Tag Archives: vat-planning

VAT – New road fuel scale charges from 1 May 2016

By   22 March 2016
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If a VAT registered business purchases fuel for business use of its vehicles, but there is also private use of cars and other vehicles, an adjustment is required to ensure no VAT is claimed on the private consumption of fuel. This is called the VAT fuel scale charge

To make accounting for VAT on private use of fuel by car drivers a business may apply a VAT fuel scale charge, this adds back a fixed sum, per VAT period, to account of private consumption of fuel.

The scale charge is calculated according to a car’s CO2 emissions and the charge is added to Output VAT it reflects a charge for the private use of the fuel.  The road fuel scale charges are amended at each Budget.  The new rates come into effect from 1 May 2016 and may be found here

Businesses must use the new scale charges from the start of the next prescribed accounting period beginning on or after 1 May 2016.

Other Budget changes

Apart from the VAT registration limit being raised by £1,000 to £83,000 and the deregistration limit has been increased to £81,000 both with effect 1 April 2016, there were few VAT changes in the budget.

VAT Latest from the courts – importance of invoicing requirements

By   16 March 2016
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In the recent case of Gradon Construction Ltd the validity of invoices was considered and whether input tax could be recovered in respect of them.

HMRC disallowed a claim for input tax on the basis that the supplier had retrospectively deregistered on a date prior to the date shown on the invoices.  The Tribunal decided that this was not a reason to disallow the claim.  However, it decided that the claim should be disallowed on the grounds that the invoices did not contain a description sufficient to identify the goods or services supplied, nor did they provide the quantity of the goods or the extent of the services as required by legislation.  Consequently, the documents did not meet the requirements of a valid tax invoice with the result that the recipient could not recover the amount on the documents which purported to be VAT.  HMRC has the discretion to accept alternative evidence in lieu of an invoice, but in this case the Tribunal decided that HMRC acted reasonably in not accepting any other documentation, so the recipient of the supply could not recover the input tax.

This case again highlights the crucial importance of primary documentation when it comes to VAT.  A full guide to invoices here

Information on input tax that it is not possible to claim here https://www.marcusward.co/what-vat-cant-you-claim-2/

It is crucial that a business’ invoices meet all the requirements, and that a procedure is in place to check the validity of invoices received in order to determine whether the input tax is claimable, or whether the invoice issuer should be contacted so that a valid tax invoice may be obtained.

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

By   14 March 2016
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OK, so most people are aware of the Jaffa Cake case and the appeals relating to smoothies and the VAT oddities that are thrown up by chocolate foods and fruit drinks.  The latest in what many view to be a ridiculous situation is the Nestlé UK Limited case concerning Nesquik powder.

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

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

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

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

Ten Questions every business should ask about VAT

By   8 March 2016
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1. Am I sure that a VAT inspection would not find any errors?  

  • An inspection can result in significant assessments, penalties and interest, apart from a business becoming “known” to HMRC. Peace of mind is a valuable benefit for a business owner too!

 2. Am I sure that I am reclaiming as much VAT as possible?

  • We often find that businesses miss out on recovering input tax, this clearly results in an actual cost.

 3. Do I take full advantage all available VAT reliefs, customs exemptions and duty refund schemes? 

  • Failure to do so will create a tax cost and may be putting a business in a less competitive position.

4. Am I up to date on the indirect tax developments in my key markets?

  • Indirect tax changes rapidly, and so does the market place. Being unaware of changes that affect you may result in VAT being overpaid, or penalties being levied if you have underdeclared tax. It may also put you at a competitive disadvantage.

5. Have I considered the impact of tax rate changes on my pricing and margin, and have I taken the necessary measures?

  • Budgeting is affected by VAT.  Failure to consider indirect taxes may eat into profit.

6. Do I collect all the data about my customers and transactions that could be required by tax authorities?

  • As in many VAT circumstances, getting it wrong or missing something results in penalties.

7. Do I comply with all indirect tax requirements in the jurisdictions where I operate or where my customers belong?

  • VAT and GST does exist outside the UK and ignoring overseas indirect tax obligations may result in action being taken by foreign authorities which will prove to be very uncomfortable and expensive.  It is important to understand the rules for indirect tax in each country/area you trade. Don’t get caught out.

8. Do I have the tools to analyse my indirect tax flows and data?

  • Allocating sufficient technical and human resources to VAT is important.  Seeking professional advice at the appropriate time is also prudent.

9. Could changes in the way my business is structured or how transactions are organised improve my indirect tax position and/or reduce complexity?

  • Saving money and reducing tax complications must be near the top of every business’ wish list. Seeking professional advice on structuring a business or a transaction goes a long way to achieving this

10. Is my business using the right VAT scheme?

  • There are many special schemes that a business may use, from the Flat Rate Scheme to Margin Schemes. Most are optional, but some, like the Tour Operators’ Margin Scheme are compulsory. Choose the wrong one, or being unaware of a beneficial scheme could cost.

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.  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!

VAT – Residential Property Triggerpoints

By   17 February 2016
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VAT and property transactions are uneasy bedfellows at the best of times.  Getting the tax wrong, or failing to consider it at all can result in a loss of income of 20% on a project, or forgoing all input tax incurred on a development. Even a simple matter of timing can affect a transaction to a seller’s detriment. Here I take a brief look at issues that can impact residential property transactions.  It is important to recognise when VAT may affect a project so I hope that some of these triggerpoints may prove useful.

General points

The following are very general points on residential properties. No two cases are the same, so we strongly recommend that specific advice is obtained.

Refurbishing “old” residential properties

Broadly speaking, the VAT incurred on such work is not reclaimable as the end use of the property will be exempt (either sale or rent). There is no way round this as it is not possible to opt to tax residential dwellings. It may be possible to use the partial exemption de minimis limits if there are any other business activities in the same VAT registration. If this is the only activity of a business, it will not even be permitted to register for VAT. There are special rules if the number of dwellings change as a result of the work (see below).

New residential builds

The first sale (or the grant of a long lease 21 years plus) of a newly constructed dwelling by “the person constructing” is zero rated. This means that any VAT incurred on the construction is recoverable. Care should be taken if the new dwelling is let on a short term basis rather than/before being sold as this will materially affect input tax recovery.  Advice should always be taken before such a decision is made as there is planning available to avoid such an outcome. VAT incurred on professional and legal costs of the development may also be recovered such as; architects, solicitors, advisers, agents etc. VAT registration is necessary in these cases and our advice is to VAT register at the earliest stage possible.

The construction of new dwellings is zero rated, along with any building materials supplied by the contractor carrying out the work.  The zero rating also extends to sub-contractors.  It is not necessary for a certificate to be provided in order to zero rate such building works.

Conversions

There are special rules for refurbishments which create a different number of dwellings (eg; dividing up a single house into flats, or changing the total number of flats in a block, or making one dwelling by amalgamating flats). Generally, it is possible for contractors to invoice for their building work at the reduced rate of 5%. This rate may also apply to conversions. A conversion is defined as work undertaken on a non-residential property, such as a barn, office or church, into one or more self-contained dwellings.  Once converted the sale of the residential property will be zero rated and all of the input tax incurred on associated costs is recoverable (similar to a new build).

Renovation of empty residential premises

Reduced rating at 5% is also available for the renovation or alteration of empty residential premises. Such a premises is one that has not been lived in during the two years immediately before the work starts. HMRC will insist on documentary evidence that the property has been empty for that time.

Purchase of a commercial property intended for conversion

If it is intended to convert a commercial property into residential use and the vendor indicates that (s)he will charge VAT (as a result of the option to tax having been exercised) it is possible for the purchaser to disapply the option to tax by the issue of a certain document; form VAT 1614D. This means that the sale will become exempt.  Advice should always be sought on this issue by parties on each side of the transaction as it very often creates difficulties and significant VAT and other costs (mainly for the vendor).

Mixed developments

If what is being constructed is a building that is only in part a zero-rated dwelling, a contractor can only zero-rate its work for the qualifying parts. For example, if a building  containing a shop with a flat above is constructed, only the construction of the flat can be zero-rated. An apportionment must be made for common areas such as foundations and roof etc. The sale of the residential element when complete is zero rated and the sale of the commercial part will be standard rated if under three years since completion.  If the commercial part is over three years old at the date of sale, or is rented rather than sold, the supply will be exempt with the option to tax available – details here.  If an exempt supply is made, the recovery of input tax incurred on the development will be compromised and it is important that this recognised and planning put in place to avoid this outcome.

DIY building projects

There is a specific scheme for DIY Housebuilders to recover input tax incurred on the construction of a dwelling for the constructor to live in personally.  Details here https://www.marcusward.co/?s=diy

Sale of an incomplete residential development

There are two possible routes to relief if a project is sold before dwellings have been completed (either new build or conversion).  This can often be a complex area, however, there is some zero rating relief which may apply, and also it may be possible to apply TOGC (Transfer Of a Going Concern) treatment to the sale.  In both cases, it is likely that input tax previously claimed by the developer should not be jeopardised.

Overview

There are VAT complications for the following types of transactions/developments and issues:

  • work on listed properties
  • definition of a dwelling
  • arrangements where consortiums or syndicates are used/profit share
  • transactions in connection with nursing or children’s homes or similar
  • “granny flats” in the garden of existing houses
  • work on charitable buildings/ for charities
  • converting specific commercial property into residential property – particularly ex-pubs
  • sales to Housing Associations
  • sales of “substantially reconstructed protected buildings”
  • buying VATable buildings
  • date of completion – zero rating cut off
  • supplies by members of VAT groups
  • definition of building materials
  • input tax on white goods and similar
  • alterations for people with disabilities
  • garages with dwellings
  • land supplied with a property
  • buying property with existing, continuing leases
  • beneficial owner versus legal owner supplies
  • change of intention (buying land/property with the intention of using it for one purpose, but the intention changes after purchase)
  • where professional/architect’s fees are incurred
  • planning gains
  • own use of a property
  • mobile homes
  • reverse premiums/surrenders/reverse surrenders re; leases
  • holiday lets
  • hotels
  • business use by purchaser/tenant
  • contract stage of a property purchase where VAT is potentially chargeable by vendor
  • timing of supplies
  • work re; schools, churches, village halls, hospitals, or any other “unusual” structures

This list is not exhaustive, but I hope it gives a broad idea of where VAT needs to be considered “before the event”. As always, I am available to assist.

VAT – Latest from the courts – Holding companies management charges. Norseman Gold plc

By   15 February 2016
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The Norseman Gold plc case considered whether a holding company could recover input tax incurred on certain costs.  This is turn depended on whether the holding company was making taxable supplies. Specifically; management charges to non VAT-grouped subsidiary companies.

The Upper Tribunal has recently released its decision. It upheld the First-tier Tribunal’s decision which confirmed that, although the management services in this case could have been considered as economic activities for VAT purposes, there was insufficient evidence to demonstrate that Norseman was making, or intended to make, taxable supplies when the input tax was reclaimed. The UT found that “…vague and general intention that payment would be made …” for management services was insufficient to show a connection between the VAT incurred and taxable supplies.  Consequently, HMRC’s assessments to recover the relevant input tax were upheld.

Importance

This case emphasises the importance of holding companies having appropriate processes and ensuring that proper documentation is in place to evidence, not only the intention to make taxable supplies of management charges, but that those charges were actually made to subsidiaries.  It is also important to ensure that actual management of the subsidiaries take place, and a record of this management is retained.  Simply making a charge to subsidiaries is insufficient if no services are actually supplied as this will not constitute an economic activity.

Often significant costs can be incurred by a holding company in cases such as acquisitions and restructuring.  It is important that these costs are incurred by, and invoiced to the appropriate entity in order for the VAT on them to be recovered.  Consideration must be given to how the input tax is recovered before it is incurred and the appropriate structure put in place.

Please contact me should you require further information on this point or would like to discuss the matter further.

VAT Latest from the courts; can HMRC impose a higher value on a supply?

By   9 February 2016
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VAT Latest from the courts – Whether Open Market Value applies

HMRC has the power to direct that Open Market Value (OMV) is applied to the value of certain supplies between connected parties – VAT Act 1994 Schedule 6, paragraph 1. This power is used to avoid situations where one party is unable to recover all of the input tax incurred on purchases. Usually, the direction is used when one party purchase goods and services at OMV, recovers full input tax and then supplies these goods and services to a connected party at a lower price, thus reducing the amount of input tax lost by the recipient party.

HMRC deemed this to be the position in Temple Retail Limited and Temple Finance Limited (TC04840) where “TRL” purchased goods and services and resupplied them to “TFL”.  TFL was a company that was unable to recover all of its input tax as a result of partial exemption (it made supplies of exempt credit as it sold goods to consumers via HP agreements).  HMRC was concerned that TRL and TFL had an opportunity to improve their aggregate input tax recovery by charging fees for certain services below OMV and consequently issued an OMV direction.

HMRC later issued TRL with assessments for under-declared output tax for not complying with the direction and this, inter alia, was the subject of the appeal by the taxpayer.

The FT Tribunal was satisfied that the majority of TRL’s fees charged to TFL were charged at OMV. However, The Tribunal decided that advertising services were not calculated at OMV and held that these services should be recalculated by reference to a method which it specified.

The case is a useful reminder of HMRC’s powers to substitute a stated value of a supply with what it believes to be OMV between connected parties. Business which are connected and provide exempt services need to be aware of the position and ensure that relevant supplies do not fall foul of the OMV direction rules.  Care should be taken to document the values used and the reasons why they reflect the economic reality of the position in order to avoid a challenge from HMRC.  OMV is often an area that creates differences of opinion and therefore disputes.  Any structures which set out to deliberately reduce the value of supplies are likely to result in more serious actions from HMRC.

A definition of what constitutes connected parties is found here

If the case sets off any warning bells, please contact us as soon as possible.

VAT – Overseas Holiday Lets; a warning

By   8 February 2016
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It is important to understand the VAT consequences of owning property overseas. It may not be commonly known that the UK has the highest VAT threshold in the EC. This means that for many ‘sideline’ businesses such as; the rental of second or holiday properties in the UK, the owners, whether they are; individuals, businesses, or pension schemes, only have to consider VAT if income in relation to the property exceeds £82,000 pa. and this is only likely if a number of properties are owned.

However, other EC Member States have nil thresholds for foreign entrepreneurs meaning that if any rental income is received, VAT registration may be compulsory. Consequently, a property owner that rents out a property abroad will probably have a liability to register for VAT there. Failure to comply with the domestic legislation of the relevant Member State means; payment of back VAT and interest and fines being levied. It is also not a good idea to provoke the interest of overseas tax authorities. VAT registration however, does mean that a property owner can recover input tax on expenditure in connection with the property, eg; agent’s fees, repair and maintenance and other professional costs.  Such claims may be restricted if the home is used for own use.

It should be noted that, unlike other types of rental of homes, holiday lettings are always standard-rated. Also, the letting of holiday homes is always treated as a business activity unless lettings are very infrequent.  If lettings are a one-off or rare, evidence should be retained to evidence this fact.  There is no set number of times a property can be let before it is treated as a business, and the interpretation may differ between different Member States.  Details of taxable supplies and being in business here

Given that every EC Member State has differing rules to the UK, it is crucial to check all the consequences of letting property overseas.

A final word of warning; I quite often hear the comment “I’m not going to bother – how will they ever find out?”

If an overseas property owner based in the UK is in competition with local letting businesses, those businesses generally do not have any compulsion in notifying the authorities. In addition, I have heard of authorities carrying out very simple initiatives to see if owners are VAT registered. In many resorts, income from tourism is vital and this is a very important revenue stream for them so it is well policed.

Please contact us for further details. We have experience in dealing with overseas VAT matters on our clients’ behalf.

Monthly VAT Round-Up

By   29 January 2016
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We produce a free monthly email update on all VAT things great and small. It covers events for the last month and flags up significant changes as a result of changes to legislation, HMRC announcements and case law. It also looks at specific VAT issues that may affect a business.

Please contact us you would like to subscribe.

marcus.ward@consultant.com

07748 117935

Twitter: @mw_vat

Linked In; Marcus Ward

Linked In Group – Marcus Ward Consultancy VAT

VAT – Zero rating of charitable building; latest from the courts

By   25 January 2016
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A recent case at the Upper Tribunal (UT): Wakefield College here considered whether certain use of the property disqualified it from zero rating.

Background

In order to qualify for zero rating a building it has to be used for “relevant charitable purpose”

This means that it is used otherwise than in the course or furtherance of a business. In broad terms, where a charity has a building constructed which it can show it will use for wholly non business purposes then the construction work will be zero rated by the contractor. This is the case even if there is a small amount of business activity in the building as long as these can be shown to be insignificant (which is taken to be less than 5% of the activities in the whole building) This so called de-minimis of 5% can be of use to a charity. In order for zero rating to apply the charity must issue a certificate to the builder stating the building will be used for non-business purposes.

Although the UT supported HMRC’s appeal against the F-tT decision there was an interesting comment made by the UT.  The fact that students paid towards the cost of their courses (albeit subsidised) meant that business supplies were made, and the quantum of these fees exceeded the 5% de minimis meant that the construction works were standard rated. This decision was hardly surprising, however, a comment made by the Tribunal chairman The Honourable Mr Justice Barling Judge Colin Bishopp may provide hope for charities in a similar position to the appellant: he stated that it believed that the relevant legislation should be reconsidered, suggesting that;

“… it cannot be impossible to relieve charities of an unintended tax burden while at the same time protecting commercial organisations from unfair competition and preventing abuse …”.

 In my view, it is worth considering the summing up in its entirety as it helpfully summarises the current position and provides some much sought after common sense in this matter:

 “We cannot leave this appeal without expressing some disquiet that it should have reached us at all. It is common ground that the College is a charity, and that the bulk of its income is derived from public funds. Because that public funding does not cover all of its costs it is compelled to seek income from other sources; but its doing so does not alter the fact that it remains a charity providing education for young people. If, by careful management or good fortune, it can earn its further income in one way rather than another, or can keep the extent of the income earned in particular ways below an arbitrary threshold, it can escape a tax burden on the construction of a building intended for its charitable purpose, but if it is unable to do so, even to a trivial extent, it is compelled to suffer not some but all of that tax burden. We think it unlikely that Parliament intended such a capricious system. We consider it unlikely, too, that Parliament would consider it a sensible use of public money for the parties to litigate this dispute twice before the FTT and now twice before this tribunal. We do not blame the parties; the College is obliged to maximise the resources available to it for the pursuit of its charitable activities, just as HMRC are obliged to collect tax which is due. Rather, we think the legislation should be reconsidered. It cannot be impossible to relieve 16 charities of an unintended tax burden while at the same time protecting commercial organisations from unfair competition and preventing abuse”.

 Action

If any charities, or charity clients have been denied zero rating on a building project, it will be worthwhile monitoring this development.  Please contact us if you require further information.