VAT refund opportunity for partially exempt organisations affected by COVID-19

HMRC has provided some additional flexibility that partially exempt organisations may well wish to take advantage of for their VAT accounting. This is because COVID-19 restrictions over the last 12 months may have had an adverse impact on partially exempt organisations.

HMRC has released a Business Brief which might offer assistance to partially exempt organisations impacted by COVID-19. In short, businesses/organisations that have not been able to operate as normal due to COVID-19, and have experienced lower than normal partially exemption recovery rates, can apply to HMRC for a retrospective special method using previous year % to receive a VAT refund from HMRC and a better result.

Normally, PESMs are often difficult to get approved but HMRC has set up a new unit with an accelerated process and will look more favourably on businesses that can demonstrate they have been affected over the past year. These will be temporary alterations to business’ partial exemption methods with proposals based on representative income streams from the previous tax year to get a fair and reasonable recovery rate.

Whilst there is not an automatic approval scheme in place, we would hope that HMRC will process these applications with little fuss.

There will also be an impact on organisations within a capital goods scheme (CGS) adjustment period. The same accelerated process will also be available to businesses who use the CGS to calculate input tax recoverable on capital items they use for taxable and exempt purposes.

We have been asked by some charity clients whether this also covers organisations that have Business/Non Business Methods (“BNB”), as the Brief does not mention this. This may be because BNB methods are not heavily regulated in the legislation. We would recommend that charities that have had a reduction in their taxable commercial activities due to COVID-19 get in touch as there may be an opportunity to address this with HMRC.

If you think your business or organisation may be able to benefit from this development please contact our VAT team.

HMRC announces new Brexit Support Fund for SMEs involved in imports or exports

HMRC has recently announced an SME Brexit Support Fund which can provide funds of up to £2,000 to assist with professional advice and/or training for the business.

To qualify for this grant the business must:

  • Have up to 500 employees
  • Have no more than £100 million in annual turnover
  • Be established in the UK
  • Have been established in the UK for at least 12 months, or hold a valid AEO status
  • Be involved in imports and/or exports between UK and the EU or Northern Ireland.

The potential VAT and Customs issues surrounding Brexit, particularly following the trade agreement announced in December 2020, is having an impact on many businesses and it is not too late to seek advice to get to grips with this.

If you would be interested in learning more about the grant funding available to you, and having a review undertaken of the potential VAT & Customs implications on your businesses, we would be happy to provide you with a quote for this work and discuss this further with you.

Please contact our VAT Department for more information.

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.

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.

Charity Commission recommends overhaul of UK charity tax system – Pt 2

In this blog series, Catriona Finnie, charity tax expert at Chiene + Tait outlines the key findings of the Charity Tax Commission report into the current charity tax system and outlines how the recommendations could impact charities in the future.

In this second part of her series, Catriona outlines the proposed changes to VAT and long term reforms under consideration.

Blog 2 – VAT and Long Term Reforms

VAT

  • The Commission recommended that a review is undertaken of the rules relating to irrecoverable VAT on charities that share their facilities, equipment or buildings with other entities, including a review of the relevant charitable purpose rules, which will be of particular benefit to research institutions.
  • Public bodies should be required to confirm the VAT status of all funding from them (by reference to guidance, which should be written in conjunction with the charitable sector). This will make it easier for charities of all sizes to access these funding arrangements as they would no longer have to incur expensive fees in order to establish the VAT treatment of arrangements.
  • A review of the VAT treatment of online advertising should also be considered, currently it is taxed differently from printed advertising. The Commission recommended that online and print advertising should have the same treatment, especially given the ongoing decline in print advertising.

 

Long Term Reforms

In addition to highlighting short term improvements, the Commission also looked at what could be done in the long term to ensure that the charity tax system is fit for purpose in the future. These recommendations are:

  • Consider whether the current tax system adequately supports new models for delivering public benefit, such as social enterprise organisations.
  • Consider whether tax breaks should be given to organisations that attract volunteers.
  • Ensure Gift Aid is compatible with the digital world.
  • The report noted that evidence suggested business rates relief provided only limited support to the smallest charities and questioned whether a property-based relief was appropriate, given the increasing online presence of most organisations and their decreasing physical presence in the high street. Should business rates relief be withdrawn, there is the potential to produce a new relief or extend existing reliefs. Note that the report did not recommend the scrapping of business rates relief.
  • Data on VAT reliefs and their impact on the charitable sector were in urgent need.  It was noted in the report that no figures for this were known and estimates only were produced.
  • If VAT is found to be a net cost for charities, the Government should consider exempting charities from VAT altogether. Conversely, if VAT is found to be a net benefit, existing VAT rules should be examined to ensure they decrease unnecessary administrative burdens for charities and remove any uncertainties in the treatment of certain items (such as funding agreements).
  • More research was also recommended in Gift Aid area in general. The report noted some alternatives to the current system which may provide more benefit to charities.

If you have a query about charity taxes, please contact Catriona at charities@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)

European Court Ruling may impact Charities VAT position on Investment Management fees

A recent case, in what may be one of the last UK VAT cases to be heard at the Court of Justice of the EU (CJEU), may have a significant impact on UK Charities who have investments and who have recovered any VAT on investment management services in the last 4 years.

In C-316/18 – The Chancellor, Masters and Scholars of the University of Cambridge, the UK Court of Appeal referred a question on whether a charity can treat investment management services as an overhead cost which relates to all of a charity’s activities (with the VAT potentially partially recoverable) or whether it directly related to financial investments (with the VAT not recoverable). In what was a complex case, the final analysis of the Court was that these costs were not an overhead of the charitable activities, but were solely referable to the investment activity which would mean that VAT recovery was not possible.

The case will be referred back the UK Court of Appeal to make the final decision but we expect that HMRC will use this to target charities it believes may have recovered VAT on investment management services and potentially raise assessments.

We would recommend that charities consider whether they are at risk and seek advice immediately as they may be required to submit error declarations to HMRC to avoid potential penalties.  We would hope that HMRC will issue helpful advice but in the interim we recommend that appropriate action is taken.

If you would like to discuss this or are concerned that your charity might be affected please contact Iain Masterton, our VAT Director on 0131 558 5800 or iain.masterton@chiene.co.uk.

VAT reverse charge on construction services

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

Iain Masterton, Chiene + Tait’s VAT Director, highlights a change to VAT for the construction industry – the VAT reverse charge. The following article outlines what the changes will mean.

The UK Government recently announced a new measure designed to reduce VAT fraud in the construction industry.  It is a similar ‘reverse charge’ measure to one introduced a number of years ago for high value goods such as mobile phones. The reverse charge will be introduced from 1 October 2019 and will have an impact on businesses in the construction industry.

What is a reverse charge?

The reverse charge is a mechanism for accounting for VAT where no VAT is levied on a supply by the supplier, but the customer charges themselves VAT. The reverse charge was used in the past to combat missing trader fraud on items such as mobile phones. As the reverse charge makes it the customer’s responsibility to account for VAT, there is less chance that a supplier can receive VAT from a customer and then not pay the VAT to HMRC, with the VAT payment effectively ‘going missing’. See below diagram that outlines this process.

VAT Reverse Charge Construction Services

What is the practical affect?

If you are a contractor and are providing a qualifying service to another contract you will raise an invoice without VAT to your customer.  We expect that the legislation will require a small narrative on the invoice to confirm that the reverse charge will apply.  By not charging VAT this will not affect the supplier’s VAT recovery position.  The value of the supply will be recorded on Box 6 (TotalSales) of the VAT return.  Assuming the invoice was for £1000, the purchaser will account for £200 VAT in Box 1 of his VAT return and then recover the same amount in Box 4.  The result will be the same as before, however as the purchaser is not paying over VAT there is less risk that a fraudulent supplier could disappear with the VAT before paying it to HMRC.

What construction services are affected?

This reverse charge will only apply to specific construction services to other businesses in the construction industry.

What construction services are included?

The services that will be included in the measure are:

  • Construction, alteration, repair, extension, demolition or dismantling of buildings or structures (whether permanent or not), including offshore installations; construction, alteration, repair, extension or demolition of any works forming, or to form, part of the land, including walls, roadworks, power-lines, electronic communications apparatus, aircraft runways, docks and harbours, railways, inland waterways, pipe-lines, reservoirs, water-mains, wells, sewers, industrial plant and installations for purposes of land drainage, coast protection or defence;
  • Installation in any building or structure of systems of heating, lighting, air-conditioning, ventilation, power supply, drainage, sanitation, water supply or fire protection;
  • Internal cleaning of buildings and structures, so far as carried out in the course of their construction, alteration, repair, extension or restoration;
  • Painting or decorating the internal or external surfaces of any building or structure;
  • Services which form an integral part of, or are preparatory to, or are for rendering complete, the services described above including site clearance, earthmoving, excavation, tunneling and boring, laying of foundations, erection of scaffolding, site restoration, landscaping and the provision of roadways and other access works.

The reverse charge will only apply to construction services that are normally subject to the standard rate and reduced rate of VAT. The reverse charge will also apply to building materials supplied with those construction services.

What supplies are excluded?

The following are not included within the definition of construction services:

  • Drilling for, or extraction of, oil or natural gas;
  • Extraction (whether by underground or surface working) of minerals and tunneling or;
  • Boring, or construction of underground works, for this purpose;
  • Manufacture of building or engineering components or equipment, materials, plant or;
  • Machinery, or delivery of any of these things to site;
  • Manufacture of components for systems of heating, lighting, air-conditioning, ventilation, power supply, drainage, sanitation, water supply or fire protection, or delivery of any of these things to site;
  • The professional work of architects or surveyors, or of consultants in building,engineering, interior or exterior decoration or in the laying-out of landscape;
  • The making, installation and repair of artistic works, being sculptures, murals and other works, which are wholly artistic in nature;
  • Signwriting and erecting, installing and repairing signboards and advertisements;
  • The installation of seating, blinds and shutters;
  • The installation of security systems, including burglar alarms, closed circuit television and public-address systems.

The measure will only apply to businesses that are supplying their construction services to another business, that will sell on these construction services. It does not apply where the construction services are provided to a consumer or connected businesses where the normal VAT rules will apply.

Is there anything contractors should do now to prepare?

HMRC are still finalising the final draft of the legislation, but the new law will be introduced from 1 October 2019. There will be a “light touch” from HMRC in the first 6 months which will allow for genuine mistakes.

All construction businesses need to consider if they will be impacted by this change and identify which services to other contractors will be covered. Changes will need to be made to accountancy packages to enable these transactions to be treated correctly from a sales and purchasing perspective.

If 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.

My Week of Work Experience at C+T

Even though I have always been good at maths, I had never thought of being an accountant. I was told by my school to get a work experience placement to see what path I wanted to take in life. Last year I chose to work in my old primary school since I wanted to be a teacher, but this year, I decided to take a completely different route, and try something that was completely unknown to me.

Let’s just say that my first day didn’t go that well (in my opinion) as I felt completely out of my depth. After day one, I was worried that I wouldn’t enjoy the rest of the week, but I was wrong. My second day at C+T was more of what I excepted and what I hoped to be doing – Personal Tax. I felt comfortable in that environment as I could use my knowledge of maths and Excel to complete my work, as well as working beside lovely people. I did use my knowledge of maths at C+T, but it isn’t a necessary requirement for being an accountant, as Excel formulas are always used. Yes, having maths is useful but you don’t learn tax at school or university, you learn it when you start working here. Many people who work here have told me that the degrees they did at university (like maths or physics), are not used as much as they expected when doing their job.

Throughout the week I worked with different departments, such as personal tax – that I previously mentioned –  but also the VAT team and the Marketing team. I learned how to do VAT returns (the base knowledge of them) and how to design invitations and work on the Chiene + Tait website from behind-the-scenes with marketing, which was a lot of fun in my opinion (as something is very satisfying about turning an orange dot to a green dot for SEO, just by changing small details).

Compared to working in a primary school, an office environment is the polar opposite. Being a classroom assistant to Primary 1’s is hard work, but a different type of hard work to working in an office. Working in an office is more mentally exhausting, while working in a primary school is definitely more physically exhausting. Going back to my primary school was exciting, and it was comfortable returning to the place I knew extremely well, as I got to reminisce the memories with my friends. Working in an office however was new to me, but I enjoyed it nonetheless. This week has been somewhat challenging, but I have learnt that I can do more than I thought I was capable of doing.

I’d glad I have done work experience here, as it has opened my eyes to office life, and has shown me what I can do if I want to be more than a teacher. Currently, I am still wanting to do a maths degree at university and possibly a post-graduate in teaching, but I will definitely consider applying for a summer job next year, to hopefully learn more about the departments, and working life at Chiene + Tait.

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.