Tag Archives: marcus-ward

VAT Snippet – e-supplies to Russia

By   1 December 2016
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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 – Autumn Statement. Unwelcome changes to the Flat Rate Scheme

By   24 November 2016
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Autumn Statement

The Flat Rate Scheme (FRS) is a very helpful simplification of VAT for smaller businesses. It reduces paperwork and can result in a tax benefit for those who use the scheme. Details of the FRS are at the end of this article.

In the Autumn Statement, the Chancellor has announced changes to the FRS to be introduced from 1 April 2017. Under the misleading heading: “Tackling aggressive abuse of the VAT Flat Rate Scheme” the technical note here

This sets out a new FRS rate for businesses with “ with limited costs”.

Broadly, if a business has VAT inclusive expenditure on goods of either:

  • less than 2% of their VAT inclusive turnover in a prescribed accounting period
  • greater than 2% of their VAT inclusive turnover but less than £1000 per annum if the prescribed accounting period is one year

The above excludes capital expenditure, food or drink for consumption by the business or its employees, and vehicles, vehicle parts and fuel.

Then they will be required to use a FRS rate of 16.5% rather than the rate currently applicable.

There will be anti-forestalling provisions in place to avoid manipulation of timing.

What this means

Assume a business is currently using the 12% flat rate:

100 + 20% VAT = 120 x 12% = 14.4 VAT due

120 x 16.5% = 19.8 VAT due at the new rate

Outside the FRS VAT due = 20 VAT due (but input tax recovery available to offset)

Commentary

This will unfortunately affect many small businesses who have no intention and are certainly not involved in “aggressive abuse”. It appears just another example of, as The Times leader once said of the Rolling Stones case “Who breaks a butterfly upon a wheel?”*

 

Flat Rate Scheme
The Flat Rate Scheme is designed to assist smaller businesses reduce the amount of time and complexity required for VAT accounting. The Flat Rate Scheme removes the need to calculate the VAT on every transaction. Instead, a business pays a flat rate percentage of its VAT inclusive turnover. The percentage paid is less than the standard VAT rate because it recognises the fact that no input tax can be claimed on purchases. The flat rate percentage used is dependent on a business’ trade sector.
A business is eligible for this scheme if its estimated taxable turnover in the next year will not exceed £150,000. Once using the scheme, a business is permitted to continue using it until its income exceeds £230,000.
If eligible, a business may combine the Flat Rate Scheme with the Annual Accounting Schemes, additionally, there is an option to effectively use a cash basis so there is no need to use the Cash Accounting Scheme. There has been recent case law on the percentage certain businesses’ use for the FRS, so it is worth checking closely.  There is a one percent discount for a business in its first year of trading.
Advantages
  • Depending on trade sector and circumstances may result in a real VAT saving
  • Simplified record keeping; no requirement to separate out gross, VAT and net in accounts
  • Fewer rules; no issues with input tax a business can and cannot recover on purchases
  • Certainty of knowing how much of income is payable to HMRC
Disadvantages
  • No reclaim of input tax incurred on purchases
  • If you buy a significant amount from VAT registered businesses, it is likely to result in more VAT due
  • Likely to be unattractive for businesses making zero-rated or exempt sales because output tax would also apply to this hitherto VAT free income
  • Low turnover limit

* For those of a literary bent, the original quote is from Alexander Pope’s Epistle to Dr Arbuthnot of January 1735.

VAT Latest from the courts – exemption for sporting facilities by an eligible body

By   8 November 2016
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St Andrew’s College, Bradfield

This Upper Tribunal case demonstrates the importance of getting the structure right. Full case here

Overview

Exemption exists for an eligible body making certain supplies of sporting services.

Background

St Andrew’s College is a boarding school and a registered charity.  It is the representative member of a VAT group which also included two subsidiary companies. The companies provided facilities for playing sport and the group intended to treat these as exempt supplies.  HMRC challenged the intended treatment on the basis that the subsidiaries did not qualify as eligible bodies via VAT Act 1994, Schedule 9, Group 10 (exemption related to sport, sports competitions and physical education). It was agreed that all of the other criteria were met, so the case turned on the definition of an eligible body.  It was common ground that the College, as an educational charity, was itself an eligible body. Even though, as the representative member of the VAT group, the College was treated as making all supplies actually made by the subsidiaries, that did not mean that the supplies were exempt.

Decision

In order to be regarded as an eligible body the subsidiaries were required to be a non-profit making body.  What was relevant here was whether the subsidiaries (themselves) had specific restrictions on their ability to distribute any profit that they made.  The UT formed the view that there was no specific restriction and that although profits were only covenanted up to the College this was insufficient to meet the test in Group 10 Note (2A).  It was also found that the deeds of covenant did not, of themselves, establish that the subsidiaries could make distributions only to non-profit making bodies.

Consequently, the subsidiaries failed to qualify for exemption and that the First Tier Tribunal correctly found that output tax was due on the income from provision of sporting facilities.

Commentary

This case highlights the importance of putting in place a correct structure and to ensure that it reflects the intention of the supplier.  One may see that in this scenario it would have been relatively simple to arrange matters to accurately reflect the aims of the group.  Care would have been required in drafting documentation etc as matters stood, or rearranging the supply chain.

It should also be noted that there are specific anti-avoidance provisions in place for certain suppliers of sporting services (although not in issue here). Advice should be taken at an early stage in planning to ensure that if exemption is desired, that it is achieved if possible.

Latest from the courts: Excise Duty – against which party may an assessment be raised?

By   19 October 2016
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A little “light” relief from VAT.  Indirect taxes extend to Customs and Excise Duties (as well as IPT and various other “lower profile” taxes) and we are able to assist with all of these.

In an interesting Excise Duty case; B & M Retail Limited (B & M) the Upper Tribunal were asked whether an assessment for Customs Duty due on wine and beer could be issued to an entity “down the chain” to an entity which was holding goods at a given time.

Background

HMRC detained the relevant the goods under The Customs & Excise Management Act 1979 (“CEMA”) Section 139 on the grounds that, in their judgment, on the balance of probabilities, Excise Duty had not been paid on the goods. Under B & M’s terms and conditions of business its suppliers were required to warrant that the sale of alcohol to B & M was on a “Excise Duty paid” basis.

The First Tier Tribunal (FTT) decided that despite an HMRC investigation resulting in the fact that they were not satisfied that duty had been paid on the goods, B & M was not responsible for the duty (and subsequent penalties) as the goods had passed through other various entities before they reached the appellant.  The decision was based on the fact that the duty point must have arisen before the goods reached B & M and consequently, the duty was payable by someone further up the supply chain and not simply by the entity which was holding the Excise Duty goods at the Excise Duty point.

Decision

However, the Upper Tribunal disagreed with the FTT and overturned the verdict.  The Upper Tribunal stated that “… the recognition by HMRC that one or more other Excise Duty points must, in principle, have been triggered before B & M received the relevant goods did not preclude HMRC from assessing B & M for excise duty …”.  The Upper Tribunal did, however, remit the case to the First Tier Tribunal to review the evidence to ensure that the assessment is in time and that, as a matter of fact, the Excise Duty due on the beer and wine remains unpaid.

Conclusion

It would appear that this decision currently gives HMRC the right to raise an assessment for duty and penalties anywhere along the supply chain when an entity is holding the goods, even though a “previous” entity may have been responsible for the payment. This is not * * polite cough * * small beer as the amount in question was £5,875,143 of duty and a penalty of £1,175,028.  This is helpful to HMRC as, in this instant case, it would appear that entities further up the supply chain were either not registered, or became deregistered, making it more difficult for HMRC to recover the Duty due.

It is important for every importer to be clear about the Excise Duty position and to carry out detailed due diligence on the relevant shipment.  It is now not possible to escape an assessment by demonstrating that a third party is responsible for the payment of the duty.

VAT – Latest from the courts: treatment of web-based introductions

By   14 September 2016
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First Tier Tribunal (FTT) – What intermediary services may be exempted?

Background

The provision of intermediary services (putting those who require a financial product in touch with those who provide them) is exempt from VAT if certain conditions apply.  Broadly, the requirement is mainly the need to provide something more than just the introduction, eg; negotiation of credit. If a business acts as a mere conduit or in an advertising capacity its supplies will be standard rated.

The case

In the FTT case of Dollar Financial UK Limited TC05334 (Dollar) the applicant received web-based services from overseas The Reverse Charge was applied to these supplies (details of the Reverse Charge here). Dollar provides “payday loans” which are themselves exempt from VAT.  As Dollar was unable to recover all of the VAT on the Reverse Charge it represented a VAT cost to the business.  However, if the supplies were exempt there would be no need to apply the Reverse Charge and so the loss would be avoided.

The FTT was required to consider what precisely the suppliers (so called lead generators) provided to Dollar in return for a commission based on the value of the loan.  The lead generators operated websites which are mainly comparison sites and which referred potential borrowers to loan providers such as Dollar. HMRC formed the view that these services did not amount to intermediary services and hence were subject to the Reverse Charge.

The FTT ruled that there were differences between the two examples of services received by Dollar.  In one example it was decided that despite;

  • there being no legal relationship between the lead generator and the potential borrower
  • that the leads were sold to the lender offering the best commission
  • that the assessment for loan suitability was quick, only involved only a few basic checks, and did not require any judgment or discretion, and
  • that only 1% of the introductions resulted in offers of loans to borrowers,

the appellant was acting as more than a mere conduit or in an advertising capacity, and was providing exempt introductory services. Consequently, there was no need to apply the Reverse Charge.

In the other example, the Tribunal considered that a single supply of online chat assistance was more akin to an outsourced, principally back-office function which did not amount to intermediary services and was therefore standard rated such that Dollar must apply the Reverse Charge.

Commentary

This case demonstrates the need to identify precisely what is being provided by a business’ suppliers and to review contracts intently.  A small change in the circumstances between one supply and another may result in different VAT treatment. This is a comprehensive judgement and it is worth reading in its entirety if a business is involved in these type of transactions.  We recommend that advice is sought by those businesses which could be affected by this case; either as supplier or recipient.

VAT Distance Selling Q & As

By   11 July 2016
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VAT Distance Selling: What is it and how will it affect my business?

Q – My internet business is expanding and I am now selling goods all over the EC. Does this create any VAT issues?

A – It could do; if you are selling to individuals (or any other non-business entity) then you should be charging UK VAT regardless of where your customer belongs in the EC. However, when these type of sales reach a certain limit, you will be required to VAT register in each Member State in which the threshold is breached. These are called the Distance Selling rules and apply in situations where the seller is responsible where the supplier is responsible for the delivery of goods B2C; typically mail-order and increasingly goods purchased online (so called “delivered goods”).

Q – What are those limits?

A – Each Members state sets its own limit. However these may be broken down into two categories:

€ 35,000 (or near equivalent in domestic currency) Belgium, Cyprus, Czech Republic, Denmark, Estonia, Finland, France, Greece, Hungary, Ireland, Latvia, Lithuania, Malta, Poland, Portugal, Slovak Republic, Slovenia, Spain, Sweden, Italy.

€ 100,000 (or near equivalent in domestic currency) Austria, Germany, Luxembourg, Netherlands, UK.

Q – What are the practical implications?

A – Each Member State has different rules for VAT registration and filing of returns. All dealings, save for a few Member States, are undertaken in the language of that country, so broadly, there could be 27 sets of rules and many languages to master in order to comply with the Distance Selling rules! Additionally, we find that some business are unaware of these rules, or discover the impact of them after the limits have been reached. This creates penalties for late registration and filing in nearly all Member States. However, mitigation (along the lines of “reasonable excuse” in the UK) in varying degrees is available in some countries. We have found that it is possible, via negotiation to have penalties reduced or removed after making full disclosure of past turnover. As one may expect, the approach varies from country to country.

Q – Do I have any choices?

A – Yes, although it is not necessary to register until the thresholds set out above are breached; it is possible to VAT register there on a voluntary basis rather than accounting for UK VAT. The considerations are usually; the VAT rate in the Member State concerned (compared to the UK) and; administrative simplification, ie; not having to change over from UK VAT to another Member State’s VAT regime when the limit is reached.

Q – But what if I have accounted for UK VAT on these sales already, what can be done about that? I don’t want to have to pay VAT twice to different authorities.

A – In our experience, HMRC do repay UK VAT overpaid if overseas output tax is due, but this sometimes becomes a struggle and HMRC require full explanation and precise evidence to support a repayment.

Q- Do these rules affect sales made to customers outside the EC?

A- No, these are usually zero rated as exports.

Q So I need to identify the location of all of my customers and monitor sales to ensure I comply with the rules and to identify whether to charge VAT, at what rate, and to which authority?

A – Yes, I am afraid so!

Please contact if you would like us to deal with overseas authorities on your behalf, or you would like assistance with technical issues or with language matters

VAT Schemes Guide – Alternative ways of accounting for tax

By   1 June 2016
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2013-12-01 Bury St Eds Xmas Fair0020 (2)There are a number of VAT Schemes which are designed to simplify accounting for the tax.  They may save a business money, reduce complexity, avoid the need for certain documentation and reduce the time needed to deal with VAT.  Some schemes may be used in combination with others, although I recommend that checks should be made first.

It is important to compare the use of each scheme to standard VAT accounting to establish whether a business will benefit.  Some schemes are compulsory and there are particular pitfalls for certain businesses using certain schemes.

I thought that it would be useful to consider the schemes all in one place and look at their features and pros and cons.

These schemes reviewed here are:

  • Cash Accounting Scheme
  • Annual Accounting Scheme
  • Flat Rate Scheme
  • Margin schemes for second-hand goods
  • Global Accounting
  • VAT schemes for retailers
  • Tour Operators’ Margin Scheme

Cash Accounting Scheme

Normally, VAT returns are based on the tax point (usually the VAT invoice date) for sales and purchases. This may mean a business having to pay HMRC the VAT due on sales that its customers have not yet paid for.

The VAT cash accounting scheme instead bases reporting on payment dates, both for purchases and sales. A business will need to ensure its records include payment dates.

A business is only eligible for the Cash Accounting Scheme if its estimated taxable turnover is no more than £1.35m, and can then remain in the scheme as long as it remains below £1.6m.

Advantages

  • Usually beneficial for cash flow especially if its customers are slow paying
  • Output tax is not payable at all if a business has a bad debt

Disadvantages

  • Is generally not beneficial for a repayment business (one which reclaims more VAT than it pays, eg; an exporter or supplier of zero rated goods or services)
  • Not usually beneficial if a business purchases significant amounts of goods or services on credit

Annual Accounting Scheme

The Annual Accounting Scheme allows a business to pay VAT on account, in either nine monthly or three quarterly payments. These instalments are based on VAT paid in the previous year. It is then required to complete a single, annual VAT return which is used to calculate any balance owed by the business or due from HMRC.

A business is eligible for the scheme if its estimated taxable turnover is no more than £1.35m and is permitted to remain in the scheme as long as it remains below £1.6m.

Advantages

  • Reduces paperwork as only the need to complete one return instead of four (Although it does not remove the requirement to keep all the normal VAT records and accounts)
  • Improves management of cash flow

Disadvantages

  • Not suitable for repayment businesses as they would only receive one repayment at the end of the year
  • If turnover decreases, the interim payments may be higher than under standard accounting

Flat Rate Scheme

The Flat Rate Scheme is designed to assist smaller businesses reduce the amount of time and complexity required for VAT accounting. The Flat Rate Scheme removes the need to calculate the VAT on every transaction. Instead, a business pays a flat rate percentage of its VAT inclusive turnover. The percentage paid is less than the standard VAT rate because it recognises the fact that no input tax can be claimed on purchases. The flat rate percentage used is dependent on a business’ trade sector.

A business is eligible for this scheme if its estimated taxable turnover in the next year will not exceed £150,000. Once using the scheme, a business is permitted to continue using it until its income exceeds £230,000.

If eligible, a business may combine the Flat Rate Scheme with the Annual Accounting Schemes, additionally, there is an option to effectively use a cash basis so there is no need to use the Cash Accounting Scheme. There has been recent case law on the percentage certain businesses’ use for the FRS, so it is worth checking closely.  There is a one percent discount for a business in its first year of trading.

Advantages

  • Depending on trade sector and circumstances may result in a real VAT saving
  • Simplified record keeping; no requirement to separate out gross, VAT and net in accounts
  • Fewer rules; no issues with input tax a business can and cannot recover on purchases
  • Certainty of knowing how much of income is payable to HMRC

Disadvantages

  • No reclaim of input tax incurred on purchases
  • If you buy a significant amount from VAT registered businesses, it is likely to result in more VAT due
  • Likely to be unattractive for businesses making zero-rated or exempt sales because output tax would also apply to this hitherto VAT free income
  • Low turnover limit

Margin Scheme for Second Hand Goods

A business normally accounts for output tax on the full value of its taxable supplies and reclaims input tax on its purchases. However, if a business deals in second-hand goods, works of art, antiques or collectibles it may use a Margin Scheme. This scheme enables a business to account for VAT only on the difference between the purchase and selling price of an item; the margin. It is not possible to reclaim input tax on the purchase of an item and there will be no output tax if no profit is achieved. There is a special margin schemes for auctioneers. A variation of the Margin Scheme is considered below.

Advantages

  • Usually beneficial if buying from (non-VAT registered) members of the public
  • Applies to EC cross-border sales
  • Purchaser will not see a VAT charge
  • Although no input tax claimable on purchases of scheme items, VAT may be claimed in the usual way on overheads and other fees etc

Disadvantages

  • Record keeping requirements are demanding and closely checked, eg; stock records and invoices which are required for both purchases and sales
  • Cannot be used for items purchased on a VAT invoice
  • Can be complex and create a cost if goods exported
  • Although no VAT due on sales if a loss is made, there is no set-off of the loss

Global Accounting

The problem with the Second Hand Goods Scheme is that full details of each individual item purchased and sold has to be recorded. Global Accounting is an optional, simplified variation of the Second Hand Margin Scheme. It differs from the standard Margin Scheme in that rather than accounting for the margin achieved on the sale of each individual item, output tax is calculated on the margin achieved between the total purchases and total sales in a particular accounting period.

Advantages

  • Simplified version of the Margin Scheme
  • Record keeping requirements reduced
  • Losses made on sales reduce VAT payable
  • Beneficial for businesses which buy and sell bulk volume, low value eligible goods

Disadvantages

  • Cannot be used for; aircraft, boats, caravans, horses or motor vehicles
  • Similar to Margin Scheme disadvantages apart from loss set off

VAT Schemes for Retailers

It is usually difficult for retailers to issue an invoice for each sale made, so various retail schemes have been designed to simplify VAT. The appropriate scheme for a business depends on whether its retail turnover (excluding VAT) is; below £1m, between £1m and £130m and higher.

Smaller businesses may be able to use a retail scheme with Cash Accounting and Annual Accounting but it cannot combine a Retail Scheme with the Flat Rate Scheme.  However, retailers may choose to use the Flat Rate Scheme instead of a Retail Scheme.

Using standard VAT accounting, a VAT registered business must record the VAT on each sale. However, via a Retail Scheme, it calculates the value of its total VAT taxable sales for a period, eg; a day, and the proportions of that total that are taxable at different rates of VAT; standard, reduced and zero.

According to the scheme a business uses it then applies the appropriate VAT fraction to that sales figure to calculate the output tax due. A business may only use the Retail Scheme for retail sales and must use the standard accounting procedures for other supplies.  It must still issue a VAT invoice to any VAT registered customer who requests one.  It is a requirement of any scheme choice that HMRC must consider it fair and reasonable.

Examples of Retail Schemes

  • Apportionment
  • Direct calculation
  • The point of sale scheme

There are special arrangements for caterers, retail pharmacists and florists.

Advantages

  • No requirement to issue an invoice for each sale
  • Most schemes are relatively simple to administer once set up. Technology assists in a helpful way with EPOS systems
  • Simplifies record keeping

Disadvantages

  • It is usual for each line sold to need to be coded correctly for VAT liability
  • Smaller businesses without state of the art technology may be at a disadvantage
  • Time and resources required to set up and maintain systems
  • In some cases the calculation depends on staff “pressing the right button”

Tour Operators Margin Scheme (TOMS)

This simplifies cross-border supplies by fixing the place of supply where the tour operator is located (rather than applying the usual place of supply rules).  Tour operators often buy goods and services from businesses in overseas countries and often cannot reclaim the associated input tax. The TOMS resolves this issue by permitting tour operators to calculate the VAT solely on the value they add. This is, in theory, similar to the Margin Scheme above.  The scheme applies to any business that buys in and re-sells; travel, accommodation and certain other services as a principal. It not only affects the normal High Street travel companies, but entities such as; schools, hospitality companies, organisers of events etc.  TOMS is compulsory and it applies to supplies made to/in in the UK as well as overseas.

Advantages

  • Avoids the need for the tour operator to VAT register in every country it makes supplies to/in
  • Effectively gives credit for input tax incurred overseas as well as the UK
  • No VAT shown on documents issued to clients

Disadvantages

  • Often complex calculations and record keeping
  • Very precise and complicated rules
  • Lack of understanding by a number of  inspectors
  • Complexity increases the risk of misdeclaration

Overall

As may be seen, there are a lot of choices for a business to consider, especially a start-up.  Choosing a scheme which is inappropriate may result in VAT overpayment and a lot of unneeded record keeping and administration.  There are real savings to be made by using a beneficial scheme, both in terms of VAT payable and staff time.

We are happy to review a business’ circumstances and calculate what schemes would produce the best outcome.

Please contact us if you require further information.

 

 Marcus Ward Consultancy Ltd 2016

VAT – New company car fuel rates

By   31 May 2016
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Advisory fuel rates from 1 June 2016

HMRC have published the new rates which apply from 1 June 2016. These rates apply to employees using a company car and HMRC will also accept them for VAT purposes. 

Engine size Petrol – amount per mile LPG – amount per mile
1400cc or less 10 pence 7 pence
1401cc to 2000cc 13 pence 9 pence
Over 2000cc 20 pence 13 pence
Engine size Diesel – amount per mile
1600cc or less 9 pence
1601cc to 2000cc 10 pence
Over 2000cc 12 pence

Hybrid cars are treated as either petrol or diesel cars for this purpose.

HMRC website here

VAT – Apportionment issues: complex and costly

By   24 May 2016
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The dictionary definition of the verb to apportion is “to distribute or allocate proportionally; divide and assign according to some rule of proportional distribution”.

So why is apportionment important in the world of VAT and where would a business encounter the need to apportion? I thought that it might be useful to take an overall look at the subject as it is one of, if not the most, contentious areas of VAT. If affects both output tax declarations and input tax claims, so I have looked at these two areas separately. If an apportionment is inaccurate it will either result in paying too much tax, or risking penalties and additional attention from HMRC; both of which are to be avoided!

The overriding point in all these examples is that any apportionment must be “fair and reasonable”.

Supplies

The following are examples of where a business needs to apportion the value of sales:

  • Retail sales

Retailers find it difficult to account for VAT in the normal way so they use what is known as a retail scheme. There are various schemes but they all provide a formula for calculating VAT on sales at the standard, reduced and zero rate. This is needed for shops that sell goods at different rates, eg; food, clothing and books alongside standard rated supplies.  As an example, in Apportionment Scheme 1 a business works out the value of its purchases for retail sale at different rates of VAT and applies those proportions to its sales.

  • Construction

A good example here is if a developer employs a contractor to construct a new building which contains retail units on the ground floor with flats above.  The construction of the commercial part is standard rated, but the building of the residential element is zero rated.  The contractor has to apportion his supply between the two VAT rates.  This apportionment could be made with reference to floorspace, costs, value or any other method which provides a fair and reasonable result.  The value of supplies relating to property is often high, so it is important that the apportionment is accurate and not open to challenge from HMRC.  I recommend that agreement on the method used is agreed with HMRC prior to the supply in order to avoid any subsequent issues.

  • Property letting

Let us assume that in the construction example above, when the construction is complete, the developer lets the whole building to a third party. He chooses to opt to tax the property in order to recover the attributable input tax.  The option has no effect on the residential element which will represent an exempt supply. Consequently, an apportionment must be made between the letting income in respect of the shops and flats.

  • Subscriptions

There has been a great deal of case law on whether subscriptions to certain organisations by which the subscriber obtains various benefits represent a single supply at a certain VAT rate, or separate supplies at different rates. A common example is zero rated printed matter with other exempt or standard rated supplies.

  • Take away

Most are familiar with the furore over the “pasty tax” and even with the U-turn, the provision of food/catering is often the subject of disputes over apportionment.  Broadly; the sale of cold food for take away is zero rated and hot food and eat in (catering) is standard rated.  There have been myriad cases on what’s hot and what’s not, what constitutes a premises (for eat in), and how food is “held out” for sale. The recent Subway dispute highlights the subtleties in this area. I have successfully claimed significant amounts of overpaid output tax based on this kind of apportionment and it is always worth reviewing a business’s position.  New products are arriving all the time and circumstances of a business can change.  A word of warning here; HMRC regularly mount covert observation exercises to record the proportion of customers eating in to those taking away.  They also carry out “test eats” so it is crucial that any method used to apportion sales is accurate and supportable.

  • Opticians

Opticians have a difficult time of it with VAT.  Examinations and advice services are exempt healthcare, but the sale of goods; spectacles and contact lenses, is standard rated.  Almost always a customer/patient pays a single amount which covers the services as well as the goods. Apportionment in these cases is very difficult and has been the subject of disagreement and tribunal cases for many years; some of which I have been involved in.  Not only is the sales value apportionment complex, but many opticians are partly exempt which causes additional difficulties. I recommend that all opticians review their VAT position.

Input tax recovery

  • Business/Non-Business (BNB)

If an entity is involved in both business and non-business activities, eg; a charity which provides free advice and also has a shop which sells donated goods. It is unable to recover all of the VAT it incurs.  VAT attributable to non-business activities is not input tax and cannot be reclaimed.  Therefore it is necessary to calculate the quantum of VAT attributable to BNB activities, that VAT which cannot be attributed is called overhead VAT and must be apportioned between BNB activities.  There are many varied ways of doing this as the VAT legislation does not specify any particular method.  Therefore it is important to consider all of the available alternatives. Examples of these are; income, expenditure, time, floorspace, transaction count etc.

  • Partial exemption

Similarly to BNB if a business makes exempt supplies, eg; certain property letting, insurance and financial products, it cannot recover input tax attributable to those exempt supplies (unless the value is de minimis). Overhead input tax needs to be apportioned between taxable and exempt supplies.  The standard method of doing this is to apply the ratio of taxable versus exempt supply values to the overhead tax. However, there are many “special methods” available, but these have to be agreed with HMRC.  Partial exemption is often complex and always results in an actual VAT cost to a business, so it is always worthwhile to review the position regularly.  Exemption is not a relief to a business.

  • Attribution

In both BNB and partial exemption situations before considering overheads all VAT must, as far as possible, be attributed to either taxable or exempt and non-business activities. This in itself is a form of apportionment and it is often not clear how the supply received has been used by a business, that is; of which activity is it a cost component?

  • Business entertainment

At certain events staff may attend along with other guests who are not employed. The recovery of input tax in respect of staff entertainment is recoverable but (generally) entertaining non staff members is blocked. Therefore an apportionment of the VAT incurred on such entertainment is required.

  • Business and private use of an asset

If a company owns, say, a yacht or a helicopter and uses it for a director’s own private use, but it is chartered to third parties when not being used (business use) an apportionment must be made between the two activities. The most usual way of doing this is on a time basis. Apportionment will also be required in the example of a business owning a holiday home used for both business and private purposes. Input tax relating to private (non-business) use is always blocked.

  • Motoring expenses

It is common for a staff member to use a car for both business and private purposes.  Input tax is only recoverable in respect of the business use so an apportionment is required.  This may be done by keeping detailed mileage records, or more simply by applying the Road Fuel Scale Charge which is a set figure per month which represents a disallowance for private use.

The above examples are not exhaustive but I hope they give a flavour to the subject.

If your business apportions, or should apportion, values for either income or expenditure I strongly recommend a review on the method.  There is often no “right answer” for an apportionment and I often find that HMRC impose unnecessarily harsh demands on a taxpayer.  Additionally, many business are unaware of alternatives or are resistant to challenging HMRC even when they have a good case.

VAT – Spot The Ball – Latest from the courts

By   9 May 2016
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Is Spot The Ball a game? And if it is, is it a game of chance? (And therefore exempt from VAT).

In the case of IFX Investment Company Ltd & ORS the main issue was whether the First-tier Tribunal (FtT) were wrong to hold that the appellants’ “Spot The Ball” competitions was exempt under the gaming exemption in Value Added Tax Act 1994, Schedule 9 Group 4. To fall within the gaming exemption, Spot The Ball must be a “game of chance” within the meaning of the Gaming Act 1968. The dispute was over the word “game” and the words “of chance”.

The Court of Appeal (CoA) considered whether the FtT decision in favour of the appellant that the supply was exempt or whether HMRC’s successful appeal to the Upper-tier Tribunal (UtT) should stand.

The court heard form the promoters that while there was an element of skill in determining roughly where the panel that decided where the ball should be would actually place it, the precise placement of the cross was essentially a matter of chance.  HMRC insisted that the competitors were not “playing a game” as they advanced the argument that a “game” required interaction between the players. and therefore Spot The Ball could not be considered playing a game of chance such that the supply is standard rated.

The UtT  deemed that Spot The Ball is “played” in “solitary isolation” and does not involve any interaction between competitors. The only contract is between the operator and the individual competitor. Additionally the act of placing a cross on the coupon was not “playing”

The CoA disagreed with the UtT’s decision and concluded that the FtT made a finding that Spot The Ball was a game of chance and there was no reason to disturb this decision. The FtT was correct to hold that there is no inter-player interaction rule. Previous case law clearly contemplates that there can be a game without the contestants being in communication with each other. Consequently, it restored the FtT’s decision and the supplies are exempt.

This case has brought home to me two (non-VAT) things; 1) That Spot The Ball is still around, and that 2) I always thought that one had to actually put a cross where the ball actually was, rather than where a judging panel thought the ball was likely to be.  One lives and learns. I’m also constantly surprised that “the pools” still exist in these days of lotteries and lotto and other promotions.

Case here