Important changes to HMRC’s Option to Tax process
16 Jan 2023
New penalties and interest for late payment and submission of VAT returns
25 Oct 2022
Option To Tax trial period
22 Aug 2022
The VAT Bulletin: May 2022
03 May 2022
Do I need to register for VAT? A guide for SMEs, freelancers and sole traders
18 Mar 2022
Advisers and taxpayers alike will undoubtedly recognise the fact that dealing with HMRC has become more challenging than ever and what was previously understood to be relatively routine tasks, can easily turn into ongoing battles.
We do, of course, have sympathy with HMRC staff who are often doing the best they can in difficult circumstances but it is difficult to understand some of the changes HMRC has made in recent times, that appear to have created lots of problems and offered very little in the way of solutions.
In this edition of The VAT Bulletin, our team has highlighted some of the ongoing issues we are facing with HMRC and practical solutions, based on our recent experience. More interestingly, whilst issues such as national ‘lockdowns’ appear to be a thing of the past, the impact of COVID-19 is still being felt. During these unprecedented times, businesses had to be innovative in order to remain competitive and VAT issues have emerged from such innovation. We have highlighted some trends we are seeing in the ‘post-COVID’ landscape, which require serious consideration from a VAT perspective and a potential opportunity for partially exempt organisations that saw a dip in their effective rate of VAT recovery as a result of the pandemic.
Post Covid-19 VAT considerations
How did your Covid-19 webinar strategy impact your VAT obligations?
During the pandemic, many organisations had to hold events that would ordinarily be held in person, electronically. With the power of online conferencing tools such as Zoom and Teams, many resorted to building a strategy going forward that would allow them to host cheaper events, on a national and even international scale. However, for those who continue to host webinars and online conferences, there are some VAT implications to consider.
Ordinary 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 UK., 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 office spaces and the VAT implications
Working from home or utilising a hybrid working policy continues to see success within professional services, with many firms taking the view that most staff should be in the office only around half of their time to allow employees to maintain the work-life balance they developed during the pandemic. As a result of this, many businesses 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 the 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 is 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.
Our top updates
HMRC introduced a new system which is not user friendly. HMRC rarely contacts the agent but rather the client who may either assume the letter is for information purposes or assume their agent, the accountant, will have received a copy. After the initial email with the registration application reference number, all communication is by post and this adds to the time taken to process a VAT registration.
In addition, it is now difficult if not impossible to upload documents with the application and instead an email needs to be submitted quoting the registration reference number, the backlog for this ‘paper’ filing was nine weeks.
The backlogs at the registration unit have not disappeared, and delays of up to 10 weeks or more are common.
Option to Tax
There has been a huge backlog with the Option to Tax section, whether that is notifying HMRC about an option to tax or asking if one has been made in the past. We have waited for nine months for a full response in some cases.
HMRC has also changed the format of the notification which does not always include the date when the option to tax takes effect. We are hoping that this is temporary as it is very useful to know the date particularly when buying or selling a property rental business. In the meantime, we strongly recommend you retain a copy of the application form (1614A) that includes the effective date as well as the acknowledgement letter from HMRC.
Most VAT returns, where a refund is due to a business, are paid very quickly; within a few days of the VAT return being submitted. This is particularly true when the business is normally in a repayment position.
Where the VAT return is for the first VAT return or the business normally pays VAT, HMRC will often contact the business to verify the return. We are now seeing examples where the repayment is not made and HMRC is merely sending letters stating that they are late paying the return but with no explanation.
We mention elsewhere that some of the penalties regarding late return submission are changing and the same applies to HMRC after 1 January. After that date HMRC will pay interest at 1% below base rate from the date they receive the return, rather than at present where they pay a flat 5% supplement on the VAT due where they have delayed repayment for more than 30 days plus reasonable enquiry time.
Covid partial exemption methods
HMRC announced over a year ago that if a business who uses the standard method to recover VAT on its overheads, when it makes a mixture of taxable and exempt supplies, finds that the VAT recovery drops because of a change in the business activities resulting from Covid, that business could potentially use a different method to recover the VAT it incurs subject to HMRC agreement.
This announcement is not widely known, even amongst VAT inspectors but could save a business a large amount of VAT. HMRC will normally allow the use of the prior year's recovery rate to apply to VAT periods affected by Covid, where the prior year on its own is not representative of the use of the costs, HMRC may allow a representative period of up to three years to be used.
We have found that golf courses are a good example of businesses that may benefit, but any that have exempt and taxable supplies and use those proportions to work out what element of the overheads to claim should review their returns to see if they could make a claim.
Customs Declaration Service changes from 1 October 2022
Over the last few months, HMRC has written to those VAT-registered businesses that import goods to explain the changes in how HMRC will deal with imports and exports. The change is that the IT system they currently use, CHIEF, will be withdrawn and is being replaced by CDS (Customs Declaration Service).
HMRC has used a system known as CHIEF (Customs Handling of Import and Export Freight) to manage any UK imports and exports. For VAT-registered businesses, it was CHIEF that would have issued the C79 import VAT certificates. For some time, a system has been running parallel to this for imports, Customs Declaration Service (CDS). CDS has enabled a business using Postponed VAT Accounting to access their statements for inclusion on their VAT return.
From 1 October, CDS must be used for access to PVA statements and C79 Import VAT statements, these will no longer be issued by post. Access to CDS is through a separate link to the online gateway for VAT but the log in details are the same and can be found here. There have been a few instances where statements have been mismatched or a business cannot migrate to CDS so, if this applies to you, you can apply to extend the use of CHIEF.
CDS will also manage a duty deferment account and enable a business to pay the duties and import VAT due so if it has not already been done, a direct debit may also need to be set up.
Many businesses have already given access to their shipping agent who will manage their CDS account but business owners are advised to contact their shipper. If you do not already have access to your CDS account and are uncertain about how to proceed, please contact our team today.
PVA statements are only available to download for six months and you will need them to evidence their declaration on your VAT return.
The Gerald Edelman VAT team
If you would like further advice on anything we have covered in this newsletter, speak to our team today.Get in touch Back to top