VAT changes for UK businesses selling to EU consumers from 1 July

As of 1 July 2021, new EU VAT rules for business to consumer (B2C) sales will be introduced. These new rules will affect UK suppliers selling goods to EU consumers online.

Why are new rules being introduced?

The new rules are being introduced to facilitate with EU cross-border trade, to ensure a fair competition for EU suppliers and to ensure that VAT is charged based on where the customer is located. The changes are also designed to combat VAT fraud.

What’s new?

The major changes from 1 July 2021 include:

  1. Withdrawal of distance selling rules and new single return for ecommerce sales;
  2. Removing import VAT exemption and new VAT scheme for imported goods – IOSS; and
  3. Online market places responsible for EU VAT.

1. Withdrawal of distance selling rules & new single return for ecommerce sales

Firstly, the existing ‘Distance Selling Thresholds’ for EU sales will be withdrawn from 1 July 2021.

Instead, cross-border sellers will have to charge the VAT rate of the customer’s country of residence at point of sale. This is to be accompanied by the roll-out of a single One Stop Shop (OSS) EU Return. This new OSS return will avoid the requirement to register for VAT in each applicable EU country. This is an extension of the MOSS which is currently used for accounting for VAT for digital supplies. Local businesses will be registered in their home country, and non-EU businesses can choose any member state to act as their VAT identification country. All pan-EU sales will then be included in a single OSS return.

The Union scheme which applies to EU businesses will extend to include the supplies of all types of B2C services, intra-EU online sales of goods and specific domestic supplies sold through digital marketplaces.

2. Removing import VAT exemption and new VAT scheme for imported goods – IOSS

This VAT change also affects imported goods into the EU so will have an impact on businesses who wish to sell goods to EU consumers that are based outside the EU, including the UK.

The EU is introducing a new imports scheme called Import OSS (IOSS) for goods worth less than €150. Non-EU businesses will have the option to register for this scheme in a member state of the EU.

In addition, from 1 July 2021, the VAT exemption for goods imported into the EU in small consignment of a value of up to €22 will be withdrawn. This is intended to level the playing field for EU businesses that are always charged VAT.

The options for non-EU UK sellers are therefore:

a) Use the new IOSS scheme

If using the IOSS, businesses will be required to register for the scheme in one EU country, and charge and collect VAT at the point of sale on products below €150 when selling to EU customers.  The applicable VAT rate will be the customer’s local rate. Each month, the business must then declare and remit the total applicable EU VAT through an IOSS return. These sales will then benefit from a VAT exemption upon importation, allowing a fast release at Customs. Businesses will also have to consider their pricing structure as rates of VAT vary in the EU from 17% to 27%.

b) Alternative to IOSS

Where the Import OSS is not used, a second simplification mechanism will be available for sales to EU consumers worth less than €150. Import VAT will be collected from customers by the customs declarant (e.g. postal operator, courier firm, customs agents) which will pay it to the customs authorities via a monthly payment. This means that the customer will have to pay a fee to accept their package.

3. Online marketplaces responsible for EU VAT

After July 2021, online marketplaces will become responsible for charging and collecting VAT on deemed supplier transactions. For imports not exceeding €150, instead of import VAT the marketplace will charge the customer VAT at the point of sale and declare it instead of the seller. Both EU and non-EU sellers will benefit from reduced VAT obligations and may be able to deregister in some EU states.

How can we help?

At Chiene + Tait we are in a unique position to help you navigate these changes and help you to understand how the above changes will impact you and your business on a day-to-day practical level.

If you are concerned about expanding your business into EU markets, or how your current business with the EU might be affected, we can assist you by undertaking a review into your business and recommending to you the best course of action. Whether it be sales to EU consumers and businesses, importing goods from the UK, exporting goods to the EU and further afield, Customs Duties & Tariffs, we will help you find the ideal solution for you and your business.

Chiene + Tait is also part of a worldwide association of firms, including members in the EU, with whom we can communicate on your behalf or put you in touch with directly so that you can understand from professionals across the EU how the rule changes will affect you from start to finish.

Grant Funding Available

The UK government has confirmed that that there will be grant funding available of up to £2,000 for SMEs to receive advice and training on how changes brought about because of Brexit can affect your business. We can guide you through the grant funding process to ensure you get the best value and piece of mind.

We would recommend that any business that wishes to sell goods to EU consumers acts now to be in a position to be ready for these changes.

Contact our VAT and Indirect Taxes team at vat@chiene.co.uk, or 0131 558 5800 for help, advice or to arrange a review.

Budget 2021: VAT Extension for Tourism & Hospitality Businesses

On 3 March 2021, the Chancellor announced the annual UK Budget for the coming year in an effort to kick start the economy following the restrictions imposed as a result of the Coronavirus pandemic. Amongst the package of financial support and assistance during 2021/22, the Chancellor confirmed further assistance for the tourism and hospitality sector which has arguably been the worst affected industry by the pandemic.

Temporary VAT rate extended

The UK government has confirmed that the temporary reduced rate of 5% VAT for the tourism and hospitality sector will be extended to until 30 September 2021.  To help businesses manage the transition back to the standard 20% rate, the Government has also announced that a 12.5% rate will apply for the subsequent six months from 1 October 2021 until 31 March 2022.  The 20% normal standard VAT rate will then be reinstated from 1 April 2022.

Summary of changes

The table below summarises the applicable VAT rate and timeline for the sectors:

PeriodVAT Rate
To 30 September 20215%
From 1 October 2021 to 31 March 202212.5%
From 1 April 202220%

To highlight the significance of this announcement, this will be the first time since 1979 that 4 distinctive VAT rates will be in operation in the UK.

Key Issues

With this extension of the reduced VAT rate we consider the following key issues:

  • How to operate and correctly identify the tax point in relation to supplies to determine the correct VAT rate to use.
  • If your business also provides goods or services that fall outside the scope of the reduced VAT rate above such as alcohol sales, how should this be accounted for and are you paying the correct amount of VAT?
  • If you are using an accounting packages (Xero, Quickbooks, SageL50 etc.) you may not have a defined tax rate for the interim 12.5% that will be used from 1 October 2021 to 31 March 2022.  A new tax rate may therefore need to be added to your software package.

Tax Points

Special provisions are available which provide an option to maximise the use of the limited 5% reduced rate period – allowing you to choose to apply the ‘basic’ or ‘actual’ tax point.  But with this flexibility it can cause complexities.  Actual tax points (invoicing for a service or receiving payment) normally override the basic tax point (service completion) but the special provisions allow a choice; tax payers have the opportunity to receive cash payments and account for VAT at the reduced rate for supplies that will be taking place after end of the 5% period (so after 30 September 2021).

Practical Example

Consider a scenario where a hotel business supplies hotel rooms at £100 per night, 50% of the payment is usually paid for at booking and 50% at the time of the stay.  A customer books on 1 March 2021 to stay at the hotel on 5 October 2021.  The issue created here is that up to 30 September 2021 the VAT rate will be 5%, but from 1 October 2021 the VAT rate will change to the interim rate of 12.5%.  Therefore at the time of the booking the VAT rate is 5% but at the point of stay it will be 12.5%.

The table below outlines the different VAT rates in the outlined scenarios:

Scenario Tax PointVAT Treatment
Customer pays 50% at time of booking (1 March 2021) and then 50% at time of stay (5 October 2021)

Payment date of 1 March 2021 will create a tax point, therefore VAT at 5%.

Second payment/actual stay will create another tax point, therefore at 12.5%

1st Payment: £50 (VAT 5% of £2.38)

2nd Payment: £50 + (VAT 12.5% of £5.55)

Total VAT = £7.93

What if full amount was paid at time of booking (March 2021)Date of payment – 1 March 2021, therefore 5% ratePayment: £100 (VAT 5% of £4.76)
What if full amount was paid at time of visit (October 2021)Date of payment  – October 2021Date of payment  – October 2021
Payment: £100 (VAT 12.5% of £11.11)

Unusually, and perhaps due to the nature of the legislation, there are no specific anti-forestalling measures (designed to stop people circumventing and abusing the rate change), in particular when the VAT rate increased to 12.5% from 1 October 2021 and then returns to 20% from 1 April 2022.

If you would like to discuss the impact of the reduced VAT rate on your business please contact our VAT team on 0131 558 5800 or email VAT@chiene.co.uk.

New HMRC VAT Deferral Scheme – Update

If your business deferred VAT payments for the February, March or April 2020 VAT returns, HMRC has issued updated guidance in relation to the repayment of these outstanding amounts.

If the business has outstanding VAT to pay, the business can either:

  • Pay the deferred VAT in full, on or before 31 March 2021; or
  • Join the VAT deferral new payment scheme.

The opt-in process for the VAT deferral new payment scheme will be open from 23 February to 21 June 2021 (inclusive).

If your business is on the VAT Annual Accounting Scheme or the VAT Payment on Account Scheme, the business will be invited to join the new payment scheme later in March 2021.

The new deferral scheme allows businesses to:

  • Pay any applicable deferred VAT in equal instalments, interest free; and
  • Choose the number of instalments, from 2 to 11 (depending on when it joins).

To use the online service, the business must:

  • Join the scheme itself. Agents cannot sign up on the business’ behalf;
  • Still have deferred VAT to pay;
  • Be up to date with its VAT returns;
  • Join by 21 June 2021;
  • Pay the first instalment when it joins;
  • Pay its instalments by Direct Debit (if you want to use the scheme but cannot pay by Direct Debit, there’s an alternative entry route).

If your business joins the scheme, it can still have a Time to Pay arrangement for other HMRC debts and outstanding tax.

Instalment options available to you

The month the business decides to join the scheme will determine the maximum number of instalments that are available. If you join the scheme in March, you’ll be able to pay your deferred VAT in up to 11 instalments.

The table below sets out the monthly joining deadlines (to allow for Direct Debit processing) and the corresponding number of maximum instalments (including the first payment):

If you join by:Number of instalments available:
18 March 202111
21 April 202110
19 May 20219
21 June 20218

Before joining, the business must:

  • Create its own Government Gateway account (if it does not already have one)
  • Submit any outstanding VAT returns from the last 4 years – otherwise the business will not be able to join the scheme
  • Correct errors on any VAT returns as soon as possible
  • Make sure you know how much the business owes, including the amount you originally deferred and how much you may have already paid (if any).

Interest & Penalties

You may be charged interest or a penalty if you do not:

  • Pay the deferred VAT in full by 31 March 2021.
  • Opt into the new payment scheme by 21 June 2021.
  • Agree extra help to pay with HMRC by 30 June 2021.

Tour Operator Margin Scheme (TOMS) VAT update

We understand that HMRC has confirmed that once the Brexit transition period ends on 1 January 2021, the VAT charged on package tours and holidays through the Tour Operator Margin Scheme (TOMS) on travel outside of the UK will be zero rated.

The announcement comes after discussions between ABTA and HMRC and removes a crucial area of uncertainty for many travel businesses.

Through TOMS, UK tour operators only account for VAT on their profit margin (ie the difference between the amount they receive from customers and the amount they pay suppliers).

It has been agreed by HMRC on the assumption of a possible no deal with the EU on TOMS. In the event of a no deal Brexit scenario, a new UK TOMS scheme will be introduced which will require payment of TOMS VAT only on UK holidays but not on package holidays outside the UK.

VAT Rate Cut

The Chancellor Rishi Sunak has announced a temporary 5% VAT rate which will come into effect from 15 July to 12 January 2021. The main areas which will be affected are:

  • Sales of Food and non-alcoholic drink in restaurants, pubs, bars, cafes and similar premises;
  • Hot takeaway food and non-alcoholic beverages;
  • Sleeping accommodation in hotels, B&B and similar accommodation including holiday accommodation, pitch fees for caravans and tents and associated facilities; and
  • Admissions to tourist attractions such as theatres, concerts, amusement parks etc.

The changes are not limited and will impact on any businesses or organisation that provide food or drink, accommodation, or are considered a tourist attraction. For more details visit our VAT page here. Or download our free VAT Rate Cut Factsheet here.

If you have a query about the VAT rate change, contact our team today at vat@chiene.co.uk.

UK Government confirms VAT Zero rating for PPE

The UK Government has confirmed that from 1 May 2020, personal protective equipment (‘PPE’) purchased by care homes, businesses, charities and individuals to protect against Coronavirus will be zero rated for three-month period.

This will be particularly beneficial for care homes, charities and individuals for whom VAT would be a cost.  The Government estimates that this will save care homes and businesses more than £100 million. Previously, the Government removed import duty on PPE items which will continue to be the case.

VAT Zero Rating on E-publications Announced

The zero rate of VAT will now apply to all e-publications from 1 May 2020. In the recent Budget this measure was due to come into force in December, however the Chancellor Rishi Sunak has brought the measure forward.

Digital publications have previously been taxed at 20% in the UK whereas printed publications have been exempt from VAT since its introduction in 1973, ‘on the general principle of avoiding a tax on knowledge’.

The change in law means that e-books, e-newspapers, e-magazines and academic e-journals are entitled to the same VAT treatment as their physical counterparts with the Treasury estimating that this will potentially slash the cost of a £12 e-book by £2 and e-newspapers subscriptions by up to £25 a year (assuming suppliers pass the saving on to customers).

This will obviously apply to newspaper and magazine suppliers but also to charities who provide access to materials such as journals and learning materials online.

Making Tax Digital ‘digital links’ requirement delayed

In response to the COVID-19 crisis, HMRC has confirmed that any businesses undertaking Making Tax Digital (MTD) for VAT now have an extension to 1 April 2021 (previous deadline 1 April or 1 October 2020) to meet the ‘digital links’ requirement related to their recordkeeping systems.

To be MTD for VAT compliant, the digital links requirement will see businesses move their system to ‘functional compatible software’. For clarity, a digital link is when the VAT data required for MTD is transferred between two digital places such as software or computer devices, for example when a business digitally transfers VAT data to their accountant in order for exemptions to be calculated. It also occurs when a business retains transactions with a spreadsheet and uses a formula to calculate a total. However, HMRC does have two strict rules on what defines a digital link for HMRC, that is:

  1. Data is transferred electronically between software programmes, products or applications – linked cells in a spreadsheet or a formula.
  2. The transfer is automated – it doesn’t need manual intervention such as copying data by hand, but a click of a button is considered a digital process.

HMRC also accepts less obvious digital links including:

  • Emailing a spreadsheet so it can be imported into software.
  • Using a memory stick or pen drive.
  • Import and export including downloading and uploading of files.
  • API transfer.

If you have a query about Making Tax Digital, contact our team today at MTD@chiene.co.uk.

Digital Newspapers: Zero-rating win for The Times in Upper Tribunal

News Corp (that own the Times and Sunday Times) previously lost a VAT Tribunal in 2018 where they tried to argue that their online digital newspapers should benefit from the same VAT treatment as printed editions.

At the Upper Tribunal, the judge found in favour of News Corp stating ‘that item did not exist in 1991’ – referring to digital newspapers. Currently print newspapers are zero-rated for VAT, while all online versions and website subscriptions are subject to VAT at 20%.

There were two issues considered:

  • Whether the digital editions of the newspaper titles were ‘newspapers’ within the meaning the zero-rating provisions of the VAT Act; and,
  • Whether the application of the principle of fiscal neutrality required zero-rating.

The appellant (News Corp) contended that the principle of fiscal neutrality applied because the similarities between the print and digital versions of the newspapers, from the perspective of consumers, meant they should receive the same VAT treatment.

The Upper Tribunal made the decision that although it might be correct to observe that digital versions of newspapers are zero-rated, this would result in an item being zero-rated under UK domestic law that was not zero-rated in 1991. This is solely because ‘that item did not exist in 1991 and the item is properly to be characterised as within the genus of things that the pre-1991 legislation did exempt’, according to the Upper Tribunal Judge.

The publisher first brought the case to the VAT Tribunal in 2018, arguing that its digital editions were ‘newspapers’ under the terms of the VAT Act and should be zero-rated.

The original Tribunal ruled in favour of HMRC, stating that the content of The Times and The Sunday Times was ‘fundamentally the same or very similar’ as between the digital and printed editions. It concluded that the digital editions provided services rather than goods, whereas the relevant Schedule in the legislation relating to zero-rating was confined solely to goods.

At the original Tribunal, News Corp had also argued that the word ‘newspaper’ should be interpreted in a way which keeps pace with technological developments, but the Tribunal decided that a strict interpretation should apply.

The EU is currently debating whether to change the rules on VAT on digital books and online published media so this development is timely (although with the UK leaving the EU it is unlikely that any EU VAT Directive changes will impact on UK law).

It is highly likely that HMRC will appeal this decision, however any providers of digital newspapers and magazines may wish to review their VAT positions.

If you have a VAT related query, please contact our VAT Director Iain Masterton today at vat@chiene.co.uk.

European VAT ‘Quick Fixes’ for EU Cross-Border Trade from 2020

The UK’s departure date from the EU is still to be decided and it is likely that there will be a transition period for at least 12 months once this is finalised.

It is therefore important to highlight the fact that EU VAT laws will still apply to UK businesses trading with the EU during this process.

Simplification procedures will be introduced for EU sales of goods from 1 January 2020 which will apply to UK and EU businesses from this date.

The EU has created a selection of VAT simplification measures, or ‘Quick Fixes’, with the aim of simplifying and harmonising EU VAT rules regarding intra-EU supplies of goods. Over the years different Member States applied some provisions differently so these changes have the effect of making the provisions more uniform across the EU.

The Quick Fixes can be summarised as:

  • Call Off Stock Simplification
  • Chain Transactions
  • Proof of Intra-EU Supplies
  • VAT Number (EORI) Requirement

Call Off Stock Simplification

Current

This simplification measure will have an impact on situations in which one EU supplier supplies goods to a warehouse or storage facility in another EU member state. Under current EU VAT rules, if the goods are sent to a warehouse or storage facility that is under the control of the EU-based customer, then it is considered that the supplier has made a deemed intra-community supply in its own member state and a deemed intra-community acquisition in the EU member state of destination. When the customer takes the goods out of the call-off stock, the supplier would be considered to perform a domestic supply in the EU member state, and this will likely trigger a VAT registration for the UK-based supplier in the EU member state of destination. There is also the possibility that the seller will have to start completing Intrastat reports.

The change

The purpose of the new Call-Off stock Quick Fix is to harmonise the legislation across the EU Member States. Under the new rules, the transfer of goods to a warehouse or premises controlled by a customer in an EU member state will no longer qualify as a deemed-intra community supply and a deemed intra-community acquisition. Call-Off stock arrangements do not generally require the seller to VAT register in the EU member state as a non-resident trader.

For EU VAT purposes, any eventual sale is treated as an intra-community VAT supply. This means the sale is recorded under the seller’s domestic VAT number and return, and there is nil VAT charged. The customer only has to register the sale as an acquisition in its local VAT return. Reporting under Intrastat and EC Sales Listing may still be required and both supplier and customer will be required to keep a ‘call off’ stock register.

Chain Transactions

Intra-EU chain transactions refer to a situation where:

  • The same goods are supplied successively; and
  • Those goods are dispatched or transported from one Member State to another Member State directly from the first supplier to the last customer in the chain

Current

Currently the VAT treatment of intra-EU chain transactions is based on case law established by the CJEU. However, where a middle party in the chain arranges for transportation, there is still uncertainty and a lack of harmonization as to which supply the cross-border movement of the goods should be allocated to.

The change

The revised VAT Directive will include a specific regulation for chain transactions. Notably, the Quick Fix will only deal with the scenario of a middle party in the chain arranging for the transportation (referred to as “intermediary operator”):

  • As a rule, the dispatch or transport shall be ascribed only to the supply made to the intermediary operator
  • By way of derogation from the above, the dispatch or transport shall be ascribed only to the supply of goods by the intermediary operator where he has communicated to his supplier the VAT identification number issued to him by the Member State from which the goods are dispatched or transported

Proof of Intra-EU supplies

Current

Generally, under EU VAT rules, to apply the 0% VAT rate on an intra-EU supply a supplier should be able to provide suitable evidence that the goods were dispatched from one EU member state to another. However, currently there are no specific rules at EU level on what pieces of evidence qualify as suitable proof of intra-EU transport of goods. This has led to some uncertainty and inconsistency within the EU as there have been different requirements across the member states. This in turn has led to uncertainty for businesses who often trade across the EU.

The change

Under the new VAT rules from 1 January 2020, for VAT purposes it will be presumed that goods were imported to another EU member state from another if the supplier can readily provide at least two independent, non-contradictory documents that show evidence of the transport of the goods. Examples of types of evidence that can be used for this purpose across the EU are outlined in the table below.

Nature of documentParticulars / examples
Documents relating to transport or dispatch of the goodsSigned CMR document or note/Bill of lading/airfreight invoice/carrier invoice
Insurance policyWith regard to the dispatch or transport of goods
Bank documentsBank documents proving payment for dispatch or transport of goods
Official documents issued by public authority e.g. notaryConfirming the arrival of the goods in the EU member state of destination
Receipt confirming the storage of goodsIssued by a warehouse keeper in the Member State of destination, confirming the storage of the goods in that Member state
Written statement from the buyerRequired where the buyer arranges the transport

VAT Number (EORI) Requirement

Current

Obtaining a customer’s valid VAT number is a formal requirement for applying the 0% VAT rate to intra-EU supplies of goods. However, recent European case law provides that a taxable person only has to comply with the material conditions in order to apply the 0% VAT rate. Therefore, the 0% VAT rate cannot formally be refused due to the fact that a taxable person did not receive a valid VAT number from its customer.

The change

Under the new rules, obtaining a valid VAT number that the customer provides to the supplier will be regarded as a material requirement for applying the 0% VAT rate. If the supplier fails to include the customer’s VAT number on invoices, it should not be possible to apply the 0 % VAT rate.

Zero rating will also be dependent on the supply of the goods being included in the supplier’s EC Sales List.

What Can C+T Do for You?

If you are interested in finding out more about the above EU Quick Fixes and feel that either one of these, or a combination, would be of benefit to you and your business, get in touch with our specialist VAT Team to find out more at 0131 558 5800.

MTD for VAT: Deferred Business – Act Now

As most will now be aware, MTD for VAT came into effect for most UK VAT registered businesses trading above the VAT threshold of £85,000 per annum from 1 April 2019.

This meant that for the first quarter starting after this date (30 June 2019, 31 July 2019, 31 August 2019), these affected businesses were required to register for MTDfV with HMRC and submit their VAT returns directly to HMRC using functionally compatible software (e.g. Xero, Quickbooks, Sage L50 etc.).

We are pleased to report that we have now successfully been able to assist our affected clients during this transition and all those clients affected by MTDfV have now been fully signed up for the scheme and have submitted at least one MTDfV return successfully. We can report no major issues.

As part of this process, the government announced in 2018 that there was to be a deferred start date for MTDfV that would apply to a small group of complex businesses and these entities were not obliged to register for MTDfV until their first quarter end that started after 1 October 2019 (31 December 2019, 31 January 2020, 28 February 2020). The affected businesses included:

  • Trusts
  • ‘Not for profit’ organisations that are not companies (this includes some charities)
  • VAT divisions
  • VAT groups (the deferral applies to the group registration only and not to any group companies that are not covered by the group registration)
  • Public sector entities that are required to provide additional information alongside their VAT return (such as Government departments and NHS Trusts)
  • Local authorities and public corporations
  • Traders based overseas
  • Those required to make payments on account
  • Annual accounting scheme users.

We are aware that all deferred businesses should have received a letter from HMRC stating that its requirement to register for MTD was deferred until 1 October 2019.

As we are now near the end of November, it is time for these businesses to sign up for MTDfV with HMRC and ensure that they have the appropriate accounting software package or subscription to enable them to be fully MTD-complaint.

If you are part of a complex business that falls under one of the above categories, please get in touch with our specialist digital team that would be more than happy to have a discussion about your requirements for MTDfV and what steps you will need to take.  Our experienced advisers can also recommend the right accounting software for your business and assist you with the signing up process with HMRC.

UK VAT-registered traders based overseas

We are aware of issues where HMRC’s system will not recognise a non-UK based trading entity’s company registration number and therefore are not yet able to sign up for MTDfV. HMRC are currently in the process of fixing this error, but at the time of writing this issue is still ongoing and so for the time being any overseas UK VAT-registered business should continue to submit VAT returns the normal way.

If you are an overseas UK VAT registered trader and will be required to become MTD-complaint, please contact us and we can discuss with you any updates and what you should do in the meantime.

If you would like to discuss MTDfV with one of our experienced advisers please contact us on 0131 558 5800 or email us at MTD@chiene.co.uk.

Charity online advertising and VAT zero rating

We published a news item earlier this year confirming that charities have been contacted by HMRC in relation to advertising on social media.  Most advertising for charities is zero rated, however HMRC have been clarifying their interpretation on specific situations and contacting charities whom they believe may be receiving zero rating in error.

HMRC has been in dialogue recently with the Charity Tax Group and the following summarises the result of these discussions.

HMRC has confirmed that:

  • ‘Natural hits’ are not supplies of advertising for the purposes of the zero rating provision so are standard rated;
  • Pay-per-click adverts are advertisements for the purposes of the zero rating provisions as they do not involve selection by address.
  • Direct placements on third party websites are advertisements for the purposes the zero rating provision as they do not involve selection by address. They are therefore zero rated.

The key issue seems to be whether individuals are selected when they access a social media account or a subscribed website, and an advertisement is, effectively, waiting for them because that account has been preselected based on data held by them.

Zero rating for charity advertising

The VAT Act zero rates the supply of advertising to charities.  The law exists to assist with the promotion of charities to the wider public, however it states that this does not include instances where any of the members of the public (whether individuals or other persons) who are reached through a particular medium are selected by or on behalf of the charity.

For this purpose ‘selected’ includes selected by address (whether postal address or telephone number, e-mail address or other address for electronic communications purposes) or at random.

HMRC’s policy is widely interpreted and covers, for example, direct mail and e-mails sent to ‘the occupier’ and even that addressed by inference when it is delivered to every address in a location but not individually marked. It also covers all telephone calls whether or not the person receiving the call is known to the charity even when the number is selected at random. In each of these cases, therefore, an individual (or family) or address has been specifically targeted to receive information rather than an advert being placed that may or may not reach particular members of the public.

Due to the way certain social media works, content is often based on the sites using tools to apply content, including advertising, to the individual’s personal page or presence when signed in. The content is based on the individual’s likes, dislikes, interests, location, etc., associated with the address of that individual’s page, or to their presence as a signed in member of a website. HMRC consider that this is selection of a recipient by an electronic address, and not the distribution of something to a wider public and as such it should be excluded from the relief.

In HMRC’s view, the individual has not made the selection themselves, but had an advertisement targeted directly at their digital address.

 

Retargeting

HMRC also put across their view on ‘Retargeting’ which is when data collected on users when they visit a site and uses this data to reach them again. For example, a user may visit a clothing site, browse products but not purchase – this user is tracked via cookies and then those cookies can be used to find them again as they browse the internet. It is important to note here that no PII [Personally Identifiable Information] is used here, so the advertiser does not know who the individuals are, simply that that a certain device has behaved in a certain way. If you were to use a shared computer, you would likely be retargeted with items which another user has looked at, as a result of this.

As explained above, HMRC’s policy on the advertising zero rating provision holds that cases where an individual, family, or address has been specifically targeted to receive information, rather than an advert being placed that may or may not reach particular members of the public, will be caught by the condition and cannot be zero rated.

 

Practical impact

As a lot of social media providers such as Google and Facebook are based overseas, any VAT that would be due is accounted for using the reverse charge (for VAT registered charities) but crucially it counts towards the VAT registration threshold for charities that are not currently VAT registered.

The whole situation appears to be subject to debate between what charities and HMRC believe is the correct position.  In what is a recurring them in VAT, a lot has to do with the advance of technology and the capabilities of social media not being even invented when the legislation was first drafted.

A VAT case considering these very issues would assist in clarifying the law, however we are not aware at this stage of a case that is in the pipeline.

If any charity has concerns over these issues please feel free to contact our VAT team today at vat@chiene.co.uk.

Land Promotion Agreements and hidden VAT charges – Iain Masterton discusses

Chiene + Tait VAT Director Iain Masterton is featured in the most recent LandBusiness magazine discussing the VAT treatment of Land Promotion Agreements (LPAs).

Iain conveys the attractiveness of rural land development to property developers – and how, in turn, this enables landowners to enter into LPAs with promoters when they wish to maximise their income. LPAs can be arranged in different ways so that the partnered promoter can aid the landowner with their return of the sale without the added pressure of obtaining planning permission or finding a buyer. As these agreements are flexible – and can be in place for many years – it is essential that landowners understand their VAT position so that the end VAT cost does not surprise them when the sale ultimately ends.

Iain confirms that it is important to understand what the LPA originally says. Often there is an initial understanding by the landowner about the right over land. This depends on if the land is opted to tax. If it is not, then the grant of any right over the land is exempt from VAT. However, for there to be a right over land, the agreement must make it clear that that is exactly what the promoter is acquiring. In some cases, the promoter is in fact not receiving the right to the land but instead an exclusive right to promote the land in question. This is a taxable supply of services. Due to this technicality, VAT errors can occur for landowners who have already received introductory or extension payments.

When a promoter is involved, they will be acting as an agent and therefore will charge a commission which will be subject to VAT. This would be non-recoverable to the landowner if the sale did not go through. This can be avoided if the land is taxed prior to the sale as the VAT could be recovered on the promoter’s commission and any other legal fees associated with the sale.

Iain concludes by stating that LPAs are beneficial to both landowners and potential buyers – as this can maximise returns and sell the land at an optimal time for both landowner and developer.  He would recommend, however, that the VAT aspects of these agreements are considered fully to ensure that there is no tax loss to landowners.

 

To read the full article click here.

VAT: Construction Services Domestic Reverse Charge – Postponed until 2020

Following our recent articles regarding the construction services domestic reverse charge (“CSDRC”), the government has now decided to postpone the introduction of this mechanism until 1 October 2020.

HMRC issued a short brief on 6 September which can be found at: https://www.gov.uk/government/publications/revenue-and-customs-brief-10-2019-domestic-reverse-charge-vat-for-construction-services-delay-in-implementation/revenue-and-customs-brief-10-2019-domestic-reverse-charge-vat-for-construction-services-delay-in-implementation#explanation-of-the-change

This brief outlines that the change in implementation date has come about due to industry representatives raising concerns that some businesses are simply not prepared enough for the introduction of the VAT domestic reverse charge by the original date of 31 October 2019. Other sources cite that the looming uncertainty over Brexit is also a factor in the delay.

HMRC insists that it still remains committed to the introduction of the domestic reverse charge and in the intervening year it will work closely with the industry to raise awareness and to provide additional guidance and support to ensure all businesses are prepared for the new implementation date.

Our previous articles on the CSDRC were Construction Services Domestic Reverse Charge (2019) and VAT reverse charge on construction services (2018).

If you have any concerns or wish to discuss the incoming domestic reverse charge for the construction industry with one of our advisers, please get in touch with our VAT Director Iain Masterton on 0131 558 5800.

Construction Services Domestic Reverse Charge

Update September 2019: the Construction Services Domestic Reverse Charge has been postponed until 2020.

HMRC has now issued new guidance in relation to the VAT reverse charge for building and construction services which will be introduced from 1 October 2019.  This new guidance supplements and expands upon the guidance note published in November 2019.  The legislation change is now contained in SI 2019/892.

This guidance can be viewed here: www.gov.uk/guidance/vat-domestic-reverse-charge-for-building-and-construction-services

The domestic reverse charge is a major change to the way VAT is collected in the building and construction industry.

It comes into effect on 1 October 2019 and means the customer receiving the service will have to pay the VAT due to HMRC instead of paying the supplier.

It will only apply to individuals or businesses in the construction trade who are registered for VAT in the UK (although it will not apply to consumers).

This will affect you if you supply specified services that are reported under the Construction Industry Scheme (CIS).  You’ll need to prepare for this change by:

  • checking whether the reverse charge affects either your sales, purchases or both
  • contacting your regular clients or suppliers to let them know
  • making sure your accounting systems and software are updated to deal with the reverse charge
  • considering whether the change will have an impact on your cashflow

Will the domestic reverse charge apply to your supply?

If you consider your business might be affected by this change and you would like to discuss this further please do not hesitate to contact our VAT Director Iain Masterton at vat@chiene.co.uk or call 0131 558 5800.

Case Study: DIY Home Builders VAT Reclaim

The DIY House Builders VAT scheme is available for people who build their own homes to reclaim the VAT incurred on their building costs. This scheme puts self-builders in the same position as people who buy new houses from housebuilders in that the costs are zero rated for VAT.

In its guidance to applicants HMRC sets out a strict and rigorous application process for each applicant to follow in order to be successful.

Two important conditions for making a claim stand out:

  • Only one claim can be made per project; and
  • The reclaim application must be submitted within 3 months of the building being “completed”.

Completion certificates are mentioned several times on the application form (VAT431NB) and there is a section outlining their importance in the accompanying notes and when completing a claim form most people would consider that the date of the completion certificate was the relevant date for the clock to start ticking on making a claim. So in an ideal situation, a property will be completed on time and on budget, a completion certificate will be issued, a family will move into the house and an application to recover the VAT will be dispatched to HMRC within 3 months seeking a reclaim of the VAT on the project.

In recent years, we have become aware that HMRC has rejected several claims where the builder and family have moved into the property prior to the work being fully completed. These claims have been rejected even where a completion certificate has been issued and the reclaim application is submitted within 3 months of the certificate date. Within the application form there is a question which asks when the property was first occupied which then leads to the initial challenge by HMRC. Given the strict timescale for submitting claims, it can render some claims “out of time” and self-builders have lost out on the VAT they paid on the construction of their homes.

We recently assisted one DIY builder who was faced with this very issue.  Due to financial and extreme economic pressures our client had to move into the property midway though the project. The house was built, however several rooms were incomplete but he was left with no option to move firstly into the garage building of the property and then into the main house and then continue work when he had time and budget to undertake the additional work.

In this particular case, a completion certificate was issued on 26 May 2017 and a claim was submitted on 10 August 2017 (within the 3-month timescale), however the claim was rejected because HMRC considered that the building was completed well before the completion certificate was issued.

We advised our client through an independent review process and then Alternative Dispute Resolution (ADR) but were not able to change HMRC’s position on the date when they considered that the building was complete. HMRC’s position was that the building was complete either in December 2008 when the property first started to be occupied; or, in June 2016 when the last invoice was received.

Our client was brave enough to take his case to the VAT Tribunal and was successful in what was a significant personal (and financial) triumph.  What was most interesting about the Tribunal judgment was the Chairman’s comments on what the law means by “completion” (rather than HMRC’s definition which was relied on throughout the appeal process).

The VAT legislation explains that specific documents are required in order to make a claim; namely, a certificate of completion from a local authority or other documentary evidence of completion of the building. The Tribunal Chairman goes on to describe that having this rule gives clear guidance for both a claimant and HMRC on where the 3-month clock starts clicking for a DIY claim. The Chairman ruled that it is only where there is no certificate in place that other completion date alternatives can be given. This may apply where a claimant wants to submit a claim well in advance of a formal completion certificate being issued (which would negate his ability to make a further claim). Tellingly, the judgment goes on to point out that, based on the statute, neither the date of occupation or the date of the last item of expenditure should be used as alternatives to determine the completion date, although HMRC relied on these in this case.

A lot of the discussion during the Tribunal revolved around the clarification of what the legislation means to be ‘complete’. On this point the Tribunal found in our client’s favour and ruled that the meaning of ‘completion’ is to be given its plain meaning and can be defined by the issuing of a certificate of completion as this is a clear-cut definition. The Tribunal also rejected HMRC’s argument that the primary date of completion was the date of the last invoice included in the refund as it is considered that DIY new builds often occurs in bursts of activity then periods of inactivity. The tribunal also noted that from the photographic evidence submitted, there were still several rooms of the property ‘incomplete’ at the date of sale.

Conclusion

This case has helped highlight how strict and compliant DIY housebuilders must be in order to be successful with their claims. It also highlights that HMRC can be challenged where taxpayers are denied claims. Unfortunately, the costs associated with going to VAT Tribunal often outweigh the VAT at stake, so taxpayers are often in the invidious position of having to accept HMRC’s position. In this case, our client was confident enough to represent himself clearly worked in his favour with Tribunal Chairman – a position that the majority of laypeople would want to face!

HMRC has decided not to appeal this case, which is a relief for the taxpayer, however it still leaves legal uncertainty. As this is a Tribunal decision it cannot be relied on by other taxpayers in future cases (although the Tribunal Chairman’s comments on “completion” are very telling).

We would recommend that anyone who has had recent DIY claims rejected by HMRC to speak to a VAT adviser to see if it may be possible to appeal the decision.

TC07240: STUART FARQUHARSON

[2019] UKFTT 425 (TC)

HMRC Policy Change: VAT to be charged on all non-refundable deposits

HMRC has confirmed a new policy in a recent Business Brief (13/2018) that VAT should be accounted for on deposits even in circumstances where the customer does not use the goods or services they have paid for. This policy is effective from 1 March and it overrides a previous HMRC policy which allowed some non-refundable deposits to be treated as compensation which is outside the scope of VAT.

Who will be affected?

This change in policy will have an impact in the hotel and hospitality industry who commonly have “no shows”.  Hotels, for example, will no longer be able to treat VAT charged on cancellation or ‘no show’ charges, eg for hotel room bookings as outside the scope of VAT.

Businesses that retain forfeited deposits for unfulfilled supplies may also be covered by the new policy.

HMRC’s previous approach to deposits

HMRC previously allowed businesses to recover VAT accounted for on deposits where the customer did not use the service or collect the goods for which payment had been made.

That policy was largely based on a French European Court of Justice case which held that deposits retained by a hotel for cancelled bookings had no direct connection with the supply of any service, so should be regarded as compensation for the loss suffered as a result of the cancellation. HMRC’s guidance has stated that a cancellation charge for a hotel room is outside the scope of VAT (unless it is for a ‘guaranteed reservation’, where the hotel is contractually obliged to retain an empty room for a customer who can arrive at any point within the guaranteed period).

HMRC’s new policy

In the 2018 Budget, HMRC announced that changes will be made to the VAT treatment of deposits, with details to follow before the end of the year. HMRC has now published Revenue and Customs Brief 13 (2018), setting out its new policy.

HMRC has concluded that, when a customer makes or commits to make a payment, it is consideration for a supply and therefore subject to VAT. HMRC says 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. HMRC’s new policy is therefore that VAT is due on all retained payments for unused services and uncollected goods. VAT already accounted for on the deposit must not be reduced, unless the payment is refunded. Only fully refundable deposits paid as security are outside the scope of VAT.

HMRC’s new policy is based on more recent judgments of the CJEU, including in Air France/KLM, where it was found that VAT must be accounted for on an unused airline ticket because the customer had purchased the right to use the service, not the service itself. However, this does not take account of the ruling in the French case referred to above which specifically found that that deposits kept by a hotel for cancelled bookings could be regarded as VAT free compensation.

HMRC also says that it will not accept repayment claims for past VAT periods from those who have not recovered VAT paid on these deposits under the old rules. HMRC consider its new policy was always the correct approach and its prospective start date of 1 March 2019 is simply to give businesses time to change their VAT accounting procedures. Nevertheless, this creates a disparity as some businesses will have effectively enjoyed a windfall in past VAT periods where others have not.

The CJEU currently has the final word over interpretation of VAT law, and HMRC has not yet explained its logic for applying the Air France/KLM judgment to all deposits while ignoring the French case. As it is expected that CJEU case law will continue to have precedent status in the UK after Brexit (unless and until the government specifically changes the UK law on that point), it is therefore possible that any refusal of VAT recovery on a cancellation charge for a hotel room by HMRC may be challenged in the courts.

How to prepare for these changes

Hotels, restaurant and leisure sector operators should take action now to prepare for this change and, if necessary, protect their position, by:

  • Reviewing their current VAT treatment of deposits and checking their terms and conditions on cancellations/no shows to determine whether they will be affected by HMRC’s new policy;
  • Preparing to change their VAT accounting procedures from 1 March 2019;
  • Identifying any retained deposits that could, arguably, be regarded as compensation under the French case (e.g. hotel room payments other than for a guaranteed reservation) and consider asking HMRC to confirm its view on those precise circumstances.

For more information on this issue, please speak to our VAT team led by Iain Masterton, VAT Director

Changes to VAT Grouping Eligibility

Here, Andrew Young in our VAT team highlights proposed changes to VAT Groups, what they are and what entities are impacted.

Background

A VAT group is where a group of eligible businesses is treated as 1 taxable entity, rather than separate entities. In July 2018, the UK Government published draft legislation amending the eligibility criteria for VAT grouping. This legislation will come into effect once the Finance Bill 2018-19 receives Royal Assent.

Current Law

Current VAT group legislation states that to be eligible to become a member of a registered VAT group, one must be an established corporate body that has a fixed establishment in the UK as well as they must satisfy the control and the eligibility conditions outlined in the legislation. Only limited companies and LLPs can currently join VAT groups.

What is to change?

Under the new legislation non-corporate bodies such as individual sole traders and partnerships will be eligible to register as members of a VAT group so long as they can demonstrate that they control the corporate subsidiaries. Group members will still have to have a business establishment in the UK and be able to register for UK VAT.

Impact and Conclusion

The major impact will be that partnerships and individuals will now be able to benefit from the VAT grouping advantages already experience by VAT grouped business such as:

  • The representative member accounts for any tax due on supplies made by the group to third parties outside the group;
  • Qualifying individual sole traders and partnerships will no longer have to account for VAT on goods and services supplied between fellow group members;
  • One single VAT return needs to be submitted for the whole group.

A more detailed supplement to this article on the changes can be found here: https://www.gov.uk/government/publications/vat-grouping-eligibility-criteria-changes/vat-grouping-eligibility-criteria-changes

If you have any questions about this new legislation or other queries about VAT grouping in general, please contact our VAT Director, Iain Masterton, for further information at vat@chiene.co.uk or call 0131 558 5800.

 

Recent VAT cases for Rural Businesses

Chiene + Tait’s VAT Director Iain Masterton runs through some recent VAT cases that impact on the rural business sector. If you have a query about VAT, please feel free to contact us today.

Brexit

The implications of Brexit are still being debated and nothing is yet certain, though it seems that VAT, the ‘European’ tax, will still be with us for some time. Brexit will be felt by businesses that
currently trade with the EU (especially in goods), however the UK (or Scottish) Government may be free to change elements of the VAT system without having to adhere to European VAT Directives. For farms and estates, we do not envisage any major changes, at least for now.

Room Hire

HMRC won a VAT Tribunal against a hotel which confirmed that VAT was due on the hire of a room for a civil wedding ceremony, even where there was no option to tax in place.
The hotel had considered that its income from renting out the rooms for events was VAT exempt. The hotel operated under the Marriages & Civil Partnership (Approved Premises) Regulations 1995, which made it clear that the hotel provided a number of services rather than just the passive hire of a room (which are the hallmarks of a lease or licence to occupy). The Tribunal agreed that the resulting ‘service’ was subject to VAT. HMRC also consider that the supply of a room in a venue is subject to VAT if the purpose of the hire involves catering, whether this is provided by the venue or a third party. This includes receptions, breakfasts and birthday parties; and it will now include rooms for wedding ceremonies too. This differs slightly from HMRC’s policy on conferences where day delegate rates at venues can be treated as exempt (if no option to tax is in place). Long-stay delegate rates that include board and accommodation can be apportioned.

Conversions

An area where the UK Government might still provide VAT incentives is residential property. If you rent out residential property, this will be VAT exempt and any VAT incurred on renovations or repairs to these buildings is likely to be irrecoverable. Three VAT concessions exist currently which reduce the VAT cost on residential renovations by 15% to 5%. These are:

  • Renovation of a residential property which has been empty for 2 or more years
  • Renovations which change the number of dwellings after completion, and
  • Conversion of a non-residential property into residential.

If you are considering renovating existing residential properties, or converting steadings or old agricultural buildings, knowing where these VAT reductions apply can reduce the amount of irrecoverable VAT on residential property renovations. This should be established at an early stage to ensure budgets are accurate.

Cars, Vans & Agricultural Vehicles – VAT recovery?

VAT recovery depends on whether there is any private use of the vehicle and the vehicle design. VAT is irrecoverable if the vehicle meets the car ‘tests’ and if there is any private use. The following are not cars for VAT purposes:

  • Vehicles capable of accommodating only 1 person or suitable for carrying 12 or more people including the driver
  • Vehicles that don’t have roof accommodation to the rear of the drivers’ seat
  • Caravans, ambulances and prison vans
  • Vehicles of not less than 3 tonnes unladen weight
  • Special purpose vehicles, such as ice cream vans, mobile shops, hearses, bullion vans, and breakdown and recovery
  • Vehicles and vehicles with no side windows
  • Vehicles with a payload of 1 tonne or more.

We are seeing more vehicles with payloads of more than 1 tonne not being treated as ‘cars’ which allows a more favourable VAT treatment where there is private use. If you can demonstrate that the car is being used 100% for the business, the VAT is fully recoverable, assuming the business is entitled to full VAT recovery.

The VAT rules allow 50% of the VAT on a lease to be eligible for recovery, even where there is private use. As above, where the vehicle is not used for any private purposes the 100% of the VAT on the lease can be recovered.

Have a question about VAT, get in touch with Iain at mail@chiene.co.uk or call 0131 558 5800.

Charity Printing: Interesting page-turner in VAT printing case

In 2014 HMRC ‘clarified’ its policy on the treatment of printing companies supplying and delivering mailings, to confirm that they regarded the entire service as a direct mailing/marketing service which would be subject to 20% VAT, rather than wholly or partly zero rated (as the supply of most printed matter products is not subject to VAT).

Despite an initially robust approach to charities and printing companies by HMRC, it was eventually accepted that the position was not clear given the wording in the guidance and an amnesty was introduced for a limited period.

Going forward, the clarification meant that organisations such as charities and financial institutions that cannot recover their VAT would bear additional costs from advertising and mailing campaigns in the future.

Without any legal test case the printing industry and its customers had to accept HMRC’s position and live with the additional VAT costs.

Until now.

Paragon Customer Communications Limited, an insurance company, took HMRC to a VAT Tribunal to examine this point.  In the case, HMRC tried to argue that there was a supply of services that went beyond the provision of zero rated goods, as they have done in their guidance.  HMRC did not accept that the essence of the supply was the goods that were delivered and considered it a ‘service’.  The supply in question involved printing and delivering mailing packs, similar to fundraising packs for charities.

HMRC lost the case and the tribunal held that the supply was one of zero rated printed goods.

As this is a first tier Tribunal decision HMRC will argue that it was decided on specific facts and cannot be relied upon by other taxpayers, however this aside, HMRC’s guidance and previously held position may be wrong in law.

It would be extremely helpful to everyone if HMRC appeals as a decision in the Upper Tribunal will carry more weight and would clarify the position for everyone.  Printing companies and charities should therefore be aware of this as it will have important consequences to margins and VAT savings if the taxpayer wins again.

If you have a query about VAT, please contact Iain Masterton at iain.masterton@chiene.co.uk today.

News Corp v HMRC

In this blog, VAT Director Iain Masterton looks at the history of the tax treatment of newspapers and books and how VAT legislation hasn’t moved with the times.

A recent VAT case has highlighted how VAT legislation drafted in the 1970s and 1990s has not easily translated into the modern age.

VAT zero rating is available for the supply of “printed matter” which includes newspapers, books and magazines.  Critically the legislation describes these items as “goods”.

News Corp, the company who own the Times and Sunday Times, tried to argue at the VAT Tribunal digital versions of their newspaper should qualify for the same VAT treatment as its printed counterparts.

The decision in the case revealed the fascinating history of the tax treatment of newspapers and books going back to 1940 when the VAT treatment of these items was exempt under the then named ‘purchase tax.’ This was replaced in 1973 by VAT as the UK joined what is now the EU.

The Tribunal conceded that the digital version of The Times was 95% similar to the paper version of the newspaper and despite the fact that the digital version of the paper was issued periodically under the same title and contained current affairs news, the VAT Tribunal could not look past the fact that the zero-rating provisions for printed matter refers to goods, not services.

The Tribunal also noted that zero rating provisions needed to have a social component and when Parliament originally decided to zero rate newspapers, the purpose of this was to increase literacy amongst the population and to encourage debate. Despite this “purposive” construction, the Tribunal could not look beyond what Parliament originally intended and drafted in the legislation. As a result, the legislation considers digital newspapers to be more suitable to a supply of services than of goods.

Clearly there is a huge change in how the UK public read newspapers, magazines and books in 2018 compared to the 1970s and 1990s when the last version of the VAT Act was drafted.  The zero rating provisions which were introduced with VAT cannot be revised at present. They can only be removed.

With the UK’s impending move away from the EU there may be scope for the UK Government to change this in the future, however it would have to consider the amount of revenue it could potentially lose from removing VAT from all online publications.

If you have a query about VAT, please contact Iain.Masterton@chiene.co.uk or call 0131 558 5800.

Iain Masterton in Business Insider Magazine: Crowdfunding is a grey area for HMRC

‘Iain Masterton, director of VAT and indirect tax at Chiene + Tait , says that businesses looking to raise finance via the crowdfunding route should carefully consider the VAT implications before going ahead.

He says that if the crowdfunding pitch includes the funders getting a product in exchange for their funds then the business might be liable to VAT – something that should be taken into account when working out the funding requirement.

Masterton says: “There is a problem because there is no definitive guidance on offer from HMRC, something that people could refer to without going to an advisor so it does make it a bit of a grey area.”

He says that if the product provided in exchange for the funding is something that would have been liable for VAT on the sale of the good then VAT will be levied. This will not be the case on VAT exempt products such as food and children’s clothes.

“It’s a fact for a lot of these businesses that they haven’t taken VAT into account and they are suddenly faced with a bill from HMRC for 20 per cent of the value of the VAT-able goods sold.”

He says: “We worked for a company that was crowdfunding a board game they were developing. They were trying to put together a Dungeons and Dragons type board game and they had commitments from the UK, EU and non-EU funders.

“They had commitments of £90,000 from the UK which meant that they immediately went over the £85,000 turnover threshold and they were liable to VAT. HMRC were very good about it and didn’t give them a penalty payment but it meant that they were due to pay 20 per cent and that was something they hadn’t taken into account in the financial calculations.”

Masterton says that if the crowdfunding is set up as a loan or if the investor received equity in return for their investment then VAT would not apply; only if goods are exchanged for the investment that are liable to VAT.

Despite recent uncertainties, including Brexit and the triggering of Article 50, alternative lending has seen a sustained period of growth in recent years. For example, peer-topeer lending by volume reached over £100m by the start of 2017 according to alternative funding news website altfi.’

To read the full article in Business Insider, visit their website here.

Disbursement: are landlords and their managers missing a VAT trick?

Many residential landlords use property managers to manage their properties, which can remove a great deal of administrative stress and burden for a small cost. But many may wish to check that their arrangements with managing agents are VAT efficient, as they may be paying too much VAT: disbursement could be a better way to process third-party costs.

Residential property rent is VAT exempt, so landlords will not usually be VAT registered regardless of the size of their portfolio or the rent income they receive. This means that any VAT incurred in relation to the management of these properties is irrecoverable. This includes the agent’s fees and any repairs or renovations to the property.

There are two ways an agent can deal with the invoicing of these costs. Firstly, it can absorb any third-party costs (such as repairs and general upkeep) and then recharge this to the landlord as part of its overall fee.

The second method is to pay the third-party costs as an agent of the landlord (from the landlord’s account) and then recharge these as a disbursement, so the income and expenditure costs pass through the agent. Using this method, VAT is only charged on the property manager’s fee and not the original third-party cost (which is passed over as a gross cost).

We have recently seen a number of agents adopting the first type of treatment, which they are perfectly entitled to do. However, this treatment is not efficient where the third-party tradespeople involved are not VAT registered. (This is often the case as a lot of tradespeople’s income is below the current VAT threshold of £85,000.)

Example: the difference disbursement can make

The example below illustrates the potential difference the disbursement treatment can make where non VAT registered tradespeople are used.

In the above example, the landlord saves £100 in VAT payments; the property manager and tradesperson are unaffected.

Property managers who have clients who are not VAT registered (particularly the residential sector) should consider their procedures and review whether this alternative accounting method might save their clients some money in a sector where margins are very tight.

Both methods are endorsed by HMRC and no prior agreement is needed.

If you require any further advice on this please contact our VAT Director, Iain Masterton, on iain.masterton@chiene.co.uk or 0131 558 5800.

Converting a building to capitalise on ‘holiday staycations’? Read our VAT advice first!

Help for Furnished Holiday Let (FHL) owners with how to avoid an unexpected VAT bill.

With the pound in our pockets stretching less than it previously did against other currencies, many families are looking closer to home for their much-needed breaks. This has led to diversification in the UK holiday accommodation market with holiday lettings in cottages, converted barns and other “staycation” accommodation now competing with traditional hotels and bed and breakfast establishments.

Farms and estates can capitalise on this trend by utilising existing residential accommodation or converting barns and outbuildings to cope with the demand.

This article highlights some of the VAT issues associated with the provision of holiday accommodation and some VAT reliefs on works to such properties.

What is holiday accommodation?

In VAT terms, “holiday accommodation” includes any accommodation in a building, hut (including a beach hut or chalet), caravan, houseboat or tent which is advertised or held out as holiday accommodation or as suitable for holiday or leisure use, but excludes any accommodation in a hotel or similar establishment.

This definition is important as the letting of holiday accommodation is subject to VAT at 20%.  As traditional residential lettings are VAT exempt, some farm and estate business often overlook this fact.  If the farm and estate business is already VAT registered, VAT will have to be charged on the holiday rental income. If the business is not VAT registered, it will have to be mindful of the VAT registration threshold which is currently £83,000 in a 12 month period.

The imposition of a 20% VAT charge can impact on pricing particularly in areas where rates are competitive, so knowing VAT will apply at an early stage can allow the business to plan and adjust prices to maximise income and ensure that the venture makes sufficient profit.

VAT Recovery & Reducing VAT costs

One of the benefits of VAT registration and charging VAT on the holiday lettings income is that any VAT incurred on the running of the property can be recovered.  This can potentially include VAT renovation and repair costs and furnishings for the property itself.

As holiday accommodation often meets the VAT “dwellings” tests, some of the concessions available for reduced ratings on conversions and renovations to residential property are available, subject to certain conditions.  A 5% reduced VAT rate is available for conversions of buildings into residential accommodation and also for renovations to residential accommodation that has been empty for 2 years or more.  This concession is also available where changes are made to the number of “units” as a result of the work (e.g. converting one house into 4 apartments).

Whether your business is VAT registered or not, if you are considering venturing into the FHL sector we recommend you take some advice to ensure that savings are maximised and the VAT position does not impact on your profits.

If you have a VAT query contact Iain Masterton, Senior VAT Manager on 0131 558 5800 or email iain.masterton@chiene.co.uk.

European Court VAT blow for not-for-profit cinemas

In what could be one of the last high profile UK VAT cases to be heard in a European Court, the Advocate General’s Opinion was published in the case of British Film Institute (C-592/15). The Court of Appeal referred this case to the European Court of Justice (“CJEU”) to consider whether the BFI’s main source of income (admission to films) can benefit from the VAT cultural services exemption and whether the European VAT Directive has direct effect in the UK. In the UK there is a cultural VAT exemption, though it is restricted to admissions to museums, galleries, art exhibitions, zoos and theatrical, musical or choreographic performances of a cultural nature.

HMRC’s current view is that admissions to films are not included.

The Advocate General’s (AG) opinion is that Member States do have discretion to decide which cultural services are exempt from VAT; however, CJEU will also consider whether excluding film admissions is contrary to the EU principle of equal treatment in relation to supplies by other operators. If the CJEU follows the AG’s decision, the BFI case will have to be referred back to the UK Court to decide whether the BFI is being denied equal treatment.

Many UK not-for-profit cinema operators have submitted claims to recover VAT previously accounted for on admissions so will be viewing this development closely. If you would like more information on this case or you think this case will have an impact on your organisation please do not hesitate to contact Iain Masterton, Senior VAT Manager iain.masterton@chiene.co.uk or telephone 0131 558 5800.

VAT: Another single/multiple supply case caught in the net

This article first appeared in our Summer 2016 Rural Business Update. Download the full publication here.

A recent VAT tribunal involving a trout fishery has thrown more light upon the VAT liability of multiple supplies, a complex area of VAT law. Stocks Fly Fishery, in Lancashire, argued that they were supplying a multiple offer of standard rated fishing rights and a zero rated supply of food.

Many cases have been brought in front of the courts to decide on whether certain supplies should be classified as single or multiple supplies, and these are vitally important for the companies involved. For instance, there have been cases on delivery charges, financial advice, airport car parking, and card protection services to name but a few.

Case

Stocks Fly Fishery provide customers with sport fishing with the opportunity to take the fish away, if a premium is paid. They offer their customers two different types of ticket: a ‘catch and release’ sporting ticket with which any fish caught must be returned to the reservoir; or a more expensive “take ticket” which allows the angler to take home the fish they catch up to a limit.

The main issue in this case was whether the supply of fish for consumption was a separate supply from the supply of sport fishing, and whether a “take ticket” could be split into two separate supplies of sporting right (subject to VAT at 20%) and food for consumption (subject to VAT at 0%). Stocks argued that the price differential between the two tickets was the element subject to zero-rating.

Decision

The VAT tribunal determined that the essential feature of the supplies with both types of tickets is fishing, and that the primary motive of purchasing a ticket is to fish for sport. They were not persuaded that the dominant purpose of anyone purchasing the “take ticket” was for food consumption. At the point a “take ticket” is purchased it is not a sale of fish as there is no guarantee fish will physically be caught. There is, therefore, no distinct separate charge solely for fish; only one single charge which includes the right to fish and the chance of catching them.

The VAT Tribunal therefore found that the right to fish was the principal supply for VAT purposes, and the right to take home caught fish should be regarded as ancillary. Consequently, in this case there is a single supply of fishing which should be subject to 20% VAT.

Relevance

It is always important to determine whether bundles of supplies should be regarded as a single supply (principal and ancillary supplies), or distinct multiple supplies which ought to be treated separately for VAT purposes.

This case illustrates further development of a complex legal issue that will continue to be a concern for VAT-registered organisations. If you have a query regarding single and multiple supplies please get in touch with Iain Masterton at iain.masterton@chiene.co.uk or 0131 558 5800.

VAT’s what SMEs need to know

Iain Masterton, our VAT Senior Manager, looks as VAT for SMEs.

Dealing with Value Added Tax (VAT) is, for many SMEs, one of many ‘necessary evils’ that accompanies running a business. Although it might make your head hurt, a decent understanding is essential in both compliance and financial terms.

VAT accounts for around 22 per cent of the tax receipts raised by the UK Treasury. It contributed approximately £115bn in revenue in 2014/15. Therefore, while our current system has been shaped by European Union VAT Directive restrictions and could therefore be altered when the UK formally departs from the EU, it is unlikely that we will see major changes to it in the foreseeable future.

Any business engaging in economic activity can register for VAT, although this is only mandatory for those which are generating revenues of £83,000 per year or more.

Once a company is registered it is required to submit returns to HMRC on a quarterly basis, and pay them any VAT received in that period within one month and seven days.

It’s important for businesses to retain all invoices that are both raised and paid as these are needed to complete an accurate VAT return. All VAT invoices raised by a company must hold detailed information including their own as well as their customer’s name and address, VAT number, the tax point, details of the supply being made, and the net and VAT amounts being charged. These records are maintained as part of a VAT account and must be kept on file for six years.

Depending on the size of a business and the type of work it does, there may be some alternative options available which simplify the level of administration and record keeping involved with VAT.

The Flat Rate Scheme simplifies the accounting process by making VAT payable as a single fixed percentage applied to gross turnover. This also usually results in a company having to pay less to HMRC. The scheme may be suitable for one or two-person service businesses which turn over up to £150,000 per year and bill their clients for a much higher proportion of VAT than they pay out on goods or services. Using this scheme, HMRC charge a reduced rate to businesses (discounted by a further one per cent in the first year) which is applied to the quarter’s gross billings to clients.

Larger SMEs that turnover up to £1.35m annually can consider the Cash Accounting Scheme (CAS) or the Annual Accounting Scheme (AAS). The former enables smaller businesses to defer payments of tax liabilities, only paying out VAT after they have had their invoices settled. There is no formal application required to join the CAS and businesses can begin to use this scheme without notifying HMRC.

Meanwhile AAS requires businesses to complete only a single VAT return each year, so alleviating administrative burdens and helping them to better manage cash flow. A fixed interim payment is then required with qualifying companies given an extra month to submit the return and pay tax due followed by an annual balancing payment.

Start-up businesses that require an extended development phase with little or no revenue generated can certainly benefit from voluntary registration as this allows them to reclaim their VAT back on expenditure. VAT monthly returns as opposed to quarterly submissions can also increase cash flow to fledgling businesses.

Any SME that has under-recovered or over-accounted for VAT in the past four years can address this by making a claim to HMRC, the reverse is also true and HMRC have the right to assess for any underpayments in the same timescales.

I would always advise any registered company to carry out regular reviews of their treatment of income and VAT recovery position, doing this could reduce the risk of penalties which tend to be significantly higher if HMRC uncovers a discrepancy. That could result in what is often the worst kind of headache for an SME: a financial one.

If you have any questions, please contact Iain at iain.masterton@chiene.co.uk.

VAT Brexit Briefing Note

The recent referendum in favour of the UK leaving the EU will mean that UK VAT registered organisations may face greater VAT compliance.

This briefing note highlights some of the potential issues that may arise for VAT registered organisations, should the UK follow the referendum result and implement Article 50 of the Lisbon Treaty. Once this is triggered, the process to leave the EU could take up to two years. This time will be taken up by negotiations between the UK and the remaining 27 members of the EU.

VAT is an EU tax

The UK has its current VAT system by virtue of being an EU Member State. Given that VAT accounts for around 22% of the tax raised by the UK Treasury – and contributed approximately £115bn in 2014/15 – it is unlikely that VAT will be abolished and we do not expect major changes.

However, a post-Brexit UK Government will be free to amend the VAT system without the current EU VAT Directive restrictions. This may lead to additional compliance requirements and greater complexity, particularly importing and exporting with EU suppliers and customers. It will also be possible for the UK Government to abolish VAT and introduce a goods and services tax instead.

Change in the relevant legislation

As a Member State, the UK currently follows EU legal precedence via the EU VAT Directive as well as judgements of the Court of Justice of the European Communities (CJEC). Following exit from the EU, VAT law will be governed by the Value Added Tax Act 1994; this Act will need to be amended to deal with elements that will no longer be dealt with by the EU VAT Directive and CJEC decisions.

In terms of legal precedence, the CJEC will no longer be the highest Court for VAT decisions, although it is likely that EU judgements will still be referred to in legal actions.

Possible changes to VAT rules

At present, within the EU, the standard rate of UK VAT has to be a minimum of 15% (there are also two other additional rates that have a minimum of 5%). After leaving the EU, the UK will be free to set rates as it chooses. For example, the restaurant and tourism industry has consistently lobbied for lower VAT rates and the referendum campaign suggested that the VAT rate on domestic energy bills would be reduced and the VAT rate on sanitary products would be reduced to nil.

Additional Customs costs

UK businesses currently have Intra-Community Trading Status, whereby they can sell products and services VAT-free to business in other EU states. This will no longer be the case after Brexit; such sales will be treated as imports in the destination country and subject to VAT in that state. The costs of going through these additional Customs procedures are likely to be borne by UK traders; we have seen one estimate that these costs will amount to approximately £3 billion. There will be similar costs for EU businesses exporting to the UK.

This will have an impact on accounting systems, though these should already be equipped to deal with imports and exports to third-party countries.

Less efficient EU VAT recovery

UK businesses currently benefit from an online system for ‘8th Directive Reclaims’ – VAT refunds from other EU member states in which the businesses are not VAT registered.

After Brexit, it is expected that UK businesses will have to file paper claims in the same way as other non-EU businesses, assuming there are agreed reciprocal tax refund systems. These are much slower than the online system, and more easily challenged.

VAT registration throughout the EU

Currently, UK businesses that sell goods online do not have to register for VAT in each EU state in which they have customers thanks to ‘distance selling thresholds’. Following Brexit, UK businesses may have to register in multiple EU member states in order to carry on trading with EU customers.

Customs issues

The EU is a customs union so Customs Duty applies to all goods entering the EU. Norway and Switzerland are part of the EU Customs Union (through EEA and EFTA respectively) despite the fact that they are not part of the EU; it is possible that the UK will assume similar status however it is unclear at this stage which route the UK will take. It is hoped that the UK will have such an arrangement; otherwise a customs tariff will mean that there will be additional costs for UK businesses importing goods from the EU and vice versa.

If you have a query about the VAT impact of Brexit, please get in touch with Iain Masterton at iain.masterton@chiene.co.uk or call 0131 558 5800.

BBN/2

Murky waters for VAT treatment of charitable buildings

An ongoing charity VAT case could have important implications regarding recent and future capital projects. The case of Longridge on the Thames [2014] UKUT 504 is currently with the Court of Appeal and we’re awaiting the (imminent) ruling.

In the current economic climate charities are feeling the pinch and funds are being stretched, particularly when it comes to capital projects. A positive saving grace available for charities comes in the form of the 0% VAT rate, which is available on the construction of a new charitable building. Needless to say, not having to worry about funding an additional 20% can be a huge bonus.

One of the conditions of this rate is that the building must be used “solely” for charitable purposes, which HMRC take to mean “otherwise in the course or furtherance of a business”. HMRC interpret this as a charity not raising any charges for activities within the building – the point that could have significant ramifications for Longridge and many other charities.

Longridge is a charity formed ‘for the advancement of education in water, outdoor and indoor activities for young people generally’. It arranged for the construction of a training centre on a site that it owns on the River Thames assuming zero rating would be available; however, HMRC issued a ruling that the construction of the centre was standard-rated, and the charity appealed.

Both the VAT Tribunal and Upper Tribunal agreed with Longridge and considered that, although charges were made for participation in activities at the centre, it was run by volunteers and access to activities was largely heavily subsidised so it was not run in the course of furtherance of a business. HMRC has appealed the case to the Court of Appeal.

In the current uncertain context, charities should consider carefully what activities will take place in their buildings to ensure that the 0% VAT rate can be obtained on works, particularly as HMRC can revisit this and apply VAT retrospectively if the building is not used for its original purpose and there are different activities taking place.

Some charities may have obtained zero rating on the basis of this case so should take note of the outcome, as it may have a significant impact on past and future projects.

Temp agency case muddies the VAT waters

Organisations using employment agencies to source their temporary workers will have to continue to pay VAT on agency charges, a recent VAT Tribunal found.

The case of ‘Adecco’ found that VAT remains payable on both the value of the wages and the agency’s commission.

The Tribunal found that, as there was no contract between the end business and the worker, the consideration paid had to be for the whole service provided. The agency considered that VAT was only chargeable on the commission element as the agency had no control over the workers’ duties or activities.

At first glance this case appears to directly contradict a decision from 2011 based on similar facts involving a different employment agency; however, rules have changed in the meantime, and this Tribunal came to a different conclusion. Perhaps unsurprisingly given the uncertainty and the large sums of money involved, the case is undergoing an appeal which should help to clarify the law to employment agencies and users of temporary workers.

The appeal was raised by an employment agency that made a claim for overpaid VAT on their services, so further developments in the case will principally be of interest to these types of business. However, any businesses that hire temporary workers from agencies and cannot fully recover their VAT might be affected by the ultimate outcome of the case.