppliers who let you self-bill them
  • make sure invoices contain the required information and are correctly issued

If a supplier stops being registered for VAT then you can continue to self-bill them, but you can’t issue them with VAT invoices. Your self-billing arrangement with that supplier is no longer covered by the VAT regulations.

Self-billing agreements

You can only operate a self-billing arrangement if your supplier agrees to put one in place. If you don’t have an agreement with your supplier your self-billed invoices won’t be valid, and you won’t be able to reclaim the input tax shown on them.

Both parties need to sign a formal self-billing agreement. This is a legally binding document. The agreement must contain:

  • your supplier’s agreement that you, as the self-biller, can issue invoices on your supplier’s behalf
  • your supplier’s confirmation that they won’t issue VAT invoices for goods or services covered by the agreement
  • an expiry date – usually for 12 months’ time but it could be the date that any business contract you have with your supplier ends
  • your supplier’s agreement that they’ll let you know if they stop being registered for VAT
  • details of any third party you intend to outsource the self-billing process to

Reviewing self-billing agreements

Self-billing agreements usually last for 12 months. At the end of this you will need to review the agreement to make sure you can prove to HMRC that your supplier agrees to accept the self-billing invoices you issue on their behalf. It’s very important that you don’t self-bill a supplier when you don’t have their written agreement to do so.

Record keeping

If you are a self-biller you’ll need to keep certain records. These are:

  • copies of the agreements you make with your suppliers
  • the names, addresses and VAT registration numbers of the suppliers who have agreed that you can self-bill them

If you don’t keep the required records, then the self-billed invoices you issue won’t be proper VAT invoices.

All self-billed invoices must include the statement “The VAT shown is your output tax due to HMRC”.

It is important that a business does not add VAT to self-billed invoices that it issues to suppliers who are not VAT-registered.

A business will only be able to reclaim  input tax shown on self-billed invoices if it meets all the record keeping requirements.

If you are a VAT registered supplier

If one of your customers wants to set up a self-billing arrangement with you, they’ll ask you to agree to this in writing. If you agree, they will give you a self-billing agreement to sign.

For VAT purposes you will be required to do all of the following:

  • sign and keep a copy of the self-billing agreement
  • agree not to issue any sales invoices to your customer for any transaction during the period of the agreement
  • agree to accept the self-billing invoices that your customer issues
  • tell your customer at once if you change your VAT registration number, deregister from VAT, or transfer your business as a going concern

The VAT figure on the self-billed invoice your customer sends you is your output tax.   You are accountable to HMRC for output tax on the supplies you make to your customer, so you should check that your customer is applying the correct rate of VAT on the invoices they send you. If there has been a VAT rate change, you will need to check that the correct rate has been used.

The Case

The issues were whether the lack of formalised self-billing agreements disqualified the use of self-billing, and if that was the case, whether alternative evidence should have been accepted to support a claim for input tax. The CoA discharged HMRC’s assessment which was issued to GB Housley – a scrap metal merchant.

The assessment was based on input tax claims made on the basis of the self-billed documents.  It was ruled that although the self-billing was used in error, HMRC should have considered alternative evidence and used its discretion on whether to allow the claims on transactions which took place. For this reason, as it is unclear whether HMRC would have assessed if they had considered other information, the assessment should be removed.

A timely warning to ensure that all of the conditions of self-billing arrangements are met, and that this is clearly demonstrable.  Ongoing monitoring is crucial for businesses operating self-billing as an overlooked change can affect the VAT treatment.

In this case, it looks like the applicant was rather fortunate, but this outcome cannot be relied on if self-billing is applied incorrectly.

We are able to advise on such agreements, arrangements and accounting.

VAT – EC proposal for new rules for e-commerce and online businesses

By   1 December 2016
0

The EC has announced measures to simplify VAT for e-commerce businesses in the EU. The proposals will purportedly allow consumers and businesses to buy and sell goods and services more easily online.

 New VAT rules for sales and goods and services online

Currently, online traders have to register for VAT in all the Member States to which they sell goods. Often cited as one of the biggest barriers to cross-border e-commerce, these VAT obligations cost businesses around €8,000 for every EU country into which they sell. We are now proposing that businesses make one simple quarterly return for the VAT due across the whole of the EU, using the online VAT One Stop Shop. This system already exists for sales of e‑services such as mobile phone apps, and has been proven successful with more than €3 billion in VAT being collected through the system in 2015. Administrative burdens for companies will be reduced by a staggering 95%, giving an overall saving to EU business of €2.3 billion and increasing VAT revenues for Member States by €7 billion.

Simplifying VAT rules for micro-businesses and start-ups

A new annual threshold of €10,000 in online sales will be introduced under which businesses selling cross-border can continue to apply the VAT rules they are used to in their home country. This will make complying with VAT rules easier for 430,000 companies across the EU, representing 97% of all micro-business trading cross‑border. A second new yearly threshold of €100,000 will make life easier for SMEs when it comes to VAT, with simplified rules for identifying where their customers are based. The thresholds could be applied as early as 2018 on e‑services, and by 2021 for online goods. Other simplifications would allow the smallest businesses to benefit from the same familiar VAT rules of their home country, such as invoicing requirements and record keeping. The first point of contact will always be with the tax administration where the business is located and businesses will no longer be audited by each Member State where they have sales.

VAT fraud from outside the EU – Removal of Low Value Consignment (LVC) relief

Small consignments imported into the EU that are worth less than €22 are currently exempt from VAT. With around 150 million parcels imported free of VAT into the EU each year, the EC says that this system is open to massive fraud and abuse, creating major distortions against EU business. Firstly, EU businesses are put at a clear disadvantage since unlike their non-EU competitors, they are liable to apply VAT from the first eurocent sold. Secondly, imported high-value goods such as smartphones and tablets are consistently undervalued or wrongly described in the importation paperwork in order to benefit from this VAT exemption. The Commission has therefore decided to remove LVC relief

Equal rules for taxing e-books, e-newspapers and their printed equivalents

Current rules allow Member States to tax printed publications such as books and newspapers at reduced rates or, in some cases, super-reduced or zero rates. The same rules exclude e-publications, meaning that these products must be taxed at the standard rate. Once agreed by all Member States, the new set-up will allow (but not oblige) Member States to align the rates on e-publications to those on printed publications.

Action

Please contact us if any of the above affects your business or your client’s businesses.

VAT Snippet – e-supplies to Russia

By   1 December 2016
0

New VAT rules for B2C supplies to Russian recipients

If your business, or your client’s business provide electronically supplied services to private consumers* in Russia new rules will require foreign (“non-established“) businesses to register and pay VAT on their supplies.

These rules will come into effect from 1 January 2017.

Supplies of such services will be subject to the Russian standard VAT rate of 15.25% of gross revenue.

For the purposes of this legislation electronically supplied services include (but are not limited to):

  • e-books
  • streaming of music and film
  • online access to games and download of games to electronic devices
  • services of social networking sites
  • cloud computing
  • hosting of websites
  • access to search engines
  • internet service providers
  • broadcasting of TV or radio channels
  • online advertising
  • data storage,
  • and other similar services

This definition broadly follows the definition for EU supplies.

Quarterly VAT returns will be required, however, there will be no right to recover input tax on these returns.

Place of belonging

As with any e-sales, it is important to have a procedure in place in order to establish the place of belonging of all customers as this will dictate what (if any) VAT is applicable, and to which authority payment should be made.  In broader terms, the rules for Distance selling must also be adhered to. Guide here 

* Russian definition of place of an individual customer – A “private consumer” is deemed to be in Russia if his/her living place is in Russia; or if he/she purchased the service by using a Russian bank (or a Russian electronic money operator), a network address registered in Russia, or a phone number with the Russia’s country code.

This follows an international trend as may be seen with similar developments here

If you are affected by this new VAT legislation, please contact us.  We have a worldwide network which can take the pain out of international VAT compliance and avoid a business inadvertently triggering swingeing penalties and interest overseas. Please see further details of this service here

VAT Latest from the courts – Application of Capital Goods Scheme

By   10 November 2016
0

Should the costs of a phased development be aggregated, and if so, do the anti-avoidance provisions apply?

In the case of Water Property Limited (WPL) the First Tier Tribunal was asked to consider the application of; the Capital Goods Scheme (CGS) and the anti-avoidance provisions set out in the VAT Act 1994, Schedule 10, para 12.

A helpful guide to the CGS is here

Background

WPL purchased land and buildings formerly used as a public house, subject to planning permission to convert the ground floor into a children’s day care nursery and the upper floor into residential flats. The planning permission was subsequently granted. WPL paid £210,000 plus £37,500 VAT on the acquisition of the ex-pub in March 2013. The children’s nursery business was kept separate from the property development business to enable the children’s nursery business to be sold at a date in the future and for the leasehold reversion to be retained as an investment by WPL.  The value of the building contract for the nursery was £209,812.34 including VAT. The value of the contract for the residential flats was £161,546.42 including VAT. The consideration for the acquisition and each phase of development was below £250,000 (the threshold at which land and buildings become CGS items) but combined, they exceeded the £250,000 limit. WPL exercised an option to tax on the property and entered into a lease with Smile Childcare Limited (SCL).  SCL was established to carry on a business of the provision of nursery care for infant children. It was jointly owned by Mr and Mrs Waters. Mrs Waters as the operator of the children’s nursery.

WPL recovered input tax on costs incurred in respect of the nursery, but not the flats. It was accepted by the appellant that SCL and WPL were “connected” within the meaning of VAT Act 1994, Schedule 10, para 13 and that the activity of carrying on the business of a nursery was an exempt activity.

Issue

HMRC formed the view that the option to tax should be disapplied by virtue of the anti-avoidance legislation meaning that no input tax was recoverable. This is because the property was, or was intended to become, a CGS item and the ‘exempt land test’ is met. This test is met if, at the time the grant is made, the grantor, or a person connected with the grantor expects the land to be used for an exempt purpose.

So the issue was whether the land constituted a CGS item.  That is, whether the value of the two elements forming the phased development should be aggregated.

Decision

The FTT allowed the taxpayer’s appeal against HMRC’s decision. It was decided that the acquisition and development costs were financed through different means; there were separate contracts for each phase; there was no overlap in the works* and HMRC had not identified any evasion, avoidance or abuse and considered that the costs did not need to be aggregated.  In addition, it was concluded that WPL had relied on HMRC guidance in determining that there was no requirement to aggregate the cost of the phased development provided that there was no overlap in time.

As a consequence, as each part of the development fell below the £250,000 limit, there were no CGS items.  Therefore the fact that the parties were connected was irrelevant and the anti-avoidance provisions did not apply such that the option to tax could not be disapplied meaning that the recovery of the input tax was appropriate. The Chairman also commented that the appellant had a legitimate expectation to rely on the guidance provided by HMRC (in this case the provision of a copy of Public Notice 706/2).

Commentary

There is often uncertainty on the VAT position of land and property developments of this kind, and the interaction with the CGS is rarely straightforward.  This is not helped by HMRC’s interpretation of the rules.

Action

If any business or advisers with clients which have been;

  •  forced to use the CGS as a result of aggregation
  • subject to the application of the anti-avoidance provisions
  • assessed despite relying on HMRC’s published guidance

they should seek advice and review their position. We can advise in such circumstances.

 * As per PN 706/2 Para 4.12 as follows
 “What if the refurbishment is in phases?
If you do this you will need to decide whether the work should be treated as a whole for CGS [capital goods scheme] purposes or whether there is more than one refurbishment. If you think that each phase is really a separate refurbishment then they should be treated separately for CGS purposes. Normally there is more than one refurbishment when:
· There are separate contracts for each phase of work, or;
· A contract where each phase is a separate option which can be selected, and;
· Each phase of work is completed before work on the next phase starts…”

VAT – Treatment of used pre-registration assets

By   9 November 2016
0

New HMRC Publication: Brief 16/2016

HMRC has clarified its position on the claim of input tax relating to assets used by a business prior to VAT registration.  HMRC had previously, in some circumstances, sought to disallow an element of such input tax. They now accept that input tax incurred on fixed assets purchased within four years of the Effective Date of Registration (EDR) is recoverable in full, providing the assets are still in use by the business at the time of EDR. HMRC state that there has been no change of policy on this matter, however, experience insists that that there have been cases where they have sought to limit the amount of VAT claimable prior to registration.  This brings the VAT treatment into line with what many advisers always thought the position to be.

Background

UK legislation permits businesses which have become VAT registered to recover tax incurred on goods and services purchased before their EDR. This is so as long as the purchases are used in taxable activities post EDR. The “simplified” rules are now:

  • Services

Services must have been received less than six months before the EDR for VAT to be deductible. This excludes services that have been supplied onwards pre EDR. There may be a restriction to VAT recovery if a business is partly exempt. A guide to partial exemption here

  • Goods

Input tax incurred on goods which were purchased within four years of EDR and are still on hand at the time of EDR may be recovered in full (subject to any partial exemption restriction). Input tax on goods which were consumed or sold prior to EDR do not qualify for recovery.  This rule also applies to fixed assets.

Please contact us if your business, or that of your clients have been the subject of a disallowance of input tax in these circumstances.