Tag Archives: tax-point

VAT: Bad Debt Relief – The Total case

By Marcus Ward 1 July 2019

Latest from the courts

Bad Debt Relief (BDR) is often an area that creates disputes with HMRC. The legislation has changed over the years and the current rules are described here.

Background

Broadly speaking, under normal VAT rules, a supplier is required to account for output tax, even if the supply has not been paid for (however, the use of cash accounting or certain retail schemes removes the problem of VAT on bad debts from the supplier). BDR, as the names suggests, is intended to provide relief on the VAT element of a bad debt. Output tax previously claimed may be “reclaimed” by using the BDR mechanism.

The law which governs the claiming of bad debt relief is The VAT Act 1994, Section 36, and Section 26A which covers the repayment of input tax when a customer fails to pay for supplies received within six months of the relevant date, and The VAT Regulations 1995, Parts XIX, XIXA and XIXB.

Conditions for claiming bad debt relief

A business must have accounted for the VAT on the supplies and paid it to HMRC
It must have been written off the debt in its day to day VAT accounts and transferred it to a separate bad debt account
The value of the supply must not be more than the customary selling price
The debt must not have been paid, sold or factored under a valid legal assignment
The debt must have remained unpaid for a period of six months after the date of the supply

The case

In the First Tier Tribunal (FTT) case of Total Catering Equipment Ltd [2019] TC 07184, heard on 4 June 2019, the issue was whether payments from customers which were diverted by a dishonest employee should be recognised as a payment for a supply of goods (no BDR available as the money was received then stolen) or whether the fact that the business did not actually receive the payment meant that a BDR was appropriate. Total supplied goods to customers, some of whom paid by credit or debit cards. The member of staff responsible for these transactions, set up a separate (from the business) bank account and fraudulently diverted customers; payments into his own account. A BDR claim was made by the appellant when the crime was discovered. The claim was refused by HMRC on the grounds that the employee had received payment “on behalf” of Total before making payment into his own account.

Decision

The judge found for the appellant. The appeal was allowed – it was decided that Total had never actually received payment for the goods supplied, so BDR was available. A distinction was made between the diversion of monies in this case (where the supplier was deemed to never had received the money) and a theft by an employee from, eg; a till or subsequent withdrawals from the business’ bank account (where a business would have received payment before the money was stolen).

Commentary

I have written about VAT and illegal activities here. There can be a fine line between taxable illegal activities and non-taxable illegal activities, and subtleties around tax points (time of supply) misrepresentation and consideration. If you, or your clients have been in the unfortunate position of being on the receiving end of crime, it would be adding insult to injury to have to account for tax on money you do not have. I would always advise that any demands from HMRC, or refusals to refund VAT should be properly reviewed.

VAT: When is the building of a house complete? (And why is it important?)

By Marcus Ward 11 June 2019

Completion of a residential dwelling

A technical point which comes up surprisingly often and seems innocuous is: when is a building “complete”? The following case is helpful, and I thank Les Howard for bringing it to my attention.

The date that the construction of a dwelling is deemed to be complete is important for a number of reasons. The issue in the case of Mr and Mrs James was whether certain works could be zero rated via the VAT Act Schedule 8 Group 5 Item 2 (The supply in the course of the construction of a building designed as a dwelling…) or as HMRC contended, they were the reconstruction or alteration of an existing building and the work should be standard rated.

Background

The James used a contractor to plaster the entire interior of their house in the course of its construction. However, the work was demonstrably defective to such an extent that the James commenced legal proceedings. A surveyor advised that all of the old plaster needed to be hacked off and replaced by new plastering installed by a new firm. The stripping out and replacement works took place after the Certificate of Completion had been issued.

The James claimed input tax on the house construction via the DIY Housebuilders’ Scheme.

Technical

HMRC refused the James’ claim to have the remedial work zero-rated because, in their view, the re-plastering works amounted to the reconstruction or alteration of the house which was, when the supplies were made, an “existing building”. They proffered Note 16 of Schedule 5 which provides that “the construction of a building” does not include “(a) … the conversion, reconstruction or alteration of an existing building”.

They stated that zero-rating only applied if the work formed part of the construction of a zero-rated building. They had previously decided that the work of snagging or correction of faults carried out after the building had been completed could only be zero-rated if it was carried out by the original contractors and correction of faults formed part of the building contract. When the snagging is carried out by a different contractor, the work is to an existing building and does not qualify for zero rating.

The James stated that the Customs’ guidelines on snagging do not take into account extraordinary circumstances. Their contention was that the re-plastering works were zero rated because they had no choice but to engage the services of a different contractor other than the one who carried out the original works.

Decision

The judge found for the appellant – the re-plastering works were zero rated.

There was a query as to why The James applied for a Certificate of Completion before the plastering was completed. In nearly all cases such a certificate would crystallise the date the building was complete.

The reasons were given as:

the need for funds. The James could not remortgage the house without the certificate and they needed to borrow a substantial amount
they could not reclaim VAT under the DIY Housebuilders’ Scheme until the Certificate of Completion had been issued
they were aware that the building inspector was beginning to wonder why the building works were taking such a long time
they needed the house assessed for Council Tax which could only happen when the certificate had been issued
the Certificate was issued as part of the procedure required by the Building Act 1984 and the Building Regulations of 2000

These reasons were accepted by the judge.

Despite the respondents stating that:

for the reasons given above
the fact that the James had been living in the house for some time
they had obtained the Certificate of Completion
the new plastering work had been done by the new plasterer such that the house had been constructed before supply of the new plasterer’s services had been made
the house was an “existing building”

the judge was satisfied that in the circumstances the new plastering work was supplied in the course of the construction of the building as a dwelling house and that there was no reconstruction or alteration of an existing building in the sense contemplated by Note (16) to Group 5 Schedule 8.

He observed that the Certificate of Completion records that the substantive requirements of the Building Regulations have been satisfied. But to the naked eye the old plasterwork was obviously inadequate and dangerous ad he could not possibly consider that the construction project had finished until the new plasterwork was installed. The James’ construction project was to build a new dwelling house. Plasterwork of an acceptable standard was an integral part of the construction works. The new plasterwork was done at the earliest practicable opportunity.

Commentary

Care should be taken when considering when the completion of a house build takes place. There are time limits for DIY Housebuilders’ Scheme clams and clearly, as this case illustrates, usually work done to a house after completion does not qualify for zero rating. So, if the owner of a house is thinking of, say, building a conservatory for example, it is more prudent in VAT terms to construct it at the same time as a new house is built, and certainly before completion.

I would say that the appellant in this case achieved a surprisingly good result.

VAT: Treatment of vouchers, gifts and discounts – How business promotions work

By Marcus Ward 24 May 2019

Business promotions are an area of VAT which continues to prove complex. This is further exacerbated by changes to the legislation at EU and domestic level and ongoing case law. The main points are; whether there is a supply, and, if so, what is the value of that supply?

I hope that the VAT position is helpfully summarised here. I thought it may be useful if the VAT treatment of various business promotion schemes is summarised in one place.

…I recall a statement from an old mentor of mine; “if you have a marketing department you have a VAT issue!”

Summary

Offer	How to charge VAT
Discounts	Charged on the discounted price (not the full price)
Gifts	Charged on the gift’s full value – there are some exceptions listed below
Multi-buys	Charged on the combined price if all the items have the same VAT rate. If not, VAT is ‘apportioned’ as mixed-rate goods
Money-off coupons, vouchers etc	No VAT due if given away free at time of a purchase. If not, VAT due on the price charged
Face value vouchers that can be used for more than one type of good or service (multi-purpose)	No VAT due, if sold at or below their monetary value
Face value vouchers that can only be used for one type of good or service (single-purpose)	VAT due on the value of the voucher when issued
Redeemed face value vouchers	Charged on the full value of the transaction at the appropriate rate of the goods provided in return for the voucher

Exceptions for gifts

There’s no VAT due on gifts given to the same person if their total value in a 12 month period is less than £50.

Free goods and services

A business is not required to account for VAT on things like free samples if they meet certain conditions.

Supplies	Condition to meet so no VAT due
Free samples	Used for marketing purposes and provided in a quantity that lets potential customers test the product
Free loans of business assets	The cost of hiring the asset is included in something else you sell to the customer
Free gifts	The total cost of all gifts to the same person is less than £50 in a 12 month period
Free services	You don’t get any payment or goods or services in return

Background

Face value vouchers

Recent changes, radically alter the UK rules for face value vouchers (FVV). FVVs are; vouchers, tokens, stamps (physical or electronic) which entitle the holder to certain goods or services up to the value on the face of the vouchers from the supplier of those goods or services.

Examples of FVVs would include vouchers sold by popular group discount websites, vouchers sold by high street retailers, book tokens, stamps and various high street vouchers.

Single or multi-purpose

The most important distinction for FFVs is whether a voucher is a single purpose voucher or multi-purpose voucher. If it is a multi-purpose voucher then little has changed. If it is a single purpose voucher, however, HMRC will now required output tax to be accounted for at the date it is issued.

Single purpose vouchers are vouchers which carry the right to receive only one type of goods or services which are all subject to a single rate of VAT. Multi-purpose vouchers are anything else. The differences can be quite subtle.

For example:

a voucher which entitles you to download an e-book from one seller will be a single purpose voucher. A voucher which entitles you to either books (zero rated) or an e-book download (standard rated) from the same seller will be multi-purpose
a voucher which entitles you to £10 of food at a restaurant which does not sell takeaways is probably single purpose, whereas if the restaurant has a cold salad bar and you can buy a take away with the voucher (or hot food) then it would be multi-purpose.

The above means that for single purpose vouchers VAT is due whether the voucher is actually redeemed or not; which seems an unfair result. There is no way to reduce output tax previously accounted for if the voucher is not used.

Please contact us if you, or your clients use this type of business promotion. of course, get it wrong, and there is likely to be a financial penalty!

VAT: Property – The Option To Tax

By Marcus Ward 13 March 2019

Opting To Tax commercial property

Opting to tax provides a unique situation in the VAT world. It is the only example of where a supplier can choose to add VAT to a supply….. or not.

What is an option to tax?

The sale or letting of a property is, in most cases, exempt (VAT free) by default. However, it is possible to apply the option to tax (OTT) to commercial property. This has the result of turning an exempt supply into a taxable supply at the standard rate. It should be noted that an OTT made in respect of a residential property is disregarded and consequently, the supply of residential properties is always exempt.

Why opt?

Why would a supplier then deliberately choose to add VAT on a supply?

The only purpose of OTT is to enable the optor to recover or avoid input tax incurred in relation to the relevant land or property. The OTT is a decision solely for the property owner or landlord and the purchaser or tenant is not able to affect the OTT unless specific clauses are included in the lease or purchase contracts. Care should be taken to ensure that existing contracts permit the OTT to be taken. Despite a lot of misleading commentary and confusion, it is worth bearing in mind that the recovery or avoidance of input tax is the sole reason to OTT.

Once made the OTT is usually irrevocable for a 20-year period (although there are circumstances where it may be revisited within six months of it being taken – see below). There are specific rules for circumstances where the optor has previously made exempt supplies of the relevant land or property. In these cases, HMRC’s permission must usually be obtained before the option can be made.

What to consider

The important questions to be asked before a property transaction are:

Was VAT incurred on the purchase price?
Is the purchase with the benefit of an existing lease (will the tenant remain?) if so, it may be possible to treat the transaction as a VAT free TOGC (see below)
Is the property subject to the Capital Goods Scheme (CGS here)?
Is it intended to spend significant amounts on the property, eg; refurbishment?
What other costs will be incurred in respect of the property?
If renting the property out – will the lease granted be full tenant repairing?
Will the tenant or purchaser be in a position to recover any or all VAT charged on the rent/sale?

These are the basic questions to be addressed; further factors may need to be considered depending on the facts of a transaction.

Input tax recovery

Input tax relating to an exempt supply is usually irrecoverable. In fact, a business only making exempt supplies is unable to register for VAT. A guide to partial exemption here. So input tax incurred on, say; purchase, refurbishment, legal costs etc would be lost if a property was sold or rented on an exempt basis. In order to recover this tax, it must relate to a taxable supply. If an OTT is taken, the sale or rent of the property will be standard rated which represents a taxable supply. VAT on supply = input tax claim.

Two-part process

The OTT is a two-part process.

The first part is a decision of the business to take the OTT and it is prudent to minute this in Board meeting minutes or similar. Once the decision to OTT is taken VAT may be added to a sale price or rent and a valid tax invoice must be raised.
The second part is to formally notify HMRC. If the OTT is straightforward the form on which this is done is a VAT1614A. Here. In some cases, it is necessary to obtain HMRC’s permission in which case separate forms are required. HMRC guidance here – para 5.

There can be problems in cases where the OTT is taken, but not formally notified.

Timing

It is vital to ensure that an OTT is made at the correct time. Even one day late may affect the VAT treatment. Generally speaking, the OTT must be made before any use of the property, eg; sale or rent. Care should also be taken with deposits which can trigger a tax point before completion.

Disadvantages

As mentioned above (and bears repeating) the benefit of taking the OTT is the ability to recover input tax which would otherwise fall to be irrecoverable. However, there are a number of potential disadvantages.

opting a commercial property may reduce its marketability. It is likely that entities which are unable to recover VAT would be less inclined to purchase or lease an opted property. These entities may be; partly exempt business, those not VAT registered, or charities/NFP organisations.
the payment of VAT by the purchaser may necessitate obtaining additional funding. This may create problems, especially if a VAT charge was not anticipated. Even though, via opting, the VAT charge is usually recoverable, it still has to be paid for up-front.
an OTT will increase the amount of SDLT payable when a property is sold. This is always an absolute cost.

Transfer of a Going Concern (TOGC)

I always say that advice should be taken in all property transactions and always in cases of a TOGC or a possible TOGC. This is doubly important where an opted building is being sold, because TOGC treatment only applies to a sale of property when specific tests are met. A TOGC is VAT free but any input tax incurred is recoverable, so this is usually a benefit for all parties.

Revoking an Option To Tax

The cooling off period – If an OTT has been made and the opter changes his/her mind within six months it can be revoked. This is as long as no tax has become chargeable on a supply of the land, that no TOGC has occurred, and the OTT has actually been notified to HMRC. There are additional considerations in certain cases, so these always need to be checked.
No interest has been held for more than six years – An OTT is revoked where the opter has not held an interest in the opted building for a continuous period of six years. The revocation is automatic, and no notification is required.
20 years – It is possible to revoke an OTT which was made more than 20 years ago. Certain conditions must be met, and advice should be taken on how such a revocation affects future input tax recovery.

Summary

Property transactions are high value and often complex. The cost of getting VAT wrong or overlooking it can be very swingeing indeed. I have also seen deals being aborted over VAT issues. of course, if you get it wrong there are penalties to pay too. For these reasons, please seek VAT advice at an early stage of negotiations.

More on our land and property services here

VAT: More on the Mercedes Benz Financial Services case – PCP

By Marcus Ward 1 March 2019

Further to my article on the Mercedes Benz Financial Services (MBFS) case on Personal Contract Purchase (PCP), HMRC has published a Briefing Note – Changes to the VAT treatment of PCPs

HMRC has fully implemented the findings in the MBFS CJEU case. In summary, HMRC state that:

“The correct treatment of PCP and similar contracts depends on the level at which the final optional payment is set:

if, at the start of the contract, it is set at or above the anticipated market value of the goods at the time the option is to be exercised, the VAT treatment of the contract will follow the MBFS It is a supply of leasing services from the outset and VAT must be accounted for on the full value of each instalment, there is no advance, or credit, so there is no finance
if, at the start of the contract, it is set below the anticipated market value, such that a rational customer would buy the asset when they exercise the option, it is a supply of goods, with a separate supply of finance. VAT is due on the supply of goods in full at the outset of the contract, the finance is exempt from VAT”

This treatment must be used by 1 June 2019. Past declarations which have been in error must be adjusted per PN 700/45. Businesses affected by the changes may also need to consider adjustments to input tax claimed, or forgone in respect of partial exemption. A guide to partial exemption here.

VAT: New reverse charge for the construction industry

By Marcus Ward 4 February 2019

Further to my article which sets out the basis of these changes, I look further at the measures which will be introduced on 1 October 2019. Time is running out for businesses in the building and construction sector to understand the impact of the new rules and to make arrangements to implement the required changes. These will include:

cashflow implications
accounting procedures
processes
tax compliance
documentation
systems

Background

HMRC will introduce the Reverse Charge (RC) to combat Missing Trader Fraud (MTF). The rules avoid suppliers charging and being paid VAT but failing to declare or pay this over to the government. HMRC has identified the building trade as an area where there has been considerable tax leakage in the past. The UK has introduced similar measures in response to criminal threats for mobile telephones, emissions allowances, gas, electricity and electronic communications. A domestic reverse charge only applies to supplies between UK taxable persons therefore unless the customer is registered or liable to be registered for VAT it will not apply.

The RC will make supplies of standard or reduced rated construction services between construction or building businesses subject to the domestic RC, which means that the recipient of the supply will be liable to account for VAT due, instead of the supplier. Consequently, the customer in the construction industry receiving the supply of construction services will be required to pay the VAT directly to HMRC rather than paying it to the supplier. It will be able to reclaim this VAT subject to the normal VAT rules. The RC will apply throughout the supply chain up to the point where the customer receiving the supply is no longer a business that makes supplies of construction services (a so-called end user, see below).

The supplies to which the RC will apply are set out here

Further information on the RC in general, including invoicing requirements are to be found in VAT Notice 735

Technical

As a general rule, it is the supplier of goods or services who is required to account for VAT on those supplies. However, the VAT Act 1994, section 55A requires the recipient, not the supplier, to account for and pay tax on the supply of any goods and services which are of a description specified in an order made by the Treasury for that purpose.

The final version of the draft legislation has now been published. In addition HMRC have issued guidance notes which include a helpful flowchart.

Mixed supplies

If there is a RC element in a supply, then the whole supply will be subject to the RC. This is to make it simpler for both supplier and customer and to avoid the need to apportion the supply.

End user

End users will usually be recipients who use the building or construction services for themselves, rather than sell the services on as part of their business of providing building or construction services.

VAT Returns

Suppliers

Suppliers applying the RC do not enter a figure for output tax in box 1 of the VAT Return, but should enter the value of such sales in box 6.

Customers

Customers must enter the output tax on purchases to which the RC applies in box 1 of the VAT Return, but must not enter the value of such purchases in box 6. They may reclaim the input tax on the RC purchases in box 4 of the VAT Return and include the value of the purchases in box 7, in the normal way.

Implementation

HMRC state that it understands the difficulties businesses may have in implementing the domestic RC and say it will apply a light touch in dealing with related errors that occur in the first six months after introduction.

Action

It is prudent to check whether you, or your clients’ businesses will be affected by these changes. If so, plans need to be put in place; whether as a supplier or recipient, to ensure that VAT is not charged incorrectly (supplier) and the RC is applied correctly (recipient). It is likely that output tax incorrectly shown on an invoice will be due to HMRC but will not be recoverable by the recipient and the omission of levying the RC will lead to penalties. It will also be helpful for smaller construction providers affected by the RC to examine the impact on their cashflow.

Please contact us if you have any queries or require further information.

VAT: Changes to the treatment of forfeited deposits

By Marcus Ward 1 February 2019

HMRC have announced via its Policy Paper Customs Brief 13 (2018) that the VAT treatment of forfeit, or “no-show” deposits will change 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.

Current 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.

New treatment

From 1 March 2019, HMRC’s new policy will be 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”

Who is affected?

Clearly, any business that takes non-refundable deposits will be hit by the new rules. These will be mainly; hotel and accommodation providers, hirers of goods, transport suppliers, the entertainment sector and bespoke goods. (And apparently, in Bulgaria; the production and marketing of bread and pastries according to the Firin OOD case).

Technical

HMRC base their decision on this matter on CJEU decisions in Air France-KLM and Firin OOD) and claim that is treatment is unavoidable.

Please find more details of deposits and advance payments in general here

Please contact me should you have any queries.

VAT: Time of supply (tax point). Baumgarten Sports case

By Marcus Ward 4 December 2018

Latest from the courts

In the Baumgarten Sports EJEU case, the matter was the time of supply of a German football agent’s services.

Background

As is common in the football world, clubs make payments to agents in order to obtain the services of footballers. When the agent places a player with a football club, it receives commission from that club, provided that the player subsequently signs an employment contract and holds a licence issued by the Deutsche Fußball Liga GmbH (German Football League). The commission is paid to the company in instalments every six months for as long as the player remains under a contract with that club.

The arguments

The German tax authorities took the view that a tax point was created when Baumgarten Sports services were complete – when the contract was signed, and that output tax was due in full at that time The appellant contended that the rules for “successive payments” applied and that VAT was due on each six monthly payment.

Legislation

The issue is covered by Articles 63 and 90 of Council Directive 2006/112/EC of 28 November 2006 on the common system of value added tax (‘the VAT Directive’).

Decision

The supply of services gave rise to successive payments, the chargeable event for VAT occurs and VAT becomes chargeable on expiry of the periods to which those payments relate (re; Asparuhovo Lake Investment Company, C‑463/14).

The chargeable event (tax point) and chargeability of a tax on the supply of the agent’s services must be regarded as occurring, not when the player is placed, but on expiry of the periods to which the payments made by the club relate.

Commentary

It is useful to look at the UK tax point rules for services, which I have summarised here:

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

Actual tax point

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.

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.

As always, please contact us if you have any queries.

New RCB 5 – VAT treatment of goods supplied on approval

By Marcus Ward 25 June 2018

Goods supplied on approval

Meaning

Goods supplied on approval is an arrangement under which items of durable nature are provided to a prospective customer for a pre-purchase trial. These items are returnable after a specified period in re-saleable condition if not accepted for purchase.

New publication

HMRC has announced via Revenue and Customs Brief 5 (2018) “RCB 5” changes to the way goods supplied on approval are treated for VAT purposes.

The broad thrust of RCB 5 is that, in HMRC’s opinion, taxpayers are using the rules for goods supplied on approval when this treatment is inappropriate.

The goods supplied on approval rules

Output tax is due at the end of the approval period. That is, tax is deferred until a time the goods are adopted (if they are). These rules are distinct from a supply of goods with a subsequent right to return them. In these cases the tax point is when title passes.

Sale on approval was considered by the Tribunal in the case of Littlewoods Organisation plc (VTD 14977). The Tribunal held that goods were supplied on approval where there is no contract of sale unless, and until, the recipient concerned adopted or was deemed to have adopted the goods. The judge in that case decided that Littlewoods did not supply goods on approval. This case appears to have triggered an HMRC initiative to look at the number of businesses which may be incorrectly deferring output tax by using these rules. It concluded that a lot fewer taxpayers were actually providing goods on approval than previously thought.

Technical

The basic tax point for a supply of goods in these situations is determined by the VAT Act 1994 section 6(2) (c) which applies in the case of goods on approval. It delays the basic tax point until the time when the goods are adopted by the customer or twelve months from the date they were originally despatched, whichever is the earlier

Section 6(2)

(2) … a supply of goods shall be treated as taking place –

(a) if the goods are to be removed, at the time of the removal;

(b) … ;

(c) if the goods (being sent or taken on approval or sale or return or similar terms) are removed before it is known whether a supply will take place, at the time it becomes certain that the supply has taken place or, if sooner, 12 months after the removal.

The guidance

HMRC has published the RCB to provide guidance on how businesses should review their transactions in order to establish whether they are using sale on approval treatment correctly.

Indicators of goods supplied on approval

Whether or not goods are supplied on approval will depend on the facts in each case and will require consideration of a number of indicators which will have to be carefully weighed against each other. Relevant indicators include the following factors but they are not exhaustive.

The terms and conditions of trading, and all contractual terms applying.
The time when title in the goods passes to the buyer.
The time at which the buyer has the right to dispose of the goods as owner.
The view presented to the customer in marketing literature, order forms, delivery notes, statements etc.
The rights of the customer to return unwanted goods.
The terms of any supply of credit finance provided with the goods.
The time when payment for the goods is demanded.
The time when payment for the goods is received.
The time when the buyer assumes responsibility for the upkeep and insurance of the goods.
Anything the buyer does to signify his adoption of the goods.
The calculation of the minimum payment due for goods delivered.
The time when a sale is recognised in the financial accounts of the business.

(these indicators are not featured in RCB 5).

Deadline

HMRC state that from 18 September 2018 all business must change their accounting systems and accurately apply the appropriate VAT treatment. However, no action will be taken for past inaccuracies and taxpayers will not be required to make any changes to records or declarations.

Delivery charges

In normal circumstances, the fee charged for delivery follows the VAT liability of the goods being supplied (it is a single supply of delivered goods). However, the RCB somewhat controversially, states that when goods are supplied on approval the delivery charge is not ancillary. HMRC conclude that as delivery occurs before the customer or the supplier know whether there will be a supply of goods, delivery is an aim in itself, represents a separate, independent supply and is not dependent upon the supply of goods. The purpose of the delivery service is to facilitate the customer inspecting the goods to decide whether or not they wish to purchase them. This is always a standard rated supply and consequently, output tax is due on this fee, whether or not the goods are adopted (and with a tax point prior to adoption or return). I expect that this analysis will be challenged at some point as it does not, in my mind, sit comfortably with previously decided case law.

Action

Businesses which consider themselves to be supplying goods on approval (usually mail order businesses) need to review their terms and manner of trading to identify whether that is indeed the case. Consideration must be given to the above indicators, the ruling in the Littlewoods case and the information in RCB 5. If what is being provided falls outside the definition of a supply on approval, the necessary changes are required in order to recognise a sale at an earlier time. Even if goods are supplied on approval, the VAT treatment of delivery charges need to be reconsidered and adjusted if need be. We can assist if required.

VAT – Bringing goods into the UK from other EU countries

By Marcus Ward 8 June 2018

VAT Reverse Charge for Goods – Acquisition Tax and Intrastat

If a business registered for VAT in the UK receives goods from other Member States in the EU (technically known as acquisitions rather than imports) it will not pay overseas VAT in the Member State from which they are purchased. However, a “Reverse Charge” applies to such purchases The rate of VAT payable is the same rate that you would have paid had the goods been supplied to the purchasing business by a UK supplier. This VAT is known as acquisition tax and a business can normally reclaim this VAT if the acquisitions relate to taxable supplies it makes. This is usually resale of the goods, but in some circumstances the goods will be “consumed” by a business. In these cases, if the business is partly exempt, there may be a restriction of the amount of acquisition tax claimable.

VAT free

In order to obtain intra-EU goods VAT free a business must give its supplier its UK VAT number. The supplier is obliged to make checks to determine whether the number is valid and if it is it allows the supplier to treat the supply as VAT free. VAT number validity may be checked here

Why?

This system ensures that tax is paid (and paid in the “correct” Member State) and also avoids “rate shopping” where a business which cannot recover input tax could, without these rules, buy goods VAT free to the detriment of suppliers in its own country. With acquisition tax, it is a level playing field for all EU businesses.

Record-keeping for acquisition tax

A business must enter the VAT details on its VAT return. The time of supply for VAT purposes is the time of acquisition – normally, the earlier of:

the 15th day of the month following the one in which the goods come into the UK
the date the supplier issued their invoice

A business must account for the acquisition tax on the return for the period in which the time of supply occurs, and may treat this as input tax on the same return. This, for most businesses is a bookkeeping exercise and is far preferable than the previous system when goods had to be physically entered at borders. This issue forms part of the problems for Brexit, especially with the UK’s only land border between Northern Ireland and the ROI.

Value of acquired goods for VAT purposes

The value for VAT of any goods brought into the UK is the same as the value for VAT of the goods had they been supplied to the purchaser by a UK supplier. A business must account for the value of the goods or services in £sterling, so it must convert their value into £sterling if the goods were priced in another currency.

Intrastat

Intrastat is the name given to the system for collecting statistics on the trade in goods between EU Member States. The requirements of Intrastat are similar in all EU Member States.

It is worth noting that:

the supply of services is excluded from Intrastat
only movements which represent physical trade in goods are covered by Intrastat, although there are some movements that are excluded

Intrastat – use of information

The information collected by the Intrastat system is a key component for Balance of Payments (BOP) and National Accounts (NA) data, which is regarded as an important economic indicator of the UK’s performance.

The Office for National Statistics uses the monthly trade in goods figures collected by HMRC together with the trade in services survey to produce the BOP and NA figures.

The Bank of England uses monthly trade data as part of its key indicators for gauging the state of the UK and world economic environment to set interest rates each month.

Government departments use the statistics to help set overall trade policy and generate initiatives on new trade areas.

Beyond the UK, trade statistics data are used by the EU to set trade policy and inform decisions made by such institutions as the European Central Bank, the United Nations and the International Monetary Fund.

The commercial world uses statistics to assess markets both within the UK (for example, to assess import opportunities) and externally (for example, to establish new markets for its goods).

Intrastat – the practicalities

All VAT registered businesses acquiring goods must complete two boxes (8 and 9) on its VAT return showing the total value of any goods acquired from VAT registered suppliers in other EU Member States (known as arrivals). In addition, larger VAT registered businesses must supply further information each month on their trade in goods with other EU Member States. This is known as an Intranet Supplementary Declaration (SD) …which is a subject for another day. For arrivals, the current threshold is £1.5 million and this limit is reviewed annually.

How this system will work (if at all) after Brexit remains to be seen, but given past experiences I am not optimistic.