A new Tribunal case ruled that marshmallows of an unusual size are zero rated, while normal sized marshmallows continue to be standard rated.
Tag Archives: VAT-output-tax
A VAT Did you know?
Ferret food has recently been ruled to be subject to 20% tax when previously it was VAT free (from 1973).
VAT: Disclosed and undisclosed agents
There has been substantial case law on whether a business acts as agent or principal, the most recent being:
In this brief article I consider the distinction between disclosed and undisclosed agents and the VAT position of each.
Agent
An agent is a person who has been legally empowered to act on behalf of another entity (a principal). An agent may be employed to represent a client in negotiations and other dealings with third parties under his direction. The agent may be given decision-making authority. The relationship between a principal and agent can be disclosed or undisclosed to a third party. A disclosed agent acts in the name of the principal, whereas an undisclosed agent acts in his own name.
VAT Treatment
Disclosed Agents
A disclosed agent acts in the name of the principal and the client is aware that they are dealing with an agent of the principal. The relevant supply is made by the principal to the client. The agent does not make the supply to the client, but rather, to (usually) the principal in respect of commission for its services of acting as the “middle-man” in the transaction.
Output tax is due on the full selling price of the goods or services supplied by the principal. The value is not reduced by any amount paid to the agent. The agent will invoice the principal for his services and in most cases the principal will recover this as input tax (subject to the usual rules).
Undisclosed Agents
The buyer of goods or services will not (usually) know the name of the principal and will deal with the agent in the agent’s own name. The legislation states that ‘where a taxable person acting in his own name but on behalf of another person takes part in a supply of services, he shall be deemed to have received and supplied those services himself’.
This means that the supply of goods or services by an undisclosed agent is treated as a simultaneous supply to, and by, the agent. The agent is treated as both the purchaser (from the principal) and seller (to the client/customer).
The agent treats the goods as its own purchase – incurring VAT charged by the principal and then declares output tax on the onward sale to the client. The input tax charged by the principal is usually recoverable by the undisclosed agent. In some circumstances, the purchase and sale will have different VAT liabilities, eg; the sale of goods may be a VATable UK supply, but the onward sale could be a zero rated export. Generally, the principal is not put in a less advantageous position by operating through an agent.
Summary
It is sometimes difficult to establish whether an entity acts as agent or principal, and if agent, whether it is in a disclosed or undisclosed capacity. Not only is the VAT treatment different, but the distinction effects where goods or services are deemed to be supplied for VAT purposes. The place of supply rules dictates such matters as VAT registration (UK and overseas) whether (and where) VAT is chargeable and the compliance obligations of the principal and agent.
It is important to analyse the terms of the relevant contracts/agreements between the agent and principal to establish the nature of the relationship. However, it also necessary to consider the commercial reality of transactions between the parties as this may differ from the contract.
VAT: Financial Services – Flowchart
| 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: Electronic invoicing update
HMRC has updated VAT Notice 700/63 – Electronic Invoicing in respect of “information required on a tax invoice” (para 3.2).
The Notice sets out what a business needs to do if it is sending, receiving and storing VAT invoices in an electronic format.
Electronic invoicing offers many advantages over traditional paper invoices. The rapid electronic transmission of documents in a secure environment may provide for:
- structured data for auditing
- improved traceability of orders
- decreased reliance on paper reducing storage and handling costs
- rapid access and retrieval
- improved cash flow
- security and easier dispute handling
A business does not need to inform, nor seek permission from, HMRC to use electronic invoicing.
We advise that any business periodically reviews its use of any invoicing system to ensure that:
- invoices contain all of the required information
- credit notes are properly issued and accounted for
- the authenticity of the origin, integrity of invoice data, and legibility are all appropriate
- its customers agree to receive invoices electronically
- there is an interchange agreement between EDI (electronic data interchange) trading partners which makes provision for the use of procedures which guarantee the authenticity of the origin and integrity of the data
- appropriate internal controls are in place
- system controls, eg; a control which prevents a sales order being changed after the invoice has been issued
- procedural controls, eg; a purchase order must be issued before an invoice is received
- authorisation controls, eg; a user who has access to maintain supplier master data can not enter invoices from that supplier
- the electronic invoice message format is acceptable. Examples include:
- traditional EDI standards such as UN/EDIFACT, EANCOM and ODETTE
- XML-based standards
- comma-delimited ASCII, PDF (this list is not exhaustive)
- the cross-border invoicing rules are adhered to
- the conditions for electronic storage are met
- HMRC can access required information
- invoices meet all the other conditions in the above Notice
If a business cannot meet HMRC’s conditions for transmission and storage of electronic invoicing, it must issue paper invoices.
There are penalties for incorrect invoices or systems.
VAT: Are preparatory ground works for burial chambers exempt? The Hodge case
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.
VAT: The importance of due diligence. The 50 Five (UK) Limited case
Latest from the courts
In the First Tier Tribunal (FTT) case of 50 Five (UK) Limited the issue was the VAT rate applicable to energy saving materials. An additional twist was that there was a sale of the business between the tax point of the relevant supplies and HMRC’s assessment.
Background
The appeal was brought in the name of the Appellant in respect of assessments raised by HMRC against the company prior to the date on which it was purchased by the present owners. The present owners were not made aware of the assessment at the time of purchase. It had not been disclosed to them as part of the due diligence which was undertaken.
The Appellant’s business was that of supply and installation of heating and hot water systems. The customers were supplied with fully installed systems. The Appellant did not ask the customers to separately source the parts for such systems and then simply fit them. These supplies were treated as those of energy saving materials and the reduced rate of 5% was applied.
HMRC raised an assessment after taking the view that the supply should have properly been standard rated at 20%.
Decision
The FTT decided that legislation which permits the sale of energy saving materials at the reduced rate of VAT apply only where the supply of those materials is independent of an installation service. In this case, as the Appellant was the provider of the goods, and also the installer, the supply to the end customer was standard rated (a composite supply).
It was noted that this outcome was counter intuitive and the result does indeed seem unfair to the taxpayer, but as there was no reasonable prospect of the appeal succeeding, it was struck out. The assessment and interest was now payable by the new owners.
Commentary
An unfortunate outcome for the new owners, but it highlights three VAT issues:
- always carry out appropriate due diligence when buying a business. VAT is often an issue and if the buyer had discovered the assessment, it could have either abandoned the purchase, or negotiated on the price
- never assume that a lesser rate of VAT applies without carrying out appropriate research or seeking advice
- always consider whether a supply is separate or composite. This is a difficult area of the tax as the amount of case law testifies
The only recourse the new owners have now is taking action against the sellers of the business.
VAT: Global Accounting simplification
VAT: Second Hand Scheme – Global Accounting simplification
Overview
The problem with the VAT Second-Hand Goods Scheme is that details of each individual item purchased, and then later sold, has to be recorded. This requirement can lead to a lot of paperwork and an awful lot of administration which, obviously, many businesses are not too keen to comply with.
Global Accounting is an optional, simplified variation of the Second Hand Margin Scheme (MS).
It differs from the standard MS because rather than accounting for the margin achieved on the sale of individual items VAT is calculated on the margin achieved between the total purchases and total sales in a particular accounting period without the requirement to establish the mark up on each individual item. It is beneficial if a business buys and sells bulk volume, low value eligible goods, and is unable to maintain the detailed records required of businesses who use the standard MS.
There two significant differences in respect of Global Accounting compared to the standard MS. The first difference is that losses on an item are automatically offset against profits on items. Thus losses and profits are offset together in the period. In the standard MS no VAT is due if a loss is made on an item, but that loss cannot be offset against any other profit. There is also a timing advantage with Global Accounting because all purchases made in the period are included, even if those goods are not actually sold in the same period.
Goods which may be included in Global Accounting
Global Accounting can be used for all items which are eligible under the standard MS. However, the following goods cannot be included in Global Accounting:
- individual items costing more than £500 (although these can be accounted for via the standard MS)
- aircraft, boats and outboard motors,
- caravans and motor caravans,
- horses and ponies, and
- motor vehicles, including motorcycles; except those broken up for scrap.
Starting to use the scheme
When a business starts using Global Accounting, it may find that it already has eligible stock on hand. It may include the value of this stock when it calculates the total purchases at the end of the first period. If a business does not take its stock on hand into account, it will have to pay VAT on the full price, rather than on the margin achieved, when it is sold.
Note: any goods bought on an invoice which shows a separate VAT figure are not eligible for resale under the scheme.
The calculation
VAT is calculated at the end of each tax period. Because you can take account of opening stock in your scheme calculations, you may find that you produce a negative margin at the end of several periods. In other words, your total purchases may exceed your total sales. In such cases, no VAT is due. But you must carry the negative margin forward to the next period as in the following example:
Period One
- a) Total purchase value of stock on hand 10,000
- b) Total purchases 2,000
- c) Total sales 8,000
Margin = c – (a+b) = (4,000)
Because this is a negative margin there is no VAT to pay. However, negative margin must be carried forward into the next period as follows:
Period Two
- a) Negative margin from previous period 4,000
- b) Total purchases 1,000
- c) Total sales 7,000
- d) Margin = c – (a + b), sales minus (purchases plus negative margin), £7,000 – (£1,000 + £4,000) 2,000
- e) VAT due = margin (£2,000) × VAT fraction (1/6) 333.33
There is no negative margin to carry forward this time. Therefore, in the third period, the margin is calculated solely by reference to sales less purchases.
The negative margin may only be offset against the next Global Accounting margin. It cannot be offset against any other figure or record.
Global Accounting Records and Accounts
A business does not need to keep all the detailed records which are required under the normal MS – for instance, you do not have to maintain a detailed stock book.
Global Accounting records do not have to be kept in any set way but they must be complete, up to date and clearly distinguishable from any other records. A business must keep records of purchases and sales as set out below, together with the workings used to calculate the VAT due.
If HMRC cannot check the margins declared from the records, VAT will be due on the full selling price of the goods sold, even if they were otherwise eligible for the scheme.
Buying goods under Global Accounting
When a business buys goods which it intends to sell under Global Accounting it must:
- check that the goods are eligible for Global Accounting
- obtain a purchase invoice. If a business buys from a private individual or an unregistered entity, the purchaser should make out the invoice at the time the goods are purchased. If purchased from another VAT-registered dealer, the dealer must make out the invoice at the time of sale, and
- enter the purchase details of the goods in your Global Accounting purchase records. The purchase price must be the price on the invoice which has been agreed between you and the seller.
You cannot use the scheme if VAT is shown separately on the invoice.
If you are buying from a private individual or an unregistered business, you must make out the purchase invoice yourself.
When selling goods under Global Accounting
If the purchase conditions above apply, Global Accounting may be used when the goods are sold by:
- recording the sale in the usual way
- issuing a sales invoice for sales to other VAT-registered dealers and keeping a copy of the invoice, and
- transferring totals of copy invoices to the Global Accounting sales record or summary
- you must be able to distinguish at the point of sale between sales made under Global Accounting and other types of transaction
Leaving the scheme
If a business stops using Global Accounting for any reason, it must make a closing adjustment to take account of purchases for which it has taken credit, but which have not been sold (closing stock on hand). The adjustment required does not apply if the total VAT due on stock on hand is £1,000 or less. In the final period for which the business uses the scheme, it must add the purchase value of its closing stock to the sales figure for that period. In this way VAT will be paid (at cost price) on the stock for which the business previously had credit under the scheme.
Items sold outside the scheme
If goods are sold which had been included in a business’ Global Accounting purchase (for example, they are exported), a business must adjust its records accordingly. This is done by subtracting the purchase value of the goods sold outside the scheme from the total purchases at the end of the period.
Stolen or destroyed goods
If a business loses any goods through breakage, theft or destruction, it must subtract their purchase price from your Global Accounting purchase record.
Repairs and restoration costs
A business may reclaim the VAT it is charged on any business overheads, repairs, restoration costs, etc. But it must not add any of these costs to the purchase price of the goods sold under the scheme.
For further advice on any global accounting, used goods schemes, or any other special VAT schemes please contact me.
A VAT Did you know?
Aphrodisiacs can be food and therefore VAT free. Capsules, drops, powders and sprays presented as aphrodisiacs that stimulate libido are intended for human consumption and are taken orally. The fact that consumption of the product may have positive effects on the sexual desire of the person ingesting it is irrelevant.
Crime doesn’t pay……..VAT. Is there tax on illegal activities?
A number of people have been surprised to find that crime does pay tax, thank you very much. It seems bad enough that the police should chase and catch you, put you in the dock and send you to prison, without finding that your first visitor is HMRC…. Let’s look at some examples:
Dodgy perfume?
Goodwin & Unstead were in business selling counterfeit perfume. They were also up-front about what they were doing. Unstead claimed that “Everything I can carry in my vehicle, everything I trade in and sell, is a complete copy of the real thing. I do not sell goods as the real thing. In fact I sell my goods for a quarter of the original price. I am not out to defraud or con the public. I only appeal to the poseurs in life.”
The real manufacturers might have sued these men for passing off the product of their chemistry experiments in trademarked bottles, but it was HMRC who sent them to jail – for failing to register and pay VAT on their sales. The amount they should have collected was estimated at £750,000, which shows that they must have appealed to a great many poseurs.
If they had paid the VAT, Customs would have had no problem with them. Their customers must have been reasonably satisfied – if your counterfeit perfume smells something like the real thing, why worry?
They tried to get out of jail with an ingenious argument – if the sale of the perfume was illegal, surely there shouldn’t be VAT on it. It wasn’t legitimate business activity, so it wasn’t something that ought to be taxable. The European Court had no time for this. They pointed out that it would give lawbreakers an advantage over lawful businesses; they wouldn’t have to charge VAT. The judges suggested that maybe people would even deliberately break the law so they could get out of tax; in this case, the only thing that made the trade illegal was treading on someone’s trademark rights, and that was something that might happen at any time in legitimate businesses. The judges said that VAT would apply to any trade which competed in a legal marketplace, even if the particular sales broke the law for some reason. Counterfeit perfume is VATable because real perfume is too. Of course, Customs have traditionally had two main roles – looking for drug smugglers, and dealing with VAT-registered traders. They have generally treated both with much the same suspicion, but the ECJ made it clear in this case that the two sets of customers are completely separate.
“Personal” services?
Customers paid the escort £130, of which £30 was paid to the agency. VAT on £130 or VAT on £30?
The first hearing before the Tribunal went something like this (this may be using artistic licence, but the published summary implies it was so):
HMRC: “We think the VAT should be on £130 because the escorts are acting as agents of the escort business.”
Trader: “No, it’s just £30, the £100 belongs to the escort and is nothing to do with me.”
Tribunal chairman: “All right, tell me a bit about how the business operates.”
Customs: “No.”
Tribunal chairman: “What?”
Customs: “You don’t want to know.”
Tribunal chairman: “How can I decide whether the escorts are acting as agent or principals without knowing how the business operates?”
Customs: “Don’t go there, just give us a decision.”
Tribunal chairman: “Trader, you tell me how the business operates.”
Trader: “I agree with him, you don’t want to know.”
The Tribunal seems to have been a bit baffled by this. They were aware that Customs had a great deal more evidence which had been collected during the course of a thorough investigation, and they asked the parties to go away and decide whether they might let the Tribunal see a bit more of it so they could make a judgement rather than a guess.
What about drugs then?
It’s well-known that you are allowed to smoke dope in some establishments in Amsterdam, although the Dutch authorities are thinking about restricting this to Netherlands’ residents. They may find that such a rule contravenes the European Law on freedom of movement – under the EU treaty, you can’t be meaner to foreigners than you are to your own people just because they are foreign. That’s a nice idea, but individuals and governments keep trying it on. Anyway, the Coffeeshop Siberie rented space to drug dealers who would sell cannabis at tables for people to take advantage of the relaxed atmosphere. Presumably they are preparing to examine passports or local utility bills before making the sale, if only the Dutch are to be allowed to get stoned. Anyway, the Dutch authorities asked the coffee shop’s owners for VAT on the rent paid by the dealers, and the owners appealed to the ECJ. This time, surely, it was sufficiently illegal. Although the consumption of drugs was tolerated, it was still against the law, and it must therefore be not VATable.
The judges pointed out that the coffee shop was not actually selling drugs. They were just providing the space for other people to sell drugs. Although selling drugs was completely illegal, and there was no legitimate market in cannabis, renting space was a normal business activity. Renting space to someone who did something illegal with it was in the same category as the dodgy perfume sales in Goodwin & Unstead: it was a bit illegal, but not illegal enough. The VAT was still due.
Counterfeiting?
In a German case, the ECJ ruled that the importation of counterfeit money was outside the scope of VAT. The Advocate-General observed that a line must be drawn between, on the one hand, transactions that lie so clearly outside the sphere of legitimate economic activity that, instead of being taxed, they can only be the subject of criminal prosecution, and, on the other hand, transactions which though unlawful must nonetheless be taxed, if only for ensuring in the name of fiscal neutrality, that the criminal is not treated more favourably than the legitimate trader’.
So, there you have it, if you are of a criminal disposition, and you want to avoid VAT, funny money is the way to go. Please note, this does not constitute advice…..