He trades as a limited company and the question he raised was if payments were spread over a few months at agreed rate of interest, would VAT be chargeable on the interest added.
My response was "yes" but I informed him that I would refer to my on - line coleagues for their views, especially with regard to the legality of charging interest.
Comments would be appreciated
Replies (14)
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This is tax evasion
does this exteme example go wrong:
"Buy this laptop from me for £1 plus VAT. Pay me tomorrow and I will charge you £600 interest.Meantime I will retain laptop in lien against non-payment. Terms agreed and person obtains laptop for £601.20. "
Sorry if this is basic
Because this is tax evasion (as opposed to avoidance) as the sole purpose for this arrangement is to avoid VAT. There is no commercial basis to it.
Commercial?
does this exteme example go wrong:
"Buy this laptop from me for £1 plus VAT. Pay me tomorrow and I will charge you £600 interest.Meantime I will retain laptop in lien against non-payment. Terms agreed and person obtains laptop for £601.20. "
Sorry if this is basic
It seems like a clear case of VAT fraud. If you offered that to me I would pay you £1.20 immediately and you'd look stupid.
Hmmm - sorry ignore
does this exteme example go wrong:
"Buy this laptop from me for £1 plus VAT. Pay me tomorrow and I will charge you £600 interest.Meantime I will retain laptop in lien against non-payment. Terms agreed and person obtains laptop for £601.20. "
Sorry if this is basic
It seems like a clear case of VAT fraud. If you offered that to me I would pay you £1.20 immediately and you'd look stupid.
Redcats
The circumstances of the case were a little different - involving supplies of mail order catalogues and goods - but the decision confirmed the view that where consideration has to be apportioned between different types of supply, it should be done on a commercial and/or reasonable basis. I would suggest that charging interest at 18,250,000% is neither commercial nor reasonable.
Providing extreme examples does not really help because, almost by definition, they are likely to be countered by anti-avoidance measures. A more realistic example might involve a supply of goods for £600 and a daily late payment interest charge of £1.20. Even that equates to an interest rate of over 70%.
Interest
I must admit I am suprised that charging of interest in commerce is allowable in an informal and unregulated way.
Then you should have a look at the
Late Payment of Commercial Debts (Interest) Act 1998
I assume there will be some kind of credit agreement with the customer, and if a trader is offering credit terms I thought they had to be licensed, indeed the OFT think they need to be as well:
"If your business sells goods or services on credit, lends money or provides debt counselling or debt adjusting services to consumers, you almost certainly need to be licensed by the OFT."
(http://www.oft.gov.uk/business-advice/offering-credit/)
If there's no actual credit agreement and the set up is "if you pay me now I charge £100, if you want to spread it over 4 months then you'll pay £120" then the VAT office will be looking for VAT out of the £120. I'd be rather surprised if they didn't look at renegotiating to receive a higher price being exactly that; a higher consideration for the supply.
If the trader charges a late payment penalty/interest, or charges interest under the LPOCDA once the payment has become due, then that's fine and would be outside the scope as a penalty and not consideration for a supply, but unless there's a proper licensed credit agreement then I cannot see HMRC accepting that an extra charge negotiated at the outset actually relates to a supply under Sch 9, Group 5, Item 2 of the VAT Act which is the provision exempting credit/interest, unless the trader is able to provide credit.
(Just in response to the last post by BKD I'm a bit confused as to how you feel that charging interest by right, and under the specifications, of an act of parliament is an informal form of interest, unregulated I'll grant but hardly informal.)
So basically I'd go with your initial advice, unless they're licensed to provide credit, the higher price is likely to be viewed as higher consideration for the supply and taxable at the same rate as the supply. If they are able to charge interest legally then that wouldn't incur a VAT liability, nor would applying penalties to any late payments.
Deferred payment charges
If there's no actual credit agreement and the set up is "if you pay me now I charge £100, if you want to spread it over 4 months then you'll pay £120" then the VAT office will be looking for VAT out of the £120. I'd be rather surprised if they didn't look at renegotiating to receive a higher price being exactly that; a higher consideration for the supply.
How does that square with
where you agree to defer payment beyond the time of supply and make an additional charge for doing so, such a charge will be consideration for an exempt supply of credit
Surely the £20 is nothing more than a charge for credit - exempt - or, better still (since it avoids the need for licensing), an interest or penalty charge for late payment - outside the scope.
"Pay me now or pay interest at x% pa for late payment" is markedly different from "Pay me over 4 months and I'll charge you interest at x% pa". Nevertheless, both should be VAT-free, being either outside the scope or exempt.