Feb 192017

At the start of 21st century it dawned on the then generous Commissioners (HMRC) that VAT was a subject too complicated for small businesses (with turnover up to £150,000) to be spending their business time on. So, they inserted a new Part VIIA into the Value Added Tax Regulations1995 introducing what is now known as the ‘flat rate scheme’ (FRS). Simply put, normal VAT accounting would mean paying to HMRC the difference between the output tax collected on sales less input taxes paid on purchases made during a VAT period. But then simplicity has never had anything to do with VAT anyway. Accounting for VAT for each item of sales and purchases and other inputs, as a matter of fact, ate up considerable time each quarter. FRS, on the other hand, promising instant simplicity, would disregard input taxes altogether and, subject to some exceptions, the VAT due from a person operating it for any VAT period would be the appropriate percentage of his gross turnover (including VAT) for that period. The percentages varied from 4% to 14.50% depending on which sector the business operated in. So, if you were an accountant in practice, and for a VAT period if the turnover was £100,000 + 20% VAT, you would pay 14.5% of £120,000= £17,400 over to HMRC and keep the change of £2,600 (£20,000-£17,400). Simple?  Not really.

Firstly, there was this constant tug of war between HMRC and the business as to what percentage should apply. HMRC would obviously look for a classification with a higher percentage rate and the business would argue otherwise. The Chilly Wizard Ice Cream Co Ltd successfully argued that its ice cream kiosk with two plastic chairs kept outside for customers to sit and relax was a business “retailing food, confectionery, tobacco, newspapers or children’s clothing” attracting 4% FRS VAT as opposed to “catering services including restaurants and takeaways” attracting 12% VAT as HMRC argued. Calibre Tas Ltd was into “business services that are not listed elsewhere” applying 12% instead of HMRC’s choice of “management consultancy” that attracted a 14% charge. Then there was this mechanical engineering business (Idess Ltd) successfully arguing that its was “any other activity not listed elsewhere” as opposed to HMRC classification of “architects, civil and structural engineers or surveyors” with 2.5% VAT advantage.

Then there were other complications; businesses seeking to apply FRS retrospectively, changing an appropriate percentage rate already chosen and applying a new percentage, and so on. However, HMRC appeared more concerned about businesses voluntarily registering (those below the registration threshold) for VAT with a view to pocketing the FRS bonus!

Enough: HMRC decided in the 2016 autumn statement that it wished no more to be generous with the small businesses as there has been an ‘aggressive abuse’ of the scheme. So, to be introduced in to the list of business sectors effective 01 April 2017 is a new category called Limited Cost Trader effectively killing the scheme for most of the small businesses. A limited cost trader will be defined as one whose VAT inclusive expenditure on goods for a VAT accounting period is either less than 2% of their gross turnover; or more than 2% but less than £1,000 (or £250 for a quarterly return).Those hit by ‘limited cost trader’ definition will be responsible for using the new 16.5% rate or the trade-related rate as appropriate. A 16.5% on the gross turnover (including 20% VAT) will effectively mean paying 20% of the output tax collected, and thus writing the obituary of the scheme for many out there.

Now for those enterprising businessmen and women, goods, for this purpose excludes a) items of capital expenditure, b) food or drink for consumption by the business or its employees, and c) vehicles, vehicle parts and fuel (except where the business is one that carries out transport services – for example a taxi business – and uses its own or a leased vehicle to carry out those services). So, don’t just rush to buy a laptop every quarter thinking that would keep you out of being a limited cost trader! However, all is still not lost – you could still buy items of stationery, ink cartridges, software etc for example, and still stay out of this new category!

So back to the twentieth century for quite a few out there when it comes to preparing and filing their quarterly VAT returns!

Tax Partners

UK VAT registration

 UK VAT Registration, VAT ADVISORS  Comments Off on UK VAT registration
Feb 252013

The basic rule that determines whether you need to compulsorily register for VAT in the UK is simple: If you’re a ‘taxable person’ making ‘taxable supplies’ in the UK above the registration threshold you need to register. But that is to over simply what is otherwise considered an extremely complex system of finding out if you need to register for VAT. If you do, then you need to file a certain form, in most cases online and in some cases in paper form, with HMRC. Registration can take anything from one week to six months depending on the nature and level of further information exchanged between you and the HMRC.

‘Taxable person’ can be an individual (sole traders), partnership or a company etc that is in business. But what complicates the most is the definition of ‘taxable supplies’. Clearly exempt supplies (e.g. medicines) are outside the scope of VAT. Or for that matter even supplies of goods are fairly straight forward in that the place of supply could logically be determined to be where the supplier supplies the goods from. But the internet revolution has meant that services could be delivered anywhere online from anywhere. This has lead to the introduction in 2010 of the complicated ‘place of supply rules for services’. So in order to determine whether a supply is taxable one needs to first determine where the place of supply for that service is. If it is considered to be the UK then one needs to register for VAT.

What we have done below is that we have attempted to decode the complicated rules to simplify as to who should register for VAT in the UK. Please do note that this is for information only and under no circumstances constitute advice which should be sought separately considering your specific circumstances.

Businesses established in the UK will need to register for VAT in the UK if the following apply to you:

a) If you make taxable supplies (both goods and services) within the UK on cumulative basis for the last 12 months in excess of £77,000 or if you expect it to go over that limit in the next 30 days.

b) If you make acquisitions of GOODS from other EU countries exceeding £77,000 when counted on a calendar year basis starting Jan 1 or if you expect to acquire more than that value in the next 30 days alone, you must register for VAT.

c) If you’ve acquired a VAT registered business in the UK you need to add your own VAT taxable turnover over the last 12 months to the turnover of the business taken over and if the total exceeds the current registration threshold of £77,000 then you’ll have to register for UK VAT.

d) If you make taxable supplies of SERVICES to customers based outside the EU you need to register if the place of supply is determined to be the UK and the supplies exceed the registration threshold (e.g. if you’re a lawyer advising a client in Australia about a UK property the place of supply is the UK). Supplies of services to a customer based within the EU are zero-rated if the customer is VAT registered in their country of origin. If the supplier is not VAT registered, the place of supply is held to be the UK and the if the registration threshold is breached then you will need to register for VAT.

e) If you are a business established in the UK that receives SERVICES from outside the UK, the place of supply of such services is held to be the UK, and if the value of the services received by you together with the taxable supplies you make exceed the registration threshold you will need to register for VAT. You will account for VAT using the reverse charge mechanism for services received from outside.

Businesses established outside the UK but within the EU

a) If you are a business established within the EU making taxable supplies of GOODS to customers based in the UK and if the taxable supplies of goods to UK customers who are not registered for UK VAT exceed £70,000 you need to register. This is called distance sales. For registration purposes distance sales are counted from on a calendar year basis from 1 January.

b) If you make taxable supplies of SERVICES exceeding the VAT registration threshold to customers not registered for VAT in the UK and where the place of supply of such services is held to be the UK you need to register.

Businesses established outside the EU

a) If you are a business established outside the EU with no place of establishment in the UK and making taxable supplies of GOODS to customers based in the UK then a you’re a Non-Established Taxable Person (NETP). NETPs making taxable supplies of goods of ANY value will need to register for UK VAT.

b) If you make taxable supply of SERVICES of ANY value to customers not registered for VAT in the UK and the place of supply such services is held to be the UK then you need to register.

How we could help?

As a tax practice we deal with all sorts of clients facing all sorts of situations. So we should be able to:

a) Understand your business structure and advise if at all you need to register
b) Advise you if your products or services are VAT chargeable in the UK
c) Advise you on the ‘place of supply’ for your services
d) Advise you when to register and when not to register to optimise on VAT
e) Help you get registered with HMRC
f) Compute your VAT liability on a regular basis and file your VAT returns
g) Advise on VAT accounting
h) Register with HMRC as your tax advisor in the UK

Please contact us for a free initial consultation.

Tax Partners

Feb 172013

Basically an anti-avoidance provision, this rule is aimed at preventing avoidance of VAT by the maintenance or creation of any ‘artificial’ separation of business activities carried on by two or more persons. Schedule 1 to Value Added Tax Act 1994 (VATA 1994) deals with disaggregation of businesses as follows:

Para 1A(1): Paragraph 2 below is for the purpose of preventing the maintenance or creation of any artificial separation of business activities carried on by two or more persons from resulting in an avoidance of VAT.

Para 1A(2): In determining for the purposes of sub-paragraph (1) above whether any separation of business activities is artificial, regard shall be had to the extent to which the different persons carrying on those activities are closely bound to one another by financial, economic and organisational links.

Para 2 specifies the impact upon the constituent members of the businesses caught by these rules as follows:

a) The taxable person carrying on the specified business is registrable in such name as the persons named in the direction jointly nominate in writing within 14 days of the direction. Otherwise the taxable person is registrable in such name as may be specified in the direction.

(b) Any supply of goods or services by or to one of the constituent members in the course of the specified business is treated as a supply by or to the taxable person.

(c) Any acquisition of goods from another EU country by one of the constituent members in the course of the specified business is treated as an acquisition by the taxable person.

(d) Each of the constituent members is jointly and severally liable for any VAT due from the taxable person.

(e) Without prejudice to (d) above, any failure by a taxable person to comply with any VAT requirement is treated as a failure by each of the constituent members severally.

(f) Subject to (a)–(e) above, the constituent members are treated as a partnership carrying on the specified business and any question as to the scope of that business at any time is determined accordingly.

That brings us to the question as to what exactly is ‘artificial separation of business’? Well, artificial separation arises where the entities, closely bound to one another by financial, economic and organisational links, disaggregate businesses with a view to avoiding VAT. In order to prove artificial separation generally at least one link needs to be established under each head:

  • Financial Links include providing financial support to one entity by the other, common financial interest in the proceeds of the business or the mere fact that one entity wouldn’t be financially viable without financial support from the other.
  • Economic Links arise where the same economic objective is pursued by the constituent business entities, where the activities of one part benefit the other or where both supply the same circle of customers.
  • Organisational Links could be established by having a common management or common employees

HMRC’s view on what constitutes disaggregation of businesses to avoid VAT is contained in VAT notice 700/1. Generally, HMRC would look at striking at least one link each under financial, organizational and economic heads before proceeding to issue a direction. That said HMRC, as a general rule, would view the following to be a single taxable entity:

  • Two businesses owned by same persons where one VAT-registered entity sells only to VAT-registered customers, and the other entity, not registered for VAT, sells only to customers not registered for VAT.
  • The premises and/or equipment are shared; something common with businesses such as launderettes and takeaway food supplies
  • Splitting up a single supply for e.g. bed and breakfast business where one supplies the bed and another the breakfast.
  • A number of businesses owned by the same person making the same type of supplies.

Here are some examples, where the businesses were held to be artificially separated with a view to avoiding VAT:

  1. Husband and wife acting as tax consultants, operating from the same office (Osman v C & E Commissioners 1989)
  2. A company operating a fitness club and a director and his wife operating a beauty salon in partnership from the same premises (West End Health and Fitness Club)
  3. A company operating a service station and a director’s son running a video club at the same premises (Old Farm Service Station Ltd & L Williams)
  4. Married couple providing computer programming services via a partnership and supplying computer hardware via a limited company (A & S Essex (t/a Essex Associates)).
  5. Bed & Breakfast business carried on by one who is also partner in farm with onther  – Self-catering accommodation part of farm business (Patric and Patric V HMRC [2011] UKFTT 865 (TC)

What this brief discussion aims to convey is that businesses are unlikely to be caught by these rules where employees, premises, equipment are NOT common and where the business and customers are different. It must, however, be noted that the INTENTION where apparent also plays a crucial role in determining whether the disaggregation is artificial or not.

Tax Partners

May 312012

The UK VAT regime is characterised by a complex piece of legislation comprising the Act (VAT Act 1994) and myriad other regulations, notices, and extra statutory concessions. To confound the situation, tribunals and courts often contribute their own bit through various interpretations and judgements. If that isn’t enough there are the EU directives and the European Court of Justice that can further up the ante with what should apply to fit in line with the EU VAT. The UK is bound to align its rules in line with the EU ones. Wading successfully through this maze at the moment are fraudsters, with ‘inventions’ like carousal fraud. The taxman is caught right at the centre of all this confusion desperately trying to stop VAT leakage. In the process, more legislative changes are pushed in through the annual Finance Acts, adding to the ever-complex regime!

VAT Registration

The complexity begins at the registration stage itself. To register for UK VAT a business needs to be a ‘taxable person’ (i.e. carrying out an economic activity) and what is being sold should be a ‘taxable supply ’(e.g. local authority services are not taxable supplies). Once these conditions are met a business could get vat-registered voluntarily until the threshold level for registration (2012 -£ 77,000) is hit. Registration becomes compulsory once this level is breached. So far so good, but confusion starts when an overseas business ventures out to do business in the UK or a UK one tries to sell overseas. If you are an EU business selling in to the UK you follow a different set of rules (distance sales) than those from outside the EU would be following. Incidentally, those from the outside the EU watch out (!), the law is changing again from 01 December 2012.

Place of supply

Different rules apply for goods and services. Normally, when you supply goods the law of the country where the seller is based should apply. That has all changed from January 2010, particularly for services. To prevent enterprising businessmen from setting up artificial tax-base in low-VAT jurisdictions like Luxembourg, we now have what is called ‘place of supply for services’ rules. As a result, the general rule now is that for a business selling services to another business, the VAT rules of customer’s country apply. If it is to a consumer the rules of the supplier’s country will apply. What this means generally is that a US-based business selling services to UK consumers could be expected to apply the US rules. But then there are the usual detailed exceptions to the general rules, making the general rule nearly ineffective! The exceptions mean that the US-based business selling services to UK consumers could be expected to register for UK VAT if the place of supply is held to be the UK and the threshold level is breached.

Reverse charge mechanism

Even if the place of supply is held to be the UK, the overseas seller doesn’t necessarily need to charge and account for UK VAT. If the customer is registered for VAT in the UK, he would do it by becoming both the seller and the buyer of the services in his books! This is reverse charge mechanism, or technically the tax shift. There is no financial impact because the customer just passes accounting entries for both the input and output VAT based on notional sales and purchases. Double-entry system of accounting, literally! The notional input and output VAT cancels out each other.

On a serious note, reverse charge mechanism was introduced to check carousal fraud, where a vat-registered customer collects VAT and disappears without paying the government (missing trader intra-community or MTIC for short).  Originally introduced for five goods including computer chips and mobile phones, this was later extended to all services acquired from outside the UK. Whether this mechanism has indeed checked carousal fraud is anybody’s guess because in a recent case decided by the Upper Tax Tribunal, reversing the First-Tier Tribunal decision, (HMRV v Greener Solutions Ltd – 2012/UKUT 18(TCC) a mobile phone recycling company that did not in fact disappear, got caught in a carousal fraud and was ordered to pay £176,000.

To tax or not to tax is not the question

To tax or not to tax is no more a question because everything is taxable unless specifically exempt (s. 4(2) – VATA 1994)! Schedule 9 to the Act has some 15 groups of items specifically exempt from VAT. Yet there is no cast-iron guarantee that everything specifically exempt is indeed exempt from VAT. Take for example postal services, which are specifically exempt from VAT. But an ECJ ruling a couple of years ago (only universal postal services are exempt from VAT) means that some of the Royal Mail services are now subject to VAT.

Even where taxable, Schedule 8 lists items that are subject to zero-rate of VAT (i.e. effectively no VAT). In a case decided by the First Tier-Tribunal last year (Thorncroft Ltd v HMRC – UTFTT/TC/2011/01536) HMRC sought to charge VAT on a tea drink bottled and sold ice-cold, despite tea being one of the items subject to zero-rate of tax under Schedule 8 to the Act. HMRC unsuccessfully argued it was a soft drink subject to the standard VAT of 20%. 

Heat and VAT 

The heat coming from Brussels can now be felt at Pasty stores. The Finance Bill 2012 added what is now widely known as pasty VAT where food items served above the ambient air temperature will attract standard vat at 20%. So to avoid a 20% levy all you need to do is wait for the food item to cool down to the ambient temperature level or raise the ambient temperature to the food’s level or may be a bit of both!

The latest is that bowing to the ‘heat’ felt in the business and consumer circles the government may now go back on ‘pasty tax’!! 

The complexity of the UK VAT system has reached absurd levels and just toeing the EU line has significantly contributed to it. But then that’s politics.

Tax Partners provide expert advice on UK tax

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