VAT update – July 2011

VAT UPDATE – July 2011

VAT is constantly changing and with increasing fines and penalties for getting things wrong, it’s time to review the current position.

Exporting goods and services.

Exports are zero-rated but you do need to have proof of shipping. Exporting to the EU is more involved. To zero-rate an export to a European customer, you must record their VAT registration number and show it on your invoice, along with your own VAT number. If your customer is not VAT-registered, then you must charge UK VAT. You will have to complete Intrastat returns for European sales and record the notional VAT amount in box 2 on the returns and reclaim it in box 4. Exports to European customers who are not businesses carry a calendar year limit which varies from country to country. If your exports exceed that country’s limit, you will required to VAT register there and make returns charging that country‘s rate of VAT. If you import from the EC, put the net amount of purchases in boxes 7 and 9 on your return.

The main changes relate to place of supply. Cultural activities relate to the country in which they happen. Business to Business services relate to the place where the supply is received rather than as previously, the place it was sent from.

3-Party Arrangements.

These are charges paid by one party but where the benefit was to another party. The most common of these are such as we suffered over our dilapidations charges. The landlord instructed the surveyor and received his reports but we had to pay the bill. As the benefit was to the landlord, we cannot reclaim the VAT on the surveyor’s invoice.

Incorrectly charged VAT is not reclaimable.

If you are charged VAT at the wrong rate, you cannot reclaim it. So if a builder charges you VAT at the current standard rate and the work should have been either zero rated or charged at the lower rate, you cannot reclaim the VAT from HM Revenue and Customs – you have to get it back from the builder.

Grants

Whether grant income is subject to VAT depends on the nature of the giving. If the grant was purely for use at the discretion of the recipient, it is outside the scope of VAT. However, if something is expected in return, it becomes subject to VAT.

Hot food takeaways.

These may be rescheduled as zero rated, subject to an EU ruling, as they are zero rated in some other countries. If you have been charging VAT correctly under UK regulations, put in a protective claim going back 4 years, detailing the amount you will want to claim. McDonald’s has already submitted a claim. Please be aware that any claim may be refused under Unfair Enrichment rules.

Deregistration

You can look forwards to what you expect your turnover to be in the next 12 months rather than wait until it has dropped below the registration level over the past year.

VAT on assets and stock at deregistration

VAT only needs to be repaid if it totals less than £1,000 so valuation is all important. Vat is only repayable on stock and assets if it was reclaimed at the time of original purchase.

Pool cars

These are a tax and VAT minefield. There are very strict rules on what constitutes a pool car and if HMRC decides any claim is invalid, the VAT will be repayable along with hefty fines, interest and penalties.

Careless error penalties

These depend to a great extent on who made the error and if the tax payer can prove “reasonable care”. Appointing a book-keeper or accountant to complete your VAT returns does show reasonable care but if they make a mistake and your return figure varies considerably from what you’d expect, not questioning it does not show reasonable care. If reasonable care can be proved then no penalty applies. If there has been a careless error and insufficient care, the penalty is up to 30% of the tax due. A deliberate error means 20% to 70% penalties and a deliberate and concealed error up to 100%.

VAT on expenses

Recharged expenses are VAT-able, even if the expense was zero rated, such as train fares. It all depends on who “owns” the expense and recharged expenses are deemed part of the fee charge. Disbursements are different – such as when we pay the Companies House Annual Return fee on your behalf as you own that expense.

Partial Exemption

This is a major issue and we shall contact anyone who falls in to this category separately.

Flat Rate Scheme

There is a major catch to this scheme. All income to a VAT-registered entity using FRS is subject to VAT. This includes income that is usually left out of VAT, such as rental income and selling a business car. If you sell a buy-to-let property and you use FRS, you will have to pay on that too. Please remember that FRS VAT is calculated out of the VAT-inclusive sales, not charged on the net sales.

Transfer of a business as a going concern

No VAT is chargeable on transfer providing the new owner is VAT-registered at the time of the change over and the trade continues in the same business. Transferring a restaurant is fine providing the new owner runs it as a restaurant, even if the cuisine differs. However, if a brewery sells the freehold of the pub to the tenant, this is not a transfer as a going concern. Also the building may be opted to tax, so depending on who is buying the freehold, they must also register an option to tax. Opting to tax a commercial building is another subject all together. If VAT is charged on a transfer as a going concern in error, the purchaser will not be able to reclaim it.

5% VAT on some building work

Conversion of a non-residential property to residential is at 5% unless for a housing association, when it is zero-rated. Changing the number of residential units in a building, say from one to two, is at 5% as is work carried out on a building that has been empty for at least 2 years. It is the responsibility of the builder to decide the rate to charge.