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VAT Standard Retail Schemes

VAT retail schemes are a special set of schemes used by retail businesses to account for VAT.  The schemes are usually used by businesses that sell a significant amount of low value and/or small quantity items to the public with different VAT liabilities.

The use of the scheme can save businesses a significant amount of time in calculating the amount of VAT due to HMRC on each and every sale. In many circumstances it would be extremely difficult for these businesses to account for VAT using standard VAT accounting. By using the VAT retail scheme, retailers are able to calculate VAT due to HMRC at the standard, reduced and zero rates of VAT as a proportion of sales. Usually this is done on a day by day basis.

There are 3 standard VAT retail schemes:

  • Point of Sale Scheme
  • 2 x Apportionment Schemes
  • 2 x Direct Calculation Schemes

There is also the option of using a bespoke scheme. The use of a bespoke scheme is obligatory for retailers with a turnover excluding VAT of £130 million or more. The decision as to which retail scheme to be used is usually driven by a combination of looking at the scheme that provides the best result for the business and the cost of using the scheme. Note, HMRC need to be of the opinion that the chosen scheme is fair and reasonable.

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UK VAT claims by non-EU businesses

The VAT paid in other EU countries is often recoverable by VAT-registered businesses in the UK, who bought goods or services for business use. The rules that govern the amount of VAT repayable depends on the EU countries rules for claiming input tax. It is important to note that VAT incurred in foreign countries can never by reclaimed on a domestic UK VAT return.

There are special rules for businesses established outside the EU submitting a claim for VAT incurred in the UK. The deadline for the submission of a refund request for expenses incurred in the UK by non-EU businesses during the period 1 July 2018 – 30 June 2019 is 31 December 2019. There are a number of conditions which must be met in order for a claim to qualify.

The form that should be used by these businesses to submit a claim is called a VAT65A form. The VAT notes explain how the form should be completed and includes details of alternative versions that can be used. The telephone number to contact the Overseas Repayment Unit has been updated.

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Transfer of business as a going concern

The transfer of a business as a going concern (TOGC) rules cover the VAT implications when a business is sold. Normally the sale of the assets of a VAT registered or VAT registerable business will be subject to VAT at the appropriate rate.

Where the sale of a business includes chargeable assets, and meets certain conditions, the sale will be categorised as a TOGC. A TOGC is defined as 'neither a supply of goods nor a supply of services' and is therefore outside the scope of VAT. Under the TOGC rules no VAT would be chargeable on a qualifying sale.

All of the following conditions are necessary for the TOGC rules to apply:

  • The assets must be sold as part of a 'business' as a 'going concern'. In essence, the business must be operating as such and not just an 'inert aggregation of assets'.
  • The purchaser intends to use the assets to carry on the same kind of business as the seller.
  • Where the seller is a taxable person, the purchaser must be a taxable person already or become one as the result of the transfer.
  • Where only part of a business is sold it must be capable of separate operation.
  • There must not be a series of immediately consecutive transfers.
  • There are further conditions in relation to transactions involving land.

The TOGC rules can be complex and both the vendor and purchaser of a business must ensure that the rules are properly followed. The TOGC rules are also mandatory which means that it is imperative to establish from the outset whether a sale is or is not a TOGC. For example, if VAT is charged in error, the buyer has no legal right to recover it from HMRC and would have to seek to recover this 'VAT' from the seller.

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What you must do when charging VAT

When you issue a VAT invoice to your customer, you must ensure that you charge the correct rate of VAT. Whilst most businesses in the UK charge VAT at the standard rate of 20% there are a number of different VAT rates and exemptions that you will need to be aware of. In the UK, there are three separate VAT rates, the standard rate of 20%, the reduced rate of 5% and the zero rate 0%.

In addition, there are two other categories that the supplies of goods and services can fall under:

  • Exempt – where no VAT is charged on the supply.
  • Supplies that are ‘outside the scope’ of the UK VAT system altogether.

Where a transaction is a standard, reduced or zero-rated taxable supply, you must:

  • Charge the right rate of VAT
  • Work out the VAT if a single price is shown that includes or excludes VAT
  • Show the VAT information on your invoice
  • Show the transaction in your VAT account – a summary of your VAT
  • Show the amount on your VAT Return

If you charged the wrong amount of VAT and it is too high, then you are still responsible for accounting for the higher sum. If the amount is too low, then you must account for the amount you should have charged. Your customer can also ask for a replacement invoice to be issued reducing / increasing the amount of VAT due. The timing of finding an error can also impact on how the issue is resolved.

It is important to be aware that if the amount of VAT you charge is too high, your customer can only claim back the correct amount of VAT they should have been charged. A credit note will usually be required to rectify the situation.

If you are concerned that you may not be charging VAT at the correct rate, please call.

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Making Tax Digital (MTD)

Since April 2019, VAT registered businesses with a turnover above the VAT threshold need to keep digital records for VAT purposes using the Making Tax Digital (MTD) protocols. This means that businesses must keep their records digitally (for VAT purposes only) and provide their VAT return information to HMRC through MTD compatible software.

Businesses with a turnover under the VAT registration threshold (currently £85,000) are not mandated to use the MTD for VAT service but can opt to do so if they wish. There is also an exception for certain businesses that have until their 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.

HMRC also has a number of other relaxations to help businesses adapt to MTD. For example, HMRC has agreed to give businesses until 1 April 2020 (or 1 October 2020 for deferred businesses) to make sure there are digital links between software products. This means that during the first year of MTD for VAT, businesses who use more than one software programme to keep their VAT records and prepare and file returns will not be required to have digital links between those software programmes. After this time, bridging or MTD-compatible software will be required so that this information can be digitally sent to HMRC with no manual intervention.

HMRC has updated its guidance for businesses that need to update exceptionally complex or legacy IT systems. These businesses may qualify for a time-limited extension to their 2020 deadline for having full digital links in place. An application needs to be made to HMRC and the qualifying criteria must be met.

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Brexit and making an EU VAT refund claim

The VAT paid in other EU countries is often recoverable by VAT-registered businesses in the UK, who bought goods or services for business use. The exact rules that govern what VAT is refundable depends on the other countries rules for claiming input tax. It is important to note that VAT incurred in foreign countries can never by reclaimed on a domestic UK VAT return.

Claims must be made electronically via the tax authority in which the claimant is established: i.e. a claim from a UK company to any other EU country must be submitted electronically to HMRC. The deadline for the submission of a refund request for expenses incurred in other EU member states during the 2018 calendar year expires on 30 September 2019. HMRC electronically will forward the claim to the country where the VAT was paid. 

If the UK leaves the EU as planned on 31 October 2019, then HMRC’s VAT online services to claim a VAT refund from an EU member state will become unavailable (after 5pm on 31 October 2019). The ability to view previous claims will remain.

This means that after Brexit, you’ll need to use the process for the EU country where you’re claiming a VAT refund. This will likely need to be done using the existing process available to non-EU businesses. This will also apply to unclaimed expenses you had before Brexit.

If you have already incurred significant VAT in the EU during the current calendar year, it may be worthwhile making a claim before the 31 October 2019 via the HMRC portal. The rules allow for partial claims to be made.

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Brexit and VAT Mini One Stop Shop

HMRC has confirmed that after Brexit, you will not be able to use the UK’s VAT Mini One Stop Shop (MOSS) to declare and pay VAT. The final return period for the UK’s VAT MOSS system will be the period ending 31 December 2019. However, on this final return you should only include sales made before Brexit.

HMRC has confirmed that after Brexit, you will be able to use the UK’s VAT MOSS system to:

  • submit your final return by 20 January 2020
  • amend your final return until 14 February 2020
  • update your registration details until 14 February 2020
  • view previous returns

If you want to continue to use MOSS for sales you make after the UK leaves the EU, you will need to register for MOSS in any EU Member State. Alternatively, you will need to register for VAT in each EU member state where you sell digital services to consumers. The digital services threshold of €10,000 (£8,818) will no longer apply.

The place of supply rules on the sale of business to consumer (B2C) digital services is determined by the location of the customer who receives the service rather than the location of the supplier. The MOSS scheme is an electronic system that allows businesses to register in only one EU member state and submit a single VAT return and payment each quarter for all their cross-border supplies of digital services.

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VAT Agricultural Flat Rate Scheme

Businesses that use the flat rate scheme pay VAT as a fixed percentage of their VAT inclusive turnover. The VAT agricultural flat rate scheme is a variant of the flat rate scheme specifically designed for farmers and other activities relating to agricultural production (such as horticulture).

Farmers cannot join this scheme if the value of their non-farming activities is above the VAT registration threshold (currently £85,000). The amount of VAT paid on business expenses becomes irrelevant to the VAT returns.

The scheme was introduced to help ease the administrative burden of farmers who found that the requirement to maintain full VAT records had become disproportionally burdensome, usually by reason of the relatively small size of their businesses.

It is a condition of joining the scheme that farmers who are registered for VAT must have their registration cancelled. However, although the farmers will no longer be able to reclaim input tax, they can still charge a flat rate addition (FRA) currently 4%.

The FRA is not VAT and the farmer is allowed to keep the 4% collected. The addition acts as compensation for the loss of input tax the farmer would have been able to reclaim if registered for VAT.

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VAT changes for CIS Sub-contractors delayed

The VAT rule changes for building contractors and sub-contractors that were expected to come into effect imminently, have been delayed for 12 months until 1 October 2020.

This surprise announcement followed intense lobbying by the construction industry who have long argued that many businesses in the sector were unprepared for the change. The planned introduction of the new rules was also conflicted with the current EU exit deadline next month.

In fact, a coalition of fifteen of the UK’s leading construction associations had written to the Chancellor last month asking for the impending changes to be delayed for 6 months. Delaying the introduction of the new rules should reduce the burden on the construction industry at a critical time.

The new rules 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. From 1 October 2020, sub-contractors will no longer add VAT to their supplies to most building customers, instead, contractors will be obliged to pay the deemed output VAT on behalf of their registered sub-contractor suppliers. This is known as the Domestic Reverse Charge.

HMRC has said that they recognise some businesses have already changed their invoices to meet the needs of the reverse charge and cannot easily change them back in time. Where genuine errors have occurred, HMRC will consider the fact that the implementation date has changed.

The news of the 12-month delay has been warmly welcomed by the construction industry and will give businesses who had not properly prepared for this change time to act. However, the very short notice of this delay will impact on those businesses who had acted diligently and spent time and money preparing for the change, as they will now have to reverse their changes and moth-ball them until next year.

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Deregistering for VAT

A compulsory VAT deregistration is usually required if you:

  • Stop making taxable supplies
  • Sell your business
  • Change legal status
  • Disband a VAT group
  • Join a VAT group
  • Join the agricultural flat rate scheme

A voluntary VAT deregistration can be made if you do not expect your taxable turnover to exceed the VAT deregistration limit. The current deregistration limit is £83,000. 

You will be required to submit a final VAT Return for the period up to and including the VAT deregistration date.

You must account for any stock and other assets you have on this date if:

  • you could reclaim VAT when you bought them,
  • the total VAT due on these assets is over £1,000.

You can also make late claims for input tax on invoices received relating to the period that you held a VAT registration. This can be done after the final VAT return has been submitted (subject to the usual VAT time limits).