Caviar is deemed a necessity in terms of VAT, while orange squash is a luxury item.
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VAT Self-billing. What is it? The pros and cons
VAT Basics – Self Billing
Self-billing is an arrangement between a supplier and a customer. Both customer and supplier must be VAT registered. Rather than the supplier issuing a tax invoice in the normal way, the recipient of the supply raises a self-billing document. The customer prepares the supplier’s invoice and forwards a copy to the supplier with the payment.
If a business wants to put a self-billing arrangement in place it does not have to tell HMRC or get approval from them, but it does have to get its supplier or customer to agree to the arrangement and meet certain conditions.
The main advantage of self-billing is that it usually makes invoicing easier if the customer (rather than the supplier) determines the value of the purchase after the goods have been delivered or the services supplied. This could apply more in certain areas such as; royalties, the construction industry, Feed-In-Tariff, and scrap metal. A further benefit is that accounting staff will be working with uniform purchase documentation.
However, there is a high risk of errors, significant confusion and audit trail weaknesses. The wrong rate of VAT may easily be applied, documents can go missing, invoices may be raised as well as self-billing documents, the conditions for using self-billing may easily be breached (a common example is a supplier deregistering from VAT) and essential communication between the parties can be overlooked. As the Tribunal chairman in UDL Construction Plc observed: “I regard the self-billing procedure as a gross violation of the integrity of the VAT system. It permits a customer to originate a document which enables him to recover input tax and obliges his supplier to account for output tax. It goes without saying that such a dangerous procedure should be strictly controlled and policed.”
The rules
For the customer
You can set up self-billing arrangements with your suppliers as long as you can meet certain conditions, you’ll need 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 right information and are correctly issued. This means including all of the details that make up a full VAT invoice – details here
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 (and you cannot claim any input tax). Your self-billing arrangement with that supplier is no longer covered by the VAT regulations.
The Agreement
A self-billing arrangement is only valid 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 VAT invoices – and you won’t be able to reclaim the input tax shown on them.
You’ll both 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, get a new VAT registration number or transfer their business as a going concern
- Details of any third party you intend to outsource the self-billing process to.
An example of an agreement here
Reviewing self-billing agreements
Self-billing agreements usually last for 12 months. At the end of this you’ll 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.
Records
If you are a self-biller you’ll need to keep certain additional records:
- 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.
Invoices
Once a self-billing agreement is in place with a supplier, you must issue self-billed invoices for all the transactions with them during the period of the agreement.
As well as all the details that must go on a full VAT invoice you will also need to include your supplier’s:
- name
- address
- VAT registration number
All self-billed invoices must include the statement “The VAT shown is your output tax due to HMRC” and you must clearly mark each self-billed invoice you raise with the reference: ‘Self Billing’ (This rule has the force of law). Details required on invoice here
Input tax
You’ll only be able to reclaim the input tax shown on self-billed invoices if you meet all the record keeping requirements. When you can reclaim the input tax depends on the date when the supply of the goods or services takes place for VAT purposes. This is known as the the tax point, details here
For the supplier
If one of your customers wants to set up a self-billing arrangement with you, they will be required to agree to this with you in writing. If you agree, they’ll give you a self-billing agreement to sign.
The terms of the agreement are a matter between you and your customer, but there are certain conditions you’ll both have to meet to make sure you comply with VAT regulations:
- 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.
Accounting for output tax
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.
Tips
- As a supplier, take care not to treat self-billed invoices as purchase invoices and reclaim the VAT shown as input tax
- As a customer, carry out an instant check of VAT registration numbers here
- As a supplier or customer regularly check that the conditions for self-billing continue to be met and ensure good communications
- As a supplier or customer ensure that the documentation accurately reflects the relevant transactions and the correct VAT rate is applied
- As a supplier or customer ensure that there is a clear audit trial and that all documentation is available for HMRC inspection
- It is possible to use self-billing cross-border intra-EC, but additional rules apply.
VAT treatment of cryptoassets – new HMRC guidance
Following our previous articles on cryptoassets, HMRC has published a document: Help with VAT treatment of cryptoassets — GfC2.
This guidance sets out:
- what HMRC means by cryptoassets
- when a business needs to register
- what information a business need to collect about your customers – and why
- the rules about the place of supply for cryptoasset transactions
-
what records digital platforms and marketplaces need to keep
It is aimed at UK and overseas businesses involved in cryptoasset transactions where UK VAT may apply. It includes businesses that sell or exchange cryptoassets and businesses that operate platforms where other people do so.
Overview
Cryptoassets (sometimes called ‘tokens’ or ‘cryptocurrencies’) are a digital representation of value that are created, stored and transferred securely using public computer networks, and cannot be altered or destroyed.
There are many different types of tokens, and they can have different uses. Some tokens can represent ownership of something or the right to access particular goods or services. The asset, goods or services represented by the token are known as the underlying asset or supply. The underlying asset can be tangible or intangible, such as digital or physical art, music and collectables.
A non-fungible token (NFT) is a unique digital certificate that represents ownership of an asset. The VAT treatment of an NFT will depend on the asset it represents. For example, if the underlying asset is a piece of digital art, then the same VAT treatment as digital art will usually apply. If the underlying asset is a physical item, such as a car, then the same VAT treatment as a car will usually apply.
It is worth emphasising that there are no separate VAT rules for cryptoassets. VAT still depends on what you supply and how it is used, not the definition or description of a token
HMRC says that following these guidelines will help taxpayers reduce the risk of mistakes, VAT adjustments and penalties.
VAT Planning – Why?
Why?
It is impossible for any business to do such a basic thing as set its prices properly unless it understands its VAT position and ensures that this is reflected in those prices, terms and contract terms etc. The aims of tax planning are:
- compliance
- business planning
- avoiding unnecessary tax costs
- maximising input tax claims
- minimising VAT payable where possible
- obtaining any refunds and retrospective claims due
- avoiding penalties and interest
How?
The “How?” is dependent on the specific business and its needs. We offer a flexible and tailored service from start-ups to multi-national companies. We offer:
- solutions to ad hoc issues
- negotiation
- structuring and restructuring
- contractual arrangements
- Dispute resolution (with HMRC, suppliers, customers etc)
- full reviews and health checks
- training of staff and management
- assistance with international/cross-border supplies and purchases
- due diligence
- cost reduction exercises
- income maximisation programmes
- comprehensive land and property advice
- advice on overseas indirect/GST matters both EC and non-EC
- accounting and documentation advice
The VAT planning process – “The four As”
- Ascertainment
- Analysis
- Alternatives
- Action
More details of this approach here.
Where?
VAT, or its derivations applies in most countries around the world. So, the answer is probably “everywhere”. This is particularly relevant with cross-border transactions. A common issue is the “Place Of Supply” (POS) rules which dictate where a supply takes place and thus the VAT liability of it.
When?
Planning needs to be done in advance of transactions. Once a contract has been entered into without thought for the VAT consequences, the damage may have already been done.
Where there is a one-off transaction (eg; sale of premises, sale of know-how, issue of shares), this is, by definition, something of which the business has little experience. It is an occasion to assume that advice is needed, rather than to assume that the most obvious treatment is correct.
Since the impact of a change in the pattern of a business’ activities will continue down the years, rather than being restricted to a single occasion, it is doubly important to ensure that the correct treatment is identified from the outset.
Periodic reviews are a good time to look, not only at the future, but also at the past, to see whether developments in case law reveal past overpayments which may be reclaimed. This is particularly important since repayments are subject to the four-year capping provisions.
The essential step is to have some means of becoming aware of changes and monitoring these with VAT in mind. The means to be adopted are various and will depend on the size and type of the business.
What?
“Right tax, right time”. This means compliance with the relevant legislation but not paying any more VAT than is necessary. As one wag once said; “You must pay taxes. But there’s no law that says you have to leave a tip.”
Since VAT is a transaction-based tax, timing is often crucial and the objective is to legitimately defer payment to HMRC until the latest time possible, thus improving cash flow and retaining the use of VAT monies for as long as possible. The converse of this of course, is to obtain any repayments of VAT due from HMRC as soon as possible. We must also consider avoiding VAT representing an actual cost and taking advantage of any beneficial UK and EC legislation, determinations, guidance, case law and Business Briefs etc available.
VAT Planning objectives
- improve cash flow
- improve competitive position
- legitimately reducing VAT payments or increasing repayments
- minimise administration/management
- avoid unnecessary tax or compliance costs
- avoid penalties and interest
Who?
Marcus Ward Consultancy of course!
HMRC new ‘VAT Assist’ service
VAT Assist
HMRC has announced a VAT Assist service which is due to be launched in April 2027.
The service will compare data added to a taxpayer’s VAT return against information HMRC holds for that business to provide incisive feedback to help businesses submit accurate tax returns.
The service will be available to businesses using participating third-party software and HMRC will monitor and review the relevance and effectiveness of the feedback provided.
The pre-submission VAT Return data is transmitted from third-party software to HMRC via an API. That data is analysed in real time, using a rule-based model, comparing to data held within HMRC. Where potential errors are identified, digital ‘nudges’ will be transmitted through the API for the third-party software to present to the taxpayer.
The message will be displayed to the taxpayer through their software before the return is submitted although the taxpayer is not required to act on the feedback and may proceed with their submission if they consider that the return is correct.
VAT: New guidance for fund management services
HMRC has published new guidance GfC20 on the sometimes complex subject of outsourced fund management services.
These Guidelines for Compliance (GfC) set out HMRC’s recommended approach and are designed to help businesses determine the correct VAT treatment of outsourced fund management services, including whether services should be treated as single or multiple supplies.
More on exemption for fund management services here
More on pension management here.
VAT: What is a taxable supply? – Definition
VAT Basics
Taxable supply
It is sometimes useful when considering a transaction to “go back to basics” for VAT purposes. There are certain tests to determine whether a supply is taxable, and these are set out below. Broadly, the tests establish whether UK VAT is payable on a sale and they determine whether an entity is “in business”, that is; carrying on an economic activity.
A transaction is within the scope of UK VAT if all four of the following conditions are satisfied:
- It is a supply of goods or services.
There is a distinction between the two types of supply as different VAT treatments may apply. Generally, everything that is not tangible goods is services. However, if no goods or services are actually provided, there is no supply. Indeed, if there is no consideration for a supply, in most cases it is not a taxable supply.
- It takes place in the UK.
There are quite complex tests to consider when analysing the “place of supply”, especially where services are concerned. If the place of supply is outside the UK then usually no UK VAT is due, however, the supply may be subject to VAT in another country.
- It is made by a taxable person.
A taxable person is any legal entity which is, or should be, registered for VAT in the UK.
- It is made in the course or furtherance of any business carried on by that person
Business
The term “business” is only used in UK legislation, The Principal VAT Directive refers to “economic activity” rather than “business” and since UK domestic legislation must (well historically) conform to the Directive both terms must be seen as having the same meaning. Since the very first days of VAT there have been disagreements over what constitutes a “business”. I have only recently ended a dispute over this definition for a (as it turns out) very happy client. The tests were set out as long ago as 1981 and may be summarised as follows:
- Is the activity a serious undertaking earnestly pursued?
- Is the activity an occupation or function, which is actively pursued with reasonable or recognisable continuity?
- Does the activity have a certain measure of substance in terms of the quarterly or annual value of taxable supplies made (bearing in mind that exempt supplies can also be business)?
- Is the activity conducted in a regular manner and on sound and recognised business principles?
- Is the activity predominantly concerned with the making of taxable supplies for a consideration?
- Are the taxable supplies that are being made of a kind which, subject to differences of detail, are commonly made by those who seek to profit from them?
So, if these tests are passed a taxable supply exists. The next step is to establish which VAT rate applies. In an often quoted comment from the judge in the Morrison’s Academy Boarding Houses Association 1978 STC1 Court Of Session case “…In my opinion it will never be possible or desirable to define exhaustively ‘business’ ”. Which what it lacks in helpfulness, makes up for in candour.
There was something of a deviation from the Lord Fisher tests in the Longbridge Court of Appeal case, however, that appears to be a blip and HMRC seem to have reverted to Lord Fisher in subsequent hearings on the same topic. A bit of a: watch this space area of VAT.
Recent cases on business
Recent case law on this issue here and here and HMRC Internal guidance on the Lord Fisher tests here
Commentary
Tip: It is often easier to consider what isn’t a taxable supply to establish the correct VAT treatment. Specific examples of situations which are not taxable supplies are; donations, certain free supplies of services, certain grants or funding, some compensation and some transactions which are specifically excluded from the tax by legislation, eg; transfers of going concerns (TOGC).
I think that it is often the case that the basic building blocks of the tax are overlooked, especially in complex situations and I find it helps to “go back to the first page” sometimes.
A VAT Did you know?
Orange juice is zero rated. Lemon juice is zero rated. Mix them, and the product is standard rated.
VAT – Residential Property Triggerpoints
What to look out for
VAT and property transactions are uneasy bedfellows at the best of times. Getting the tax wrong, or failing to consider it at all can result in a loss of income of 20% on a project, or forgoing all input tax incurred on a development. Even a simple matter of timing can affect a transaction to a seller’s detriment. Here I take a brief look at issues that can impact residential property transactions. It is important to recognise when VAT may affect a project so I hope that some of these triggerpoints may prove useful.
General points
The following are very general points on residential properties. No two cases are the same, so we strongly recommend that specific advice is obtained.
Refurbishing “old” residential properties
Broadly speaking, the VAT incurred on such work is not reclaimable as the end use of the property will be exempt (either sale or rent). There is no way round this as it is not possible to opt to tax residential dwellings. It may be possible to use the partial exemption de minimis limits if there are any other business activities in the same VAT registration. If this is the only activity of a business, it will not even be permitted to register for VAT. There are special rules if the number of dwellings change as a result of the work (see below).
New residential builds
The first sale (or the grant of a long lease 21 years plus) of a newly constructed dwelling by “the person constructing” is zero rated. This means that any VAT incurred on the construction is recoverable. Care should be taken if the new dwelling is let on a short term basis rather than/before being sold as this will materially affect input tax recovery. Advice should always be taken before such a decision is made as there is planning available to avoid such an outcome. VAT incurred on professional and legal costs of the development may also be recovered such as; architects, solicitors, advisers, agents etc. VAT registration is necessary in these cases and our advice is to VAT register at the earliest stage possible.
The construction of new dwellings is zero rated, along with any building materials supplied by the contractor carrying out the work. The zero rating also extends to sub-contractors. It is not necessary for a certificate to be provided in order to zero rate such building works.
Conversions
There are special rules for refurbishments which create a different number of dwellings (eg; dividing up a single house into flats, or changing the total number of flats in a block, or making one dwelling by amalgamating flats). Generally, it is possible for contractors to invoice for their building work at the reduced rate of 5%. This rate may also apply to conversions. A conversion is defined as work undertaken on a non-residential property, such as a barn, office or church, into one or more self-contained dwellings. Once converted the sale of the residential property will be zero rated and all of the input tax incurred on associated costs is recoverable (similar to a new build).
Renovation of empty residential premises
Reduced rating at 5% is also available for the renovation or alteration of empty residential premises. Such a premises is one that has not been lived in during the two years immediately before the work starts. HMRC will insist on documentary evidence that the property has been empty for that time.
Purchase of a commercial property intended for conversion
If it is intended to convert a commercial property into residential use and the vendor indicates that (s)he will charge VAT (as a result of the option to tax having been exercised) it is possible for the purchaser to disapply the option to tax by the issue of a certain document; form VAT 1614D. This means that the sale will become exempt. Advice should always be sought on this issue by parties on each side of the transaction as it very often creates difficulties and significant VAT and other costs (mainly for the vendor).
Mixed developments
If what is being constructed is a building that is only in part a zero-rated dwelling, a contractor can only zero-rate its work for the qualifying parts. For example, if a building containing a shop with a flat above is constructed, only the construction of the flat can be zero-rated. An apportionment must be made for common areas such as foundations and roof etc. The sale of the residential element when complete is zero rated and the sale of the commercial part will be standard rated if under three years since completion. If the commercial part is over three years old at the date of sale, or is rented rather than sold, the supply will be exempt with the option to tax available – details here. If an exempt supply is made, the recovery of input tax incurred on the development will be compromised and it is important that this recognised and planning put in place to avoid this outcome.
DIY building projects
There is a specific scheme for DIY Housebuilders to recover input tax incurred on the construction of a dwelling for the constructor to live in personally. Details here https://www.marcusward.co/?s=diy
Sale of an incomplete residential development
There are two possible routes to relief if a project is sold before dwellings have been completed (either new build or conversion). This can often be a complex area, however, there is some zero rating relief which may apply, and also it may be possible to apply TOGC (Transfer Of a Going Concern) treatment to the sale. In both cases, it is likely that input tax previously claimed by the developer should not be jeopardised.
Overview
There are VAT complications for the following types of transactions/developments and issues:
- definition of a dwelling
- arrangements where consortiums or syndicates are used/profit share
- transactions in connection with nursing or children’s homes or similar
- “granny flats” in the garden of existing houses
- work on charitable buildings/ for charities
- converting specific commercial property into residential property – particularly ex-pubs
- sales to Housing Associations
- sales of “substantially reconstructed protected buildings”
- buying VATable buildings
- date of completion – zero rating cut off
- supplies by members of VAT groups
- definition of building materials
- input tax on white goods and similar
- alterations for people with disabilities
- garages with dwellings
- land supplied with a property
- buying property with existing, continuing leases
- beneficial owner versus legal owner issues
- change of intention (buying land/property with the intention of using it for one purpose, but the intention changes after purchase)
- where professional/architect’s fees are incurred
- planning gains
- own use of a property
- mobile homes
- reverse premiums/surrenders/reverse surrenders re; leases
- holiday lets and
- hotels
- business use by purchaser/tenant
- contract stage of a property purchase where VAT is potentially chargeable by vendor
- timing of supplies
- work re; schools, churches, village halls, hospitals, or any other “unusual” structures
This list is not exhaustive, but I hope it gives a broad idea of where VAT needs to be considered “before the event”. As always, we are available to assist.
VAT: Check if you need to register as a digital platform operator
HMRC has updated its Guidance Check if you need to register as a digital platform operator.
This guidance now includes various examples of what may qualify as a digital platform.