Tag Archives: VAT-exempt

VAT: The Partial Exemption Annual Adjustment

By Marcus Ward 4 December 2023

What is the annual adjustment? Why is it required?

An annual adjustment is a method used by a business to determine how much input tax it may reclaim.

Even though a partly exempt business must undertake a partial exemption calculation each quarter or month, once a year it will have to make an annual adjustment as well.

An annual adjustment is needed because each tax period can be affected by factors such as seasonal variations either in the value supplies made or in the amount of input tax incurred.

The adjustment has two purposes:

to reconsider the use of goods and services over the longer period; and
to re-evaluate exempt input tax under the de minimis rules.

An explanation of the Value Added Tax Partial Exemption rules is available here

Throughout the year

When a business makes exempt supplies it will be carrying out a partial exemption calculation at the end of each VAT period. Some periods it may be within the de minimis limits and, therefore, able to claim back all of its VAT and in others there may be some restriction in the amount of VAT that can be reclaimed. Once a year the business will also have to recalculate the figures to see if it has claimed back too much or too little VAT overall. This is known as the partial exemption annual adjustment. Legally, the quarterly/monthly partial exemption calculations are only provisional, and do not crystallise the final VAT liability. That is done via the annual adjustment.

The first stage in the process of recovering input tax is to directly attribute the costs associated with making taxable and exempt supplies as far as possible. The VAT associated with making taxable supplies can be recovered in the normal way while there is no automatic right of deduction for any VAT attributable to making exempt supplies.

The balance of the input tax cannot normally be directly attributed, and so will be the subject of the partial exemption calculation. This will include general overheads such as heating, lighting and telephone and also items such as building maintenance and refurbishments.

The calculation

Using the partial exemption standard method the calculation is based on the formula:

Total taxable supplies (excluding VAT) / Total taxable (excluding VAT) and exempt supplies x 100 = %

This gives the percentage of non-attributable input VAT that can be recovered. The figure calculated is always rounded up to the nearest whole percentage, so, for example, 49.1 becomes 50%. This percentage is then applied to the non-attributable input VAT to give the actual amount that can be recovered.

Once a year

Depending on a businesses’ VAT return quarters, its partial exemption year ends in either March, April, or May. The business has to recalculate the figures during the VAT period following the end of its partial exemption year and any adjustment goes on the return for that period. So, the adjustment will appear on the returns ending in either June, July, or August. If a business is newly registered for VAT its partial exemption “year” runs from when it is first registered to either March, April or May depending on its quarter ends.

Special methods

The majority of businesses use what is known as “the standard method”. However, use of the standard method is not mandatory and a business can use a “special method” that suits a business’ activities better. Any special method has to be “fair and reasonable” and it has to be agreed with HMRC in advance. When using a special method no rounding of the percentage is permitted and it has to be applied to two decimal places.

Commonly used special methods include those based on staff numbers, floor space, purchases or transaction counts, or a combination of these or other methods.

However, even if a business uses a special method it will still have to undertake an annual adjustment calculation once a year using its agreed special method.

De minimis limits

If a business incurs exempt input tax within certain limits it can be treated as fully taxable and all of its VAT can be recovered. If it exceeds these limits none of its exempt input tax can be recovered. The limits are:

£625 per month on average (£1,875 per quarter or £7,500 per annum) and;
50% of the total input VAT (the VAT on purchases relating to taxable supplies should always be greater than the VAT on exempt supplies to pass this test)

The partial exemption annual adjustments are not errors and so do not have to be disclosed under the voluntary disclosure procedure. They are just another entry for the VAT return to be made in the appropriate VAT period.

Conclusion

If a business fails to carry out its partial exemption annual adjustment it may be losing out on some input VAT that it could have claimed. Conversely, it may also show that it has over-claimed input tax. When an HMRC inspector comes to visit he will check that a business has completed the annual adjustment. If it hasn’t, and this has resulted in an over-claim of input VAT, (s)he will assess for the error, charge interest, and if appropriate, raise a penalty. It is fair to say that partly exempt businesses tend to receive more inspections than fully taxable businesses.

A VAT Did you know?

By Marcus Ward 20 September 2023

Dance classes in some EU countries are subject to different VAT rates depending on whether the dance style is considered artistic or entertainment. In the UK, belly dancing and ceroc lessons are standard rated, but ballet is exempt.

VAT: Definition of insurance

By Marcus Ward 5 September 2023

Further to my article on insurance and partial exemption, HMRC has published a new definition of what insurance means for VAT as a consequence of the CJEU United Biscuits (Pension Trustees) Ltd and another v HMRC [2020] STC 2169 case.

It is set out in para 2.2 of Public Notice 701/36

What insurance is

There is no statutory definition of insurance, although guidance can be gained from previous legal decisions in which the essential nature of insurance has been considered.

The Court of Justice of the European Union , in the case of United Biscuits (Pension Trustees) Ltd & Anor v R & C Commrs (Case C235-19) [2020], upheld the definition given in the case of Card Protection Plan Ltd v C & E Commrs (Case C-349/96) [1999] which concluded that:

“…the essentials of an insurance transaction are… that the insurer undertakes, in return for prior payment of a premium, to provide the insured, in the event of materialisation of the risk covered, with the service agreed when the contract was concluded”.

HMRC also accept that certain funeral plan contracts are insurance (and therefore exempt from VAT), even though they are not regulated as such under the FSMA insurance regulatory provisions.

Vehicle breakdown insurance is also seen as insurance even though providers are given a specific exclusion under the FSMA from the requirement to be authorised.

VAT: Is a cosmetic treatment exempt medical care? The Illuminate Skin Clinics Ltd case

By Marcus Ward 12 July 2023

Latest from the courts

In the Illuminate Skin Clinics Ltd First-Tier Tribunal (FTT) case the issue was whether cosmetic procedures qualified as exempt medical treatment.

Background

The Appellant runs a private, ie; non-NHS clinic offering a range of aesthetic, skincare and wellness treatments advertised as: fat freezing, thread lifts, chemical peels, fillers, facials, intravenous drips and boosters. The Appellant’s sole director and shareholder, Dr Shotter, complies with Item 1 (below) in terms of qualifications, ie; she is enrolled on the register of medical professionals.

The list of treatments included:

Botox
Dermal fillers
CoolSculpting
Microsclerotherapy
Prescription skincare
Chemical peels
Microdermabrasion
Thread lifting
Thermavein
Aqualyx
Platelet-rich plasma treatment.

HMRC contended that these supplies were standard rated because there is no medical purpose behind the treatments, and they are carried out for purely cosmetic purposes. An assessment was raised for output tax on this income.

The Appellant argued that what it provided was exempt medical care via The VAT Act 1994, Schedule 9, Group 7, item 1 – “The supply of services consisting in the provision of medical care by a person registered or enrolled in any of the following:

The register of medical practitioners…”

And its contention was that the primary purpose of the treatments was “the protection, maintenance or restoration of the health of the person concerned”

In the Mainpay case it was established that “medical” care means “diagnosing, treating and, in so far as possible, curing diseases or health disorders”

Decision

Although there may have been a beneficial psychological impact on undergoing such treatments and this may have been the reason for a patient to proceed (and they may be recommended by qualified medical professionals) this, in itself, was insufficient to persuade the judge that the services were exempt. Consequety, the appeal was rejected and the assessment was upheld.

The FTT found that there was very little evidence of diagnosis. This was important to the overall analysis because diagnosis is the starting point of medical care. Without diagnosis, “treatment”, in the sense of the exemption, is not something which is being done responsively to a disease or a health disorder.

The fact that people go to the clinic feeling unhappy with some aspect of their appearance, and (at least sometimes) are happier when something is done at the clinic about that aspect of their appearance, does not mean that the treatment is medical, or has a therapeutic aim.

It was telling that the differentiation, in Dr Shotter’s own words, between what the clinic does from what “a GP or other health professional” does is; diagnosis. It also highlighted the general trend or purpose of the clinic’s activity – helping people to feel better about their appearance, in contexts where their appearance is not itself a health condition, or threatening to their health in a way which mandates treatment of their appearance by a GP or another health professional.

Helping someone to achieve goals in relation to their appearance, which is what this clinic did, is not treating someone’s mental health status, but is going to their self-esteem and self-confidence. It is a misuse of language to say that this is healthcare in the sense that it would fall within Item 1 of Group 7.

Commentary

There has been an ongoing debate as to what constitutes medical care. Over 20 years ago I was advising a large London clinic on this very point and much turned on whether patients’ mental health was improved by undergoing what many would regard as cosmetic procedures. We were somewhat handicapped in our arguments by the fact that many of the patients were lap dancers undergoing breast augmentation on the direction of the owner of the club…

It is worth remembering that not all services provided by a medically registered practitioner are exempt. The question of whether the medical care exemption is engaged in any given case will turn on the particular facts.

Further recent cases on medical exemption here and here.

VAT: Mind the gap – HMRC latest figures

By Marcus Ward 23 June 2023

GOV.UK has published details of the most recent measurement of the tax gap for 2021-2022.

What is the tax gap?

The tax gap is measured by comparing the net tax total theoretical liability with tax actually paid. This is comparing the amount of tax HMRC expected to receive in the UK and the amount HMRC actually received.

The figures

The tax gap is estimated to be 4.8% of total theoretical tax liabilities, or £35.8 billion in absolute terms, in the 2021 to 2022 tax year.

Total theoretical tax liabilities for the year were £739.3 billion.

There has been a long-term reduction in the tax gap as a proportion of theoretical liabilities: the tax gap reduced from 7.5% in the tax year 2005 to 2006 to 4.8% in 2021 to 2022 – remaining low and stable between the years 2017 to 2018 and 2021 to 2022.

Criminal activity and evasion accounted for £4.1billion loss in tax collected.

30% of all underpayments of tax were due to a failure to take reasonable care, while 13% of instances were down to evasion.

A massive 56% of the tax gap is made up by small businesses (up from 40% of the total in 2017-18). Whether this is down to HMRC improving collection from large businesses or an increasing failure to crack down on small business is a moot point. It remains to be seen how HMRC react to this new information, but experience insists that small businesses may expect increased attention for the authorities.

The VAT gap

VAT represents 21% of the overall tax gap.

The VAT tax gap is 5.4%.

The absolute VAT gap is £7.6 billion.

The VAT gap has reduced from 14.0% of theoretical VAT liability in 2005 to 2006 to 5.4% in 2021 to 2022.

More than two thirds of the theoretical VAT liability was estimated to be from household consumption. The remainder came from the expenditure by businesses that supply goods and services where the VAT is non-recoverable (they are exempt from VAT), and from the government and housing sectors.

Information on the method used to estimate the VAT gap is here for those interested (I don’t imagine that there will be that many…).

So, £7.6 millions of VAT is missing. That seems an awful lot.

VAT: Was an option to tax valid? The Rolldeen Estates Ltd case

By Marcus Ward 18 April 2023

Latest from the courts

In the First-Tier tribunal (FTT) case of Rolldeen Estates Ltd there were a number of issues, inter alia; whether the appellant’s option to tax (OTT) was valid, if not, whether HMRC had the power to deem it valid, whether HMRC acted unreasonably and whether appellant estopped from relying on earlier meeting with an HMRC officer.

Background

The letting of property is an exempt supply, however, a landlord the owner can OTT the property and charge VAT on that supply. If the OTT is exercised, the supplier is able to reclaim input VAT on costs such as repairs and maintenance, but charges output VAT on its supplies. The OTT provisions are set out at The VAT Act 1994, Schedule 10.

The appellant in this case had previously submitted an OTT form VAT1614A and charged VAT on the rent to its tenant. Subsequently, the property was sold without charging VAT. HMRC issued an assessment for output tax on the sale value.

Schedule 10

A taxpayer does not need HMRC’s permission to OTT, unless that person has already made exempt supplies in relation to that property – in particular, if the property has already been let without VAT having been charged. In that scenario, the person must apply to HMRC for permission to exercise the OTT, and permission will only be given if HMRC are satisfied that the input tax is fairly attributed as between the exempt period and the taxable period. When OTT the company stated that no previous exempt supplies of the relevant property had been made and this was also confirmed in subsequent correspondence with HMRC.

Appellant’s contentions

The company informed HMRC that the OTT was invalid so that no VAT was due on the sale. Evidence was provided which demonstrated that Rolldeen had made exempt supplies before the date of the OTT so that HMRC’s permission had therefore been required before it could be opted. No permission had been given and therefore there was no valid OTT in place even though the appellant had purported to exercise that option. Also, the appellant submitted that it was unreasonable of HMRC to have exercised the discretion to deem the OTT to have effect, because they had failed to take into account the fact that during an inspection, HMRC had known that Rolldeen had made exempt supplies before OTT.

HMRC’s view

VATA, Schedule 10, para 30 allows HMRC retrospectively to dispense with the requirement for prior permission, and to treat a “purported option as if it had instead been validly exercised”. HMRC issued a decision stating that it was exercising its discretion under Schedule 10, para 30 to treat the relevant property as opted with effect from the date of the VAT1614A and that VAT was due on the sale and the assessment was appropriate.

Decision

The FTT found that:

after an inspection by HMRC it knew that prior exempt supplies had been made
although HMRC knew exempt supplies had already been made Rolldeen was estopped* from relying on that fact, because both parties had shared a “common assumption” that the OTT had been valid
para 30 could be used to retrospectively validate the OTT (albeit only in relation to supplies made after 1 June 2008). In this case that was sufficient as the sale of the property occurred on in March 2015
HMRC had not acted unreasonably because they had not taken into account their own failure to carry out a compliance check
this is exactly the sort of situation for which para 30 was designed
it was entirely reasonable and appropriate of HMRC to deem the purported option to have been validly exercised

The appeal was rejected and the assessment was valid.

Commentary

Again, proof, if proof is needed, that OTT can be a complex and costly area of the tax and care must always be taken. Advice should always be sought, as once an OTT is made, there is usually no going back.

An interesting point in this case was that no case law was cited on this issue and the FTT was unable to identify any.

* The principle of “estoppel” means that a person may be prevented from relying on a particular fact or argument in certain circumstances.

VAT: Doctors and healthcare professionals

By Marcus Ward 16 January 2023

Healthcare services – an overview

I have noticed that I am receiving more and more queries in this area and HMRC does appear to be taking an increased interest in healthcare entities. This is hardly surprising as it can be complex and there are some big numbers involved.

(This article refers to doctors, but applies equally to most healthcare professional entities including; opticians, nurses, osteopaths, chiropractors, midwives, dentists etc.)

The majority of the services provided by doctors’ practices are VAT free. Good news one would think; no need to charge VAT and no need to deal with VAT records, returns and inspections.

However, there is one often repeated question from practices; “How can we reclaim the VAT we are charged?” This is particularly relevant if a practice intends to spend significant amounts on projects such as property construction or purchase.

The first point to make is that if a practice only makes exempt supplies (of medical services) it is not permitted to register for VAT and consequently cannot recover any input tax. Therefore we must look at the types of supplies that a practice may make that are taxable (at the standard or zero rate). If any of these supplies are made it is possible to VAT register regardless of their value. Of course, if taxable supplies are made, the value of which exceeds the current turnover limit of £85,000 in a rolling 12-month period, registration is mandatory.

Examples of supplies of services and goods which may be taxable are:

drugs, medicines or appliances that are dispensed by doctors to patients for self-administration
dispensing drugs against an NHS prescription (zero-rated)
drugs dispensed against private prescriptions (standard-rated)
medico legal services that are predominantly legal rather than medical – for example negotiating on behalf of a client or appearing in court in the capacity of an advocate
clinical trials or market research services for drug companies that do not involve the care or assessment of a patient
paternity testing
certain rental of rooms/spaces
car parking
signing passport applications
providing professional witness evidence
any services which are not in respect of; the protection, maintenance or restoration of health of a patient.

So what does VAT registration mean?

Once you join the “VAT Club” you will be required to file a VAT return on a monthly of quarterly basis. You may have to issue certain documentation to patients/organisations to whom you make VATable supplies. You may need to charge VAT at 20% on some services. You will be able to reclaim VAT charged to you on purchases and other expenditure subject to the partial exemption rules – see below. You will have to keep records in a certain way (see MTD) and your accounting system needs to be able to process specific information.

Because doctors usually provide services which attract varying VAT treatment, a practice will be required to attribute VAT incurred on expenditure (input tax) to each of these categories. Generally speaking, only VAT incurred in respect of zero-rated and standard-rated services may be recovered. In addition, there will always be input tax which is not attributable to any specific service and is “overhead” eg; property costs, professional fees, telephones etc. VAT registered entities which make both taxable and exempt supplies are deemed “partly exempt” and must carry out calculations on every VAT return.

Partial Exemption

Once the calculations described above have been carried out, the resultant amount of input tax which relates to exempt supplies is compared to the de-minimis limits (broadly; £625 per month VAT and not more than 50% of all input tax). If the figure is below these limits, all VAT incurred is recoverable regardless of what activities the practice is involved in. More details here.

VAT registration in summary

Benefits

recovery of input tax; the cost of which is not claimable in any other way
potentially, recovery of VAT on items such as property, refurbishment and other expenditure that would have been unavailable prior to VAT registration
only a small amount of VAT is likely to be chargeable by a practice
may provide opportunities for pre-registration VAT claims

Drawbacks

increased administration, documentation and staff time
exposure to penalties and interest
may require VAT to be added to some services provided which were hitherto VAT free
likely that only an element of input tax is recoverable as a result of partial exemption
uncertainty on the VAT position of certain services due to current tax cases
potentially dealing with the Capital Goods Scheme (CGS)
possible increased costs to the practice in respect of professional fees.

Please contact us if any of the above affects you or your clients.

VAT: Financial Services – Flowchart

By Marcus Ward 30 June 2022

FS Intermediary – flowchart Download

Financial Services (FS) is a complex area of VAT and the legislation and case law add to that complexity. For ease, I have made a flowchart which I hope may help.

The supply of FS intermediary services may be exempt from VAT, but other types of supplies relating to FS are standard rated (advice, marketing, providing information etc).

With new technology advancing all the time, this adds more difficulties in establishing the correct VAT treatment.

VAT: Welfare services – School Holiday Clubs

By Marcus Ward 27 June 2022

HMRC has published updated guidance on childcare following the decision in the RSR Sports Limited (RSR) case. The issue being what supplies fell within the definition of “services… closely linked to the protection of children and young persons” and supplies of “welfare services” – VAT Act 1994, Schedule 9, Group 7, item 9.

The guidance in VATWELF3032 states that RSR could be distinguished from Sports Academies (Decision No TC05171), a case where the tribunal had held that the activities element predominated.

The important key features were:

the members of staff were merely supervising activities
they did not hold any coaching or teaching qualifications
there was no external standard to which the services were being provided
the activities were merely an adjunct to the essential service which was childcare

Other providers supplying services can similarly exempt their supplies where the facts demonstrate that they qualify and exhibit the key features set out by the FTT in RSR.

HMRC no longer interprets activity-based clubs to include those clubs exhibiting these key features. Such clubs can therefore, qualify for the welfare exemption if they otherwise meet the conditions.

VAT: Are preparatory ground works for burial chambers exempt? The Hodge case

By Marcus Ward 23 May 2022

Latest from the courts

In the First-Tier tribunal (FTT) case of Hodge and Deery Limited the issue was whether ground works preparatory to installing flexi vault burial chambers exempt via The VAT Act 1994, Schedule 9, group 8, item 2 – “The making of arrangements for or in connection with the disposal of the remains of the dead.”

Background

The vaulting system was installed in graveyards with unstable soil structures which can result in issues with toxins and in subsidence of an existing grave when another grave is dug in the adjacent plot. The burial plots are ready for use and the element above the plots is landscaped (which was undertaken by a third-party).

The appellant’s case

The appellant considered that the installation of the flexible burial vaults should be treated as the advance digging of multiple graves. It should not be regarded differently from the preparation of “normal” graves. The sole purpose of the preparation of a grave is to dispose of the remains of the dead and it should not matter that the undertaker does not prepare the grave himself.

HMRC’s case

HMRC considered that the installation of flexible burial vaults do not fall within the exemption because:

item 2 must be construed to confine the exemption to those supplies directly involved with the disposal of the remains of a particular dead person
item 2 is confined to supplies directly made by the funeral director with care and custody of the deceased. It does not extend to sub-contractors of the funeral director
the appellant had no responsibility for the deceased
although the availability of zero rating in connection with the provision of new housing can be available to sub-contractors involved in the supply of new housing, this exemption cannot extend to sub-contractors in the same way, as the sub-contractors cannot be concerned with the body of the deceased

Decision

The judge considered that the services resulted in the provision of many graves for the disposal of the remains of the dead and that the result of the services satisfied the object of the exemption. The digging of graves is central to the disposal of the remains of the dead, the services are made in connection with the disposal of the remains of the dead and within Item 2.

Commentary

In this case, it did not matter that the services are provided in advance, and nor did it matter that the services are not provided in connection with a specific funeral. It also confirms that the funeral director or undertaker need not provide all the services themselves. It seems obvious that the digging of graves is pivotal to the disposal of the remains of the dead and once it was established that a third party could dig the grave, the appeal was bound to be successful.