Neil Warren is an independent VAT consultant and author who worked for Customs and Excise for 14 years until 1997.
Comment from Neil Warren:
To pick up on some specific items in the postings:
1) Motor mechanics - the exclusion of 'vehicle parts' from relevant goods will apply to motor mechanics because their FRS category is not 'transport or storage......etc' - they have their own category for 'repairing vehicles' - this is clearly ludicrous unless the final SI corrects this oddity.
2) Promotional goods - another mystery is why promotional goods were not shown as a specific exclusion in the revised Notice 733 para 4.6 about relevant goods but were shown on a bullet point slide in the HMRC webinar. We can only assume that the final SI will include these items and then a revision to Notice 733 will be made at a future date.
3) Overalls - in my view, overalls are definitely not capital goods - let's hope that motor mechanics get through enough overalls to pass the 2% test and keep them in their 8.5% category.
4) Hairdressers - hairdressers having to exclude purchases for resale because they are not part of their main activity of hairdressing is an unfortunate outcome of the latest exclusion from relevant goods for those that relate to secondary activities - a bit like my football coaching example in the article.
Overall, HMRC are clearly adopting a ruthless approach to cut out the tax avoidance that they consider to be a big problem....leaving the FRS or deregistration (if voluntarily registered) will be the best options for most service businesses after 31 March. With the likely exclusions for stationery items, gas and electricity (because of a bit of private use) as well as food and drink, road fuel, capital goods etc (specific in the SI), it must be asked what 'relevant goods' will be included to give some service traders a chance of passing the 2%/£250 test - very little it seems.
To answer the questions in the trail:
1) A tax point is only created when a business issues a VAT invoice - so an unregistered business cannot issue a VAT invoice until it is registered. It is only a VAT invoice if it fully complies with the requirements of regulation 14 of the VAT Regulations 1995. See HMRC manual VATTOS5210.
2) A zero-rated invoice issued by a registered business more than four years ago that should have been standard rated will be out of time for both the supplier and customer so no adjustment is needed. If it less than four years old, correction can be made with a VAT only invoice etc.
Hello Paul - spot on with what you say - the 'reverse charge' means the customer is paying the VAT - hence why the overseas supplier can then get his VAT refund.
Thank you to everyone for the comments on my article - the individual examples are very useful - the issue about the HMRC computer putting all builders into the 'general construction' rather than 'labour only' category is one I had not thought about - how can it ever know?
I like the suggestion of Jon that the computer should offer the business owner the chance to select a category other than the one suggested, with an explanation box to support the change. I'll raise this at our ATT meeting in early September when we discuss this issue. The flat rate scheme certainly presents some challenges!
Hello Wayne - thank you for this - I had heard there was litigation pending on this issue, which is good news to help clarify things - I also know that the topic is on the agenda for the next JVCC meeting. Regarding input tax, the recent case of Premier Foods (Holdings) Ltd was also very interesting, although I need to do more reading on it before I put pen to paper. Neil Warren
HMRC policy should be communicated properly
I am really pleased that Accounting Web have followed up my Taxation article to cover this topic - it is very important because, as one respondent rightly said, HMRC have changed their view on something we have been happily adopting in practice for 43 years ! And the amounts of tax involved can be considerable. As a bit of further background, my first liaison with HMRC on this issue was about three months ago, to tell them there was a technical error in their guidance - I was very surprised when their policy section (via the press office) said that it wasn't an error and that was how they thought the rules applied - and our liaison developed from there. I think we are all agreed that if they do change their interpretation of any important legislation, then it should be properly communicated (and the reasons why) and not hidden away in the internal manuals............. Neil Warren
Advance invoicing - reply from Neil Warren
This would be fine Lee, as long as the value of the advance invoice was less than or equal to £100,000 excluding VAT. The other point is that an advance invoice or prepayment is fine if it is a 'normal commercial practice' for the transaction in question and relates to the letting, hiring or rental of assets and covers a period of twelve months or less. The key challenge here is to ask whether the same invoice would be raised at the same time if there was no change in the rate of VAT. If the answer is a 'yes' to this question, there is unlikely to be any problem with the anti-forestalling legislation.
Flat rate scheme
Hello Chris - this is correct - there is no change to the flat rate scheme with the new rules.
As a general principle, exempt, zero-rated, standard rated and reduced rated business income is included in the flat rate scheme - income that is outside the scope of VAT (i.e. where place of supply is outside UK) is excluded.
Neil Warren - VAT consultant, lecturer, author.
Reply from Neil Warren
Some excellent points have been raised following my article - here's a few comments:
* the place of supply for the computer processing services will be where the customer is based ie UK in the first reply below and subject to the reverse charge. If the UK customer is not VAT registered because it only or mainly has exempt sales, then the overseas services it receives will form part of its taxable sales. It will need to register for VAT if the value of these services (and other taxable income - coffee machine sales?) exceeds the VAT registration limit (£68,000 etc.)
* CPE seminars and courses - the place of supply for training (educational) services is where the course is held. So a German business delegate attending a tax update course in the UK will be charged UK VAT before and after 1 January 2010. There will continue to be scope in many cases for the German delegate to reclaim this VAT form HMRC through the overseas VAT repayment system. However, watch out for changes on 1 January 2011 to the place of supply rules for these 'where performed' services.
* Overseas business delegates will continue to pay UK VAT if they stay in a UK hotel. The place of supply for land based services (and a hotel is land) will continue to be where the land is based.
* Peter with the Dutch clients gives an excellent example of how the new rules will simplify the current procedures
* Be aware that it is still possible for a sale to be B2B without the customer being VAT registered. A VAT number is the best evidence of a customer being 'in business' but it is not a requirement. In the HMRC guidance, they refer to alternative evidence such as membership of business organisations such as Chamber of Commerce (seems a strange one) and paperwork from fiscal authorities. However, under the new rules, a business not VAT registered soon will be if it is receiving services from overseas suppliers because it will (as explained above) need to include the services as part of its turnover for registration purposes.
* Final point - if an EU business customer is not VAT registered for some reason, then no entry will be made on the new EC sales list.
Neil Warren (VAT lecturer, author and consultant)
VAT and education
Yes - agreed.
As a separate point, the other main situation when supplies of education can be exempt from VAT if provided by a commercial business is if the training or education is vocational and is ultimately funded by the Learning Skills Council. In this situation the exemption also applies to training provided by employees of the business, not just the sole trader or partners as applies with private tuition.