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VAT on Benefit in kind

VAT on Benefit in kind

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Further to a VAT inspection, we have been told there should be a payment for VAT on the private use of a van and private use of company supplied fuel and therefore they want vat on the benefit in kind personal tax of £3000 & £564 for the van & fuel.

Any thoughts or comments much appreciated.

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By Jekyll and Hyde
08th May 2014 08:30

who's private use?
An employee or subcontractor? I have read this post about 10 tomes now and still do not really know the full content of query.

I have never seen hmrc raise assessments for vat on benefits in kind to employees as these are not supplies, but (although I don't necessarily agree) can understand why they may chance themselves on vat for a supply of van to another business using a recognised tax treatment.

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By taxhound
08th May 2014 08:48

It is a first for me too...

Never heard of this before.  Ask them where the authority for this is.

If there is private use of fuel then presumably the fuel scale charge should apply, but I have never heard of a VAT liability on a BIK before.

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chips_at_mattersey
By Les Howard
08th May 2014 08:53

Private use of business asset

VAT Law does provide for a deemed supply in such circumstances; VAT Act 1994, Sch 4, para 5(4). PN 700, para 9.3.1 explains this.

But, like the previous comments, I have not seen HMRC assess for output tax due.

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By Steve Kesby
08th May 2014 09:47

Were the benefits "made good"...

... such that there was actual consideration for the supplies perhaps?

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By RussellG
08th May 2014 12:54

VAT on Benefit in kind

Hi. Thanks everyone for your comments.

It is for myself as an employee / director.  Her (the inspector) argument is that as there is private as well as business use of the vehicle, some of the VAT that was reclaimed from it's purchase (eight years ago) should be handed back and her solution to that is VAT on the Benefit-in-kind value of the vehicle.

She's then applying the same logic to the Benefit-in-kind charge for fuel for private use, presumably because (as I understand it), the scale charges do not apply to commercial vehicles as there are no emission figures listed for such to calculate the scale charges from.

 

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By BKD
08th May 2014 14:07

I'd tell her to go and whistle ...

... or cite the specific authority on which a VAT charge can be applied, rather than some woolly suggestion that there has been private use. There is no such thing as private use in the context of a company asset - it is either used for the business or it is not. Being made available as part of the director's remuneration package falls squarely within business use.

If there are no fuel scale charges for vans then that is tough.

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By Steve Kesby
08th May 2014 14:32

I don't agree BKD

There is no such thing as private use in the context of input VAT recovery; either the van is going to be used for the purposes of making taxable supplies or it isn't. That's true.

However, where an employer allows goods (like petrol or diesel) to be removed from the business and used for some non-business purpose there is a deemed supply, which is normally valued at cost (unless the scale charge is used for car fuel).

Likewise where the employer allows an employee to use an asset, then there is a deemed supply, the consideration for which is determined in accordance with part 15A of the VAT regulations (input VAT originally recovered, divided by 5 years, divided by the number of return periods in the year multiplied by the proportion that private use bears to total use).

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By BKD
08th May 2014 14:57

If you're right. Steve ...

... then I suspect that pretty much every company in the country that provides chargeable vans (and other assets) for private use of directors and employees is potentially facing additional VAT liabilities. Because I don't know of a single business that accounts for output VAT on such benefits.

In any event, it seems that the suggestion of charging VAT on the £3k benefit is quite wrong.

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Replying to Tax Dragon:
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By RussellG
08th May 2014 15:58

BKD:

I share your thoughts - we've been providing vans with personal use for decades (I would think from the 50's or 60's), and this has never come up before.

What happens with other benefits-in-kind? eg. Company provided Gym Membership (which VAT is charged on). Obviously it would be declared on a P11D, but from what the inspector is saying either the VAT should not be reclaimed by the employer, or 1/6th of the gross cost should be added back into the VAT return as VAT due (thereby cancelling out the reclaiming of the VAT)?

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By Democratus
08th May 2014 15:42

Would one not use the Car scale charge in any event?

RussellG wrote:

She's then applying the same logic to the Benefit-in-kind charge for fuel for private use, presumably because (as I understand it), the scale charges do not apply to commercial vehicles as there are no emission figures listed for such to calculate the scale charges from.

and 

BKD wrote:

If there are no fuel scale charges for vans then that is tough.

HMRC advice on no CO2

For cars which are too old to have a CO2 emissions figure, you should identify the CO2 band based on engine size, as follows:  • if its cylinder capacity is 1,400cc or less, use CO2 band 140 • if its cylinder capacity exceeds 1,400cc but does not exceed 2,000cc, use CO2 band 175 • if its cylinder capacity exceeds 2,000cc, use CO2 band 225 or more  

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Replying to lionofludesch:
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By RussellG
08th May 2014 15:51

Thanks Democratus

I know that cars that are too old have to follow that advice, but this is about commercial vehicles (vans & lorries), that do not appear on such tables as there are no government emission data for them. 

The inspector has (grudgingly) agreed (verbally) that there are no scale charges for commercial vehicles, but this seems to be something she has made up as I can't find any mention of it anywhere.

 

Thanks for your thoughts.

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Replying to lionofludesch:
By Democratus
08th May 2014 16:49

I'd like that in writing RusselG, as I'm sure would you

RussellG wrote:

I The inspector has (grudgingly) agreed (verbally) that there are no scale charges for commercial vehicles, but this seems to be something she has made up as I can't find any mention of it anywhere.

Thanks for your thoughts.

If that's the case, and not opening up Steve's can of worms with respect to output VAT on all BIKs then i smell a reclaim coming on where i work. I have only been here for 2 VAT periods but the Co policy was to have a scale charge for all vans (as we did know the CO2). But if no charge exits then happy days.

Steve's case is just too depressing to contemplate.

D

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Replying to Wanderer:
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By RussellG
08th May 2014 18:13

Democratus,

Trouble is that while you'd have a reclaim on the scale charges, they'll be dwarfed by a charge of 1/6th of the benefit-in-kind values, ie 1/6th of £3564pa.

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By Steve Kesby
08th May 2014 15:54

I agree...

... that the £3,000 benefit is irrelevant.  I also agree that few people actually do it, but, nonetheless:

VATA 1994, Sch. 4, para 5(4),VATA 1994, Sch. 6, para 7, andPart 15A of the VAT regulations, made under Sch. 6, para 7,

do make clear provision for an output VAT charge in such circumstances. The fact that few people actually do so, doesn't have the effect of making the majority that don't right.

In a case where a van is provided and only commuting is permitted, I've seen it argued that the reason that the employees are allowed to take them home is either (i) so that they can travel directly to/from sites or (ii) that the vans are at risk of theft/vandalism if left on the employer's premises overnight. In those situations the commuting travel is then being undertaken for a business purpose.

Where there is provision such that the £3,000 BIK arises, the argument isn't available and it is open to attack from HMRC. The best defence is then to show that the private proportion is small, but I doubt that all of these people that aren't doing it are keeping sufficient records to demonstrate that.

HMRC's modern tactic is to find things that a class of people (or even people generally) are doing incorrectly and then go round the entire class and say "tax please".

I've seen somebody else raise this same point (having a similar issue) today through another network.

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By BKD
08th May 2014 15:59

I agree, Steve ...

... the fact that the majority do (or don't do) something doesn't make that treatment correct. It does look as though clients need to be made aware of an issue that they, their advisers, and HMRC, have all previously overlooked - or considered not worth worrying about.

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By BKD
08th May 2014 16:27

I can see a certain logic

As we all know (I hope) the taxable value of a benefit in kind is the VAT-inclusive cost to the employer (excluding special classes of benefit). This is at odds with the principle that the actual cost to the employer will be the net cost if they are able to recover all the VAT. So I suppose that if the employer is having to account for some of the VAT then the assessable benefit more closely reflects the cost to the employer.

I don't think the gym membership is relevant here. Certainly not subject to the same legislation - Sch 4 para 5(4) deals only with goods made available for private or non-business use.

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By Steve Kesby
08th May 2014 16:45

VIT43700

It's not terribly clear exactly what HMRC's policy is but VIT43700 deals with the issues in general terms.

I think the provision that could catch a supply of services (like the gym membership) to an employee is VATA 1994, s. 5(4) and the VAT (Supply of Services) Order 1993 (SI 1993/1507, reg. 3) made under it. The way around it would be to charge a nominal consideration.

I'm coming to the conclusion that most BIKs should have output VAT accounted for on them, but the subtle distinction between what is for the purposes of the business in the 2nd and 4th paragraphs of VIT43700 is currently escaping me!

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By RussellG
08th May 2014 18:39

Further thoughts:

Is there a distinction to be drawn on output tax on fuel supplied, and output tax on the private use of a vehicle.

When the company allows fuel for private use, the company is handing over goods to the individual that it now longer has the use off.  In the absence of an applicable scale charge, calculating output tax on the benefit in kind value (currently £564 p.a.) may not be unreasonable.

However, in granting personal use of the vehicle the employer is not handing goods to an employee. The employer still owns that asset and is not deprived of the use of it, and therefore it is hard to classify it as goods made available to an employee.  HMRC could make a case that the employer has lost money through increased depreciation, but since the bulk of depreciation is age rather than mileage related, unless the personal mileage is high compared to work mileage, it would be hard put to make a serious case for this.

 

Thoughts anyone?

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By BKD
08th May 2014 19:33

I think ...

.. that if you accept that there is a £3k taxable BIK by virtue of the vehicle being made available for private use you'd have a fun time trying to argue that it is not so available for other purposes, namely VAT.

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By Jekyll and Hyde
08th May 2014 20:18

Not helping, but what joys!

Am I right in thinking that for all other aspects the inspection was relatively clean?

It would appear reading on from my post that HMRC may be looking at squeezing even more blood out of the good decent business owners, who engage accountants who try and do things right, whilst not looking at businesses that just don't care (except the very, very odd accountant that goes to jail). I agree with above, if you have accepted and agreed that there is private use for one aspect of the tax system then you are caught by the other aspect of the tax system.

I can envisage what my clients will be saying to me and the conversation that I will have, should this issue become rife with HMRC's vat inspections. And hello to a more simplified tax system!

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Replying to Rammstein1:
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By RussellG
09th May 2014 14:50

Thanks J&K:

As an Civil Engineer I'm not really experienced as to what "clean" would be. She came up with a purchase ledger credit note that had been posted twice, value £500+VAT and two sales invoices that hadn't been posted in the month they were raised (which we brought to her attention in the spirit of trying to be honest and open), combined value under £300+VAT.  I would guess that on a £1.2M turnover that's not too bad?

Having had no personal experience of such an inspection, I was dreading it and expecting a cross between a rabid Rottweiler and the Gestapo.  To be fair to the inspector, while asking an awful lot of (for me) very difficult and searching questions that had me hunting high and low for papers, she was the epitome of politeness, calm, professionalism and reasonableness.  One thing that struck me as amusing was that rather than referring to HMRC publications or documents, she used a Tolley's Tax Guide - doesn't say a lot for the clarity of what HMRC produces.

 

 

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By David Heaton
08th May 2014 22:30

Look at the VAT Manual

VIT 51500 is interesting on the acquisition of the van: for commercial vehicles you're supposed to either apportion the input tax on the purchase and only claim the business element, or claim all the tax and account for output tax each quarter under Lennartz principles.  Logical enough.

VIT 56300 says you ignore fuel for vans if private use is small scale and incidental.  In this case, if there's a P11D scale charge for income tax purposes, that seems unlikely to apply, so "it is reasonable to reflect any private use of fuel in [the] VAT calculations".

But as others have said, you don't normally disallow input VAT on employee BIKs - it's wholly a business cost - except when it comes to directors, who are often in a position to buy things for themselves for personal use via the company.  And you might have to account for output tax in some circumstances - see VIT 43700.

The idea of using the income tax scale charge as a proxy for the VAT basis is novel and non-statutory, but might be a sensible enough estimate if there's substantive private use by a director.

 

 

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By jonsa
12th May 2014 14:47

VAT on scale charge

My view is that you cannot charge vat on a scale charge as that is not a vatable item.  It bears no relationship to actual cost or private usage.  It is just a fixed charge.  I agree there are times where the vat inclusive cost is used for the benefit, but not here.  HMRC fixed charges are just that.  There is of course the argument that vat has already been included in the fixed charge.  Ask her to prove it has not!

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By shoshana
12th May 2014 17:55

Supply for consideration

HMRC did clarify a while back that if a benefit is supplied in return for a salary sacrifice, then the sacrifice was consideration for the supply and VAT would be accountable (at 1/6th of the sacrifice) if the benefit was a taxable supply (such as gym membership, but not pension provision).

If an employee is permitted to use a van for private purposes then clearly these are supplies. The question is whether the employee has given consideration for the use?

Subjectively, the answer is 'yes' because they have provided their services to the company, but unless they have foregone an amount of salary for the benefit, there is no measurable consideration. My conclusion would be therefore that there is a supply of services (right to use a van) for no consideration, so no VAT is due.

HMRC could argue that the fuel is a free supply of goods to the employee. The law here is different so if the fuel has a cost of more than £50 then a deemed supply is made to the employee. HMRC would be looking for the company to charge output VAT approximating to the input VAT reclaimed on the fuel used for private use. If private use is insignificant they would not pursue it and I have never seen a situation where they have, but they would be within the law to do so.

Malcolm

Malcolm Greenbaum

Director, Greenbaum Training and Consultancy Limited

IFRS, US GAAP, UK GAAP, UK direct tax and VAT

 

 

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By whopkinscom
12th May 2014 20:19

And does FRS complicate this?

The £2000 VAT reclaim concession within the FRS says that there is no apportionment for private use?

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