VAT Question Of The Week – VAT & The Eat Out To Help Scheme

My client runs a restaurant and will be registering for the Eat Out to Help Out Scheme, where they can claim back the 50% discount offered to customers for supplies made on Mondays to Wednesdays between 3rd August and 31 August 2020. As they are offering a discount to customers on their bill, does this mean they only pay VAT to HMRC on the discounted amount?

Although where there is a true discount given, VAT is due on the discounted amount, HMRC have confirmed that VAT will still be due on the full value of the bill, before the discount has been applied. The logic behind this is presumably that whilst the customer is only paying part of the bill themselves, the restaurant is still receiving full consideration for the supply, in the way of third party consideration from the scheme.

VATSC05830 says – In respect of the supply of goods or services, other than as referred to in Articles 74 to 77, the taxable amount shall include everything which constitutes consideration obtained from the customer or a third party, including subsidies directly linked to the price of supply.

The VAT should be paid in full within the correct period in which the transaction takes place, i.e. when the service is provided, and not when the refund for the scheme is paid.

You will be allowed to make a manual adjustment to your records to reflect the VAT that is due if your point of sale system would not otherwise allow you to reflect the VAT due accurately.

Alongside the scheme you can continue to apply the temporary reduced rating for VAT on these catering supplies.

VAT example for meal for two people:

Food cost – £15
Non-alcoholic beverages – £5
Total bill – £20
Total paid by customer = £10
Total paid by scheme = £10 (50% of the total bill as it is all for food and non-alcoholic beverages)

VAT due = 1/21 of £20 = 0.95p (1/21 is the VAT fraction to extract 5% VAT from a VAT inclusive price)

Remember that the temporary reduced rate doesn’t apply to sales of alcohol and neither does the Eat Out to Help Scheme.

VAT example for meal for two people, including alcohol.

Food cost – £15
Alcoholic beverages – £5
Total bill – £20
Total paid by customer = £12.50
Total paid by scheme = £7.50 (50% of the bill excluding alcohol)

VAT due on food = 1/21 of £15 = £0.71

VAT due on alcohol = 1/6 of £5 = £0.83
Total VAT due = £1.54

Within their guidance on Eat Out to Help Out HMRC have mentioned that they will accept estimated returns if you are unable to calculate the adjustment in the correct period, and then correct the VAT on your next return. Whilst we cannot envisage a scenario where this would be applicable, the provision for estimating is there should it be necessary.

Our practice is getting an increasing number of queries from clients who have bought or are looking to buy electric cars, which will be used for both business and private purposes. Many of them seem convinced that the VAT is recoverable regardless of use. They may have been subject to persuasive sales techniques or be getting confused with the treatment for P11D. Please could you clarify the VAT position regarding input tax recovery and how to treat the charging costs?

It is a common misconception that VAT is recoverable on the purchase of electric cars per se, due to some perceived underlying environmental or “green” reason. However, there is no difference in treatment for VAT purposes between electric cars or those with hybrid or traditional fuel technologies. This applies equally to outright purchases, hire and lease purchase, personal contract purchases and contract hire. The rules are the same and are broadly summarised in VAT Notice 700/64 (https://www.gov.uk/guidance/vat-on-motoring-expenses-notice-70064).

With regard to fuel costs, if a business pays an employee a mileage allowance, whereby VAT is recoverable on the fuel element of that mileage allowance, HMRC have published a 4p per mile rate for electric cars in their advisory fuel rate table.

https://www.gov.uk/government/publications/advisory-fuel-rates/advisory-fuel-rates-from-1-march-2016.

What is not made clear however, is whether the VAT contained therein should be extracted using the VAT fraction 1/6 assuming a 20% standard-rate for electricity or whether, if the car is charged at home, 1/21 should be applied for the domestic rate of electricity at 5% and how this calculation would work if the car is charged at home and at the business, and possibly at third party charging points as well. As an additional complication, it is likely that input tax is already being recovered by the business on its electricity so, if a car if charged at the premises, claiming on the mileage would result in some duplication. Croner Taxwise have sought clarification from HMRC but to no avail; this is clearly an area where some workable simplification could be published.

The advisory fuel rate table does confirm that hybrid cars are treated as either petrol or diesel cars for this purpose.

In summary, any ecological benefit does not result in a VAT benefit, and until HMRC clarifies guidance it leaves a rather grey area in respect of charging costs.

VAT Question Of The Week – Lockdown, Turnover and Deregistration

My client is a hairdresser and due to the current Covid-19 pandemic situation, her salon has been closed since mid-March. Prior to that she was VAT registered and significantly above the registration threshold. She has asked whether she can deregister from the beginning of her current VAT quarter, which spans 1.2. 20–30.4.20, as she has had to suspend trading for the foreseeable future until the lockdown measures ease.

 

There is no provision for retrospective deregistration unless the business has actually ceased to trade. In cases where it is the intention that trade will continue, cancellation of registration is only permitted if it can be demonstrated to the satisfaction of HMRC that “the taxable supplies in the period of one year then beginning” will be below the deregistration threshold, which is currently £83,000 (Paragraph 4(1) VATA 1994).

VAT Notice 700/11 Cancelling your registration, states:

“If you’re requesting voluntary VAT registration cancellation on turnover grounds, you’ll need to tell HMRC why you think your turnover is going to fall below the VAT registration cancellation limit. You may, for example, have reduced your opening times, lost contracts, or changed your business practices.”

However, the law prohibits deregistration under the 12 month forward look for a temporary suspension of trade. Paragraph 4(2) states:

“ A person shall not cease to be liable to be registered under this Schedule by virtue of sub-paragraph (1) above if the Commissioners are satisfied that the reason the value of his taxable supplies will not exceed £83,000 is that in the period in question he will cease making taxable supplies, or will suspend making them for a period of 30 days or more.”

In the current circumstances it is difficult to predict how long the lockdown will continue and affect trade and indeed how an enforced closure would be considered in the light of paragraph 4(2). As such it is unclear how HMRC would view a deregistration application on the grounds of future turnover, particularly if the business had been trading above the threshold prior to lockdown. My client would have to provide a monthly breakdown of turnover with a prediction that the period of enforced closure would extrapolate to reduce the turnover to below 83K in the forthcoming 12 months. My may be difficult to prove if a high demand for the client’s services is anticipated once lockdown is eased.

In summary therefore, my client cannot deregister from the beginning of the current period. She will have to account for VAT on takings until the salon closed and apply for deregistration under the 12 month rule if she feels a case can be made. Bear in mind that payments for 04/20 returns can be deferred until 31.3.21 without HMRC approval if wished.

VAT Question Of The Week – Retained Deposits Following the Cancellation of Supplies

My client is a limited company running a soft play centre and amongst many other things, is worried about the impact of Coronavirus on their VAT obligations. Several customers have already decided to forego their deposits and cancel birthday parties, and the book-keeper has had to self-isolate for 14 days. What does the client need to do about the VAT already paid over to HMRC for the deposits, and what should they do if they are concerned that they may not be able to submit their VAT return, or make the payment on time?

Until 1 March 2019, HMRC allowed businesses to treat retained deposits for cancelled supplies as compensation and therefore outside the scope of VAT, as long as the customer hadn’t used the service, or collected the goods.

However in 2018 HMRC reviewed its policy following judgements by the Court of Justice of the European Union (CJEU), and issued Revenue and Customs Brief 13 (2018) confirming that the policy was to change with effect from 1 March 2019.

This means that where a deposit is paid towards the balance of supply, and the supply is subsequently cancelled, the deposit paid cannot later be reclassified as compensation, and remains payment for a supply, albeit that supply is now unfulfilled. This means my client cannot make any VAT adjustments on deposits for unfulfilled supplies unless the deposit itself is refunded to the customer.

Regarding my client’s worry about their ability to file returns and pay on time, The Chancellor recently announced that HMRC has set up a dedicated helpline serviced by an extra 2,000 staff, for businesses who may be struggling to submit returns on time because of isolation issues, or struggling to pay because of a downturn in business. You should contact HMRC as soon as you become aware of a potential issue on their dedicated helpline which is 0800 0159 559.

VAT Question of the Week – Exception from Registration

My client has been trading as a contract cleaning company since July 2018. The company breached the VAT registration limit early this month, September 2019, under the “backward” rolling 12 month rule. However, the director has been experiencing ill health and is looking to sell the business at the beginning of 2020. Does the company still need to VAT register, knowing that the turnover will be below the deregistration limit in the next 12 months? I seem to recall that HMRC will accept this as a basis for not registering.

The policy you are thinking about is known as exception from registration. HMRC have discretion to except a business from registration where they have gone over the VAT limit under the backward (but not forward) look and crucially, can demonstrate at the time of exceeding, that there are reasons why the turnover will drop below the deregistration limit (currently 83K) in the next 12 months. Further information can be found regarding exception from registration and the application process at https://www.gov.uk/hmrc-internal-manuals/vat-registration-manual/vatreg19000.

This should not be confused with the forward look for deregistration, where a business still trading can apply for deregistration if it can satisfy HMRC that the taxable turnover in the next 12 months will not exceed the deregistration limit.

The legislation underpinning this is contained in paragraph 4(1) Schedule 1 VAT Act 1994:

4(1) Subject to sub-paragraph (2) below, a person who has become liable to be registered under this Schedule shall cease to be so liable at any time after being registered if the Commissioners are satisfied that the value of his taxable supplies in the period of one year then beginning will not exceed £83,000.

However paragraph 4(2) goes on to say:

4(2) A person shall not cease to be liable to be registered under this Schedule by virtue of sub-paragraph (1) above if the Commissioners are satisfied that the reason the value of his taxable supplies will not exceed £83,000 is that in the period in question he will cease making taxable supplies, or will suspend making them for a period of 30 days or more.

Although, on the face of it, paragraph 4(2) appears to apply specifically to deregistration cases, HMRC’s policy is to apply it equally to decisions in respect of exception from registration. This policy has been tested and upheld in the First Tier Tribunal (Lane [2016] TC 04815) and in the High Court (Gray v C & E Commrs [2000] BVC 396). Therefore, it is highly unlikely HMRC will accept my client being excepted from registration solely on the basis that they intend to sell the business, unless they can demonstrate a palpable downturn in turnover due to perhaps the director’s ill-health.

VAT Question – A friends has said that I should register voluntarily for VAT! Is this true?

Answer:

Some industries that offer zero rated supplies find it beneficial to register for VAT even if they haven’t reached the VAT threshold.

This means that they can claim any VAT on purchases and reclaim this VAT on their VAT return.

This is very common in the building industry because a New-Build house is a zero rated supply, so there is no VAT added when selling the house (Residential)

Check out our blog for more related questions:

https://aescott.co.uk/blog/

VAT Question – I have just started a business, do I have to register fro VAT?

You do not need to register for VAT when you begin trading until you reach the registration threshold of £85,000 (19/20) in a 12 month rolling period.

By rolling period we mean, you add the sales at the end of each month, if you reach the VAT threshold within 12 months, you need to register. Once you hit the 12 months you remove the figures from month 1 and add month 13, then the following month you remove month 2 and add month 14 and so on. Once your VAT turnover in the rolling 12 months reaches the VAT threshold, you need to register for VAT.

Feel free to get in touch for more info.

VAT Question Of The Week – PCP Agreements

My client is looking to buy a commercial vehicle and the dealer is offering either an HP agreement or a personal contract purchase (PCP) agreement. I understand there can be differing implications for VAT recovery depending upon the type of agreement. Please could you clarify?

This is a common question due to the proliferation of different types of financing for vehicles. HMRC’s Supply and Consideration manual (https://www.gov.uk/hmrc-internal-manuals/vat-supply-and-consideration/vatsc10170) distinguishes between a supply of goods, such as a traditional hire purchase arrangement and a supply of services. The guidance references the legislation – paragraph 1(2)(b) Schedule 4 VAT Act 1994 which states:

“If the possession of goods is transferred … under agreements which expressly contemplate that the property also will pass at some time in the future (determined by, or ascertainable from, the agreements but in any case not later than when the goods are fully paid for)… then it is… a supply of goods”.

In simple terms, therefore, a hire purchase agreement expressly contemplates that title will pass at the end of the term of the agreement, whereas lease agreements, with large balloon payments, for example, may equally end with the lessee walking away from the agreement. This is explored further in VATSC10172:

“Some final payments, or payments due at the end of the term of the agreements, are referred to as option payments. These payments are often very small such that it is very unlikely that the customer would not make the payment. In these circumstances, it is clear at the outset of the contract that in the normal course of events title will pass. Therefore there is a supply of goods at the outset.”

The importance of this distinction between a supply of goods and a supply of services is the impact on the timing of VAT recovery. In a supply of goods, the VAT is chargeable and therefore recoverable at the outset and the VAT invoice/finance agreement should show the VAT as a “lump sum” amount payable upfront and the monthly finance payment should be net of any VAT. Conversely, in a supply of leasing services, the VAT is chargeable and therefore recoverable on each periodic payment and a VAT schedule should be provided by the finance company detailing these payments.

So far so straightforward you may think until presented with a PCP arrangement, where multiple options are available to the lessee and the option payment is substantial. Could it be reasonably argued that ownership will pass in the normal course of events? This was considered in the CJEU case Mercedes Benz Financial Services, but here the issue at stake was the time of supply for the lessor. But equally, conclusions can be drawn for input tax recovery. HMRC issued Revenue & Customs Brief 01/19 (https://www.gov.uk/government/publications/revenue-and-customs-brief-1-2019-change-to-the-vat-treatment-of-personal-contract-purchases/revenue-and-customs-brief-1-2019-change-to-the-vat-treatment-of-personal-contract-purchases) and updated their guidance at VATSC10172.

The Court arrived at the conclusion that a judgment must be made by the supplier at the outset of the contract as to what the customer, acting as a rational economic actor, would do when entitled to exercise the option. If the customer could profitably sell the asset for more than the cost of the final optional payment, then if they act rationally it can be expected that they will buy the asset. However, if the optional payment is expected to be the approximate open market value of the asset (or more) at the time the option must be exercised, then the customer may equally choose to purchase the asset or return it. Under such circumstances, it is not the case that in the normal course of events title is to pass.

As such the correct treatment of PCP contracts will depend on the level at which the final optional payment is set:

  • If at the start of the contract, it is set at or above the anticipated market value of the goods, it is a supply of leasing with VAT on each installment;
  • If at the start of the contract, it is set below the anticipated market value, such that a rational customer would buy the asset when they exercise the option, it is a supply of goods with a separate supply of finance. VAT is due on the supply of goods in full at the outset and the finance is exempt from VAT.

Consequently, the timing of VAT recovery will depend on the type of agreement and the lessee should be directed by the lessor’s treatment.

VAT Question Of The Week – Call-Off Stocks

My client sells gym-wear and has been approached by a German VAT registered Amazon trader to supply them with 1000 t-shirts which are to be shipped to a warehouse in Germany – this will be the equivalent of six months’ worth of stock. The customer will take the stock whenever it is required, therefore, the client will still retain title and ownership of the goods prior to that. We have read conflicting information on whether the client needs to register for VAT in Germany. Are these call-off or consignment stocks? Does the client need to VAT register in Germany?

The definition for call-off stocks can be found in VAT Notice 725 sec 15.2:

“Call-off stocks are goods transferred by the supplier between member states, to be held for an individual customer in the member state of arrival pending ‘call-off’ for use by the customer as they need them. In the meantime title and ownership of the goods remain with the supplier.

This only applies in cases where the goods are destined for a single identified customer either:

  • for consumption within their business (for example, as part of a manufacturing process)
  • to make onward supplies to their own customers”

The main features of call-off stock are that you have identified the customer and that the specific stock is theirs to purchase as required.

VAT Notice 725 section 15.3 describes consignment stock as “goods you transfer between member states to meet future supplies to be made by you, or on your behalf, in the member state of arrival. The important feature is that the movement of the goods occurs before a customer has been found for them.” This would mean taking local advice and potentially having to VAT register in that member state.

In your scenario, my client has call-off stock. They have identified the German VAT registered entity as their customer and there is an intra-EU movement of goods. This type of supply can be treated as a zero-rated despatch, thus, avoiding the issue of having to register for VAT in Germany. See section 4.3 for conditions for zero-rating, https://www.gov.uk/guidance/vat-and-the-single-market-notice-725#section4.

For the reporting requirements for the VAT return, boxes 6 and 8 will need to be completed – this will be a value based on the cost of the goods. An EC sales list will also need completing, albeit with no value stated until the goods are called off by the customer.

Recent EU wide changes to call-off stocks from 1st January 2020 also require suppliers to enter into a call-off stock agreement and maintain a register of when goods are ‘called-off’. The prescribed record-keeping obligations can be found here: https://www.gov.uk/government/publications/changes-to-the-rules-for-call-off-stock-arrangements-between-member-states/changes-to-the-rules-for-call-off-stock-arrangements-between-member-states.

 

VAT Question Of The Week – Aircraft Parts

My client’s VAT registered business has quite recently started supplying parts for aircraft. His supplier has said they will zero-rate their supply to him if he can provide them with a certificate. He couldn’t explain why the parts would be zero-rated to my client, and we aren’t familiar with this area. What is the certificate for and where does the client get it from?

HMRC has a policy that allows parts bought in a supply chain that is destined for a qualifying aircraft to be zero-rated.

A ‘qualifying aircraft’ is legally defined as any aircraft that is used by either:

  • an airline operating for reward chiefly on international routes
  • a state institution and is of a weight of not less than 8,000kg and is neither designed nor adapted for use for recreation or pleasure

In order to qualify for zero-rating, two conditions must be met. The parts and equipment must be:

  • the sort ordinarily installed or incorporated in the propulsion, navigation or communications systems, or the general structure of a qualifying aircraft
  • for the incorporation or installation in a qualifying aircraft

‘Parts and equipment’ also extends to part-assembled aircraft, for example, the fuselage or wings.

Where there is a supply chain, a supplier in the chain can zero rate if at the time of the supply it is known that the parts are destined for installation in a qualifying aircraft. In order for a supplier to zero-rate the supply, they need to hold evidence that the parts are eligible for relief.

VAT Notice 744C section 13 describes the type of evidence that a supplier may require in order to be satisfied with the status of the aircraft and the intended use of the parts. The section includes suggested formats of declarations that the customer can complete for both of these for an issue to the supplier.

https://www.gov.uk/guidance/ships-aircraft-and-associated-services-notice-744c#evidence-of-qualifying-ship-or-aircraft

Call Now ButtonChat With The Team