The VAT Bulletin: November 2023

Editor’s message

The summer is well and truly over and there are already Christmas decorations in the shops; it seems only yesterday that I was writing about VAT being 50 years old in the May Bulletin!

Time marches on though and there have been several interesting issues this year. The backlogs in respect of VAT registration appear to be improving which is a positive and that has been expanded upon in this newsletter.

The general election is less than 18 months away and for once VAT has raised its head in the form of the Labour Party’s plan to scrap tuition fees for private schools. I have been contacted by several journalists asking for my opinion on whether the change is likely to happen, what law needs to be amended and other ramifications. It is too big a subject to cover in an update and I am currently drafting a separate article discussing the change. In short, though the VAT legislation will need to be amended quite a lot, and the education exemption is broad; many schools could come under the exemption under different sections, and withdrawing all will have wide-ranging consequences! A very interesting subject!

The number of letters we receive in respect of late VAT returns setting out interest and penalties has dramatically increased, although I think that is because they send one letter to the business and one to the agent. Finally, we are monitoring how quickly HMRC release money owing to clients, now that the Repayment Supplement has been removed. I am glad to say that at the moment they are still being released quite efficiently which is great, and nice to end my message on a positive note!

Contents:

1. Issues with VAT invoices
2. Receipt of services from outside the UK and VAT registration
3. Stop press updates

Issues with VAT invoices

While paying VAT normally enables a VAT-registered business to reclaim VAT, the prime evidence for recovery is in the form of a tax invoice. Without a tax invoice, HMRC has the discretion to allow the VAT however if they refuse it is very difficult to reclaim. If this went to a tribunal, they would need to agree that HMRC were not being reasonable in their position which is a very difficult argument to win. It is therefore very important that a tax invoice contains all the information required.

The details required on a tax invoice are well understood and quite straightforward, such as a unique number, VAT number, date, net value, VAT and gross value, and name and address of the supplier and customer. However, the requirement that there is a ‘description that accurately describes the goods or services supplied’ can cause problems. We have recently heard of a case where HMRC are querying construction work and specifically the customer being charged VAT at 20% where the description does not make mention of whether the property is commercial or residential. In almost all cases work on a commercial property will attract VAT at the standard rate, currently 20%, whereas work on residential can be at the reduced rate currently 5%, or the zero rate, if the latter is a new build.

In addition, when a contractor carries out construction or renovation work on a property that attracts different rates of VAT the contractor can choose to either apportion or simply charge VAT on the full amount. That means for the contractor the default is to charge VAT, whereas HMRC may need convincing that the standard rate applies!

It is highly recommended that any developer who receives services, particularly where the standard rate of VAT applies, include sufficient information on the invoice to demonstrate that the liability is correct. In the case in question, the addition of a ‘commercial building’ would have been sufficient. On a wider point, it is recommended that tax invoices for all goods and services have an adequate description particularly where the supply could attract more than one VAT rate.

Receipt of services from outside the UK and VAT registration

When services are purchased from abroad, UK VAT will not normally be charged by the supplier. However, when those services are provided to a UK business the customer must treat those services as being supplied by them. This is called the reverse charge.

The reverse charge is a simple procedure where the recipient business is treated as the purchaser and the supplier for all B2B general rule supplies of services. The VAT on the value of the services is declared (box 1 of the VAT return) and claimed (box 4) and the net value is also included in both boxes 6 and 7.

Although this mechanism ensures overseas businesses, in many cases, do not have to unnecessarily register for VAT in the UK, it can have an impact on UK businesses that are:

1. Not registered for VAT in the UK but receive supplies from outside the UK or,
2. Are already registered for VAT but are partially exempt.

These supplies count as part of your taxable turnover (unless the supply of service is an exempt supply but almost all services received from outside the UK are subject to a reverse charge).

As an example, a non-VAT registered UK business makes sales of £75,000 during a 12-month period which would be standard rated if they were VAT registered.

The same business buys in services from the EU of £10,000 in the same 12-month period.

Although it may look as if the business is not required to register for VAT, their turnover now includes £10,000 of reverse charge services so they are required to be registered.

If a business makes only exempt supplies, they may still be required to register for VAT if the level of (taxable) reverse charge services exceeds the VAT threshold but, they will not be able to recover any of the VAT declared. Similarly, if a business is VAT registered but makes both exempt and taxable supplies, any partial exemption calculation will probably result in an element of the reverse charge VAT being blocked. Note that the reverse charge ‘sale’ is not a sale under the standard method for partial exemption.

If this applies to any of your clients, please get in touch with the VAT team for an initial chat.

Stop Press

A new Revenue and Customs Brief has been released

Revenue and Customs Brief 7 change to the VAT treatment of drugs and medicines supplied under patient group directions.

The scope of the VAT zero rate for supplies of drugs and medicines dispensed to individuals for their personal use is being temporarily extended to include the supply of drugs and medicines which are dispensed in accordance with a patient group direction issued under the Human Medicines Regulation 2012.

A patient group direction is a written instruction that allows healthcare professionals to supply and administer specified drugs and medicines to a pre-defined group of patients without a prescription.

A temporary VAT zero rate will apply to drugs and medicines supplied under such patient group directions and so bring them into line with drugs and medicines dispensed on a prescription of a registered health professional. The zero rate will apply from 9 October 2023 until 31 March 2027.

VAT registration timescales

Tentative good news- the last few VAT registrations submitted have been processed within a month- we are hoping that this is indicative of backlogs being cleared and hopefully registration application time will continue to improve. The current HMRC target of 40 working days is surely too long?!

Postal VAT applications

At the moment it is possible to apply for VAT registration online or by post. If you wish to apply via post you can download instructions and a printable form which is available on the gov.uk. website. From mid-November, this will change, and this will no longer be available. In a bid to further speed up VAT registrations, anyone who can use the online VAT Registration Service (95% of businesses) must do so and those who cannot use it must phone the VAT Helpline on 0300 200 3700 to request a VAT 1. Taxpayers may be asked why they cannot complete the form online. Some businesses are excluded from applying online and HMRC has advised they will publish a list of these businesses.  HMRC are working on developing adequate software to get these businesses online in the future.

EORI (Economic Operator Registration and Identification) number

It is important to note that when applying online for an EORI number on the VAT application form this is not for some reason allocated during the registration process. It is therefore necessary to apply for an EORI number separately through your government Gateway account.

If you would like further advice on any of the topics we have covered in this edition, please contact our VAT team today.

For more VAT-related content, see our insights page.