VAT Connect – February 2017

‘Aggressive Abuse’ of the Flat Rate Scheme – Update

1 April 2017 will see the introduction of a 16.5% Flat Rate Scheme (FRS) rate to address what the government believes to be ‘aggressive abuse’ of the Scheme. The new rules may mean compliant taxpayers are unwittingly caught by the 16.5% rate.

Following on from our article in January’s VAT Connect, there are additional points to highlight to businesses who may be caught.

Although not clear in their guidance, HMRC’s Limited Cost Trader test is applied to each VAT period, so businesses may find themselves unaffected in one VAT period, but caught with the test in another.  Businesses with seasonal purchase of goods may therefore wish to consider planning their purchases over a longer period.  It is also worth noting that ‘goods’ for this test includes electricity and gas; something to bear in mind when you calculate the cost of goods that are not specifically excluded under HMRC’s technical note.

Businesses who are caught by the new test are likely to benefit from leaving the scheme; either by deregistering from VAT (subject to the business turnover), or remaining VAT registered but accounting for VAT under the normal method.  Any benefits will be determined by recovery of input tax on costs excluded from the test, such as fuel for vehicles and professional or skilled services.

HMRC’s online checker, designed to assist businesses in determining if they are a ‘limited cost trader’ for the current VAT period is still in the pipeline.

The Importance of Fuel Receipts

A ruling from the First-Tier Tribunal is a good reminder that employee mileage claims must be supported by fuel receipts.

Cohens Chemist, who comprised several separate retail pharmacies, had appealed a £67,000 assessment raised by HMRC in relation to input tax originally recovered on fuel incurred by delivery drivers who used their own vehicles.

HMRC had found that employee mileage claims were not supported by the fuel receipts, and disallowed the input VAT reclaimed.  The business argued that their own internal records (the mileage claim) sufficed.  The Tribunal agreed with HMRC and dismissed the appeal.

To avoid HMRC disallowing any claims of input tax, businesses should always obtain a VAT receipt for purchases under £250, and VAT invoices for everything else.  If you’re relying on receipts or less detailed invoices, ensure that the supplier’s VAT number has been quoted, and that VAT has been applied.  Where employees incur expenses on behalf of the business, it is prudent to include the requirement to obtain a VAT receipt/invoice as part of the process.  This is particularly important for any online market place accounts; they will provide invoices if you update the settings to confirm the purchases are for business.  Further information can be found in HMRC’s guidance.

Partial Exemption

It’s that time of the year again when partly exempt businesses face the task of calculating their partial exemption annual adjustment.

Although the Henderson Loggie VAT Team are partial to partial exemption, we understand that for most businesses the task in calculating that annual adjustment can be arduous.

Under the partial exemption standard method, if the total input tax incurred in relation to exempt activities in the VAT year (ending March, April or May, depending on your VAT quarters) is less than £7,500 and less than 50% of the total input tax that you have incurred (i.e. de minimus), then all of your business input tax is recoverable.

For those businesses who are not de minimus, and are blocked from recovering all of the exempt input tax, you may wish to consider if timing is an issue, and delaying any substantial spending into the next VAT year.

For those businesses whose annual exempt input tax always exceeds the de minimus limit by quite a margin, maybe the standard method is not giving you the fairest recovery?  If so, there may be alternative methods in attributing and calculating the business use of input tax that maximises the recoverable VAT.  Alternatively, special methods can be agreed with HMRC.  We can assist with either.

The Proof is in the Packaging (and marketing)

An appeal about the zero-rating of edible highlights the importance of the packaging and marketing of the product as food, as opposed to it being edible.

Zero-rating of foodstuffs extends to seeds and plants that grow into things that can be eaten, but there’s a catch; they must be ‘held out’ for sale as food for human consumption.  As a VAT inspector once told me “you can feed your horse a straw hat, but it’s still standard-rated if it’s held out for sale as a hat”.  In the First Tier Tribunal decision of Branded Garden Products Ltd, this was a sticking point for plug-plant seeds which produced edible flowers.  The taxpayer sought agreement from HMRC that the seeds could be sold zero-rated as they produced flowers which could be eaten.  HMRC refused on the basis that their customers “can still admire the floral display, but can also eat the flowers if [they wish]”; going on to say that listing the seeds in an Edible Flowers Guide and marking the packets as suitable for eating with an ‘e’ was not enough to meet the criteria.  The Tribunal agreed with HMRC, drawing the distinction between plants and seeds held out for sale for a culinary purpose as opposed to being merely edible.

Next Month: The Chancellor delivers his first Budget on 8 March and we’ll bring an insight into any VAT and indirect tax changes.

If any of these articles raise further questions for you, please contact any member of our VAT team.

Alan Davis – VAT Partner & Head of Tax

Email: or tel: 07719 295827