savill-birch

Vat & Property a whistlestop tour

Fri, 01 Nov 2024 16:02:07 GMT

The rate of VAT chargeable on supplies of or in relation to property depends on the type of property (for example commercial, charitable or residential) and whether the property is being built, renovated, leased or sold. The information below covers the different supplies at a high level so please get in touch if you would like specific advice in relation to your transaction.

Property Development

The services relating to the construction of a residential property (whether that is a dwelling or a ‘relevant residential’ property such as student or care related housing) are zero-rated. The same applies for the costs related to constructing a property to be used for certain charitable purposes. The zero-rate also covers building materials installed as part of those services.

The conversion of certain properties to residential properties or the conversion to an existing residential property that changes the residential use (e.g. converts to a care home or changes the number of residential properties) can qualify for the reduced rate of VAT (5%). The same rate can apply if the residential property has been empty for over 2 years.

With both the zero-rate and reduced rate, there are certain conditions and restrictions, so it is important to do your research or take advice prior to embarking on a new project. The development of commercial property is always subject to VAT at the standard rate (currently 20%).

Sales and leasing

The first grant of a major interest in a residential (dwelling or relevant residential) or charitable property is zero-rated. This can be either a new build, a property converted from a commercial premises or a property that has been empty for over 10 years. The sale of any other residential property is typically exempt from VAT. The letting of residential property is exempt unless the property is a holiday let, which is subject to VAT at the standard rate.

The sale of commercial property is normally exempt from VAT unless it is new (less than 3 years old) or the property has been ‘opted to tax’ in which case it is subject to VAT at the standard rate. The letting of commercial property is exempt unless the property has been opted to tax.

Option to Tax

The option to tax only applies to commercial land and property and allows transactions relating to the property (e.g. selling or leasing) to be subject to VAT. Where a transaction is subject to VAT, it allows for the recovery of VAT on related costs. Exempt property transactions do not allow for this.

The option to tax can be disapplied in certain situations, for example buildings to be used for certain charitable purposes or buildings to be converted to dwellings. It can also be disapplied if it the arrangement falls within the anti-avoidance provisions. Please take advice if you are undertaking a property transaction with a connected party just in case you fall within these provisions.

Once made, an option to tax lasts 20 years so it is not a decision that should be taken lightly. Also, the option to tax cannot be backdated so the option to tax should be considered before entering property arrangements.

Transfer of a Business

If a property is sold that contains a tenant who will remain in the property after the sale, it may constitute the sale of a business. The sale of a business, if it qualifies as a transfer of a business as a going concern (‘TOGC’), is outside the scope of VAT and therefore, is not subject to VAT or considered exempt. A TOGC is not optional and there are certain conditions that must be met before this treatment is applied.

VAT Recovery

VAT incurred by a VAT registered business can normally be reclaimed if the business has sales that are subject to VAT (either at 0%, 5% or 20%). If a business has exempt income, it cannot reclaim VAT on costs that directly relate to that income and normally must restrict a proportion of overheads (this is called partial exemption). If your business is not able to reclaim all its VAT, it is advisable to seek advice to ensure you are being charged the correct rate of VAT by your suppliers.

Businesses that are required to restrict VAT due to undertaking partial exemption calculations must also review the position on an annual basis. This is to determine the use of costs within the business over a longer period (e.g. to consider seasonal variations of taxable and exempt activity). With certain property transactions (over £250,000 where the costs were subject to VAT) you need to look at the use of the costs over a 10-year period and potentially adjust the VAT initially claimed if the taxable activity of the business changes.

Domestic Reverse Charge

This was introduced in 2021 as a fraud prevention measure between business providing construction services. It only applies if the construction services are being provided to a business who will make an onward supply of those services (e.g. sub-contractor to contractor). If the service is qualifying, the sub-contractor will not charge VAT to the contractor and instead the contractor will charge the VAT itself (and reclaim it). This puts both businesses in the same position but reduces the risk of a sub-contractor charging VAT but not paying it to HMRC. As with all things VAT, there are certain conditions that apply!

Please get in touch if you need VAT support for your business, get in touch

VAT and Property – A WHISTLESTOP TOUR

What is VAT?

Fri, 01 Nov 2024 15:56:57 GMT

What is VAT?

VAT is a general consumption tax assessed on the value added to goods and services. It is seen as a consumption tax because it is ultimately borne by the final consumer rather than businesses. VAT is charged through the supply chain with most businesses being able to claim a credit for the VAT paid at an earlier stage. The VAT on sales is called output VAT. The VAT incurred on purchases is called input VAT.

Example:

Manufacturing Co makes clothes and sells them to Distribution Co for £1000 plus VAT of £200. This VAT is paid to the tax authority. Distribution Co sells to Retail Co for £1400 plus VAT of £280. This VAT is due to the tax authority, but they can offset the £200 charged by Manufacturing Co. Let’s assume these are the only transactions in Distribution Co’s VAT return so they have VAT on sales of £280 and VAT on purchases of £200. Therefore, they only pay £80 to the tax authority.

Retail Co sells these products to lots of customers and has income from these sales of £2040. As retailers typically sell inclusive of VAT, they must report VAT of £340 (VAT taken from the sales rather than added). As they can claim back the £280 VAT charged by Distribution Co, they only have VAT of £60 to pay to the tax authority.

The customers cannot reclaim the VAT they paid for the clothes as they are not registered for VAT so the tax authority ‘gains’ the £60 to fund…well a bit of everything really!

How do we apply it?

VAT and GST are common in many countries around the world. They all have very similar rules but with local variations. Even the countries of the EU that have the EU VAT Directive have local VAT laws which differ. When determining whether VAT is due on a transaction, we must consider the following:

· What are we selling?

· Who are we selling it to?

· Where are they located?

· What is the value?

· Is it via a marketplace?

The reason these questions are important is because VAT rules differ based on whether the buyer is a business or consumer, whether they are local or international and whether the product is subject to the standard or any reduced rates or has any other special VAT rules.

Please get in touch if you need support identifying whether VAT applies to your sales or not. Get in touch

Top mistakes seen when reclaiming VAT on expenses

Fri, 01 Nov 2024 15:54:56 GMT

Top mistakes seen when reclaiming VAT on expenses

We regularly see the same errors in relation to VAT claimed on expenses so we thought it may be helpful to highlight some of these to assist businesses preparing their VAT returns. If you are in any doubt, please get in touch.

There is no VAT on trains, buses and flights so please do not try and claim VAT here.
Most taxis companies are structured in a way that it is the driver providing the service directly to the passenger. Therefore, unless they have exceeded £90,000 in fares, they will not be registered for VAT. Some firms will operate differently so request a receipt to be sure.
Uber lost its argument that it was an agent rather than a principal and therefore, it is Uber that is supplying the services to the passenger (and therefore fares should be subject to VAT). However many people noticed an absence of VAT on Uber charges. This appears to be because they are operating the tour operators’ margin scheme (TOMS). This applies where a business buys in certain travel services and supplies those on without material alteration. Under TOMS, only the margin is taxed and therefore, Uber will only be paying VAT on the difference between the price paid for the ‘bought in’ drivers and the fare paid by the passenger. The operation of TOMS by Uber means business users are not able to reclaim VAT on their trip. This is because the issuance of VAT invoices is not permitted under TOMS and no VAT amount can be shown on trip details.
Uber Eats, Just Eat, Deliveroo and other food delivery providers will typically be acting as agent and VAT will be charged on the service fee only rather than the full meal amount. Make sure you check the invoice to identify the VAT charged.
When reclaiming VAT on restaurant costs make sure you check how much VAT has been charged. If a tip has been added this will be outside the scope of VAT. It is only obligatory service charges that are subject to VAT. If something is voluntary, even if added to the bill, it will be outside the scope of VAT and therefore, VAT can only be claimed on the meal costs (assuming the cost is not business entertainment!).
VAT can be reclaimed on staff entertainment but not on business entertainment. If both staff and non-staff are in attendance, VAT can only be claimed on the staff element if they are not there to host the non-staff. If they are, no VAT can be claimed. Also, director only entertainment is not valid for VAT recovery.
VAT incurred overseas cannot be reclaimed on the UK VAT return. If these costs are substantial, it may be worth submitting an overseas VAT recovery claim.
VAT cannot be claimed on gifts if the cost to the business per employee or customer exceeds £50 in a 12-month period.
Most overseas suppliers (Google, Facebook, LinkedIn) do not charge VAT on their services to UK businesses. However we regularly see this included in Box 4 (VAT recoverable on expenses) and this is incorrect. If VAT has been charged, it will likely be because your VAT number has not been provided and they are treating you as a consumer. Strictly, HMRC will not refund VAT that should not have been charged and it is therefore, advisable to update your account with your VAT number.
Insurance Premium Tax (IPT) is not VAT and cannot be reclaimed.
There is no VAT on milk, teabags, fruit, coffee granules and therefore, when stocking up on these for the office you will not be incurring VAT.
You must hold a valid VAT invoice to reclaim VAT on costs. This can be a simplified invoice in some cases (think supermarket till receipt) but you can still only claim VAT if the items are subject to VAT and you are incurring the cost for business purposes.
VAT can only be reclaimed on fuel to the extent it relates to business mileage. If private mileage is permitted/undertaken, a fuel scale charge is required.
Not all tolls are taxable, it depends on whether it is private or operated by the local authority. Similarly, parking is subject to VAT if it is off street (carpark) but not if it is on street. A receipt is therefore vital to determine whether VAT has been incurred.
No VAT can be reclaimed on cars purchased if they are available for private use. If a car is leased and used for both business and private purposes, 50% of the VAT can be reclaimed.
Import VAT incurred when goods arrive in the UK is either paid at the time of importation or via the VAT return. Only official evidence is accepted for VAT recovery purposes which is the C79 import VAT certificate or the Postponed Import VAT Certificates. An invoice from a freight agent is not acceptable for claiming import VAT.

Global E-Commerce (supplies of goods)

Fri, 01 Nov 2024 14:49:57 GMT

We always recommend that a business takes advice to map out their intended markets and platforms as the VAT treatment of overseas sales depends on the seller location, the location of the goods at the time of sale and whether the goods are sold via a marketplace or not. This guide is intended to be high level so help businesses understand how VAT may apply to their global sales but please get in touch so we can determine what VAT registrations are required.

A VAT/GST registration is typically required in each country you hold goods. This is because you have imported the goods in the name of the business and plan to sell from this location. These sales will likely be considered taxable supplies which can lead to a VAT/GST registration requirement.

Many countries have marketplace rules now where the marketplace (e.g. Amazon) is responsible for accounting for the VAT to the customer. This can mean the seller/merchant does not have to worry about registering for VAT/GST (unless they hold goods locally).

If the seller/merchant is not utilising a marketplace (or the country doesn’t operate marketplace rules) it will need to monitor its sales to overseas countries to determine whether it needs to register for VAT. Many countries have introduced rules which tax remote sellers of low value goods (i.e. goods sent from outside the country). For example:

Sales to Norway – the sale of goods under NOK 3,000 are considered low value (per good, not per consignment). Where the combined value of low value sales to consumers in 12 months exceed NOK 50,000, VAT registration is required.
Sales to Australia – consignments of up to AUD 1,000 qualify as low value. If the value of these sales to consumers in 12 months exceeds AUD 75,000, GST registration is required.
Sales to New Zealand – goods of up to NZD 1,000 are low value and if the value of these sales to consumers exceeds NZD 60,000 in 12 months, GST registration is required.
Switzerland – the supply of low value goods that total more than CHF 100,000 in 12 months must register for VAT. Low value goods are defined as goods where the import VAT does not exceed CHF 5 (goods value of CHF 65 for standard rated goods and CHF 200 for reduced rated goods).

The EU introduced the following simplifications in 2021:

Import One Stop Shop (IOSS) - this is available for businesses selling goods located outside the EU at the time of sale to EU consumers. It is a simplified EU wide VAT registration that allows VAT to be charged at the rate in force in the customers country. If this is used, consignments of under EUR 150 are taxed at the time of sale. If IOSS is not used or the consignment is over EUR 150, the customer is liable for import VAT. IOSS is currently optional for suppliers.
One Stop Shop (OSS) - if the goods are in the EU at the time of sale (i.e. held in an EU warehouse), the sales should be reported via the OSS. It is also an EU wide VAT return which allows the seller to account for VAT in the customers location. This replaced distance sales registrations.

With Brexit, the UK introduced new rules in relation to low value goods (consignments under £135). If the goods are outside the UK at the time of sale (and under £135), the supplier must register for UK VAT and charge this to UK customers. The location of the supplier is irrelevant.

VAT treatment of supplies of services outside the UK

Fri, 01 Nov 2024 14:45:39 GMT

To determine the VAT treatment of services, we need to understand what is being provided and the location and status of the buyer and seller.

Sales to business

The default position for the UK, EU and most countries that operate a VAT or GST is that VAT/GST is chargeable when the supplier and customer are in the same country. If they are in different countries, VAT/GST is typically not charged as this is considered an export of services. The business customer is normally responsible for the VAT in their country using the reverse charge procedure (this is when the customer charges themselves VAT and also reclaims it subject to their VAT recovery position). The exception to this is admission charges and some other location-based services so it is not guaranteed that no VAT is due between businesses in different countries.

Example:

UK Co has been asked to provide marketing services to a French business as they want to target UK customers. UK Co does not need to charge VAT to its French customer as it is a business. UK Co needs to retain evidence that their customer is in business. This can be their VAT number or business information.

Sales to consumers

The default position for most VAT/GST operating countries is that VAT is chargeable on sales to consumers regardless of their location. There are exceptions of course:

· Digital services – a digital service is a service that is delivered with little or no human intervention (e.g. pre-recorded webinar, e-book or other automated service). It typically does not cover services provided digitally with human intervention (e.g. bespoke design services provided by a digital file, live training sessions), although the EU is introducing new rules from January 2025 that capture virtual events within digital services. Where a service is considered digitally supplied, it is subject to VAT/GST in the customer’s location for certain countries and a VAT/GST registration may be required.

In the EU these are reported via the OSS return. EU and non-EU sellers will be required to register.
In the UK these are reported in the UK VAT return. Again, UK and non-UK sellers will be required to register.
In other countries (for example, Norway, New Zealand, Australia, Singapore, Switzerland), the value of digital services will need to be considered to determine whether VAT registration is required. Many other countries also operate digital services rules.

Intellectual services – some countries, e.g. the UK and EU allow intellectual services to consumers outside the UK/EU to not be subject to VAT (advertising, design services, consultancy).

Example:

UK Co has been so successful with the eCommerce sales they have decided to offer training to help those that want to launch a business. They initially offer these live but demand is so great they have pre-recorded the training so people can download the course. As the attendees have not yet started trading, they cannot provide VAT numbers to UK Co and are treated as consumers. The initial live courses are subject to VAT to UK customers but not (currently) subject to VAT to consumers located outside of the UK. However, from January 2025 live training to EU consumers will need to be reported on the OSS. The pre-recorded training will fall within the definition of digital services. UK Co will need to report sales to EU consumers on the OSS and monitor their sales values around the world to see if they are required to register anywhere else.