Insurance transactions are generally VAT exempt. However, there are many issues that can arise concerning the VAT liability of certain insurance transactions. One of these issues concerns the VAT treatment of insurance claims.
Insurers are unable to recover VAT incurred in obtaining replacement goods or having repairs carried out for a policy holder. This supply is treated as being made to the policy holder regardless of who makes the payment to the supplier.
However, a VAT registered insurance policy holder can, subject to the normal rules, recover the input tax incurred. For this reason, the insurer will normally pay the policy holder compensation exclusive of VAT. This is why most insurance claim forms ask the policy holder if they are registered for VAT. Where the insured party is able to recover the VAT charged the insurer will only be responsible for paying the net amount due.
There are scenarios, such as when a business is partly exempt, where the business may not be able to recover the input tax in full. This complication needs to be resolved between the policy holder and insurer. HMRC does not get involved in resolving issues that arise in this way.
There are complex VAT rules that determine the amount of VAT that can be recovered when purchasing a new car. The usual rule is that when you purchase a car for your business then no VAT can be reclaimed.
The main exception to this rule is when the new car is used solely for business use. This rule has been the subject of much case law over the years, but it has generally been established that to qualify for VAT recovery the car must not be available for any private use and you must be able to demonstrate that this is so. Accordingly, a car should only be available to staff during working hours and should never be used for personal journeys.
It is also possible to claim back the VAT on a new car that is purchased for a specific business related activity such as: use as a taxi, self-drive hire car or a car for driving instruction.
If your business leases a car for business purposes, you can normally reclaim 50% of the VAT paid on the lease rentals. If the leased car is used exclusively for business purposes, 100% of the VAT can be reclaimed.
The rules are less complicated when you purchase a commercial vehicle such as a van, lorry or tractor that is only used for business purposes. In these cases, all the VAT charged on purchase can be reclaimed. The VAT incurred on the purchase of motorcycles, motor-homes and motor caravans, vans with rear seats (combi-vans) and car-derived vans can also be recovered if they are used solely for business purposes.
With the new Prime Minister, Boris Johnson appearing to take an increasingly hard-line, the chances of Britain leaving the EU without any working agreement, known as a 'no deal' Brexit is looking increasing likely and certainly cannot be ignored.
If the UK leaves the EU on 31 October 2019, without a deal, there would be immediate changes to the procedures that apply to businesses trading with the EU. It would be timely to repeat a summary of the VAT guidance published by HMRC reminding businesses how to prepare.
Listed below are some of the main VAT issues that will affect UK businesses trading with the EU in goods and services if the UK leaves the EU without an agreement.
Businesses that are importing goods from the EU would be required to follow customs procedures in the same way that they currently do when importing goods from a country outside the EU. This means that an import declaration would be required, customs checks and any customs duties due must be paid.
There would also be multiple VAT issues including the requirement to account for import VAT on goods coming from the EU. The Government has already confirmed that postponed accounting for import VAT on goods brought into the UK will be introduced if the UK leaves the EU without an agreement.
Any agreement in place businesses exporting goods to the EU, will be required to follow customs procedures in the same way that they currently do when exporting goods to a non-EU country.
VAT registered UK businesses will continue to zero-rate sales of goods to EU businesses and will no longer be required to complete EC sales lists. However, EU member states will treat goods entering the EU from the UK in the same way as goods entering from other non-EU countries with associated import VAT and customs duties due when the goods arrive into the EU.
A 'no deal' Brexit would also mean the end of special VAT 'distance selling' rules for the zero-rated sale of goods to EU consumers, as well as changes to the UK VAT Mini One Stop Shop rules.
We would advise any UK businesses trading with the EU to seriously consider what action will be required in the event of a 'no deal' Brexit and to prepare a carefully thought-out risk assessment.
New rules that make changes to the issuing of credit notes under certain circumstances will come into effect from 1 September 2019. The changes have been put in place to target certain businesses who seek to create a tax advantage by making VAT adjustments for reductions in price without refunding their customers. The change will ensure that customers benefit from reductions in the price paid and the new rules will also affect businesses that issue credit notes as a matter of course.
The rules will also target businesses that incorrectly attempt to treat errors as price adjustments for the purpose of avoiding the relevant time limits. Whilst HMRC is clear that Regulation 38 cannot be used in these circumstances, the new legislation will put this beyond doubt. Regulation 38 applies to cases where the price change occurs after the supplier has already accounted for the output tax on the original supply in a VAT Return. Under the new rules, Regulation 38 may only be used to reduce the amount of VAT paid to HMRC when a refund is actually made.
The new rules will ensure that:
- the time an increase in price occurs is when the change is agreed by both the supplier and the customer – a debit note must be issued no later than 14 days after the price increase – the supplier must account for the increase in VAT in the VAT period in which the change occurs.
- a decrease in price occurs when a supplier makes a refund to a customer, or other person entitled to receive the payment – a supplier has 14 days to issue a credit note from the time the decrease occurs – a supplier must account for the decrease in the VAT period in which it takes place – a VAT-registered customer must reduce the amount of VAT it has claimed by the same amount. This does not prevent a supplier issuing credit notes in advance of refunds being made, but ensures that it is issued no later than 14 days after the payment.
VAT registered businesses with a turnover above the VAT threshold, need to be ready to keep digital records for VAT purposes using Making Tax Digital (MTD). This means that businesses must keep their records digitally (for VAT purposes only) and provide their VAT return information to HMRC through MTD functional compatible software.
Many of the 1.2 million businesses affected by the MTD rules, will be required to submit their first quarterly VAT return to HMRC using software by the 7 August. If you are affected, you need to ensure you have signed up for MTD for VAT in order to submit VAT returns digitally. If paying by direct debit, you must register by Friday 27 July. There are currently around 10,000 businesses registering for MTD every day with more than 600,000 businesses having already signed up.
HMRC has said that during the first year of the changes, they will adopt a light touch approach to digital record keeping and filing penalties where businesses are doing their best to comply with the law. HMRC is clear that this does not mean a blanket 'no penalties promise' and businesses need to be aware to do all they possibly can to meet the MTD requirements.
Any businesses that are currently exempt from online filing of VAT will remain so under MTD. There are also provisions for those who cannot adapt to the new service due to age, disability, location or religion to apply for an exemption.
There is also a deferral group for certain entities that have until the first VAT Return period starting on or after 1 October 2019 to start using MTD for VAT. This includes businesses that are part of a VAT group or VAT division, use the annual accounting scheme or that make payments on account. If your business has a turnover under the VAT registration threshold, you are not currently mandated to use the MTD for VAT service but can opt to do so if you wish.
Help is at hand
If you have still not registered, or have had problems with the registration process, we can help. Please call so we can resolve any difficulties and get you organised before the June quarter filing deadline.
For most fully taxable businesses, VAT can be reclaimed on goods and services used in the business. This means that businesses must consider where there is any personal or private use of goods or services purchased for the business as the business can only reclaim the business proportion of the VAT.
For example, VAT is recoverable on all the costs of mobile phones provided to employees where no personal use is allowed. Where businesses allow private calls to be made at no charge, the VAT recovery must be apportioned on a fair and reasonable basis. Where employees pay for the private use of their phones, the business is allowed to reclaim the input tax in full provided an output tax charge is accounted for in respect of private use payments received from employees.
You cannot reclaim VAT for:
- anything that’s only for private use;
- goods and services your business uses to make VAT-exempt supplies;
- business entertainment costs;
- anything you’ve bought from other EU countries (you may be able to reclaim VAT charged under the electronic cross-border refund system);
- goods sold to you under one of the VAT second-hand margin schemes;
- business assets that are transferred to you as a going concern.
There are different rules for a business that incurs expenditure on taxable and exempt business activities. These businesses are partially exempt for VAT purposes and are required to make an apportionment between their taxable and exempt activities using a 'partial exemption method' in order to calculate how much input tax is recoverable.
If you have concerns that you may be under or over-claiming VAT, please call, we would be delighted to offer an opinion, and if required, takeover your VAT filing duties.
HMRC imposes a VAT default surcharge on businesses that submit late VAT returns. VAT registered businesses are required by law to submit their return and make sure that payment of the VAT due has cleared to HMRC’s bank account by the due date. The normal deadline for submission of a VAT return and making payment is one calendar month and seven days after the end of the relevant VAT quarter.
There is no penalty for a first offence, however a business that submits a VAT return late is issued with a surcharge liability notice that begins on the date of the notice and ends twelve months from the end of the latest period in default. If further VAT returns are submitted late during this period, a penalty based on a 'specified percentage' ranging from 2% to 15% will apply. The penalty increases to a maximum of 15% with each default.
A recent First-Tier Tribunal heard an appeal by Secco Muro Limited following their receipt of two VAT default surcharges dating back to the April and July 2016 VAT quarters. The taxpayer appealed, claiming reasonable excuse due to cash flow difficulties. These difficulties were the combined result of a number of large customers failing to pay invoices due on time, coupled with a default by one significant customer that became insolvent and unable to settle their account.
The Tribunal was clear that an insufficiency of funds cannot be a reasonable excuse. However, based on precedent, a shortage of funds might comprise a reasonable excuse, especially where a significant customer defaults in payment. The Tribunal looked at this issue in more detail but ultimately dismissed the taxpayers appeal. The Tribunal felt that the insufficiency of funds was not an unforeseeable event given the circumstances as outlined to the court.
A further argument by the taxpayer that the penalties are a little unjust and unfair, was dismissed on the basis that HMRC has no discretion on the penalties levied as the percentages are clearly set-out in the underlying legislation.
Whilst there are some exceptions where a business had a reasonable excuse for submitting a late VAT return, the criteria is limited. To avoid these issues, it is imperative that VAT returns are submitted and paid on time as a delay of even one day can have significant knock-on consequences.
The artificial separation of businesses is where two or more businesses are split, and each 'separate' entity operates below the VAT registration threshold (currently £85,000). This is known as disaggregation. HMRC has legal powers to direct that businesses that have been artificially separated to avoid VAT be treated as a single entity for VAT purposes.
The underlying legislation requires HMRC to consider the extent to which businesses are 'closely bound to one another by financial, economic and organisational links' when determining it there has been an artificial separation of businesses for the purposes of VAT avoidance. HMRC must be able to prove that businesses are linked by all three criteria as set-out in the legislation. If this is done, then the businesses will need to be treated as one entity for VAT (subject to the usual appeals process).
Businesses that have deliberately avoided VAT registration may be liable to penalties and prosecution following a direction by HMRC to aggregate their businesses. This measure can also have retrospective effect dating as far back as 20 years. This can result in significant amounts of additional VAT and penalties being chargeable.
Taxpayers that are seeking to avoid VAT registration are likely to be caught by HMRC’s rules. However, as many Tribunal cases on this issue have demonstrated it is possible for businesses to be separate even if they appear closely related at first glance.
A change to the VAT rules first announced at Budget 2018, will come into effect from 1 October 2019. This change will make the supply of construction services between construction or building businesses subject to the domestic reverse charge. The reverse charge will only apply to supplies of specified construction services to other businesses in the construction sector. The introduction of this reverse charge targets fraud where VAT due to HMRC is never paid by a building subcontractor.
New guidance on the workings of the domestic reverse charge (referred to as the reverse charge) has been published by HMRC. Using the reverse charge procedure changes the usual VAT treatment such that the customer receiving the service is liable to account for the VAT due rather than the supplier. There is no cash impact for building clients affected. The main contractor will pay the subcontractor the amount of their charge excluding VAT. They will simply add the VAT reverse charge to their return and claim back the VAT amount as input VAT.
The reverse charge will affect certain specified supplies of building and construction services supplied at the standard or reduced rates that are reported under the Construction Industry Scheme (CIS). These are called specified supplies. This will place the onus for dealing with the VAT charge due on subcontractors’ bills to the main contractor.
There are now less than 4 months until the new rules come into effect and businesses that will be impacted should already be making the necessary preparations. HMRC has said that they understand that implementing the reverse charge may cause some difficulties and will apply a light touch in dealing with any errors made in the first 6 months of the new legislation, as long as you are trying to comply with the new legislation and have acted in good faith.
There are distinct rules that VAT registered businesses must follow when keeping VAT records. This includes keeping proper business and accounting records, a separate VAT account as well as copies of all VAT invoices received and issued. There is no requirement to issue a VAT invoice for retail supplies to unregistered businesses unless requested by the customer.
A simplified VAT invoice can be used for supplies of up to £250. There are also specific situations where a VAT invoice does not have to be issued, for example, if your customer operates a self-billing arrangement.
Generally, a business must keep VAT business records for at least 6 years (or 10 years if they use the VAT MOSS service). By special permission, HMRC may allow you to keep certain records for a shorter period. For example, if the 6-year rule causes you serious storage problems or undue expense.
The VAT records can be held on paper, electronically or as part of a software program. There are no specific VAT rules about using a computer. Records used for other tax purposes may need to be kept for longer periods. There are financial penalties that can be levied for a failure to keep or produce the VAT records required by law.