VAT Tax Questiong of the Week: MTD and Cash Accounting

Q- My client is a wedding and party planner, and is compulsorily VAT registered operating the cash accounting scheme. Their current system is not particularly sophisticated and they only operate using a manual cashbook. I am in the process of ensuring they are MTD compliant for their 07/19 return, but want to keep things as simple as possible for them. Can they continue to operate a cashbook in a spreadsheet format and submit via bridging software?

A- HMRC’s Notice on Making Tax Digital 700/22 (https://www.gov.uk/government/publications/vat-notice-70022-making-tax-digital-for-vat/vat-notice-70022-making-tax-digital-for-vat), sets out the digital record-keeping requirements in section 4.3. It states that for both supplies made and supplies received a digital record should be kept of:

  • the time of supply – the tax point;
  • the value of the supply – the net value excluding VAT, and
  • the rate of VAT charged for sales or the amount of input tax that you will claim for purchases.

The Notice comments further, that the time of supply, if you are on cash accounting, is the date you receive payment or pay for the supply.

However, what is not made clear is that simply entering payments in a cashbook even in a digital form will not be sufficient. Instead, there should also be a digital record of purchase and sales invoices cross-referenced to the payments and receipts, which can be done in the cashbook and effectively the cash book will become the client’s digital record. This is not a new requirement as businesses using cash accounting have always been required to cross-reference cashbook entries to the corresponding sales and purchase invoices (see paragraph 4.3 Notice 731 Cash Accounting), and MTD has not changed this. Simply recording a payment which covers several invoices, or part-pays a single invoice is not enough as the entries must be cross-referenced to the invoices.

Additionally, for all businesses, it should be noted that supplier statements detailing multiple transactions cannot be posted as one entry. Purchase invoices must be recorded individually and retained for input tax deduction. Although it may not be directly relevant for your client, the only exception is where purchases are made via what HMRC describe as third party agents. Here Notice 700/22 confirms “where the information is received as a summary document you can treat this document as one invoice received by you for the purpose of creating your digital record”.

In theory, MTD should not change what type of records your client needs to retain, but will require those records to be maintained in a digital format. It could even be argued MTD may expose previous record-keeping deficiencies!

VAT Question of the Week: Input Tax on Re-Registering for VAT

Q – My client is a bathroom fitter and was VAT registered from January 2017 to March 2018 as he had a contract with a large developer to fit en-suites into new-build dwellings. His supplies were mostly zero-rated and he received repayments of VAT from HMRC. He bought a new commercial vehicle and specialist tooling in August 2016 on which he recovered the VAT as pre-registration input tax. On his final return, for the tax period ending 31st March 2018, he accounted for VAT on all the assets and stock on hand as a deemed supply.


The client has now been approached by another developer to install bathrooms and will look again to VAT register in order to recover his input tax. His effective date of registration (EDR) will be 1st April 2019. We are happy that he can recover pre-registration input tax on new tooling and stock on hand at registration that he purchased earlier in 2019, but can he also recover the input tax on the commercial vehicle and the tooling purchased in 2016 as pre-registration input tax again?

A –

Regulation 111 entitles businesses that buy goods and services prior to VAT registration, to be used for its taxable activities after registration, to recover the VAT as input tax provided that:

  • the goods, whether stock for resale or fixed assets, remain on hand at the EDR and have been bought within four years of that date, and
  • In the case of services, the supply was received within six months of the EDR and those services haven’t been supplied on as part of a supply made prior to registration; weren’t services on goods no longer on hand at registration, and weren’t services on assets acquired more than four years prior to registration.

Your client cannot recover the VAT on the original purchase of those goods again, but HMRC confirm in their Input Tax manual (link below) that when a business re-registers, provided those goods continue to be used in the course of his business, your client can treat the VAT accounted for on the deemed supply of the assets as input tax. The evidence required is proof of payment of VAT on the deemed supply on deregistration. The VAT should be reclaimed on your client’s first period return when he re-registers. https://www.gov.uk/hmrc-internal-manuals/vat-input-tax/vit32000

 

VAT Question of the Week: Re-Registration

Q- My client runs a Café, and de-registered for VAT back in May 2018, on the grounds that they believed their turnover would not exceed the deregistration threshold of £83,000 over the following 12 months. This was due to a slump in trade following the opening of a popular competitor across the road. Prior to this, the client had been VAT registered since January 2015 (more than 12 months). As of December 2018, the clients turnover for the period June 2018 to December 2018 was £63,000, but their rolling 12 month turnover (January 2018 to December 2018) was back up to £93,000, as the shop across the road went out of business. Does this mean they have to re-register?

A- Under VAT registration rules, schedule 1, paragraph 1(4) of VAT Act 1994 specifies that when considering a person’s taxable turnover to determine whether registration is required, any turnover from a previous period of registration should normally be excluded.

The exception to this would be where a trader misled or withheld relevant information from HMRC at the time of cancellation – for example, a trader deregistered for VAT on the grounds that their turnover would fall below the £83,000 deregistration limit over the following 12 months because they told HMRC that they were going to close their shop for an extra day per week, however the shop never intended to do so. Read More

VAT Question of the Week: Charity Fundraising

Q- Over the last few years, my client and a couple of his friends have run a small local beer and cider festival; any profits they make are given to local charities. They sell a few tickets in advance and have sponsorship/advertising income, but most sales occur on the day of the event. In the last few years, they have been below the VAT registration threshold, but with the number of people attending increasing year on year and the wonderful summer we had in 2018, they did exceed the VAT registration threshold by £800. As all the profits are donated to charity, can the client benefit from the charity fundraising exemption?

A- Charities and some other non- profit making organisations, such as certain membership, sporting, and cultural organisations ** are able to benefit from the exemption for fundraising activities. The exemption covers supplies of goods or services made by a charity or Read More

VAT Question of the Week: Supplies Spanning EDR

Q- My client is a planning consultant. He had a contract which began prior to his effective date of VAT registration and continued after. The agreement was for stage payments to be made. I understand that at least one invoice was issued prior to registration, but payment was not received until after he was registered. Does he have to account for VAT on that payment?

A- Where there is a supply of services in the course of construction where the contract is for stage payments, then Regulation 93 (VAT regulations 1995, SI 1995/2518) applies to determine the time of supply.  VATTOS9110 https://www.gov.uk/hmrc-internal-manuals/vat-time-of-supply/vattos9110 confirms that this regulation governing the time of supply applies to professional services such as architects, surveyors, consultants as well as the more obvious construction services. Read More

VAT Question of the Week: TOGC Property Rental Business

Q- Our client is looking to purchase the freehold of an industrial estate made up of six commercial units for £1.8m. They will set up a new limited company to buy the site. Four of the units are tenanted and two are empty. The current tenants have considerable time left on their leases and after the sale, they will remain in place.  The vendor is VAT registered as his turnover from the properties exceeds £85,000, and he opted to tax to recover the VAT on the purchase 12 years ago. A deposit is payable to the vendor in 2 weeks’ time and my client’s solicitor is asking whether the transfer of going concern (TOGC) provisions have been met so the sale is outside the scope of VAT. Will this still be a TOGC as the site is only partially let?

A- The TOGC provisions can still apply where a site is purchased and some units are tenanted and some temporarily vacant as long as the units are sold as a portfolio of properties that have been used together as a rental business.  This is confirmed in HMRC’s manual VTOGC7050.

Where the conditions are met, TOGC rules are compulsory; the parties cannot choose not to apply them. Where we have the sale and purchase of a property rental business and the new owner will continue renting to the current tenants, this will be a TOGC provided they meet the conditions below. Read More

VAT Question of the Week: Adjustments on Repossessed Goods

Q- My client is a VAT registered builder and purchased a van for his business on hire purchase (HP) two years ago – because it was anticipated that title would pass in the future once all the payments had been made, it was treated as a supply of goods, and my client reclaimed all of the input tax up front. He is now struggling to meet the monthly repayments and the finance company is in the process of repossessing the vehicle. Does my client have to account for any VAT when the vehicle is repossessed, or are there any adjustments to the input tax that was claimed?

A- Firstly, it is important to identify the type of credit agreement that is in place. In your client’s circumstances, under an HP agreement, where it is anticipated that title will pass in the future, this is treated as a supply of goods at the outset, thus meaning VAT is charged and recoverable at the start of the agreement.

However, lease agreements where title will not pass, or agreements where there is a large balloon payment at the end that make it highly unlikely that title will pass, are classed as services, and VAT is charged on the monthly payments, not at the outset. It is often worthwhile checking how the supplier/finance company is treating the supply. Read More

VAT Question of the Week: Online Traders selling to Germany using Amazon

Q- My client is an online retailer, selling through Amazon and other online marketplaces. They have recently received correspondence from Amazon with regard to the online sales they make to customers in Germany. It appears that Amazon is insisting that my client must VAT register in Germany if they want to continue to sell to German customers via Amazon. Can you advise what has prompted this action?

A- You may be aware that from 15 March 2018 new legislation allows HM Revenue and Customs (HMRC) to hold  the operator of an online marketplace jointly and severally liable for the unpaid VAT of overseas sellers operating on their marketplace where: Read More

VAT Question of the Week: Registration

Q- Following the filing of self-assessment returns I have been asked to address VAT registrations for several clients that exceeded the VAT threshold of £85000 in the 2017 -18 accounting year. Can you advise how best to address this? Should we register them immediately with a registration date of 5 April 2018?

A- Before rushing to register your clients you should ensure that they made taxable supplies that have exceeded the threshold and at what date. You will need to consider the liability of supplies made and whether the place of supply is the UK. Read More

VAT Question of the Week: Dry January? Input Tax Recovery on Alcohol

Q- My client company is a wholesale vintner of long-standing reputation. To capitalize on the current popularity of botanical gins they have recently opened a micro-distillery. To promote and celebrate this new venture the company held a party for staff and business associates, both suppliers and customers. Hospitality was provided at the event in the form of bought-in catering, as well as alcohol from their own stock, some of which were consumed at the event and some of which was given as gifts to take away. Please, could you clarify the input tax recovery position? 

A- It is a common misconception that where the provision of alcohol is involved, input tax recovery is denied. This may be due to the direct tax rules, which are more restrictive, but for VAT purposes, the fact it is alcohol is not necessarily material to the VAT recovery position. Read More