The Scope of VAT – Supply Issues CH1 The Scope of VAT Legislation S4(1) VAT Act 1994 Determines: 1. Whether transaction within scope of VAT in UK 2. And if yes, whether VAT is due on transaction Transactions For transaction to fall within scope of VAT, first 4 conditions within s4(1) VATA94 within scope of must be met: VAT – first 4 1. There must be a supply of goods or services conditions 2. Supply must be made by taxable person 3. Supply must be made in the course or furtherance of business 4. Supply must be made in UK Note: both taxable and exempt supplies are within scope of VAT if all 4 conditions are met. (Useful to consider in order above unless different order suits transaction) 5th Condition – is Only if first 4 conditions are met, consider 5 th condition: VAT due? 5. Is it a taxable supply? Transactions Transaction outside scope of VAT if any of: outside scope of It is neither a supply of goods nor n or services VAT Not made in UK Not made by taxable person Not made in course/furtherance of business S5 VATA94 – contains definition of supply, goods, and services.
Taxable person definition in s3(1) VATA94 In the course of business In UK Taxable supply
Amount of VAT due Next
Someone who is, or is required to be, registered for VAT
Determined by case law Rules determining place of supply of goods are contained in s7 VATA94 Supply of services in s7A Defined in s4(2) VATA94 Taxable supply is a supply of goods or services made in the UK that is not an exempt supply. Note: exempt supply is still within scope of VAT Determined by 1. Value of supply 2. The ‘liability’, ie. The rate of VAT that applies. After determining amount of VAT due, then determine when it has to be accounted for.
CH2 Meaning of Supply – Goods or Services Supply – VAT EU legislation – Article 2(1) Principal VAT Directive says: legislation – Transaction subject to VAT if: consideration a. Supply of goods in EU by taxable person b. For consideration c. Supply of services for consideration in EU by taxable person d. Importation of goods
UK legislation clarifies term in s5(2) VATA94:
Supply includes all forms of supply but not anything not done for a consideration.
Exception Para 5(4) Sch4 VATA94 Consideration
HMRC view of supply
Conclusion: For transaction to be a supply, there must be a consideration Legislation can ‘deem’ a transaction to take place, even if there is no consideration involved. Deemed supply takes place when business assets used for non-business purposes, ‘whether or not for a consideration’. Not defined in either VATA94 or EU VAT legislation. European Court of Justice confirms meaning will be one given by Second VAT Directive: Consideration means everything received in return for supply of goods or services. Consideration can be monetary or non-monetry, or mixture of two. Note: There must be a direct link between supply made and consideration given. Consideration must capable of being expressed in money. A person may make a supply, by Assigning or granting a right Surrendering a right or agreeing to refrain from doing something Accepting a payment/inducement in return for some act A supply which is not a supply of goods is a supply of services. Basic definitions in s5 VATA94 are extended by virtue of Sch4 VATA94. Para1 Sch4 provides set of general rules.
Goods or Services General rules for determining goods or services
Goods – immediate change in ownership – Para1(1) Sch4 Any transfer of the whole property in goods is a supply of goods. This means that 1. Title (ownership) 2. And either, Possession of the goods Or control over the goods has transferred from supplier to customer. Goods – delayed change in ownership – Para1(2) Sch4 Where possession of goods is transferred under agreement that ownership (title) will also transfer at some point in future, that is a supply of goods. Types of agreement that fall under this rule are: Hire purchase Lease purchase Contract purchase Hire purchase has two links in chain of supply. 1. Supplier to finance provider 2. Finance provider to customer
Supply of services
If customer takes bank loan then purchased good outright, would be supply of goods under Para1(1) rather than Para1(2). No change of ownership Where possession of goods is transferred, but ownership is not
Supply of a part share in the ownership of goods
Specific rules
There are specific rules for two groups of supplies given in Sch4 Specified utility services The supply of any form of power, heat, refrigeration, or other cooling or ventilation is a supply of goods. Supplies of land The grant, assignment or surrender of a ‘major interest’ in land is a supply of goods for VAT purposes. Any supply of land that does not involve a ‘major interest’ is a supply of services. ‘Major interest’ in land is defined in s96(1) V ATA94 as The fee simple/freehold title or a tenancy for a term exceeding 21 years, and in relation to Scotland means interest of the owner, or the lessee’s inters for a period not less than 20 years.
Ch2 Supply Issues Deemed supplies
Deemed supplies may arise where a taxable person Disposes of business asset for no consideration Makes business asset available for non-business use
Allows bought-in services to be used for non-business purposes
Removes their own goods to another member state of the EU
Has their goods sold in satisfaction of a debt by their creditor
Has goods on hand at deregistration S5(1) Sch4 VATA94 Taxable person who gives away goods they own is ‘deemed’ to have supplied those goods. Disposals such as gifts, samples or goods taken for personal use are treated as sales. Person making disposal needs to account for output tax on them. Gifts Includes gift to customers and employees for any reason Taxable person can treat gifts as overhead and recover input tax Inducements Need to distinguish between gifts and inducements There is usually something done in return for an inducement and so there will be no need to rely on deemed supply legislation because there will be an actual supply Output tax must be accounted for if taxable person recovers input tax on purchases it intends to give as gifts and gift exceeds a certain value. No deemed supply unless cost of gift together with any other gifts to same person in rolling 12 month period exceed £50. ECJ ruling: Free samples to promote sales – no deemed supply Not limited to existing and potential customer – includes goods given to any party who can influence future sales (eg media, scientific testing, reviews etc) Para5(4) Sch4 VATA94: Deemed supply occurs where taxable person loans out goods free of charge or allows them to be used for personal purposes.
Disposes of business asset for no consideration
Disposal of assets – de minimis amounts Disposal of assets – samples
Makes business asset available for non-business use
Exclusions from this rule: No deemed supply under Para5(4) Sch4 if
Assets excluded from deemed supply by Para5(4A)
Employee’s free use of business assets Non-business use of services
Removes their own goods to another member state of the EU
Free use of asset I provided in support of provider’s business The assets are listed in Para5(4A) Sch4 as being excluded from this deemed supply.
Using assets in support of provider’s business Eg. Loaning wine glasses to customer who spends a certain amount on wine or courtesy car from a garage to customer while customer’s car is serviced. Para5(4A) Sch4 VATA94, with effect from 1 January 2011 Excluded assets: Any interest in land Any building or part of building Any civil engineering work or part of such work Any goods incorporated or to be incorporated in building or civil engineering work (installed as f&f) Any ship, boat or vessel Any aircraft From 1 Jan 2011, any change in taxable B/U of these assets is adjusted under Capital Goods Scheme. Ie. Perks – normal gift rules apply
Article 3 SI1993/1507 Taxable person purchases services for business use and either uses, or allows another person to use, those services for a non- business purpose. Para6 Sch4 VATA94 Transfer of ‘own goods’ from one EU member state to another is a ‘deemed supply’. (Ownership remains with same person) 2 situations Person is VAT registered in both UK and other member state- sale can be zero rated as long as: Customer’s (person in member state where goods sent) VAT registration is obtained and quoted on invoice And supplier obtains proof that goods have left UK
Goods sold in satisfaction of a debt
If person not registered for VAT in other member state, and the removal from the UK is not temporary, there is a deemed supply and output tax should be accounted for on value of the transferred goods. Para7 Sch4 VATA94 The sale of goods by creditors and bailiffs is a deemed supply by the debtor. If debtor is not a taxable person, paragraph does not apply and supply is outside the scope of VAT.
Goods on hand at deregistration
Where goods sold are owned by taxable person and form part of business assets, output tax will be due on amount generated by sale. As proceeds not received by the owner, VAT cannot be accounted for the usual way. Regulation 27 of VAT Regulations 1995 requires auctioneer or any other seller to account for VAT due on them using form VAT833. Para8 Sch4 VATA94 deems there to be a supply immediately before deregistration takes effect.
Sole proprietors and deemed supplies Deemed supply
To be a deemed supply, the VAT due must be more that £1000. Para5(6) Sch4 VATA94 There is a deemed supply when sole proprietor uses a business asset for nonbusiness use. Making supply to themselves as taxable person and final consumer. Purpose is to ensure taxable person does not have advantage over person who is not taxable by being able to recover input tax. Therefore, deemed supply rules only apply if taxable person was entitled to claim at least some of the input tax on the purchase of the assets.
Self- Supplies
Similar provision in relation to business services bought in from a third party. Treated as supplies even though outside normal definition. Self-supply rules apply mainly to taxable persons who are ‘partly exempt’ , and are unable to recover all of the input tax that they incur. Purpose of rules is To ensure equity if treatment between businesses Or as an anti-avoidance measure
Illegal Supplies
Where a person is required to account for a self -supply, they must account for output tax on full value of that self-supply. However, while they can recover input tax, they can only recover proportion of input tax that relates to their taxable supplies. Appear to fall within definition of supply but are in certain circumstances excluded from the charge to VAT. Illegal supplies are in most circumstances within scope of VAT. Where types of goods are legitimately and legally traded by others, can be within scope of VAT as to not give criminal unfair VAT advantage. ‘Fiscal neutrality’ and ‘principal of fairness’. Eg. Counterfeit or stolen goods. Where trade in a type of product is prohibited, there is no unfair VAT advantage and there is no competition with legitimate suppliers. The only way to stop this activity is through criminal courts and confiscation. Eg. Narcotics and counterfeit money. Different rules apply for direct taxes.
Ch4 – Single and Multiple Supplies Single/multiple Outcome could affect supply Place of supply Time of supply Liability of supply Amount of VAT due on supply Areas of difficulty Park and ride services examples Supply and deliver services
Supply and install services Supply and insure services Transport and catering
Education and learning material Failure to
VAT risks/errors
Properly identify the supplies being made
Allocate the correct liability for each supply made
Allocate an appropriate value to each supply made Single = one Multiple = more than one Combined supply = a multiple supply, which is either all goods or all services, where all components are liable to same rate of tax. Composite supply = single supply with more than one component Compound supply = a transaction that consists of different components and these components are supplies in their own right – a multiple supply. Incidental elements = elements of a supply that naturally accompany the main supply – but are not a significant part of it. Integral elements = components of a supply that are essential or necessary to the supply as a whole. Mixed supply = refers to a single composite supply where different components have mixed liabilities or are both goods and services. Two-part tariff = where there are two or more payments that appear to relate to different transactions at different times, but which amount to the purchase of a single supply. Ie railcard relates to purchase of future tickets. Ancillary service = service which does not constitute an aim in itself for customers, but is a means of better enjoying the principal service supplied. Nothing within EU or UK VAT legislation to determine whether a transaction is a single or multiple supply. In some areas, HMRC relies on agreements with the trade or on Statements of Practice.
Terminology
The legal position
Card Protection Plan Ltd (CPP)
Main tool for deciding is case law. Case reached House of Lords in 1996. House of Lords referred case to ECJ and asked for guidelines.
Applying the CPP tests
ECJ guidelines When considering a transaction that consists of a number of components, regard must be had to all the circumstances in which transaction takes place. Each supply of service must normally be regarded as distinct and independent. A supply that comprises a single service from an economic point of view should not be artificially split. There is a single supply in cases where one or more elements are to be regarded as ancillary services. The fact that a single price is charged is not decisive. It is important to apply to all the CPP tests. One approach is to apply the tests in two stages. 3. Having regard to all circumstances, identify the essential features of the transaction to determine what the customer is actually receiving. The question is: Is the customer receiving two or more supplies each distinct and independent from the other. Or is the customer receiving one supply made up of a number of component parts.
4. If stage one identifies separate supplies, need to determine whether any of the parts can be regarded as principal supply to which the other goods or services are ancillary.
HMRC Approach
Supply basics
Ancillary elements
HMRC consider the ECJ’s guidelines support a ‘substance and reality’ approach. Need to consider following questions What does recipient receive in return for the consideration? How is the supply advertised? Is there a contract or agreement that describes the supply? Is there a component of the transaction that is sought by the recipient as a benefit that stands on its own? Or do all components bar one serve only to enhance the quality or enjoyment of the principal supply? What does the invoice show? (Only use as a general guide) Where supply is single item such as book, it is normally clear that it is a single supply. Where supply appears to consist of more than one component, supply is still a single supply if there is clearly one overall supply. This applies where any remaining components can be seen as incidental, integral or ancillary. Term ‘ancillary’ comes from ECJ decision in CPP and covers both ‘integral’ and ‘incidental’ elements.
Concept of whether one supply is ancillary to another was a key issue in the case of Madgett and Baldwin. This case concerned a hotel in Devon that offered travel to and from it for its distant customers. Offer was taken up by 90% of its customers. Hotel also provided excursions bought from third parties. Customers paid a single inclusive charge for coach travel, accommodation and excursions. Case was referred to ECJ which found that the provision of transport ‘went beyond tasks traditionally entrusted to hoteliers’. Such services were not ancillary to supply of accommodation and were a p rincipal service in their own right. Therefore there were two separate principal supplies for VAT purposes of accommodation and transport.
Integral elements Various court cases have decided that the test of whether component is part of single supply, or separate supply, is whether the component is an integral part of what is being supplied. This includes essential, necessary or incidental and goes further to include non-essential elements which are integral to the actual supply. Case – Mander Laundries Business argued that launderette supplies were multiple supplies of mixed liabilities. Use of washing machine and salt used for softening water was standard-rated, whereas supply of treated water, oil, gas and electricity were zero -rated. Applying CPP rules means that principal supply is service of washing clothes and other components are integral to this supply as service cannot be provided without them. Therefore single standard-rated supply. Incidental elements Naturally accompany the main supply and are not generally a significant part of it. Eg booklet with electronic equipment, packaging materials etc. An incidental element is an integral part of the overall single supply.
Single supply indicators
Manchester United plc
Multiple supply basic points
Multiple supply indicators
The more of the following features a transaction has, the more likely it is that it is a single supply comprising more than one component. There is a single price or the customer pays the same amount, no matter how much of the package they actually receive or use. The components are advertised as a package. The different components are not available separately. Goods are physically packaged together, for example a plastic toy enclosed in packet of cereal. It would not normally make sense to supply part of the package independently, eg new fridge and its delivery. Although components are separately priced, the values seem to be arbitrary. The customer perceives what they buy as a single supply, not as independent supplies. Eg, supply of tailoring service and cloth of new suit. Different components are aspects of the quality or grade of the overall supply. Different components are integral to one overall supply. If one or more is removed, the nature of the supply would be affected. Some components are clearly incidental or ancillary to an identifiable main supply. The separation of components appears artificial. Tribunal decision involving match day ‘hospitality packages’. Essential feature eof package was right top attend and watch match. Match programme was a souvenir and therefore a way of better enjoying the match. Therefore programme is not aim in itself and is part of the overall single supply. The components of the supply should not be integral or ancillary to another supply but are separate, principal, supplies in themselves. Examples: goods are packaged together such as Book with accompanying audio or video tape which may be used independently of the book and require particular equipment for their use. Children’s colouring book issued with felt tip pens which can be used without the book. The more of the following features a transaction has, the more likely it is that a multiple supply is being made. There is more than one supplier. Components are separately priced or invoiced. Components are available separately. The different components of supply are provided at different times. The different components are not interdependent or connected to each other in any way. Case – Durham River Trips Limited Business provided trips that included a meal. Decision at VAT tribunal was that this was a multiple supply for a single consideration but different liabilities.
Ch5 – Consideration and Valuation Consideration Not defined in either current UK VAT legislation or the Principal European VAT definition Directive.
Monetary payments Non-monetary payments Consideration – case law
However, the ECJ has confirmed that ‘consideration’ must have a single meaning throughout the EU. The ECJ has also confirmed that the meaning is the one contained in the 2 nd VAT Directive: A consideration need not be in the form of money. It may be based, in full or in part, on a non-monetary amount, as long as that non-monetary element can be expressed in monetary terms. Includes payment by deduction from pay, bitcoin etc
Includes barter and trade ins or part exchange Two cases highlight link between consideration and supply. Dutch Potato (Cooperative Aardapplenbewarrplaats) Cooperative provided cold storage facilities to members and normally charged for them for this service. But for 2 consecutive years no charges were made which reduced profits and lead to fall in the value of each member’s shares. Dutch tax authority argued that this reduction in value was a consideration but the ECJ rejected this argument because there was no direct link between storage service and decrease in share price. Also the reduction in share value could not be directly equated to the cost or any other measure of the value of the storage services provided. Apple and Pear Development Council Council is a statutory body formed to promote apple and pear sales. Commercial growers were required to register and pay annual fee. Whole industry received the benefits of its promotional activities. ECJ held that there was no direct link between supply made (promotion) and the payment received (annual levy). Also growers were obliged to pay fee – no consensual element.
Deposits
Naturally Yours Cosmetics Ltd Business was wholesaler of cosmetics. Consultants purchased goods wholesale and sold them at parties retail. Parties were arranged by hostesses who were allowed to purchase goods for nominal sum as a reward. Business argued that VAT was only due on price paid. HMRC argued VAT was due on retail price and that non-monetary amount was the hosting of the parties. ECJ ruled that VAT was due on normal selling price and that the n on-monetary element could be valued by looking at the normal selling price (difference between this and nominal sum). There must be some form of bargain or transaction between the parties. A payment should be related to what the payer receives although the fact that people pay same amount for different benefit does not stop it from being a consideration. Absence of consensual element Lack of control by payer over the services provided If deposit is payment in advance of a supply, then it is a consideration.
Third party payments
However if deposit is actually a security against safe return of goods, it is not a consideration. When someone other than person receiving supply makes a payment to supplier. Can include payments described as ‘subsidies’.
Consideration – indicators
Indicators of no consideration
Fines and penalties
Donations
Grants Charges for using payment method Gratuities, tips and service charges Value of supply
Valuation rules
Where consideration is wholly in money Where consideration is not wholly in money Allowance for traded-in goods
If it is a punitive amount for breaching a contract or unlawful act, it is outside scope of VAT. However, many payments described as fine or penalty are in fact additional charge for supply and have same liability as the supply. If it is freely given, it is outside scope of VAT. Payment has to be unconditional. Questions/tests: Does donor receive anything in return? Are there conditions attached to the payment that go beyond having to mention it in account statements? What will payments be used for? If donor does not benefit directly, does any third party receive a benefit? Is there a contract and what are the terms and conditions? Tests are based on Mr Tolsma case decided by ECJ. He played barrel organ on public highway and invited donations from passers-by. ECJ ruled that donations were not within scope of VAT as supply of service was not effected for consideration. Because there was no agreement or necessary link. Similar issues to donations. Payment of grant by third party may be a consideration for a supply. Fees are a further consideration for supply of goods or services. If freely given – outside scope of VAT If service charge is compulsory – it is part of consideration for supply. Legislation: VALUE + VAT = CONSIDERATION Value is exclusive of VAT. 3 situations: Where consideration is wholly in money Where consideration is not wholly in money Certain specific circumstances Value for VAT purposes is the amount that with the addition of VAT chargeable is equal to the consideration. Need to work out the value of part of consideration which is not wholly in money.
Sometimes, dealers offer fixed allowance for traded-in goods irrespective of their true value. Subject to following conditions, the dealer can treat such allowances as a reduction in the consideration rather than a part-exchange. Fixed allowance must be available Irrespective of nature of traded-in items Or for any item of particular class regardless of age, make, model or condition Or for an item of a particular class provided there has been no attempt to value the item and there is no reason to accept it other than for the particular deal
Face-value vouchers
Single purpose vouchers
Multi purpose vouchers
Credit vouchers
Retailer vouchers
Other vouchers
Discounts
Unconditional discounts Prompt payment discounts (PPDs)
Legislation contained in Schedule 10A to VATA94 Covers all forms of face value vouchers, including vouchers, tokens and stamps that represent a right to receive goods and services. From 10 May 2012, VAT treatment depends on whether face-value vouchers are Single purpose vouchers Or multi-purpose vouchers Carry right to receive only one type of goods or services which have single rate of VAT. Eg prepaid phone card. From 10 May 2012, all single purpose face value vouchers are subject to VAT when they are issued. VAT liability is liability of goods or services holder is entitled to receive. Carry right to receive more than one type of goods or services which have different VAT liabilities. Fall into 3 categories Credit vouchers Retailer vouchers Other vouchers Typically gift vouchers administered by trade bodies or associations or that can be redeemed at a number of different retailers. Normally becomes consideration when it is used/redeemed to pay for good or services. Person who accepts credit voucher in payments must account for VAT on full face-value of the voucher. Normally issued and redeemed for services by the same person. Eg high street retailer. VAT is accounted for at time the voucher is redeemed for goods or services on value of voucher when it was initially sold. Include all kinds of face value vouchers that are not defined as credit vouchers or retailer vouchers. Are subject to VAT on their sale. Eg if retailer sells gift vouchers to an intermediate supplier, onward sale of vouchers by intermediate supplier is subject to VAT. 3 main types: Unconditional Prompt payment Contingent Arise where supplier offers a discount for which customer does nothing in return. Tax value is based on discounted amount. Offered on condition that customer pays within specified time. VAT treatment of PPDs changed on 1 April 2015 From 1 April 2015 PPDs only reduce tax value of customer pays supplier in accordance with terms of PPD offer – ie customer pays in time to qualify for PPD. If supplier offers PPD, they must issue VAT invoice showing full amount due and amount of VAT due on full price. Supplier must record full amounts in their VAT records. VAT invoice must also include PPD terms. Supplier only becomes entitled to reduce output tax if customer pays in time to qualify for PPD. If customer meets terms, supplier should issue credit note to customer and record the reduction in value of the supply and the VAT charged.
As an alternative to issuing a VAT invoice and then a credit note, supplier may choose to issue a VAT invoice showing: Full price plus full amount of VAT Terms of the PPD Reduced price and VAT due if terms with PPD are met A statement that no credit note will be issued Under this option, supplier must record full amount of VAT in their records when VAT invoice is issued, and may only reduce VAT output tax if customer pays in accordance with terms of PPD.
Contingent discounts
Discount summary? Manufacturers refund
PPDs before 1 April 2015 Tax value was based upon discounted amount even if customer did not take up offer. Only requirement was that the VAT invoice had to clearly state the discount terms. If supplier offered multiple settlement discounts such as 10% for within 14 days, and 5% for within 30 days, the highest rate of discount was always deducted before VAT was calculated. This was because VAT was charged on the lowest price offered to the customer. Supplier offers discount on condition that customer does something later, eg that customer’s purchases reach a certain threshold. Tax value is based upon the full amount paid If customer earns discount, supplier makes refund but is not required to issue credit note. As long as both parties agree, no requirement to adjust tax amounts. For discounts except contingent discounts, VAT is calculated on d iscounted value. For contingent discounts, VAT is calculated on full value and may be adjusted when discount is earned. When manufacturer makes refund direct to final consumer who purchased goods from another business eg retailer. Refund may be in form of cash payment (cash back), or in form of vouchers to be used at later date. EU law – total VAT collected by HMRC must not exceed VAT due on total amount paid by final consumer. If manufacturers refund reduces total amount, VAT collected by HMRC must also be reduced.
Manufacturer Final consumer
Refund
From 1 April 2014, Regulation 38ZA SI 1995/2518 applies to manufacturers refunds. If refund goes from manufacturer to final consumer, it is manufacturer who adjusts their VAT output tax to reflect VAT element of refund. Manufacturer must not issue credit note. Reg38ZA refers to ‘first supplier’ = any VAT registered business that starts supply chain in the UK. Usually non-VAT registered person, but can be VAT registered person who purchased item to use in business. If final consumer is VAT registered, they must adjust original input tax to reflect reduced amount of VAT paid after refund is received. Payment only qualifies as refund under Reg38ZA if it represents reduction in consideration for final supply of the goods. Can be either monetary or in form of vouchers. If refund is in form of vouchers, manufacturer must not adjust VAT output tax until voucher is redeemed.
Under Reg38ZA manufacturers can adjust their output tax in respect of payments made In relation to ‘money back’ promotions For faulty or damaged goods Where customer is generally dissatisfied with a product In connection with product recalls for safety, health or quality issues
Imports
Deemed supply of goods
Deemed supply of services Multiple supplies
A manufacturer cannot use Reg38ZA to adjust output tax in respect of payments To third parties to repair faulty goods To customers as compensation for out of pocket expenses, ie repairs by a third party For consequential loss, ie damage to other items In connection with customer doing something material for manufacturer, ie completing survey /cases where goods are repaired, exchanged or replaced without refund being made. Goods which enter UK from outside EU. Generally, value for VAT of imported goods will include All taxes, duties and other charges levied outside the UK All taxes (except VAT), duties and other charges levied inside the UK by reason of importation All incidental expenses such as commission, packing, transport and insurance up to the first destination in the UK All other incidental expenses required to enable the goods to reach th eir UK destination. Where deemed supply of goods results from Business assets being given away – gifts, personal ue and so on Or when goods are on-hand at deregistration Then the value for the deemed supply shall be determined in accordance with the legislation in paragraph 6 of Sch6 VATA94. Legislation sets out strict hierarchy of rules for valuing the goods. 1. If supplier were able to buy goods identical to deemed supply, then price of those goods gives the value of supply 2. If there are no identical goods available, but the supplier would be able to buy similar goods (including age and condition), then price of those goods gives value of deemed supply. 3. Failing either of these possibilities, then the value of the supply is cost of producing equivalent goods at that time. These rules only apply if there is no consideration received for the goods. Any payment means that these rules cannot be applied. Where there is deemed supply of services, the value of deemed supply shall be full cost to supplier of providing the services. Where there are multiple supplies all at the same rate of VAT, there is no need to establish value of each individual component. When individual supplies are at different VAT rates. Need to assign the correct value to each supply. There is nothing in the legislation that states how to do this. However, there is a requirement that values attributed to various supplies are ‘properly attributable’. Therefore, values have to be fair, supported on a logical, calculated basis. General principles
It is for supplier to propose method of apportionment in first instance. HMRC has no power to insist on a particular method. There are 2 basic apportionment methods that have proved useful in many circumstances. Using costs attributable to different supplies involved Or using normal selling prices Calculation examples – page 200 -201
Ch6 – Meaning of Business Legal EU legislation Does not use the term ‘business’ in Principal VAT Directive interpretation Instead refers to ‘economic activity’ by reference to taxable person UK legislation S94(1) VATA94 The following are treated as business Trade profession or vocation Activities of member’s club or association Admission to premises Work done to wind up a business Transfer of a going concern Case law 2 cases provide the main principles behind HMRC policy Morrison’s Academy Boarding Houses Association Lord Fisher Company limited by guarantee and accepted as charitable organisation by Inland Morrison’s Academy Revenue. Provided boarding houses for school. HMCE sought to recover output tax and company appealed. Appeal was dismissed by court of appeal and that business was within scope of VAT because they made taxable supplies similar to those made by others for profit, even though this company was run as to not make profit or loss. Boarding fees were therefore seen as business income and business had to account for output tax. Lord Fisher Lord Fisher was registered for VAT in respect of his estate and wildlife park and accounted for VAT on receipts from occasional ‘commercial’ shoots. Also ran shoots for friends and relations and asked for contributions which covered half the costs. He did not treat t his as income ‘in the course of furtherance of business’. HMRC disagreed. Lord Fisher appealed and Tribunal and High Court upheld his appeal. High Court reviewed Morrison’s Academy decision and ruled as a matter of fact that shoots for friends and relations was not part of business activities. The business 6 tests tests Is the activity a serious undertaking? Is the activity pursued with reasonable or recognised continuity? How frequently supplies made Does the activity have substance in terms of supplies made? Value of supplies or intended supplies Is the activity conducted in a regular manner and on sound and recognised business principles? Are the supplies of a sort commonly made by those who seek to profit from them? Is the activity predominantly concerned with making of supplies for a consideration?
Risks and areas of concern
Preparatory acts – can register for VAT as ‘intending trader’ Should apply tests to each activity of business – not to the business as a whole. Non-business issues Input tax Specific circumstances Museum and galleries Entrance fee -probably business activity Local authorities and public bodies Responsibility of specialist Public Bodies teams within Individuals and Public Bodies Group of Local Compliance Boats and aircraft Other cases Office holders Disposals of works of art from historic houses Racehorse owner, breeders, trainers, jockeys and agents Clubs and associations
CH7 – Taxable person Person For VAT purposes, Natural or artificial Taxable person EU meaning of taxable person is different to UK VAT meaning. Principal VAT Directive defines taxable person as any person who ‘independently’ carries out in any place an ‘economic activity’ whatever the purpose or result.
UK meaning Types of taxable person
Partnership
Independent means not in employment or bound to employer. Any person who is or is required to be registered for VAT. Sole proprietor Individual who runs business alone Must take into account all business income from all business activities carried out as sole proprietor Income received in separate capacity as partner or employee is disregarded. In England, Wales and Northern Ireland, partnership is simply a number of individuals working together with view to profit. It does not have legal personality separate from individuals involved. S45 VATA94 has special rule for registering partnerships in E, W and NI for VAT purposes only. In Scotland, partnership has legal personality just like ltd company.
Incorporated bodies
Only value of supplies made by partnership should be taken into account when considering need for registration. Don’t consider income received by the individuals. Common feature: their existence recorded in a formal register. Register maintained by Companies House. Limited company Limited by share capital Limited by guarantee or limited by statute Public limited company
Unlimited company
Unincorporated bodies
Limited Liability Partnership Also registered at Companies House One partner is not liable for another partner’s misconduct Must be registered using specific legislation created to allow it to be legal person. Same legislation used to register partnership. Registration made under name of every individual involved in unincorporated body. Taxable person is in name of every member of club or association. However, legislation allows for registration to be made in name of club or association to avoid need for new registration every time member joins/leaves.
VAT group registration
Divisions
Local authority
S46(2) VATA94 allows HMRC to make regulations determining persons responsible for fulfilling VAT requirements. All members of a club, assoc. or other org, are liable for debts of organisation while they are members. Even after leaving for liabilities arising while were members. Number of companies can register under single VAT registration, treated as single taxable person for VAT purposes only. Main criteria All members of VAT group are ultimately under control of same individual, partnership, or body corporate All members of VAT group either established in UK or have fixed establishment in the UK No body corporate can be member of more than one VAT group at the same time. Under s43 VATA94 the group registers under name of one of the companies, known as the representative member. Company can request to have parts or units of company registered in their own right. Each division still part of same legal entity but treated as separate legal person for VAT purposes. For VAT purposes, means council of a County District London borough Parish or group of parishes In wales (community or group of communities) Equivalents in Scotland Certain joint committees and joint boards established by 2 or more of these Any local authority that makes taxable supplies in furtherance of business is required to register for VAT regardless of value of those services.
Public bodies Government departments
However, due to costs to HMRC, it is not policy to ask LAs to register where expected output tax they would declare in year 1 is less than £1k. Such as Police Force and Fire Authorities not covered by special rules for LAs. They are covered by normal rules. Ministerial and Non-ministerial depts. And executive agencies and trading funds.
Joint ventures, trusts and charities Non-established taxable persons
S41(6) and s41(7) VATA94 deem NHS bodies to be treated as government department for certain purposes and are subject to broadly same registration procedures as other government departments. Must consult registration guidance at V1-28 s3.7, 3.16 and 3.17
NETP is any person Who is not normally resident in the UK Does not have a business establishment, such as a branch office, in the UK If a company, is not incorporated in the UK And makes supplies of goods or services in the UK If met, normal VAT registration rules do not apply. Since 1 Dec 2012, no VAT registration threshold for overseas businesses making supplies in the UK. Need to register for VAT in UK regardless of value of supplies.
More than one business Involvement in more than one VAT registration Agents
NETP can choose to deal with UK VAT affairs themselves via NETP Unit in Aberdeen. Or can appoint UK VAT representative – HMRC will register the NETP business c/o of VAT rep and deal like any other UK VAT registration. All business activities of a legal entity are accounted for under VAT registration. Individual can be registered for VAT as sole trader, member of VAT reg’d partnership, and VAT reg’d companies. VAT liabilities need to relate to correct to correct taxable person. In general, no requirement for agents to register in order to submit returns for their principals.
However, in certain circumstances the agent is required to register even if turnover does not exceed threshold. Includes when agent acting on behalf of principal Acquires goods from EU member state Imports good from outside EU Purchases goods or services And subsequently supplies them in the UK in the agent’s own name. In these circumstances, agent must be taxable person and so registered.
