Neil Warren explains how a business owner took advice from her customer about what rate of VAT she should charge for her services and ended up in trouble with HMRC.
A basic VAT rule is that it is always the supplier who decides what rate of VAT should be charged on the goods or services he or she sells. There are many instances of customers telling their suppliers what VAT rate they should charge, and it is tempting to apply the old adage of “the customer is always right”, but that’s not a good idea.
This is a recent problem I dealt with:
Jane is a public relations (PR) consultant who delivers training courses for staff at large insurance companies.
She supplies hard-copy manuals for each contract she undertakes – the manuals cost her £50 each to produce (by an external printer) and she sells them for £100 each to her customers. A typical sales invoice will be raised as follows:
PR courses: 10 days @ £1,000 per day = £10,000
Supply of manuals: 50 copies @ £100 = £5,000
VAT at 20% = £3,000.
Total due = £18,000
An insurance business is partly exempt for VAT, so it is unable to claim all of its input tax. This means there is an incentive to minimise the VAT charged on its expenditure.
Jane’s customer asked her to charge £150 each for the manuals and then give 25% discount on her course fee rate. He also told her that she was wrong to charge VAT on the manuals because they are zero-rated as printed matter. The revised invoice was as follows:
PR courses: 10 days at discounted rate of £750 per day = £7,500
Supply of manuals: 50 copies @ £150 each = £7,500
VAT at 20% on course fee only = £1,500.
Total due = £16,500.
The VAT saving is £1,500 for the customer, but is that the correct VAT treatment?
HMRC’s approach on mixed supplies is to follow the principles of the ECJ case involving Card Protection Plan Ltd (C-349/96), which indicated that suppliers should consider two key questions:
Are there two separate supplies which are subject to different rate of VAT?
Is the reality that one of the supplies is incidental or ancillary to the other, and the VAT charge should be wholly based on the main supply?
Even if HMRC accepts that there are multiple supplies involved with Jane’s courses, it can take action if it perceives there is evidence of ‘value shifting’, ie deflecting some of the income to goods or services with a lower rate of VAT.
Which of Jane’s sales invoices is correct?
Would the second invoice have been acceptable if Jane had kept her charge for the manuals at £100 and her fee at £1,000 per day? This would produce a total VAT charge of £2,000 on her fee and zero-rating for the manuals.
Weight Watchers case
HMRC have won most tribunal cases involving mixed supplies and printed matter. A well-known case involved Weight Watchers UK Ltd ( EWCA Civ 715), which marketed a ‘weight loss programme’.
The customers attended weekly meetings but also received an initial handbook, monthly magazines and weekly leaflets - all of which were hard copy not online versions. The Court of Appeal agreed with HMRC that the printed matter was incidental to the supply of the weight loss course, and none of the fee qualified for zero-rating.
My view is that HMRC was correct to conclude that all of Jane’s income was standard rated and that her situation follows the Weight Watchers decision, ie VAT is due at 20% on all of her income.
There is an exception to the rules where HMRC will accept an element of zero-rating for printed matter, even if it does not follow the CPP principles (see VAT Notice 48, Extra Statutory Concessions, para 3.35).
This occurs where a newsletter or other printed publication is part of a membership subscription paid to a charity or non-profit making body.
Say a member pays an annual subscription of £200 and the value of a quarterly newsletter he receives in the post is £20 per year, output tax will only be due on £180. But don’t forget that the newsletter must be in paper format, an electronic newsletter sent by email is standard rated for VAT.
About Neil Warren
Neil Warren is an independent VAT consultant and author who worked for Customs and Excise for 14 years until 1997.