Tag Archives: vat

Old HMRC portal for filing quarterly or monthly returns will close on 1 November

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Making Tax Digital (MTD) for VAT is compulsory for all VAT registered businesses, for returns starting on or after 1 April 2022. This means returns must be filed using MTD software and digital VAT records must be kept.

From 1 November, the old HMRC portal for filing quarterly or monthly VAT returns will be

switched off. Businesses that file annual returns will still be able to use their VAT online account until 15 May 2023. HMRC will be writing to businesses that have not yet signed up to MTD for VAT.

Are we nearly there yet? Where are we on our VAT Brexit journey?

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The UK finally completed its exit from the European Union on 31 December 2020, after more than 40 years of membership.  Despite the four and a half year build up, many businesses found it difficult or impossible to prepare, due to the lack of clarity over what, if any, trade deal would be agreed.  The national sigh of relief on Christmas Eve, as Boris Johnson announced the deal, was swiftly followed by a Brexit hangover, leaving businesses to face the reality of a more complicated trading relationship with the EU.  Five months into the UK’s new found freedom, the challenges facing businesses are finally becoming clear.

Trading in goods

Businesses trading in goods bore the brunt of the changes on 1 January 2021. Having left the EU single market and customs union, a customs border now exists between Great Britain (England, Scotland and Wales) and the EU.  Northern Ireland has a special dual status under the Northern Ireland Protocol, where EU VAT rules for trade in goods continue, but UK VAT rules apply to services.  Many businesses trading in goods with the EU are now having to apply customs procedures for the first time.

Building contractor supplies

Take an example of a UK building contractor, purchasing bathroom fittings from Italy.  Prior to 1 January 2021, the UK contractor would have provided its VAT number to the Italian supplier and simply self-accounted for VAT on the goods through its UK VAT return.

The same transaction taking place from 1 January 2021 requires the goods to be cleared through customs by submitting an import declaration, including the importer’s GB EORI number.  Submitting an import declaration and complying with customs procedures is not straightforward.  Most businesses choose to use a customs agent to do this for them, which inevitably involves additional costs.

Incoterms

The question of who takes responsibility for customs matters is determined by the ‘incoterms’ agreed between the parties and is now an important feature of any cross border transaction involving goods.

Postponed Import VAT Accounting (PIVA)

Import VAT is payable on goods entering Great Britain and possibly also customs duty.  For a VAT registered importer, import VAT can normally be reclaimed through the VAT return and, therefore, does not hit the bottom line.  A new simplification, known as Postponed Import VAT Accounting (PIVA), means that VAT does not need to be paid at the time of importation, but can instead be paid and reclaimed through the VAT return.  This is good for cash flow, but the importer must remember to ask their customs agent to request PIVA on the import declaration.

Rules of Origin

Unlike import VAT, customs duty is a cost and, therefore, needs to be factored into the price of the goods.  Although the EU-UK Trade and Cooperation Agreement was announced as a tariff free deal, this is only the case where the goods have ‘EU origin’ or if they have a nil rate of duty based on the tariff classification of the goods.  The rules of origin can be hugely complex and will be a concept that many businesses have not dealt with previously.  For example, if the bathroom fittings in our example are partly manufactured in China, with some processing, packaging and labelling taking place in Italy, what is the origin of the goods?  The answer to this question could make a significant difference to the amount of customs duty, if any, which is payable when the goods enter Great Britain.

The importer is responsible for providing proof of origin, which may be certified by the supplier or a self-certification based on the importer’s knowledge.  This is likely to be an area that comes under greater scrutiny from HMRC in due course.  Some importers may be storing up a problem by self-certifying, without fully understanding the origin of the goods, potentially leaving them exposed to unexpected duty costs.

Double Duty Costs

Another issue which is becoming increasingly prominent is the risk of double duty costs.  Returning again to our example, customs duty paid by the supplier when importing the goods into Italy from China will be built into the price of the goods.  If duty is payable again when the goods enter Great Britain, it adds to the price.  There may be ways of preventing this, such as use of special customs procedures, but this requires careful planning and preparation.

 

The above highlights just a few of the issues facing businesses post Brexit.  Wherever you are on the Brexit journey, we can help you to navigate the new rules.

HMRC Support for Businesses Suffering Lost VAT Recovery

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HMRC have announced swift and sympathetic support for businesses suffering unfair levels of irrecoverable VAT, due to the pandemic.

VAT registered businesses making taxable and exempt supplies are normally entitled to only partial recovery of VAT incurred on costs.   Such businesses are said to be ‘partially exempt’ and must use a partial exemption method to calculate reclaimable VAT.  For example, partial exemption often arises in the real estate sector, where a mixture of taxable and exempt income is common.  Similar rules apply to charities and not for profit organisations which often suffer irrecoverable VAT as a result of having business and non-business activities.

Many businesses have suffered reduced levels of income as a result of the pandemic or have had to change or delay planned activities.  For partially exempt businesses, this may result in additional VAT costs, where their partial exemption method has ceased to produce a fair and reasonable level of recovery, due to these unforeseen events.  For example, a landlord with a mixed portfolio of taxable and exempt properties may find that its existing method results in an unfair reduction in VAT recovery, due to temporary reductions in rental income.

HMRC recognise that businesses affected by the pandemic may need to temporarily change their partial exemption method to deal with the current situation.  Changing a method requires HMRC’s approval and is often a lengthy process, typically taking months or even years, in some cases.

In Revenue and Customs Brief 4/21, HMRC have offered swift approval of requests to make temporary changes to methods, saying they will restrict their enquiries to how the proposed changes will address issues arising from the pandemic.

The Brief suggests that past income figures or projected income could be an acceptable basis.  However, HMRC will need to be satisfied that the proposed changes achieve a fair and reasonable level of VAT recovery.

Any approval granted by HMRC will be temporary, usually for a period of one tax year, although extensions can be applied for.  At the end of the temporary approval period, the business must revert to its previous method.

HMRC will also consider applications for temporary approval of new capital goods scheme and combined business/non-business methods.

This announcement is to be welcomed and should provide much needed support for businesses suffering VAT recovery issues caused by the pandemic.

Making Tax Digital: What’s changing?

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Much has been said about Making Tax Digital and more will be said over the coming months, but the changes being introduced in the first phase from April 2019 are actually fairly straightforward and will only affect VAT registered businesses whose turnover exceeds the VAT registration threshold which is currently £85,000.

Making tax digital for VAT

What is Changing?

Currently VAT registered businesses are required to submit VAT Returns, usually on a quarterly basis, via the HMRC online portal. This requires the completion of the nine boxes of the VAT Return, which can be entered manually or electronically onto the portal and then submitted.

There are still some instances where businesses may submit VAT Returns in paper format, but these cases are relatively rare and if you currently fall into one of the categories that can file by paper then this is not expected to change after April 2019.

With effect from 1 April 2019, VAT registered business with turnover over £85,000 will be required maintain the business records in an electronic format and for the VAT return information to be electronically transmitted to HMRC. There will no longer be an option to manually complete the VAT boxes on the HMRC portal.

For most companies they should be able to process and submit their VAT return as HMRC require without the need for adjustment. It is expected that accounting software providers will  upgrade their systems to automatically incorporate the necessary changes for this to happen.

If you are preparing your accounts on an accounting system, then you should contact your software supplier to ensure that the system is being upgraded before April 2019.

Who needs to do something before April 2019?

If you do not currently use a commercial accounting package to produce your VAT records, for example you are using spreadsheets or keeping paper records, then you will need to change the way you prepare your records for the purpose of submitting VAT returns.

HMRC have confirmed that keeping records on spreadsheets will meet the requirement for electronic record keeping, but it will be necessary to acquire some bridging software to bridge the gap between your spreadsheets and HMRC’s portal which you currently do manually. HMRC have not yet provided any information on available bridging software but we will update this article to provide a link to further information when we become aware that it is available.

If you currently produce your VAT records manually on paper then you will need to change your processes so that you keep your accounting records in a digital format. This may include using spreadsheets or buying accounting software.

Useful links

HMRC list of software suppliers

HMRC VAT notice 700/22

Extending Making Tax Digital to Income Tax

HMRC are keen to point out the benefits of making tax digital to businesses and individuals and there will indeed be some benefits. However, it is also fair to say that one of the main motivations behind the introduction of quarterly digital reporting of business records and income details was to target what the Government perceived as a tax gap particularly in the small business space.

Due to resourcing, HMRC have focused on VAT registered businesses in the first instance, but still plan to roll out the next phase by April 2020 which will bringing small businesses and landlords’ income tax into the arrangements. Business may be required to submit their accounting records quarterly during the course of the year and then make an annual end of year submission to take into account any accounting and tax adjustments.

Whilst we don’t know for certain that this will be introduced as planned by April 2020, HMRC are currently running a voluntary pilot scheme.

Making Corporation Tax Digital

The original roadmap for making tax digital included corporation tax. As yet there have been no announcements on this but provided making tax digital for VAT and Income tax are successfully introduced then Corporation tax will surely follow.

Commercial to residential: the VAT minefield for developers

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converted residential buildings property development

Acquiring commercial sites to convert to residential use is proving an increasingly popular strategy among property developers.

There seem to be several factors driving this trend. These include good availability of vacant commercial sites, and a growing demand for residential space. In addition, commercial locations can carry permitted development rights, which ease planning restrictions for developers.

A word of warning, though: the VAT implications when converting commercial to residential is a minefield.

It’s very different to developing bare land, for example, or redeveloping an existing residential site. These arrangements rarely expose developers to the most intricate aspects of VAT.

Converting commercial to residential, however, does have some extremely complex VAT implications. It’s easy to get caught out, and the cost of doing so will hit development profits.

Let’s take a look at some of the pitfalls. And I stress ‘some’ – the list below isn’t exhaustive.

Pitfall 1: Election to waive exemption

Developers will know that commercial property begins life exempt from VAT. But owners may have waived that exemption (sometimes known as “opting to tax”) at some point during their ownership of the property.

If the vendor has taken this option on the site you’re acquiring, then 20% VAT will be added to your purchase price.

Before finalising contracts, therefore – and preferably before agreeing Heads of Terms – you need to check whether the owner has elected to waive the VAT exemption. Otherwise, you could end up with a large, unexpected VAT bill.

Pitfall 2: Reclaiming VAT

You’re probably thinking that the obvious solution to the above scenario is simply to reclaim the VAT.

In most cases, you’d be right. Though bear in mind that it takes several months, which will impact cash-flow.

But to reclaim VAT, you will of course need to be VAT registered. And that’s where the delay lies. Developers often use Special-Purpose Vehicles (SPVs) to purchase sites, which are rarely VAT-registered.

You can apply to HMRC to register an SPV for VAT, but it’s not a user-friendly process. Many applications are delayed or rejected because the case isn’t presented properly. You’ll need technical advice to help present your case, and to ensure your application is approved with minimum delay.

Also, care must be taken over the date on which you register for VAT to ensure you maximise your VAT recovery.

Pitfall 3: The SDLT premium

Stamp duty land tax (SDLT), currently set at rates of up to 5%, is charged on the gross purchase price of property. So if your vendor has elected to waive VAT exemption on the site you’re buying, this will increase your SDLT liability – whether or not you subsequently reclaim the VAT.

Pitfall 4: TOGC

There will be further complexities if the site you’re acquiring isn’t completely vacant.

Taking over tenants in a building that is already let means your purchase may come under the Transfer of Going Concern (TOGC) rules, which will have VAT implications.

The key word here is ‘may’. Whether your transaction constitutes a TOGC or not depends on several factors: the terms of the sale contract, the commercial relationships and terms of the rental contracts between the vendor and the tenants, and a host of requirements to be VAT registered and opting to tax.

TOGC sales are ignored for VAT purposes, which is obviously beneficial for developers buying sites, as it avoids pitfalls 2 and 3. But vendors may not deal with this as strictly required, and could end up charging VAT.

What’s more, any VAT paid on a TOGC in error is NOT refundable by HMRC.

Pitfall 5: Mixed use

Converting a commercial site to wholly residential use is one thing, but developing it for mixed use creates yet more complexity.

Commercial units are treated differently for VAT purposes than residential ones, which affects the VAT you can recover on any expenditure, and the amount to charge on an eventual sale. What’s more, the VAT status of the commercial space will differ depending on whether it’s sold freehold or as a long lease.

So whether you acquire a commercial site that is VAT-exempt or opted to tax, you need to consider your own strategy for waiving VAT exemption. Your decision will depend on your proposals for the site, and on the need to avoid a troublesome VAT position – for yourself and for potential buyers.

The right solution

There’s never a black-and-white solution to these scenarios. In each case, the right approach will depend on the nature of your business, the details of the site you’re acquiring, and your plans for its development.

Demand for commercial sites is high, and you’ll need to move fast to snap them up. But you must take time to consult a technical expert on the VAT implications first. Somebody who not only understands the rules, but can interpret what they mean for your business.

 

 

Can I recover VAT on business and staff entertaining?

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Image of a waiter working on a dinning table arrangement for a private party dinner.

One of the consequences of Brexit has been the fall in the value of the Pound. The UK, now more competitive, is seen as good value and overseas customers are visiting our shores to conclude contracts. This could lead to an increase in UK businesses entertaining overseas customers, prompting the question: Can I recover VAT on business and staff entertaining?

Entertainment is broadly defined to include hospitality of any kind and therefore includes matters such as food and drink, accommodation, tickets to events and purchase of capital assets used for the purposes of entertaining.

The basic rule is that VAT on business entertainment is not recoverable and therefore VAT on entertainment of customers, or potential customers, is not possible. However recovery of the input VAT on entertainment of a customer who comes from an overseas country is permitted.

Overseas Customers

This relaxation applies to entertainment of overseas customers but not entertainment of potential customers from overseas. The customer should not have a business carried on in the UK.  If a business entertains a client based overseas then it could recover the input VAT.  However, if the customer represents an overseas company with a UK branch, they couldn’t be treated as an overseas customer.

When recovering VAT on overseas customers, additional records should be kept. You will need to show that they are an overseas customer and do not have a business in the UK. HMRC take a strict view on entertainment of overseas customers, believing that unless the entertainment is minor, necessary, and solely for business purposes, there is likely to be a private benefit provided to the recipient and the input VAT cannot be recovered. Their public notice 700/65 gives more detail.

Staff Entertainment

VAT is also recoverable for some staff entertainment. If staff entertainment is undertaken to improve morale or offer rewards for good work, then it is considered as being incurred for a business purpose and the VAT is recoverable. The input VAT associated with directors (or partners) who attend such an event is also recoverable. Should non-employees attend, input VAT cannot be recovered on their cost and it’s reasonable to apportion input VAT using headcount. Non-employees include pensioners and former employees (or former partners), job applicants or interviewees.

Recovery of VAT arising from a staff party requires staff to attend. If the attendees are solely directors of companies or partners in partnerships the input VAT cannot be recovered. This includes celebrations to improve moral or reward good work.

Subsistence

Although recovery of VAT on entertainment is subject to restriction, VAT can be recovered on subsistence. If meals are provided on a business trip  which is away from the usual place of work the VAT incurred on reasonable subsistence can be recovered. This covers subsistence incurred by staff, directors and partners. VAT receipts should be obtained when recovering tax associated with subsistence.

In conclusion, the VAT regulations generally deny recovery of VAT associated with entertainment. In the few instances where recovery is possible additional records should be kept to demonstrate that the facts meet the strict criteria required to permit the VAT to be claimed back.

Initial thoughts on Taxation after Brexit

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Although the Brexit process is anticipated to take at least two years it is worth considering the possible tax consequences of leaving the EU.

Indirect Tax

The UK is part of the EU Customs Union and therefore goods can be moved to and from other member states without duties (either customs duties or import VAT). There are reduced compliance obligations on intra-EU transfers.

Unless the UK negotiates otherwise then goods brought into the UK from the EU will be subject to import VAT and import duty. Conversely goods exported out of the UK and into the EU will be subject to EU import VAT/duty.

The EU has negotiated favourable terms of export to third countries and the UK may lose the benefit of these rights. However the UK will no longer be bound to EU rates and tariffs and therefore may be able to reduce costs of importation or negotiate separate (even more favourable) terms of exports to third country.

The rate of VAT in the UK is controlled by Brussels. On leaving the EU these restrictions will be lost and therefore the standard rate of VAT may change and/or the items to which the zero rate applies extended.

At present there is a process allowing the UK to recover VAT incurred in other EU countries. This involves access to a single portal on the HMRC website.  Although recovery will still be possible after Brexit the administrative process is likely to change and therefore there may be delays in future recovery of EU VAT.

Direct Tax

Direct taxes are broadly determined by member states without direction from Brussels and therefore there should be little impact on direct tax rates. Irrespective of this independence there are UK rules which have been specifically designed to be compatible with EU law and EU freedoms. Those rules can be repealed or varied.

Some tax reliefs are subject to EU state aid considerations and cannot be implemented without EU approval. Theoretically those reliefs could be expanded considerably.  However the UK will remain a member of the OECD and therefore subject to OECD harmful tax practice considerations.  These considerations are likely to restrict the introduction of very generous tax reliefs.

Withholding Taxes

There are exemptions from domestic withholding taxes for payments to EU members. After Brexit those exemptions would not necessarily continue and the rate of withholding tax would be determined by the tax treaty between the UK and its European neighbours.  In the absence of any other agreements this would suggest an increase in withholding taxes on both inbound and outbound payments.  Arrangements with gross up clauses (i.e. the recipient receives a certain sum and any withholding tax is a cost to the payer) would need to be managed carefully.

The UK does not have any outbound dividend withholding tax and therefore dividend payments out of the UK would remain unaffected.

Social Security

There are specific rules which apply to EU residents who work in another member state. They are designed to restrict the social security contribution to one state and determine which state that is.  These rules may not apply after Brexit and this could lead to double taxation for some internationally mobile workers.

Timings for change

Any changes are not likely to be immediate. I would anticipate that Budget 2018 would prepare the country for any changes in our domestic taxation.

The reality is that no-one really knows the taxation impact of Brexit and the extent that some, or all, of the above occur can only be determined with the fullness of time.

The Great Cake Debate

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It is comforting to hear that many of the great philosophical questions of our time are being answered by VAT tribunals on a regular basis! I give as an example the important issue of the nature of a cake!  In a recent case the First-tier Tribunal was presented with a plate full of assorted cakes and asked to consider whether one of the items, a snow ball, was a cake or confectionary (yes it matters for VAT purposes).  The judges’ comments are entertaining enough without further comment from me so here they are.

“A snowball looks like a cake. It is not out of place on a plate full of cakes.  A snowball has the mouth feel of a cake.  Most people would want to enjoy a beverage of some sort while consuming it.  It would often be eaten in a similar way on similar occasions to cakes; for example, to celebrate a birthday in the office.  We are wholly agreed that a snowball is a confection to be savoured but not while walking around or, for example, in the street.  Most people would prefer to be sitting when eating a snowball and possibly, or preferably, depending on the background, age, sex etc with a plate, napkin or a piece of paper or even just a bare table so that the pieces of coconut which fly off do not create a great deal of mess.  Although by no means everyone considers a snowball to be a cake we find that these facts, in particular, mean that a snowball has sufficient characteristics to be characterised as a cake.”

This just leaves one of life’s big questions to answer – how do I get to sit on a VAT tribunal?!

Construction Industry Scheme and Gross Payment Status

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Following on from Graeme’s post about the Time to Pay arrangements.

Are you in the Construction Industry? Have you got Gross Payment status? If you have, you’ll know how valuable that status is, and you’ll be well aware that losing that status could lead to a loss of up to 20% of cash inflow. And that would be terminal for many businesses.

In these difficult times of slowing customer payments and restricted funding from banks, it’s easy to allow PAYE and Corporation Tax payments to take a back seat to other creditors. But if you do you could be putting your Gross Payment status at risk.

Under its recently published “Time to Pay” scheme, the Inland Revenue has clarified that businesses entering into an arrangement under it will not lose their gross payment status.

But it’s vital the business agrees the Time to Pay arrangement before payment is due, not after. And whilst there is still a risk that the “computer” will send out automatic notices of revocation, the Inland Revenue has also confirmed these will be cancelled on immediate appeal.

So the message is – use the scheme or lose the status.

The Business Payment Support Service

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One announcement of the Pre-budget report of 25 November was a new service for businesses in temporary financial difficulty that were unable to pay their tax bills. They would be able to spread their bills over a timetable they could negotiate with the business support service of HMRC. This service would cover all taxes paid by the business, including Corporation Tax, VAT, PAYE, Income Tax and National Insurance Contributions. Although interest would be charged on late paid tax it is anticipated that this rate would be lower than that of bank borrowing.

A key requirement is that contact is made with the business payment support service’s helpline before the due date of payment of the tax. The helpline would only be able to deal with requests in advance of the tax being due. If approach is made after the due date then it would not be dealt with by the helpline, but rather by the local tax district dealing with the business’ tax affairs. The local district may be less sympathetic than the dedicated helpline.

Since November, HMRC have issued guidance on the operation of the service. The guidance is welcomed as it covers some very practical matters, such as mechanism where a partnership (or partner of a partnership) is experiencing cash flow problems.

Two particular matters within the guidance that caught my eye were the review of agreements and the interaction with the Construction Industry Scheme (CIS).
The guidance accepts that a payment agreement may be negotiated in good faith but the taxpayer then experiences unexpected, further, cash flow problems and who cannot meet the agreed payment profile. HMRC will consider such circumstances on a case by case basis. Again, the key is to notify HMRC of the further problems before a payment is due.

CIS allows certain contractors in the construction industry to receive payments gross of tax. There are very strict conditions to be able to qualify for gross payments. The guidance confirms that negotiation of a payment profile with HMRC will not deny “gross status”. This is a welcome confirmation as receipt of invoices net of tax can only exasperate a cash flow problem.
In the round the business support service is a welcome announcement and HMRC have issued some helpful guidance. Well done!