VAT: New tool to check HMRC’s performance and service levels

By Marcus Ward 21 July 2022

Via this service dashboard you can check current processing times and service levels for post and online requests.

The guidance sets current performance and service levels, processing dates and the date HMRC aims to return to normal service levels where there is a delay.

It currently advises:

VAT registration

Normal Service – HMRC aim to reply within 30 working days from the date the request was sent.

VAT deregistration

Normal service – HMRC aim to reply within 30 working days from the date the request was sent.

VAT – group registration application

Delayed Service

HMRC aim to return to normal service of 30 working days by the end of August 2022.

This date is an estimate and may change. HMRC say that it is sorry for the delay.

HMRC is currently processing requests received on 17 March 2022.

If you sent your request after 24 June 2022, please do not contact HMRC as it has not been processed yet.

VAT – option to tax

Delayed Service

HMRC aim to return to normal service of 30 working days by the end of August 2022.

This date is an estimate and may change. Again, HMRC say that it is sorry for the delay.

HMRC is currently processing requests received on 9 December 2021.

If you sent your request after 9 December 2021, please do not contact HMRC as it has not been processed yet.

Further, you can Check when you can expect a reply from HMRC

VAT treatment of deposits and advance payments

By Marcus Ward 19 July 2022

One query that constantly reappears is that of the VAT treatment of deposits.

This may be because there are different types of deposits with different VAT rules for each. I thought that it would be helpful for all the rules to be set out in one place, and some comments on how certain transactions are structured, so…

Broadly, we are looking at the tax point rules. The tax point is the time at which output tax is due and input tax recoverable. More on tax points here

A business may have various commercial arrangements for payments such as:

receiving advance payments
being paid in instalments
credit sales
periodic payments for continuous supplies
security deposits for goods hired

I consider these below, as well as some specific arrangements:

Advance payments and deposits

An advance payment, or deposit, is a proportion of the total selling price that a customer pays a business before it supplies them with goods or services.

The tax point if an advance payment is made is whichever of the following happens first:

the date a VAT invoice for the advance payment is issued
the date you the advance payment is received

The VAT due on the value of the advance payment (only, not the full value of the overall supply) is included on the VAT return for the period when the tax point occurs.

If the customer pays the remaining balance before the goods are delivered or the services are performed, a further tax point is created when whichever of the following happens first:

the date a VAT invoice for the balance is issued
payment of the balance is received

So VAT is due on the balance on the return for when the further tax point occurs.

Returnable deposits

A business may ask its customers to pay a deposit when they hire goods. No VAT is due if the deposit is either:

refunded in full to the customer when they return the goods safely
kept by you to compensate you for loss or damage

Forfeit deposits

If a customer is asked for a deposit against goods or services but they then don’t buy them or use the services, it may be decided to retain the deposit. Usually the arrangement is that the customer is told/agrees in advance and it is part of the conditions for the sale. This arrangement is known as forfeit deposit. It often occurs when, for example, an hotel business makes a charge for reserving a room.

VAT should be declared on receipt of the deposit or when a VAT invoice is issued, whichever happens first.

HMRC has confirmed a new policy that output tax remains due on a deposit, even if the customer does not use the goods or services for which it was paid. This came into force with effect from 1 March 2019, cancelling HMRC’s previous rules which permitted non-refundable deposits to be treated as VAT free compensation.

Continuous supplies

If you supply services on a continuous basis and you receive regular or occasional payments, a tax point is created every time a VAT invoice is issued or a payment received, whichever happens first. An article on tax planning for continuous supplies here

If payments are due regularly a business may issue a VAT invoice at the beginning of any period of up to a year for all the payments due in that period (as long as there’s more than one payment due). If it is decided to issue an invoice at the start of a period, no VAT is declared on any payment until either the date the payment is due or the date it is received, whichever happens first.

Credit and conditional sales

This is where the rules can get rather more complex.

A credit sale means the sale of goods which immediately become the property of the customer but where the price is paid in instalments.
A conditional sale is where goods are supplied to a customer but the goods remain the seller’s property until they are paid for in full.

The tax point for a credit sale or a conditional sale is created at the time you supply the goods or services to your customer. This is the basic tax point and is when you should account for the VAT on the full value of the goods.

This basic tax point may be over-ridden and an actual tax point created if a business:

issues a VAT invoice or receives payment before supplying the goods or services
issues a VAT invoice up to 14 days after the basic tax point

Credit sales where finance is provided to the customer

If goods are offered on credit to a customer and a finance company is not involved, the supplier is financing the credit itself. If the credit charge is shown separately on an invoice issued to the customer, it will be exempt from VAT. Other fees relating to the credit charge such as; administration, documentation or acceptance fees will also be exempt. VAT is declared on the full value of the goods that have been supplied on the VAT Return for that period.

If goods or services are supplied on interest free credit by arranging with a customer for them to pay over a set period without charging them interest then VAT is declared on the full selling price when you make the supplies.

Credit sales involving a finance company

When a business makes credit sales involving a finance company, the finance company either:

becomes the owner of the goods, eg; when a purchase is financed by a hire-purchase agreement
does not become the owner of the goods, eg; when a purchase is financed by a loan agreement

Hire purchase agreements

If the finance company becomes the owner of goods, the business is supplying the goods to the finance company and not the customer. There is no charge for providing the credit, so the seller accounts for VAT on the value of the goods at the time they are supplied to the finance company. Any commission received from the finance company for introducing them to the customer is usually subject to VAT.

Loan agreements

If the finance company does not become owner of the goods, the supplier is selling the goods directly to its customer. The business is not supplying the goods to the finance company, even though the finance company may pay the seller direct. VAT is due on the selling price to the customer, even if the seller receives a lower amount from the finance company. The contract between the customer and the finance company for credit is a completely separate transaction to the sale of the goods.

Specific areas

The following are areas where the rules on the treatment may differ

Cash Accounting Scheme

If a business uses the cash accounting scheme here it accounts for output tax when it receives payment from its customers unless it is a returnable deposit

Property

Care should be taken with deposits in property transactions. This is especially important if property is purchased at auction.

These comments only apply to the purchase of property on which VAT is due (commercial property less than three years old or subject to the option to tax). If a deposit is paid into a stakeholder, solicitor’s or escrow account (usually on exchange) and the vendor has no access to this money before completion no tax point is created. Otherwise, any advance payment is treated as above and creates a tax point on which output tax is due to the extent of the deposit amount. Vendors at auction can fall foul of these rules. If no other tax point has been created, output tax is due on completion.

Tour Operators’ Margin Scheme (TOMS)

TOMS has distinct rules on deposits. Under normal VAT rules, the tax point is usually when an invoice is issued or payment received (as above). Under TOMS, the normal time of supply is the departure date of the holiday or the first occupation of accommodation. However, in some cases this is overridden. If the tour operator receives more than one payment, it may have more than one tax point. Each time a payment is received exceeding 20% of the selling price, a tax point for that amount is created. A tax point is also created each time the payments received to date (and not already accounted for) exceed 20% when added together. There are options available for deposits received when operating TOMS, so specific advice should be sought.

VAT Registration

In calculating turnover for registration, deposits must be included which create a tax point in the “historic” test. Care should also be taken that a large deposit does not trigger immediate VAT registration by virtue of the “future” test. This is; if it is foreseeable at any time that receipts in the next 30 days on their own would exceed the turnover limit, currently £85,000, then the registration date would be the beginning of that 30-day period.

Flat Rate Scheme

A business applies the appropriate flat rate percentage to the value of the deposit received (unless it is a returnable deposit). In most cases the issue of an invoice may be ignored if the option to use a version of cash accounting in the Flat Rate Scheme is taken. More on the FRS here and here

Please contact us if you have any queries on this article or would like your treatment of deposits reviewed to:

Ensure treatment is correct to avoid penalties, and/or;
Establish whether planning is available to properly defer payments of output tax under the tax point rules.

VAT: The importance of Transfer of a Going Concern rules. The Haymarket case

By Marcus Ward 6 June 2022

Latest from the courts

In the First Tier Tribunal (FTT) case of Haymarket Media Group Limited (Haymarket) the issue was whether the sale of Teddington TV Studios qualified as a VAT free Transfer of a Going Concern (TOGC).

Background

The site in question was subjected to an Option To Tax (OTT) by the supplier. The sale of the property was with the benefit of planning consent for the development of flats and houses on the site after demolition of the TV studios.

Subject of the appeal

The transferor/vendor had previously let a small building on the site to the purchaser’s advisers and, on this basis, the sale was structured to be a TOGC as a property rental business. HMRC raised an assessment as it considered that neither a property rental business, nor a property development business had been transferred.

Decision

The appeal was dismissed. The FTT found that, despite the short lived and minor letting, this did not constitute a business. Further, that even if this had been a business, the contract required vacant possession so a business could not have been continued.

The contention that a property development business was being carried on was also rejected. Despite significant costs being incurred by Haymarket in obtaining the planning permission, the intention* was always to sell the site to a developer, rather than the appellant carrying out the development itself (there was no meaningful work being carried out on the site). The fact that planning permission was obtained did not mean that there was an ongoing property development business which could be transferred.

* The importance of “intention” in VAT is considered here and here.

Technical

In order for a transaction to qualify for a VAT free TOGC, ALL of the following conditions must be met:

the assets must be sold as a business, or part of a business, as a going concern
the assets must be used by the transferee in carrying on the same kind of business, whether or not as part of any existing business, as that carried on by the transferor in relation to that part (HMRC guidance uses the words “intend to use…” which, in some cases may provide additional comfort)
there must be no break in trading
where the seller is a taxable person (VAT registered) the purchaser must be a taxable person already or immediately become, as a result of the transfer, a taxable person
where only part of a business is sold it must be capable of separate operation
there must not be a series of immediately consecutive transfers

In this case, the first, second and third tests was failed leaving the supply to be VAT-able as a result of the OTT.

More on the complex subject of TOGCs including case law here, here, here, and here.

Commentary

TOGCs are often a minefield for taxpayers and their advisers, especially if property is involved. Not only is land law and the relevant VAT legislation complex, but property transactions are usually high value, with a lot of VAT at stake (the VAT in this case was £17 million). Additionally, they are often “one-offs” and frequently outside the usual commercial expertise of people running the business. We strongly advise that comprehensive technical advice is always obtained when TOGC is mooted by one side or the other, particularly when the relevant asset is involved in property letting or development.

VAT treatment of deposits and advance payments

By Marcus Ward 16 May 2022

One query that constantly reappears is that of the VAT treatment of deposits.

Broadly, we are looking at the tax point rules. The tax point is the time at which output tax is due and input tax recoverable. More on tax points here

A business may have various commercial arrangements for payments such as:

receiving advance payments
being paid in instalments
credit sales
periodic payments for continuous supplies
security deposits for goods hired

I consider these below, as well as some specific arrangements:

Advance payments and deposits

An advance payment, or deposit, is a proportion of the total selling price that a customer pays a business before it supplies them with goods or services.

The tax point if an advance payment is made is whichever of the following happens first:

the date a VAT invoice for the advance payment is issued
the date you the advance payment is received

The VAT due on the value of the advance payment (only, not the full value of the overall supply) is included on the VAT return for the period when the tax point occurs.

If the customer pays the remaining balance before the goods are delivered or the services are performed, a further tax point is created when whichever of the following happens first:

the date a VAT invoice for the balance is issued
payment of the balance is received

So VAT is due on the balance on the return for when the further tax point occurs.

Returnable deposits

A business may ask its customers to pay a deposit when they hire goods. No VAT is due if the deposit is either:

refunded in full to the customer when they return the goods safely
kept by you to compensate you for loss or damage

Forfeit deposits

VAT should be declared on receipt of the deposit or when a VAT invoice is issued, whichever happens first.

HMRC announced via its Policy Paper Customs Brief 13 (2018) that the VAT treatment of forfeit, or “no-show” deposits changed from 1 March 2019.

The changes affect businesses that receive payments for services and part payments for goods and the customer does not:

use the service
collect the goods

Typically, this could be a hotel which reserves a room for a deposit which is retained if the customer is a no-show.

Previous treatment

Prior to 1 March 2019, charges for unfulfilled supplies and the retention of customer deposits are treated as outside the scope of VAT (and consequently VAT free). This is on the basis that either no supply had been made or, in the alternative, the retention of the deposit represents compensation for a loss, or the costs necessarily incurred.

Practically, this means that output tax is payable on the initial deposit, but this is adjusted if subsequently there is a no-show or goods are not collected.

Current treatment

From 1 March 2019, HMRC’s policy is that output tax is due on all retained payments for unused services and uncollected goods. Where businesses become aware that a customer has decided not to take up goods or services after paying, the transaction will remain subject to VAT. No adjustments or refunds of VAT will be allowed for those retained payments.

This means that when a non-repayable deposit is taken, VAT will always be due on the payment, regardless of subsequent events. However, if a deposit is returned, there will be no VAT due on it.

The rationale for the new treatment, according to HMRC is that; “because when a customer makes or commits to make a payment, it is for a supply. It cannot be reclassified as a payment to compensate the supplier for a loss once it is known the customer will not use the goods or services”

Continuous supplies

If a business supplies services on a continuous basis and it receives regular or occasional payments, a tax point is created every time a VAT invoice is issued or a payment received, whichever happens first. An article on tax planning for continuous supplies here

Credit and conditional sales

This is where the rules can get rather more complex.

A credit sale means the sale of goods which immediately become the property of the customer but where the price is paid in instalments.
A conditional sale is where goods are supplied to a customer but the goods remain the seller’s property until they are paid for in full.

This basic tax point may be over-ridden and an actual tax point created if a business:

issues a VAT invoice or receives payment before supplying the goods or services
issues a VAT invoice up to 14 days after the basic tax point

Credit sales where finance is provided to the customer

Credit sales involving a finance company

When a business makes credit sales involving a finance company, the finance company either:

becomes the owner of the goods, eg; when a purchase is financed by a hire-purchase agreement
does not become the owner of the goods, eg; when a purchase is financed by a loan agreement

Hire purchase agreements

Loan agreements

Specific areas

The following are areas where the rules on the treatment may differ

Cash Accounting Scheme

If a business uses the cash accounting scheme here it accounts for output tax when it receives payment from its customers unless it is a returnable deposit

Property

Care should be taken with deposits in property transactions. This is especially important if property is purchased at auction.

Tour Operators’ Margin Scheme (TOMS)

VAT Registration

Flat Rate Scheme

Please contact us if you have any queries on this article or would like your treatment of deposits reviewed to:

Ensure treatment is correct to avoid penalties, and/or;
Establish whether planning is available to properly defer payments of output tax under the tax point rules.

Is room hire subject to VAT? – The Errol Willy Salons case

By Marcus Ward 24 January 2022

Latest from the courts

In the First Tier Tribunal (FTT) case of Errol Willy Salons Ltd (2022) TC 08370 the issue was whether the rent of two rooms were an exempt right over land, or the standard rated supply of facilities.

Background

Room hire is usually exempt from VAT unless it is subject to an option to tax. However, it can be subsumed into a different rated another supply if something more than a “bare” room is provided. In such cases, it would follow the VAT treatment of the composite supply.

The Issue

In the Errol Willy Salons case, HMRC formed the view that what was being supplied was facilities (the room occupation being a minor part of the supply) and therefore subject to VAT. In its opinion the economic and social reality was that the beauticians were provided with a licence to trade from the premises. The appellant occupied the ground floor – operating a hairdressing business. The rooms over the saloon were rented to third party beauticians. The occupants furnished the rooms themselves, provided their own equipment, set their own pricing and opening hours. They did have use of certain services and facilities; a receptionist and toilets, but it was understood that the services were rarely used. Unsurprisingly, the appellant disagreed and contended that the other services were incidental or subsidiary to the exempt supply of the room rental.

The decision

The Tribunal allowed the appeal against the assessment. It found that “non-rent” services provided to the beauticians were limited in nature and not essential to the beauticians’ businesses Consequently, the arrangements amounted to a supply of property (a licence to occupy the rooms) rather than a supply of taxable facilities and was therefore exempt.

Commentary

This is the latest in a long line of issues on composite/separate supplies and room hire/facilities disputes, especially in relation to weddings. It is important to establish precisely what is being provided to establish the correct VAT treatment and advice should be ought if there is any doubt about the VAT liability.

The CIOT has long advocated that it is not the case that every package of supplies involving room hire and other things must be a composite supply of something other than an exempt letting of land.

NB: This case is different to hairdresser chair rentals which remain standard rated.

Oops! – Top Ten VAT howlers

By Marcus Ward 2 November 2021

I am often asked what the most frequent VAT errors made by a business are. I usually reply along the lines of “a general poor understanding of VAT, considering the tax too late or just plain missing a VAT issue”. While this is unquestionably true, a little further thought results in this top ten list of VAT horrors:

Not considering that HMRC may be wrong. There is a general assumption that HMRC know what they are doing. While this is true in most cases, the complexity and fast moving nature of the tax can often catch an inspector out. Added to this is the fact that in most cases inspectors refer to HMRC guidance (which is HMRC’s interpretation of the law) rather to the legislation itself. Reference to the legislation isn’t always straightforward either, as often EC rather than UK domestic legislation is cited to support an analysis. The moral to the story is that tax is complicated for the regulator as well, and no business should feel fearful or reticent about challenging a HMRC decision.
Missing a VAT issue altogether. A lot of errors are as a result of VAT not being considered at all. This is usually in relation to unusual or one-off transactions (particularly land and property or sales of businesses). Not recognising a VAT triggerpoint can result in an unexpected VAT bill, penalties and interest, plus a possible reduction of income of 20% or an added 20% in costs. Of course, one of the basic howlers is not registering at the correct time. Beware the late registration penalty, plus even more stringent penalties if HMRC consider that not registering has been done deliberately.
Not considering alternative structures. If VAT is looked at early enough, there is very often ways to avoid VAT representing a cost. Even if this is not possible, there may be ways of mitigating a VAT hit.
Assuming that all transactions with overseas customers are VAT free. There is no “one size fits all” treatment for cross border transactions. There are different rules for goods and services and a vast array of different rules for different services. The increase in trading via the internet has only added to the complexity in this area, and with new technology only likely to increase the rate of new types of supply it is crucial to consider the implications of tax; in the UK and elsewhere.
Leaving VAT planning to the last minute. VAT is time sensitive and it is not usually possible to plan retrospectively. Once an event has occurred it is normally too late to amend any transactions or structures. VAT shouldn’t wag the commercial dog, but failure to deal with it at the right time may be either a deal-breaker or a costly mistake.
Getting the option to tax wrong. Opting to tax is one area of VAT where a taxpayer has a choice. This affords the possibility of making the wrong choice, for whatever reasons. Not opting to tax when beneficial, or opting when it is detrimental can hugely impact on the profitability of a project. Not many businesses can carry the cost of, say, not being able to recover VAT on the purchase of a property, or not being able to recover input tax on a big refurbishment. Additionally, seeing expected income being reduced by 20% will usually wipe out any profit in a transaction.
Not realising a business is partly exempt. For a business, exemption is a VAT cost, not a relief. Apart from the complexity of partial exemption, a partly exempt business will not be permitted to reclaim all of the input tax it incurs and this represents an actual cost. In fact, a business which only makes exempt supplies will not be able to VAT register, so all input tax will be lost. There is a lot of planning that may be employed for partly exempt businesses and not taking advantage of this often creates additional VAT costs.
Relying on the partial exemption standard method to the business’ disadvantage. A partly exempt business has the opportunity to consider many methods to calculate irrecoverable input tax. The default method, the “standard method” often provides an unfair and costly result. I recommend that any partly exempt business obtains a review of its activities from a specialist. I have been able to save significant amounts for clients simply by agreeing an alternative partial exemption method with HMRC.
Not taking advantage of the available reliefs. There are a range of reliefs available, if one knows where to look. From Bad Debt Relief, Zero Rating (VAT nirvana!) and certain de minimis limits to charity reliefs and the Flat Rate Scheme, there are a number of easements and simplifications which could save a business money and reduce administrative and time costs.
Forgetting the impact of the Capital Goods Scheme (CGS). The range of costs covered by this scheme has been expanded recently. Broadly, VAT incurred on certain expenditure is required to be adjusted over a five or ten year period. Failure to recognise this could either result in assessments and penalties, or a position whereby input tax has been under-claimed. The CGS also “passes on” when a TOGC occurs, so extra caution is necessary in these cases.

So, you may ask: “How do I make sure that I avoid these VAT pitfalls?” – And you would be right to ask.

Of course, I would recommend that you engage a VAT specialist to help reduce the exposure to VAT costs!

VAT: Partial Exemption -What Is It? What do I need to know?

By Marcus Ward 21 July 2021

VAT Basics

As part of our guides to VAT basics, we take a brief look at partial exemption and how it affects a business.

The first point to make is that partial exemption is often complex and costly. In some cases it may be avoided by planning and in others it is a fact of life for a business which needs to be managed properly.

Background

The VAT a business incurs on its expenditure is called input tax. For most businesses this is reclaimed from HMRC on VAT returns if it relates to standard rated or zero rated sales (referred to as “taxable supplies”) that that business makes. Exempt supplies are not to be confused with non-business income which are dealt with under a different regime.

However, a business which makes exempt sales may not be in a position to recover all of the input tax which it incurred. A business in this position is called partly exempt. Generally, any input tax which directly relates to exempt supplies is irrecoverable. In addition, an element of that business’ general overheads, e.g.; light, heat, telephone, computers, professional fees, etc are deemed to be in part attributable to exempt supplies and a calculation must be performed to establish the element which falls to be irrecoverable.

Input tax which falls within the overheads category must be apportioned according to a so called; partial exemption method. The “Standard Method” requires a comparison between the value of taxable and exempt supplies made by the business. The calculation is; the percentage of taxable supplies of all supplies multiplied by the input tax to be apportioned which gives the element of VAT input tax which may be recovered. Other partial exemption methods (so called Special Methods) are available by specific agreement with HMRC. A flowchart which illustrates the Standard Method of apportionment is below.

partial exemption flowchart1

Which businesses are affected?

Any business which receives income from the following sources may be affected by partial exemption:

Property letting and sales – generally all types of supply of land*
Financial services
Insurance
Betting, gaming and lotteries
Education
Health and welfare
Sport, sports competitions and physical education
Cultural services

This list is not exhaustive.

* Most businesses which do not routinely make exempt supplies usually encounter exemption in the area of land and property and it is an easy trap to fall into not to consider VAT when involved in property transactions. This is one area where VAT planning may be of assistance as it is possible in most situations to deliberately choose to add VAT to an exempt supply to avoid a loss of input tax. This is known as the option to tax, and it is considered in more detail here.

De Minimis relief

There is however relief available for a business in the form of de minimis limits. Broadly, if the total of the irrecoverable directly attributable (to exempt suppliers) and the element of overhead input tax which has been established using a partial exemption method falls to be de minimis, all of that input tax may be recovered in the normal way. The de minimis limit is currently £7,500 per annum of input tax and one half of all input tax for the year.

As a result, after using the partial exemption method, should the input tax fall below £7,500 (£625 per month) and 50% of all input tax for a year it is recoverable in full. This calculation is required every quarter (for businesses which render returns on a quarterly basis) with a review at the year end, called an annual adjustment carried out at the end of a business’ partial exemption year. The quarterly de minimis is consequently £1,875 of exempt input tax which represents spending of under £10,000 net; not a huge amount.

Should the de minimis limits be breached, all input tax relating to exempt supplies is irrecoverable.

The value for the de minimis limit has been in place for over 25 years (when it was increased by a huge £25 per month) and it is rather ridiculous that it has not been increased to reflect inflation. This, coupled with the fact that the VAT rate has increased significantly means that the relief which was once very useful for a business has withered away to such an extent that partial exemption catches even very small businesses which I am sure goes against the original purpose of the relief.

In summary – for a business exemption is a burden not a relief. It represents a real cost in terms of tax payable, time and other resources, in addition to uncertainty. We often find that this is an area which HMRC examine closely and one which benefits from proactive negotiation with HMRC.

VAT: Land and property – “simplification” ahead?

By Marcus Ward 19 July 2021

HMRC has issued a call for evidence in respect of land exemption. HMRC acknowledges the complexity of the existing VAT rules on land and property and would like to hear views from businesses on the application of the current rules, and whether these rules could be simplified.

The application of VAT on land and property transactions is complicated. A range of different rates and exemptions can apply depending on the facts and circumstances of individual situations and the precise treatment of a transaction or project is often open to interpretation.

Complexity

The paper identifies a number of reasons why this area is extremely complicated:

over the years the amount of legislation has increased, and the land VAT exemption now contains fifteen exceptions and twenty-six sets of notes
some businesses can be required to make several separate decisions before the VAT liability of their supply can be established. Eg; once a business has established that it is supplying land (not always straightforward) it then has to consider whether that supply falls within one of the exceptions to the exemption. If it does fall within one of the exceptions, it then has to consider a number of conditions to establish whether it is excluded from that exception
businesses may spend a disproportionate amount of time and money to establish the correct liability of their land supplies. This can also cause additional burdens for HMRC to assure compliance of these businesses
the development of new markets and services that did not exist when VAT was introduced
the impact of precedent case law (both UK and EU)
the uncertainty of establishing when an exempt supply of land becomes a taxable supply of facilities

The Option to Tax

The option to tax legislation enables a business to tax some supplies of land that would otherwise be treated as exempt from VAT. The usual rationale behind making such a choice is to be able to recover the VAT incurred on costs and overheads of a business, or to meet the conditions of a Transfer of a Going Concern (TOGC).

Suggestions

The document then suggests some ideas for simplification:

removing the ability to opt and making all relevant transactions exempt
removing the option to tax and making all land and property taxable at a reduced rate
making all commercial land and property taxable at the standard rate with an option to exempt

The first suggestion would result in many businesses incurring irrecoverable input tax which would be a direct cost, so this appears very unattractive.

The second seems a better option, but would bring new housing into the VAT net and I doubt that this would play out very well with the public.

The final suggestion would certainly simplify matters but would add VAT costs to entities which cannot recover any/all input tax, eg; charities, financial service providers, insurance companies, education bodies, health and welfare organisations and cultural services.

The document states that “The Government wants UK businesses to operate in the best possible environment and remain both productive and competitive”.

It remains to be seen whether the suggestions above (or other proposals put forward) will achieve this, but removing choices for a business (regardless of whether simplification is actually realised) is rarely a good idea and I wonder if simplification could be reached in other ways. If you have an interest in this area, please respond to this call as input is valuable for all parties.

Responses should be sent by 3 August 2021 by email to landsimplification@hmrc.gov.uk.

VAT: Is a car wash a car park? The RK Fuels Ltd case

By Marcus Ward 26 April 2021

Latest from the courts

VAT – The Capital Goods Scheme

By Marcus Ward 8 January 2021

A brief guide to the Capital Goods Scheme (CGS)

If a business acquires or creates a capital asset it may be required to adjust the amount of VAT it reclaims. This mechanism is called the CGS and it requires a business to spread the initial input tax claimed over a number of years. If a business’ taxable use of the asset increases it is permitted to reclaim more of the original VAT and if the proportion of the taxable supplies decreases it will be required to repay some of the input tax initially claimed. The use of the CGS is mandatory.

How the CGS works

Normally, VAT recovery is based on the initial use of an asset at the time of purchase (a one-off claim). The CGS works by applying a longer period during which the initial recovery may be adjusted if there are changes in the use of the asset. Practically, the CGS will only apply in situations where there is exempt or non-business use of the asset. A business using an asset for fully taxable purposes will be covered by the scheme, but it is likely that full recovery up front will be possible with no subsequent adjustments required. This will be the position if, say, a standard rated property is purchased, the option to tax taken, and the building let to a third party. The CGS looks at how capital items have been used in the business over a number of intervals (usually, but not always; years). It adjusts both for taxable versus exempt use and for business versus non business use over the lifetime of the asset. Example; a business buys a yacht that is hired out (business use) and it is also used privately by a director (non-business use). However, a more common example is a business buying a property and occupying it while its trade includes making some exempt supplies.

Which businesses does it affect?

Purchasers of certain commercial property, owners of property who carry out significant refurbishment or carry out civil engineering work, purchasers of computer hardware, aircraft, ships, and other vessels over a certain monetary value who incur VAT on the cost. (As the CGS considers the recovery of input tax, only VAT bearing assets are covered by it).

Assets not covered by the scheme

The CGS does not apply if a business;

acquires an asset solely for resale
spends money on assets that it acquired solely for resale
acquires assets, or spends money on assets that are used solely for non-business purposes.

Limits for capital goods

Included in the CGS are:

Land, property purchases – £250,000 or over
Refurbishment or civil engineering works costing £250,000 or over
Computer hardware costing £50,000 or over (single items, not networks)
From 2011, aircraft, ships, and other vessels costing £50,000 or more.

Assets below these (net of VAT) limits are excluded from the CGS.

The adjustment periods

Five intervals for computers
Five intervals for ships and aircraft
Ten intervals for all other capital items

Changes in your business circumstances

Certain changes to a business during a CGS period will impact on the treatment of its capital assets. These changes include:

leaving or joining a VAT group
cancelling your VAT registration
buying or selling your business
transferring a business as a going concern (TOGC)
selling an asset during the adjustment period

Specific advice should be sought in these circumstances.

Examples

A retailer purchases a brand new property to carry on its fully taxable business for £1 million plus £200,000 VAT. It is therefore above the CGS limit of £250,000. The business recovers all of the input tax on its next return. It carries on its business for five years, at which time it decides to move to a bigger premises. It rents the building to a third party after moving out without opting to tax. Under the CGS it will, broadly, have to repay £100,000 of the initial input tax claimed. This is because the use in the ten year adjustment period has been 50% taxable (retail sales) for the first five years and 50% exempt (rent of the property for the subsequent five years).
A company purchases a helicopter for £150,000 plus VAT of £30,000. It uses the aircraft 40% of the time for hiring to third parties (taxable) and 60% for the private use of the director (non-business). The company reclaims input tax of £12,000 on its next return. Subsequently, at the next interval, taxable use increases to 50%. It may then make an adjustment to increase the original claim: VAT on the purchase £30,000 divided by the number of adjustment periods for the asset (five) and then adjusting the result for the increase in business use: £30,000 / 5 = 6000 50% – 40% = £600 additional claim

Danger areas

Overlooking CGS at time of purchase or the onset of building works
Not recognising a change of use
Selling CGS as part of a TOGC
Failing to make required CGS adjustments at the appropriate time
Overlooking the option to tax when renting or selling a CGS property asset
Sale during adjustment period (not a TOGC)
Complexities re; first period adjustments and pre-VAT registration matters
Interaction between CGS and partial exemption calculations

Summary

There is a lot of misunderstanding about the CGS and in certain circumstances it can produce complexity and increased record keeping requirements. There are also a lot of situations where overlooking the impact of the CGS or applying the rules incorrectly can be very costly. However, it does produce a fairer result than a once and for all claim, and when its subtleties are understood, it quite often provides a helpful planning tool.