HMRC updated Notice 700 on 9 June 2023.
Changes
VAT MOSS references to credit notes for supplies of digital services, the annual accounting scheme, and monthly tax periods have been removed.
Updates also reflect the introduction of VAT late submission and late payment penalties, as well as the new interest regime in paragraphs 2.7, 19.9, 21.1, 21.2.1, 21.6, 27.1 and 28.
A brief guide to the Capital Goods Scheme (CGS)
If a business acquires or creates a capital asset it may be required to adjust the amount of VAT it reclaims. This mechanism is called the CGS and it requires a business to spread the initial input tax claimed over a number of years. If a business’ taxable use of the asset increases it is permitted to reclaim more of the original VAT and if the proportion of the taxable supplies decreases it will be required to repay some of the input tax initially claimed. The use of the CGS is mandatory.
How the CGS works
Normally, VAT recovery is based on the initial use of an asset at the time of purchase (a one-off claim). The CGS works by applying a longer period during which the initial recovery may be adjusted if there are changes in the use of the asset. Practically, the CGS will only apply in situations where there is exempt or non-business use of the asset. A business using an asset for fully taxable purposes will be covered by the scheme, but it is likely that full recovery up front will be possible with no subsequent adjustments required. This will be the position if, say, a standard rated property is purchased, the option to tax taken, and the building let to a third party. The CGS looks at how capital items have been used in the business over a number of intervals (usually, but not always; years). It adjusts both for taxable versus exempt use and for business versus non business use over the lifetime of the asset. Example; a business buys a yacht that is hired out (business use) and it is also used privately by a director (non-business use). However, a more common example is a business buying a property and occupying it while its trade includes making some exempt supplies.
Which businesses does it affect?
Purchasers of certain commercial property, owners of property who carry out significant refurbishment or carry out civil engineering work, purchasers of computer hardware, aircraft, ships, and other vessels over a certain monetary value who incur VAT on the cost. (As the CGS considers the recovery of input tax, only VAT bearing assets are covered by it).
Assets not covered by the scheme
The CGS does not apply if a business;
Limits for capital goods
Included in the CGS are:
Assets below these (net of VAT) limits are excluded from the CGS.
The adjustment periods
Changes in your business circumstances
Certain changes to a business during a CGS period will impact on the treatment of its capital assets. These changes include:
Specific advice should be sought in these circumstances.
Examples
Danger areas
Summary
There is a lot of misunderstanding about the CGS and in certain circumstances it can produce complexity and increased record keeping requirements. There are also a lot of situations where overlooking the impact of the CGS or applying the rules incorrectly can be very costly. However, it does produce a fairer result than a once and for all claim, and when its subtleties are understood, it quite often provides a helpful planning tool.
1. Am I sure that a VAT inspection would not find any errors?
2. Am I sure that I am reclaiming as much VAT as possible?
3. Do I take full advantage all available VAT reliefs, customs exemptions and duty refund schemes?
4. Am I up to date on the indirect tax developments in my key markets?
5. Have I considered the impact of tax rate changes on my pricing and margin, and have I taken the necessary measures?
6. Do I collect all the data about my customers and transactions that could be required by tax authorities?
7. Do I comply with all indirect tax requirements in the jurisdictions where I operate or where my customers belong?
8. Do I have the tools to analyse my indirect tax flows and data?
9. Could changes in the way my business is structured or how transactions are organised improve my indirect tax position and/or reduce complexity?
10. Is my business using the right VAT scheme?
It is important to constantly monitor a business’ VAT position. The nature of trade changes, technology changes, case law changes and the VAT rules are constantly in a state of flux. It is easy to assume that everything is alright because it has always been done that way, but there may be significant exposures and missed opportunities out there. Things will also change once the terms of Brexit have been agreed (or not). We offer services from a basic healthcheck to a full technical review. A review will let you rest easy in your bed if nothing else!
What is a taxable supply and who is a taxable person?
A VAT Back To Basics
Taxable supply
It is sometimes useful when considering a transaction to “go back to basics” for VAT purposes. There are certain tests to determine whether a supply is taxable, and these are set out below. Broadly, the tests establish whether UK VAT is payable on a sale and they determine whether an entity is “in business”, that is; carrying on an economic activity.
A transaction is within the scope of UK VAT if all four of the following conditions are satisfied:
There is a distinction between the two types of supply as different VAT treatments may apply. Generally, everything that is not tangible goods is services. However, if no goods or services are actually provided, there is no supply. Indeed, if there is no consideration for a supply, in most cases it is not a taxable supply.
There are quite complex tests to consider when analysing the “place of supply”, especially where services are concerned. If the place of supply is outside the UK then usually no UK VAT is due, however, the supply may be subject to VAT in another country.
A taxable person is any legal entity which is, or should be, registered for VAT in the UK.
Business
The term “business” is only used in UK legislation, The Principal VAT Directive refers to “economic activity” rather than “business” and since UK domestic legislation must conform to the Directive both terms must be seen as having the same meaning. Since the very first days of VAT there have been disagreements over what constitutes a “business”. I have only recently ended a dispute over this definition for a (as it turns out) very happy client. The tests were set out as long ago as 1981 and may be summarised as follows:
So, if these tests are passed a taxable supply exists. The next step is to establish which VAT rate applies. In an often quoted comment from the judge in the Morrison’s Academy Boarding Houses Association 1978 STC1 Court Of Session case “…In my opinion it will never be possible or desirable to define exhaustively ‘business’ ”. Which what it lacks in helpfulness, makes up for in candour.
There was something of a deviation from the Lord Fisher tests in the Longbridge Court of Appeal case, however, that appears to be a blip and HMRC seem to have reverted to Lord Fisher in subsequent hearings on the same topic. A bit of a: watch this space area of VAT.
Recent cases on business
Recent case law on this issue here and here and HMRC Internal guidance on the Lord Fisher tests here
Commentary
Tip: It is often easier to consider what isn’t a taxable supply to establish the correct VAT treatment. Specific examples of situations which are not taxable supplies are; donations, certain free supplies of services, certain grants or funding, some compensation and some transactions which are specifically excluded from the tax by legislation, eg; transfers of going concerns (TOGC).
I think that it is often the case that the basic building blocks of the tax are overlooked, especially in complex situations and I find it helps to “go back to the first page” sometimes.
Building your own home is becoming increasingly popular. There are many things to think about, and budgeting is one of the most important.
The recovery of VAT on the project has a huge impact on the budget and care must be taken to ensure that a claim is made properly and within the time limits. You don’t have to be VAT registered to make a claim, this is done via a mechanism known as The DIY Housebuilders’ Scheme. It has specific rules which must be adhered to otherwise the claim will be rejected.
If you buy a new house from a property developer, you will not be charged VAT. This is because the sale of the house to you will be zero-rated. This allows the developer to reclaim the VAT paid on building materials from HMRC. However, if you build a house yourself, you will not be able to benefit from the zero-rating. The DIY Housebuilder’ Scheme puts you in a similar position to a person who buys a zero-rated house built by a property developer.
Who can make a claim?
You can apply for a VAT refund on building materials and services if you are:
Eligibility
New homes
The house must:
A claim may also be made for garages built at the same time as the house and to be used with the house.
Contractors working on new residential buildings should zero rate their supplies to you, so you won’t pay any VAT on these.
Conversions
The building being converted must usually be a non-residential building eg; a barn conversion. Also, residential buildings qualify if they haven’t been lived in for at least 10 years.
You may claim a refund for builders’ work on a conversion of non-residential building into home. These supplies will be charged at the reduced rate of 5% for conversion works. If the standard rate of 20% s charged incorrectly, you will not be able to claim the standard rated amount. Care should be taken that the contractor understands the VAT rules for conversions as these can be complex.
Communal and charity buildings
You may get a VAT refund if the building is for one of the following purposes:
What can you claim on?
Building materials – You may claim a VAT refund for building materials that are incorporated into the building and can’t be removed without tools or damaging the building.
What doesn’t qualify
You cannot claim for:
Examples of items you can, and cannot claim for are listed below.
How to claim
To claim a VAT refund, send form 431NB or 431C to HMRC
Local Compliance National DIY Team
SO987
Newcastle
NE98 1ZZ
What you need to know
You must claim within three months of the building work being completed.
You will usually get the refund in 30 working days of sending the claim.
You must include the following with your claim:
VAT invoices must be valid and show the correct rate of VAT or they will not be accepted in the claim.
HMRC usually examine every claim closely and often query them, so it pays to ensure that the claim is as accurate as possible first time. We find a review by us before submission ensures the maximum amount is claimed and delays are avoided.
Payments made after completion of the house cannot be claimed, and only one claim can be made for the whole project, so cashflow may be an issue.
Examples of items that you can claim for
The items listed below are accepted as being ‘ordinarily’ incorporated in a building (or its site). This is not a complete list.
Examples of items that you cannot claim for
This is not a complete list.
Please contact us if you require assistance with a DIY Housebuild project.