The new VAT challenges that have emerged from the pandemic and how to manage them

The global pandemic has impacted our lives in every imaginable way. VAT is not exempt from this.

Businesses have had to be innovative in order to remain competitive/survive and VAT issues can emerge from such innovation and changing circumstances.

From face to face to online

As a result of Covid 19, and ever-increasing technological capabilities, 2020/21 saw a sharp increase in the number of organisations that are choosing to hold events that would ordinarily be held in person, electronically.

Ordinarily, face-to-face events are relatively straightforward from a VAT perspective. There may of course be additional considerations such as whether an exemption may apply such as for fundraising or education, but when it comes to the place of supply rules, such events are taxed where they physically take place This generally means that VAT is only payable in a single country when it comes to charges made for admission to the event. However, special place of supply rules exist in respect of B2C supplies of digital services.

Such services, when supplied to consumers in the EU and some Non-EU countries, can create a liability to account for VAT in the customer’s country. This may result in the need to register in multiple countries and account for VAT at the local rate.

With respect to the EU, the MOSS scheme allows for an organisation to account for all VAT due in EU countries to be handled through a single registration. As such, the key issue when it comes to online events, where attendees include consumers located outside the U.K., is to determine whether the event falls within the definition of digital services or not.

This largely comes down to the level of human intervention. For example, will the event involve live presentations and interactive Q&A sessions, etc. or does the event consist of pre-recorded video content, which can be watched at the attendee’s leisure?

Events that involve a significant degree of human intervention are unlikely to fall within the scope of ‘digital services’, whereas events that are largely automated have a far greater risk. This is a complex area and as always, should be considered in conjunction with your professional advisers.

Unwanted offices

Working from home has generally been a success within the professional services environment, with many firms taking the view that most staff should be in the office only around half of their time. As a result of this, many businesses now find themselves with office accommodation that exceeds their needs moving forward and consideration is being given as to how this may best be handled.

A potentially popular solution is to convert unwanted office space into residential accommodation, to let or sell. Such a conversion comes with its own VAT implications and it is important that professional advice is taken from the outset in order to avoid common pitfalls. One of the key issues when dealing with such conversions is to ensure that you are charged the correct rate of VAT. Qualifying services provided in the course of converting office accommodation into a dwelling (or dwellings) should be taxed at a reduced rate of 5%.

Depending on the precise circumstances, the VAT incurred in the course of such a conversion may or may not be reclaimable, as when it comes to residential accommodation, it is possible to make both taxable (with the right to recover) and exempt (without the right to recover) supplies.

Where VAT recovery is possible, it is important to stress that HMRC will not repay VAT that has been wrongly charged. If you have been charged VAT at the standard rate of 20% on services that qualify for the reduced rate of 5%, HMRC will advise you to resolve the issue with your builder, which may not be easy once the project is complete.

For these reasons, if you are intending on carrying out a conversion of this type, we would recommend that professional advice be taken from the outset. This can help to ensure that the reduced rate of VAT is applied correctly by your builder and that where possible, VAT recovery is maximised.

Need further guidance?

If you are experiencing new VAT challenges on the back of the pandemic, speak to a member of our VAT team today.