Tag Archives: output-tax

VAT – Latest from the courts: Royal Mail claims (Zipvit)

By Marcus Ward 4 July 2016

The Upper Tribunal (UTT) decided that VAT incurred on the receipt of certain postal services is not recoverable.

Brief background

It is estimated that businesses could have recovered more than £220 million of credit for input tax on RM’s postal services had the decision gone in their favour.

It has previously been decided that certain supplies made by Royal Mail (RM), including Parcelforce, to its customers were taxable. This was on the basis of the TNT CJEU case. RM had treated them as exempt. HMRC was out of time to collect output tax, but claims made by recipients of RM’s services were able to make retrospective claims. These claims were predicated on the basis that the amount paid to RM included VAT at the appropriate rate (it was embedded in the charge) and that UK VAT legislation stipulates that the “taxable amount” for any supply, is the amount paid by the customer including any VAT included in the price.

Decision

The UTT has agreed with the verdict in the FTT hearing that the appellant: Zipvit Limited (along with many other taxpayers) was unable to recover input tax claimed to be embedded the value of the supply by RM. Regardless of the arguments on the embedded input tax point (and interesting comments on the absence of a correspondingly equal amount declared as output tax by RM) the UTT agreed with the overall finding by the FTT. Although a This is a highly technical issue, the deciding point was the simple fact that as the claimant did not have valid tax invoices to support the claim it was invalid. Additionally, it was decided that although HMRC may consider alternative evidence, in these circumstances they were not obliged to accept other documentation and that Zipvit’s claim therefore failed.

Action

We are aware of many appeals being stood behind Zipvit. This case clearly is unhelpful for claims, but it may not be the end of the process. We will advise on any further progress of the appeal when that information is available.

Please contact us if you have any queries on this case.

Full case here Zipvit Limited

VAT – Latest from the courts: A round up of partial exemption

By Marcus Ward 20 June 2016

The partial exemption calculation

The calculation is required to quantify the amount of input tax a partly exempt business is able to claim. A partly exempt business is one which makes a mixture of taxable and non-taxable (eg; exempt) supplies. Input tax attributable to exempt activities is not recoverable.

With certain businesses HMRC accept that the usual “partial exemption standard method” based on taxable turnover versus exempt turnover is either impractical, distortive, or inappropriate. In such cases the business submits an application for a partial exemption special method (PESM). This may be based on many various factors such as; floorspace, staff numbers, transaction counts, management accounting etc (or any combination). If HMRC accept that the proposal is fair and reasonable, a formal agreement will be entered into by both parties.

The question in this case was when a PESM is agreed with HMRC is there a requirement to round up figures to a whole percentage point?

According to the CJEU decision in Kreissparkasse Wiedenbrück the answer is no. It was decided that, via EC legislation, in cases where there is a PESM agreement in place there was no obligation to round up.

The view was that as a significant amount of PESMs are “sophisticated” (compared to the partial exemption standard method) they achieve a more accurate allocation of input tax between taxable and exempt activities and rounding would counter this accuracy.

Full case here

Please contact us if your business is partly exempt and you either have a PESM in place, are in the process of agreeing one, or feel that your input tax recovery is suffering by the use of the standard method.

VAT Tax Point Planning – Applications for Payment

By Marcus Ward 13 June 2016

Further to my previous article on tax points, I look at a specific planning point.

General

Applications for payment can be used to defer the date when output tax is accountable to HMRC and avoids the supplier having to account (and pay) VAT if the relevant supply becomes a bad debt.

Approval

No formal approval to use applications for payment is required from HMRC. This is because this VAT planning simply uses the “Time of Supply” (tax point) legislation.

Technical

No output tax is due until a tax point is crystallised. Broadly speaking, for the supply of services, a tax point is created at the earlier of; invoice date, receipt of payment, or completion of the work. Consequently, in order to be of benefit, the services in question have to be a “continuous supply of services”. This is defined as “services are supplied for any period for a consideration the whole or part of which is determined or payable periodically or from time to time”. Therefore, if an application for payment is issued rather than an invoice, output tax is only due when payment is received. This means if the debt becomes bad, no VAT is payable on it so long as the service is continuous. An application for payment is only of benefit if there is ongoing work (continuous supply of services) since, as above, there is a tax point created when the job is complete, regardless of the invoicing or payment position. Another relevant issue is; that under the existing VAT legislation, there is no requirement to issue a proper VAT invoice to an unregistered client/customer (unless specifically requested to do so by the client).

Implementation

Sending applications for payment (rather than invoices) may be done on a job by job basis or for all services from a selected date – although, the benefit will only be obtained for those jobs which are continuous. The VAT accounting system is required to recognise and report receipts of fees rather than applications for payment or invoices raised (although if invoices are issued on the day payment is received the tax point will be the same date). Additionally, the system needs to be able to identify completion tax points since these cannot be deferred by the use of application for payment.

Documentation

A request for payment must clearly state; “This is not a VAT invoice” and it may also be helpful if it appears distinct from “usual” invoices. It should state that it is an application/request for payment. It is also helpful if it does not show the supplier’s VAT number.

Cons

If the recipient of the services is VAT registered, it may complicate their accounting and will delay the date on which input tax may be recovered. This should not affect individuals or non-VAT registered clients. As considered above, it will also affect the accounting for the supplier and may add complexity.

Summary

This is relatively simple, yet effective VAT planning. It cannot be challenged technically by HMRC, although the actual operation will be examined at an inspection.

Please contact me if this matter is of interest.

VAT – Time of supply (Tax Point). The Rules

By Marcus Ward 10 June 2016

Although one of the “VAT basics”, it is sometimes quite difficult to establish the date for a tax point, and there is a great deal of case law which suggests that this seemingly straightforward exercise can throw up difficulties.

The time at which a supply of goods or services is deemed to take place is called the tax point. VAT must normally be accounted for in the VAT period in which the tax point occurs and at the rate of VAT in force at that time. Small businesses may, however, account for VAT on the basis of cash paid and received.

Although the principal purpose of the time of supply rules is to fix the time for accounting for, and claiming VAT, the rules have other uses including

calculating turnover for VAT registration purposes
establishing the period to which supplies (including exempt supplies) are to be allocated for partial exemption purposes, and
establishing when and if input tax may be deducted

The tax point for a transaction is the date the transaction takes place for VAT purposes. This is important because it crystallises the date when output tax should be declared and when input tax may be reclaimed. Unsurprisingly, get it wrong and there could be penalties and interest or VAT is declared too early or input tax claimed late – both situations are to be avoided, especially in large value and/or complex situations.

The time of supply rules

Basic tax point (Date of supply)

Goods

The basic tax point for a supply of goods is the date the goods are removed, ie; sent to, or taken by, the customer. If the goods are not removed, it is the date they are made available for his use.

Services

The basic tax point for a supply of services is the date the services are performed.

Actual tax point
In the case of both goods and services, where a VAT invoice is raised or payment is made before the basic tax point, there is an earlier actual tax point created at the time the invoice is issued or payment received, whichever occurs first.

14 Day Rule
There is also an actual tax point where a VAT invoice is issued within 14 days after the basic tax point. This overrides the basic tax point.

Continuous supply of services
If services are supplied on a continuous basis and payments are received regularly or from time to time, there is a tax point every time:

A VAT invoice is issued
a payment is received, whichever happens first

Deposits

Care should be taken when accounting for deposits. The VAT rules vary depending on the nature of the deposit. In some circumstances deposits may catch out the unwary, these could be, inter alia; auctions, stakeholder/escrow/solicitor accounts in property transactions, and refundable/non-refundable deposits. There are also other special provisions for particular supplies of goods and services, for eg; TOMS.

Summary

The tax point may be summarised (in most circumstances) as the earliest of:

The date an invoice is issued
The date payment is received
The date title to goods is passed, or services are completed.

Some brief examples:

Situation	Tax point
No invoice needed	Date of supply
VAT invoice issued	Date of invoice
VAT invoice issued 15 days or more after the date of supply	Date the supply took place
Payment or invoice issued in advance of supply	Date of payment or invoice (whichever is earlier)
Payment in advance of supply and no VAT invoice yet issued	Date payment received

There are certain exceptions, so care should be taken when establishing a tax point.

Planning

Tax point planning can be very important to a business. the aims in summary are:

Deferring a supplier’s tax point where possible
Timing of a tax point to benefit both parties to a transaction wherever possible
Applying the cash accounting scheme (or withdrawal from it)
Using specific documentation to avoid creating tax points for certain supplies
Correctly identifying the nature of a supply to benefit from certain tax point rules
Generating positive cashflow between “related” entities where permitted
Broadly; generate output tax as early as possible in a VAT period, and incur input tax as late as possible
Planning for VAT rate changes
Ensure that a business does not incur penalties for errors by applying the tax point rules correctly.

Getting a tax point wrong by even one day can be very costly. This is particularly relevant in respect of property transactions. Also, a significant savings may be made by careful tax point planning.

In my next article I shall look at how the tax point rules may be used for beneficial VAT planning in a specific example.

VAT – Latest from the courts. More on separate and composite supplies and land exemption

By Marcus Ward 17 May 2016

TC05078 Blue Chip Hotels Ltd

This is a FTT case which considered the VAT analysis of a supply in two ways. The appellant was an hotel which offered a wedding “package”. The package comprised; a room which was licensed for civil wedding ceremonies, the hire of other rooms, catering, accommodation, car parking and the use of the grounds for photographs. The only activity carried out in the “wedding room” was the wedding ceremony itself. The hotel treated the hire of the wedding room as exempt and added VAT to the remainder of the package.

The two technical points were:

Was the supply of the wedding room a separate supply to the rest of the wedding package as advanced by the taxpayer, or was it one element of the overall package to which standard rating applied?, and;
If an independent supply, was it an exempt supply of land under VAT Act, Schedule 9, Group 1 as argued by the appellant?

Somewhat to the puzzlement of the Tribunal, HMRC had accepted that if the wedding room was supplied without any other element of the wedding package it could be treated as an exempt supply of land.

On the first point the Tribunal decided that the hire of the wedding room should be treated as a separate supply for VAT purposes. However, this was only relevant if the taxpayer could demonstrate that the provision of the wedding room was a supply of land.

On the second point, the issue was whether what the hotel supplied was more than the mere hire of the wedding room as a passive letting of land. The tribunal was of the view that an additional service was being provided, this being the service of a legal wedding ceremony which could be carried out only because of the licensed nature of the wedding room. That is; what was being paid for was the right to participate in a particular event, only part of which entailed the provision of the physical space in which that event occurred.

The Tribunal concluded that the supply of the wedding room could not be treated as an exempt supply of land via VAT Act, Schedule 9, Group 1, the provision of licensed premises in which a civil wedding could legally be carried out went beyond the passive letting of land and was outside the scope of the exemption.

This seems to go against the decision in Drumtochty Castle Ltd (TC2111) inter alia, where the Tribunal found that in similar circumstances to those in this instant case that what was being offered was a single package such that exemption could not be applied to certain elements. Although it may simply demonstrate that even subtle differences in the facts can result in a different VAT outcome. As previously observed in a number of these types of cases, it is crucial to analyse precisely what is being provided, even in cases where the VAT treatment has remained unchanged for a number of years. Case law develops at a very fast rate and legislation changes regularly, both of which can affect the tax position.

VAT Latest from the courts: Stocks Fly Fishery – single or multiple supply?

By Marcus Ward 19 April 2016

As many will know, there is a significant amount of case law concerning what may be treated as a composite supply at one VAT rate, and what are separate supplies at different VAT rates. The latest in this series is the First Tier Tribunal case of Stocks Fly Fishery

The appellant is a trout fishery in the Forest of Bowland. They argued that they supplied standard rated fishing and a distinct zero rated supply of fish for human consumption.

They provided two types of daily ticket which was required to fish the reservoir. The first was a sporting ticket, which entitled an angler to fish, but any fish caught must be returned to the water. The second was a take ticket which also enabled a person to fish but any fish caught (up to a certain number) may be taken away for food. A take ticket was more expensive than a sporting ticket. The more fish that were taken away, the more expensive the take ticket was. The taxpayer formed the opinion that it made two supplies; one of fishing which was agreed to be standard rated, and one of food for human consumption (the trout) which was zero rated. The value of the zero rated element was said to be the difference between the sporting ticket price and that of the take ticket.

The issue was whether the ability to take away the fish for food was a separate supply, or ancillary to the substantive supply of fishing.

The appellant cited Hughes v Pendragon Sabre Ltd (t/a Porsche Centre Bolton) while HMRC relied on Chalk Springs Fisheries (1987) (LON/86/706) Roger Cambrai Haynes (1988) (LON/87/624) and Card Protection Plan Ltd v Commissioners of Customs and Excise.

As an observation, the chairman in the Chalk Springs Fisheries case stated “…No trout is, in my view, supplied to him at all. Instead the fisherman must go out and catch them, if he can.” This was obviously quite unhelpful to the appellant. Additionally, the chairman was obliged to follow the well-known Card Protection Plan case which sets out guidance on matters such as this.

Decision

The FTT decided that the essential feature of the transaction was fishing and the dominant motive of anglers going to the fishery was to fish, regardless of which type of ticket was purchased. Therefore, the right to fish had to be regarded as constituting the principal service and the right to kill and keep the trout fish, if caught, should be regarded as ancillary to that principal purpose. Therefore there was a single standard rated supply of fishing.

It is always worth reviewing whether supplies made by a business can, and ought, to be treated separately, or as a single bundle. The existence of such a massive amount of case law on this subject indicates that this issue will continue to run and run.

Please contact us should this matter raise any concerns or present a possible opportunity.

Latest from the courts – More on VAT on food and drink

By Marcus Ward 14 March 2016

OK, so most people are aware of the Jaffa Cake case and the appeals relating to smoothies and the VAT oddities that are thrown up by chocolate foods and fruit drinks. The latest in what many view to be a ridiculous situation is the Nestlé UK Limited case concerning Nesquik powder.

Nestlé appealed against HMRC’s decision not to repay over £4 million in VAT accounted for on the sale of strawberry and banana flavoured Nesquik powder. Nestlé formed the view that the powder which is used to flavour milk, should be zero rated in the same way that the chocolate flavoured powder and ready to drink milk based drinks it produces are.

The First Tier Tribunal found in favour of HMRC and decided that the fruit flavoured powders were a “powder for the preparation of beverages” covered by the exception from zero-rating for such products and that they were not covered by the items overriding the exceptions to zero-rating, so they remained standard-rated; hence no retrospective claim for overdeclared output tax.

So, there is differing VAT treatment depending on what flavour the Nesquik powders are, and between ready to drink products and ones where the customer has to mix them his/herself.

Fortunately, VAT is completely logical and there are simply no traps for the unwary! My own view is that the legislation regarding food and drink is so convoluted and complex that it needs a complete rewriting. I appreciate that case law has caused the current situation, and this has not been helped by political tinkering (pasty tax anyone?) but clarity is long overdue. I strongly suggest that this is not the last food based case, and of course we have had them going back to the inception of VAT. Now, this chocolate hot cross bun……

VAT – Top 10 Tax Point Planning Tips

By Marcus Ward 24 February 2015

VAT Tax Point Planning

If a business cannot avoid paying VAT to the HMRC, the next best thing is to defer payment as long as legitimately possible. There are a number of ways this may be done, dependent upon a business’ circumstances, but the following general points are worth considering for any VAT registered entity.

A tax point (time of supply) is the time a supply is “crystallised” and the VAT becomes due to HMRC and dictates the VAT return period in which VAT must be accounted for. Very broadly, this is the earliest of; invoice date, receipt of payment, goods transferred or services completed (although there are quite a few fiddly bits to these basic rules).

The aims of tax point planning

1. Deferring a supplier’s tax point where possible. It is sometimes possible to avoid one of these events or defer a tax point by the careful timing of the issue of a tax invoice.

2. Timing of a tax point to benefit both parties to a transaction wherever possible. Because businesses have different VAT “staggers” (their VAT quarter dates may not be the co-terminus) judicious timing may mean that the recipient business is able to recover input tax before the supplier needs to account for output tax. This is often important in large or one-off transactions, eg; a property sale.

3. Applying the cash accounting scheme. Output tax is usually due on invoice date, but under the cash accounting scheme VAT is only due when a payment is received. Not only does this mean that a cash accounting business may delay paying over VAT, but there is also built in VAT bad debt relief. A business may use cash accounting if its estimated VAT taxable turnover during the next tax year is not more than £1.35 million.

4. Using specific documentation to avoid creating tax points for certain supplies. If a business supplies ongoing services (called continuous services – where there is no identifiable completion of those services) if the issue of a tax invoice is avoided, VAT will only be due when payment is received (or the service finally ends).

5. Correctly identifying the nature of a supply to benefit from certain tax point rules. There are special tax point rules for specific types of supplies of goods and services. Correctly recognising these rules may benefit a business, or present an opportunity for VAT planning.

6. Generate output tax as early as possible in a VAT period, and incur input tax as late as possible. This will give a business use of VAT money for up to four months before it needs to be paid over, and of course, the earlier a claim for repayment of input tax can be made – the better for cashflow.

7. Planning for VAT rate changes. Rate changes are usually announced in advance of the change taking place. There are specific rules concerning what cannot be done, but there are options to consider when VAT rates go up or down.

8. Ensure that a business does not incur penalties for errors by applying the tax point rules correctly. Right tax, right time; the best VAT motto! Avoiding penalties for declaring VAT late is obviously a saving.

9. Certain deposits create tax points, while other types of deposit do not. It is important to recognise the different types of deposits and whether a tax point has been triggered by receipt of one. Also VAT planning may be available to avoid a tax point being created, or deferring one.

10. And finally, consider discussing VAT timing planning for your specific circumstances with your adviser.

It should always be remembered that it is usually not possible to apply retrospective VAT planning as VAT is time sensitive, and never more so than tax point planning.

I have advised a lot of clients on how to structure their systems to create the best VAT tax point position. Any business may benefit, but I’ve found that those with the most to gain are; professional firms, building contractors, tour operators, hotels, hirers of goods and IT/internet businesses.

(c) Marcus Ward Consultancy Ltd 2015

What is the value of a sale for VAT? – Prompt Payment Discounts

By Marcus Ward 15 December 2014

The value of a supply is crucial for VAT.

The area of discounts has always been problematic, particularly in respect of prompt payments discounts (which customers sometimes do, and sometimes do not take advantage of).

HMRC has clarified the position and has published: ttps://www.gov.uk/government/uploads/system/uploads/attachment_data/file/320780/VAT_prompt_payment_consultation.pdf … which confirms that from 1 April 2015, all businesses that offer Prompt Payment Discounts will be obliged to account for VAT on the sum actually received in return for the goods or services supplied (rather than the reduced value offered – as is the current position).