VAT changes to construction – Domestic Reverse Charge

What is happening and when?

After being delayed twice, the new VAT Domestic Reverse Charge (DRC) goes live on March 1st. It is the most significant change to VAT in construction services in 30 years. From that date, sub-contractors in a Construction Industry Services (CIS) chain of supply will cease to collect VAT from other contractors. In its place, a reverse charge system will apply. This makes the buyer of the sub-contractor’s service liable for VAT accounting in place of the supplier.


Why the change?

HMRC are implementing the change to combat VAT ‘missing trader’ fraud in the sector which is estimated to cost the Treasury £100m per annum.


What services will be affected by the DRC?

The scope of the new legislation is wide and based on the definition of “construction operations” for CIS purposes. It encompasses construction services and associated goods supplied by contractors working on the construction, alteration, repair, extension or demolition of buildings and civil engineering works.


What is excluded from the DRC?

  • Professional services of architects and surveyors.
  • VAT must continue to be charged on separate supplies of goods.
  • Employment businesses supplying staff and who pay temporary workers.
  • Supplies of contractors’ services to an ‘end user’.
  • Zero-rated services (i.e. new dwellings and RRP projects).

What is an ‘end-user’?

End-users are customers who do not supply building and construction services onwards. This will include occupiers, retailers, developers, and landlords.

The position as an ‘end user’ may not be obvious to a building contractor and therefore the ‘end user’ needs to declare its position. In the absence of a declaration, contractors should assume that the domestic reverse charge applies, whenever their customer is VAT registered.


Practical implications

VAT-registered sub-contractors who work exclusively for main contractors will cease to collect VAT on their services. The right to reclaim VAT on costs is unaffected and will result in regular VAT repayments being due from HMRC. This will be a burden on cash flow for sub-contractors who may wish to consider monthly VAT returns from March this year.

The cash flow position of main contractors however should improve. They will cease to pay VAT to subcontractors and will instead self-account for VAT on these supplies, reclaiming this VAT under the normal rules at the same time on a VAT return.


Preparation

Businesses will need to adapt their accounting systems and invoicing procedures and train accounts staff to identify when the reverse charge should be applied. Relying on the supplier to get this right is not an option due to the risk of any incorrectly charged VAT being non-reclaimable from HMRC.

The terms of construction contracts should include a reference to these new rules and how VAT is to be accounted for.


Verifying the VAT and CIS status of customers

Before applying the reverse charge you need to confirm your customer is registered for VAT. You do not need to verify the CIS registration of existing customers if your contract is within CIS but you should ask new customers to provide details of their registration as a contractor for CIS purposes, or a copy of their CIS verification of you, and retain these.

HMRC recommends you use the CIS verification system.


Guidance for software packages

Some cloud accounting providers have released information to help users set up their software for the DRC:

  • Xero has specific tax rates to use on invoices and bills in order to report the correct amounts on the MTD VAT Return.
  • QuickBooks (QBO)has released two new tax rates to account for the VAT reverse charge. In order to have these tax rates appear, you need to have VAT and CIS enabled.
  • On versions 26 and above of Sage, DRC rates are automatically included. Should you be on an older version, you will need to manually create the tax codes, instructions for which can be found here.

Get in touch

If you have any concerns about the new VAT domestic reverse charge, then please contact a member of our VAT team.

Alan Davis | VAT Partner & Chairman | alan.davis@hlca.co.uk

Allan Easton | VAT Consultant | allan.easton@hlca.co.uk

Budget 2021: Key Points

Chancellor Rishi Sunak delivered the Budget in the House of Commons on 3rd March 2021, announcing the government’s tax and spending plans for the year ahead, in a bid to help the UK’s economy recover from the COVID-19 crisis.

We have summarised the key points in this article, but you can also download our full budget summary by clicking here.


Key Points:

Measures to mitigate the impact of Coronavirus

  • Extension of the Coronavirus Job Support Scheme (‘furlough payments’) to September 2021 across the UK, with employer contributions to salary from July
     
  • Fourth Self Employment Income Support Scheme grant covering February to April 2021 to claim from late April, similar to first three grants – and newly self-employed people who filed 2019/20 tax returns by 2 March may be eligible to claim for the first time
     
  • Fifth Self Employment Income Support Scheme grant covering May to September to be claimed from late July, varying in amount according to the fall in turnover during the pandemic
     
  • No further support announced for people working as directors through their own personal companies
     
  • 6-month extension of the £20 per week Universal Credit uplift, with an equivalent £500 grant to eligible Working Tax Credit claimants
     
  • Range of ‘Restart’ grants for businesses reopening after lockdown
     
  • Recovery Loan Scheme from 6 April 2021: government to guarantee 80% of eligible loans from £25,000 to £10 million to give lenders confidence to support UK businesses, with some other loan schemes coming to an end on 31 March 2021
     
  • Business rates holiday for eligible retail, hospitality and leisure premises in England continues for first 3 months of 2020/21, followed by a 66% discount for the rest of the year. In Scotland, the 100% relief has been extended for retail, hospitality, leisure & aviation to 31 March 2022.
     
  • 5% reduced rate of VAT for hospitality and leisure industry extended from 1 April to 30 September 2021, followed by 12.5% intermediate rate to 31 March 2022

Reliefs extended

  • Nil rate of Stamp Duty Land Tax on property transactions up to £500,000 extended from 31 March to 30 June 2021, with £250,000 threshold up to 30 September 2021 (England only)
     
  • Duties on alcoholic drinks and fuel frozen for the second year running

Tax year 2021/22

  • Small increases in main Personal Allowance, Basic Rate Band and National Insurance thresholds confirmed, as already announced
     
  • Lifetime Allowance for tax-advantaged pension funds, Inheritance Tax nil rate band, Capital Gains Tax annual exempt amount, ISA subscription limits all frozen at 2020/21 levels
     
  • No increase in CGT rates announced, contrary to some speculation in advance
     
  • Corporation Tax rate remains 19% until 31 March 2023
     
  • New ‘super-deduction’ for investment by companies: 130% of qualifying expenditure on general plant for two years from 1 April 2021 can be deducted from taxable profit (50% for ‘special rate’ assets, and cars are excluded)
     
  • Trading losses (up to £2 million) for companies and self-employed businesses to be carried back up to 3 years instead of the usual 12 months, making it possible to set current losses against pre-pandemic profits to obtain a repayment
     
  • Cap on Research and Development claims: payable tax credit not to exceed £20,000 plus three times PAYE & NIC liability
     
  • No significant changes announced to ‘off-payroll working’ (IR35) rules, which will apply to large and medium-sized private sector employers from 6 April 2021, as previously announced

Tax measures coming into effect later

  • Personal allowances and income tax rate thresholds frozen at 2021/22 levels until the end of 2025/26
     
  • Lifetime Allowance for tax-advantaged pension funds, Inheritance Tax nil rate band and Capital Gains Tax annual exempt amount all frozen at their current levels until the end of 2025/26
     
  • VAT registration threshold fixed at current level of £85,000 until 31 March 2024
     
  • Corporation tax rate on profits over £250,000 to increase to 25% from 1 April 2023, with the current 19% rate applying to profits below £50,000 and a tapering calculation on profits between £50,000 and £250,000
     
  • Establishment of ‘Freeports’ enjoying significant tax breaks announced in 8 areas of England, with further areas to be discussed with devolved administrations

If you have any queries about any of the changes mentioned in the budget and how this may affect you, please speak with your usual MHA Henderson Loggie contact or email info@hlca.co.uk.

Placing goods on the Great British and EU markets from January 2021

This guidance does not apply to placing goods on the market in Northern Ireland or to goods moving between Northern Ireland and Great Britain. There is information on this below.

Businesses must have taken steps to ensure compliance with EU requirements for certification and labelling of products and materials by 1 January 2021.

Manufactured goods are regulated in different ways and are covered by different UK and EU rules. To ensure you are following the right guidance for your business, check which regulations apply to your products.

For new approach goods, for example, toys, PPE and machinery, most of which can be identified by the CE marking, these can still be placed on the UK market until the 1st of January 2022. This may be longer for some goods so consult your sector-specific guidance. If a business has already placed CE marked goods on the GB or EU market before the 1 January 2021, they don’t need to take any action for these goods.

From January 2022, most new approach goods businesses will need to use the UK’s new product marking, the UKCA mark and businesses are encouraged to start using the UKCA mark as soon as possible after the 1 of January 2021. However, CE marked goods that meet EU requirements can continue to be placed on the GB market until 1 January 2022 in most cases – longer for some sectors such as medical devices and transportable pressure equipment. This is true even where an EU Notified Body has been used. Until the 1 of January 2023, most new approach goods businesses will have the option to affix the UKCA marking on a label affixed to the product or on an accompanying document.

Old approach goods which are covered by standalone regulations for example cars, chemicals and medicines. Any changes for these goods will be specific to what a business is selling.

For non-harmonised goods such as furniture and foodstuffs, there will no longer be mutual recognition for goods between GB and the EU. Please check the online guidance for these products.

Other goods – There are special rules for some goods including medical devices, construction products, civil explosives and products requiring eco-design and energy labelling.

Trading with Northern Ireland

The Northern Ireland Protocol came into effect on 1st January 2021. The Protocol is a practical solution to avoid a hard border with Ireland whilst ensuring the UK, including Northern Ireland, leaves the EU, enabling the entire UK to benefit from future Free Trade Agreements (FTAs).

The Protocol resulted in some new administrative processes for traders. Notably, there are new digital import declaration requirements, and digital safety and security information, for goods entering Northern Ireland from the rest of the UK.

You will need to make sure you have an Economic Operators Registration and Identification, otherwise known as EORI number. This number is required to move goods between the UK, including Northern Ireland and non-EU countries. The EORI number should start with GB. If you have an existing number without the GB prefix, we recommend you apply for a new one. If you do not have one, this may lead to increased costs and delays if HMRC are unable to clear your goods which may result in storage fees.

The UK Government has established a new, free service, the Trader Support Service, otherwise known as TSS. We recommend you sign up for TSS which will guide you through any changes to the way goods move between Great Britain and Northern Ireland. It can also be used to complete digital declarations, at no additional cost. https://www.gov.uk/guidance/trader-support-service

Further information is available on the Northern Ireland Protocol by visiting the gov.uk website https://www.gov.uk/guidance/moving-goods-into-out-of-or-through-northern-ireland-from-1-january-2021


Get in touch

Moving goods under the Northern Ireland Protocol

The Cabinet Office published a policy paper on 7th August 2020 explaining the procedures for movement of goods between the EU and Northern Ireland; and between Northern Ireland and Great Britain.

The UK government stated that Northern Ireland businesses will continue to have unfettered access to the GB market.

Given the importance of this announcement and its implications for the future of the UK’s relationship with the EU, it has received remarkably little attention. A brief overview of the protocol highlights its significance.


Key points

Point 1: Businesses and individuals will be able to move goods from Northern Ireland into the rest of the United Kingdom on the same basis as now.

For almost all goods this means no declarations, tariffs, customs checks, or type approvals. Goods from Northern Ireland will be able to be placed on the market in Scotland, Wales and England, whether certified against EU or UK rules. The only exceptions so far announced to these arrangements will be for goods such as endangered species. This special treatment will be available only to Northern Ireland businesses (including businesses headquartered in Great Britain with operations in Northern Ireland). The Government is still to define a qualifying status for goods and businesses in Northern Ireland benefiting from unfettered access.

Point 2: There will be no change for the movement of goods between Northern Ireland and EU Member States, including Ireland.

That means there will be no new paperwork; no tariffs, quotas or checks on rules of origin; nor any barriers to movement within the EU Single Market for goods in free circulation in Northern Ireland.

Point 3: There will be some new arrangements for goods movements into Northern Ireland from Great Britain. UK authorities will apply EU customs rules to goods entering Northern Ireland.

This entails new electronic import declaration requirements for goods entering Northern Ireland from the rest of the UK. This new system is being developed to minimise the burden on businesses required to make declarations. These are needed to make sure that tariffs are not paid on trade within the UK and that goods going to Ireland are subject to tariffs where appropriate.

Point 4: As Northern Ireland remains in the UK customs territory, its businesses will benefit from preferential tariffs from third countries just as the rest of the UK will. UK Tariffs will be applicable to imports from third countries.


What does this mean in practice?

Businesses in Northern Ireland (with a suggestion this will include any business with an NI establishment) will have “unfettered access” to both the EU Single Market and the GB domestic market.

Unless the UK government narrows the qualifying criteria significantly before January 1st, this appears to enable any sizeable UK business to retain access to tariff-free acquisitions from the EU, simply by establishing a related company in Northern Ireland to affect the import. The integrity of the Single Market, which the EU holds as an absolute red line in negotiations, cannot survive unless the UK places significant restrictions on which Northern Ireland goods can be sold without tariff or control into Great Britain.

The government intends to track the movement of goods from GB to Northern Ireland as those goods are supposed to face barriers on entry into the EU (assuming no deal is reached). In the absence of Customs’ checks, smuggling via Northern Ireland as a route into the EU may become a significant problem, particularly for goods which are UK VAT zero-rated (and which therefore do not rely on proof of export to escape 20% VAT).


Supply of parts for manufacture of goods in NI

It is still uncertain whether additional customs requirements will be imposed on businesses involved in the supply of parts for the manufacturing of goods in Northern Ireland. Depending on any agreement with the EU, those businesses may be subject to additional customs administration such as making declarations and holding a customs authorisation in Northern Ireland. This is an area that is part of the ongoing UK/EU discussions so updates will be provided in due course.


Sanitary and phytosanitary (SPS) goods

There remain ongoing concerns with sanitary and phytosanitary (SPS) goods as checks will likely be required on Great Britain goods arriving in Northern Ireland. These are goods which require overview to protect human, animal and plant health. The UK government has announced that no additional infrastructure will be built but, expansion of existing operations to carry out the SPS screening of animals and food products will be created. This added requirement could result in delays in supplies of SPS goods if the operations are overwhelmed.


Trader Support Service

The UK government will establish a new end-to-end Trader Support Service which will guide Northern Ireland businesses through all import processes for movement of goods, including handling digital import and safety and security declarations on their behalf, at no additional cost. Once registered with the Trader Support Service, businesses will simply need to provide digitally the appropriate information on the goods being moved, and the new service will deal with all associated requirements for free. All traders who wish to draw upon the support should register now.


Get in touch

If you would like any advice, please get in touch with us using the form below.

Winter Economy Plan: Key Points

On 24th September 2020, the Chancellor of the Exchequer, Rt Hon Rishi Sunak MP, unveiled the Government’s Winter Economy Plan. Central to the plan is the introduction of the Jobs Support Scheme, which is designed to focus on saving viable jobs across the UK.


The key aspects of the plan are as follows: 

  • Jobs Support Scheme – The Government will directly support the wages of people in work, in viable jobs. Employees must be working at least a third of their normal hours and be paid for that work, as normal, by their employer. The Government and the employer will each cover one-third of the pay an employee has lost by reducing their working hours.
    • Anyone who as of yesterday is employed is eligible.​
    • The Scheme will start in November and run for six months. 
    • All small and medium-sized businesses are eligible to apply. Larger businesses may be able to apply but only when their turnover has fallen.
    • All businesses are eligible, even if they have not previously utilised the furlough scheme. 
    • Employers who retain furloughed staff on shorter hours will be able to claim both the Jobs Support Scheme and the Jobs Retention Bonus.
  • The Self-Employment Support Scheme: The Government announced that it will be extending the Self Employment Income Support Scheme Grant (SEISS). An initial taxable grant will be provided to those who are currently eligible for SEISS and are continuing to actively trade but face reduced demand due to coronavirus. The initial lump sum will cover three months’ worth of profits for the period from November to the end of January next year. This is worth 20% of average monthly profits, up to a total of £1,875.  
    • An additional second grant, which may be adjusted to respond to changing circumstances, will be available for self-employed individuals to cover the period from February 2021 to the end of April. 
  • Coronavirus loan schemes: The application deadline for all coronavirus loan schemes, including the Future Fund, has been extended to 30 November 2020. The Government are currently working on a successor loan scheme, for introduction in January 2021. 
  • Pay as you Grow: The Government have introduced a ‘Pay as You Grow’ scheme for businesses which took out government-guaranteed loans during the crisis allowing. Loans taken out under the Bounce Back Loan Scheme or the Coronavirus Business Interruption Loan Scheme (CBILS) can be extended from six to ten years. Businesses who are struggling can choose to make interest-only payments and can apply to suspend repayments altogether for up to six months. 
  • VAT Deferral: Businesses who deferred their VAT will no longer have to pay a lump sum at the end of March 2021. They will now have the option of splitting it into smaller interest-free payments over the course of 11 months. Any self-assessed income taxpayers who need extra financial assistance can also extend their outstanding tax bill over 12 months from January. 
  • VAT for tourism and hospitality: The Government has extended the 15% VAT cut for the tourism and hospitality sectors to the end of March 2021. 

Get in touch

If you have any questions, please email your usual MHA Henderson Loggie contact, or email info@hlca.co.uk.

VAT – Change to the treatment of Compensation and Early Termination Payments impacts property sector – including historic transactions

Updated 21st January 2020


On Friday 18th January, HMRC shared an update on the question of early termination payments.  Whilst there is still a way to go, HMRC now accepts that there should be no retrospection.   They have given a specific comment on dilapidations payments which they consider are further consideration for the underlying supply where the work is noted in the contract.

The update is as follows;

  • HMRC consider that it has an arguable case to not apply this change retrospectively. In light of this, they will not apply the change retrospectively.
  • Instead, the change will apply from 1 February 2021.
  • Where we are already in litigation, HMRC will consider the facts and whether any alteration to the line taken to date is appropriate and communicate that to the businesses concerned.
  • HMRC plan to provide interested parties draft guidance before Christmas for comments, with responses due by 12 January 2021.  They will then consider if any changes are needed and update the guidance and issue a Business Brief before the beginning of February. RCB 12 (2020) will be withdrawn.

In broad terms, HMRC deems that early termination and similar payments will be considered for the supply if they form a cost component to the supplier of making the intended supply available or are broadly equivalent to what would have been charged for that supply. This is consistent with the judgements in MEO and Vodafone Portugal. Where a charge is made which is provided for in a contract, but which is not directly linked to the intended supply, it will be outside the scope of VAT.

The following examples help to illustrate this:

  • Dilapidation payments – (Where contracts require tenants to return the property at the end of a lease in the same condition as when it was first occupied, and if they do not do so the landlord may charge them for the costs incurred in doing that work). These payments are further consideration for the supply where the work is to make good use permitted under the contract.  There is a direct link between the payment and the supply, and there is reciprocity as the tenant has signed up to return the property in the condition they obtained it.  If the tenant had gone beyond what was permitted under the contract then the charge to rectify this would be outside the scope. It would not be for the supply as the landlord had not agreed to the usage and so the necessary reciprocity would not exist.
  • Car Hire – If a payment is required from the customer when a car is written off in the course of hire, the payment lacks the necessary link to the intended supply of car hire, as the supplier does not agree in the contract that the customer can write the car off (even if the contract makes provision for such an eventuality). The necessary reciprocity is not present in order to link the supply and consideration.  The fee for writing off the car is therefore outside the scope of VAT. The same is true of charges for excess wear and tear (that is wear and tear greater than that consistent with normal use of the car in the hire period).


September 2020 update as follows

When HMRC recently issued a Brief setting out changes to the VAT treatment of compensation and early termination payments, the guidance was given in the context of a recent European court ruling relating to cancelling mobile telephone contracts.  Closer inspection, however, highlights the danger from any HMRC or Government announcement of a change in approach – the potential for the change to have an unexpected impact or consequences in other sectors.


Policy Change

Hitherto HMRC’s guidance made clear that when customers are charged to withdraw from agreements to receive goods or services, these charges were not generally for a supply and were outside the scope of VAT.   Most early termination payments have been treated as compensation for the loss of future profit, and therefore not subject to VAT.  However, HMRC has now concluded that these early termination fees should be subject to VAT, because it is considered that the payments represent a charge for the supply of goods or services which a customer contracted for.  HMRC say that most early termination and cancellation fees are therefore liable for VAT – even if they are described as compensation or damages.


Consequences for the Real Estate sector

The Real Estate sector is likely to be impacted significantly by the change in approach.   The new policy raises a concern that VAT is liable to be charged on lease “break payments” / early termination payments whether specified in the lease or negotiated separately between the landlord and the tenant and where the option to tax has been applied.  Other property-related payments made to secure the early termination of long-term contracts including liquidated damages may also fall to be subject to VAT – for example, the payment to a facilities management company to terminate a contract early.  The policy sees a supply rather than outside the scope compensation.

It is also possible for leases and other agreements to terminate early if a particular event occurs such as the customer breaching the terms of the lessor or an associate business calling in receivers. Contracts may stipulate that such events cancel their terms or effectively allow the lessor to terminate as though there had been a breach and require a fee to compensate the lessor. As with other payments envisaged under a contract, this is a further consideration for a supply and will be subject to VAT.

Dilapidation payments have long been treated as compensation for tenants’ failure to meet their lease obligations and outside the scope of VAT.  The new policy does not affect this position, as true dilapidation payments stem from the tenants’ failure to maintain the building during the lease – but it is important that agreements reflect the position correctly and accurately.


Retrospective impact

In a further twist, HMRC’s announcement broke with the normal approach of making changes in tax policy applicable prospectively.  HMRC have set out that they consider that the policy applies retrospectively and requires taxpayers who may not have accounted for VAT on such fees to correct the errors for supplies in the last 4 years.  If taxpayers have had a specific ruling on the point from HMRC (and getting rulings from HMRC is increasing challenging these days), their treatment can change prospectively from the date of the HMRC announcement on 2 September 2020. 

We understand that representations have been made to HMRC in relation to this retrospective tax-grab, on the grounds that taxpayers have a legitimate expectation to rely on HMRC published guidance and fiscal certainty but there is no indication that HMRC will alter that approach.  It could even be seen an opportunistic tax-gathering measure in the current circumstances.


Action required

Given the new guidance, taxpayers who have paid or received compensation, termination payments or similar should review the contractual and VAT treatment and consider an adjustment if appropriate. The VAT team at MHA Henderson Loggie would be happy to provide assistance in that process if required.

Alan Davis | VAT Partner & Chairman | alan.davis@hlca.co.uk

Allan Easton | VAT Consultant | allan.easton@hlca.co.uk

VAT: What you need to know when running a small business

We’re all used to seeing Value Added Tax (VAT) as a common item on many bills and receipts. But is VAT relevant for small businesses? Is VAT something that every business needs to charge? What are the pros and cons of VAT registration?

These are the common questions our clients ask us every day.

In this article, we’re going to look at what VAT is, why it’s important to your business and whether you need to be VAT registered.

Armed with that information, you’ll be able to make the right decisions to help your business grow.


What is VAT?

The term VAT – short for Value Added Tax – is generally understood throughout the European Union as a percentage charge paid by consumers when purchasing certain types of goods and services.

Other countries have different names for the same general concept. For example, Australians have the Australian Goods and Services Tax (GST). As we provide accountancy services to UK businesses, we’ll stick with talking about VAT.

Since January 2011, the VAT rate in the UK has been 20% for most goods and services. There are some exceptions – for example, children’s clothing and footwear attracts a zero rate for VAT.

Rather than focusing on the details of how VAT is charged, we’re going to look at the broad pros and cons about being VAT registered, so that you can understand what really matters for your small business.

It’s commonly assumed that charging VAT is something that all businesses do, so it’s no surprise that many people who speak to us about starting their own business assume that they need to be VAT registered with HMRC.

In fact, that’s not true.

Many small businesses do not need to be VAT registered.


VAT fact

Businesses in the UK need to register for VAT only if their annual taxable turnover in the last 12 months or the next 30 days is greater than the VAT threshold. This figure is set and reviewed by the government, with any changes announced in the Chancellor’s regular budget statements.

The current VAT threshold is £85,000 and will be unchanged until 1 April 2022 at the earliest. (Last reviewed on 01/07/2020)

If your annual turnover is below the threshold, you can still voluntarily register for VAT. The decision is totally up to you.


Why would I register for VAT if I don’t have to?

You might wonder why you’d want to register for VAT if you’re not legally obliged to.

Registering means you have to regularly send VAT returns to HMRC as well as increasing the amounts you charge to your customers. Wouldn’t it be better to sidestep that hassle if you could?

Well, yes and no.

It makes sense that as business owners we want to keep our paperwork to a minimum. And we certainly don’t want to charge our customers more than we need to – it’s a competitive world out there and pricing matters.

On the other hand, being VAT registered can add an air of authority and permanence to your business.

And if most or all of your customers are VAT-registered businesses, the VAT they pay you for goods and services is often reclaimable. That means they might not be too worried about the VAT component of what they pay you because they’re able to claw back some or all of it.

Here’s another reason why voluntarily registering for VAT can make sense. Registering means that your clients and competitors won’t necessarily know what your annual turnover is. But if you don’t register for VAT, you’re effectively announcing to the world that your annual turnover is less than the VAT threshold.

In many cases, this won’t matter. But there may be some prospective clients who will feel more comfortable dealing with a VAT-registered business, especially if they’re likely to spend a lot of money buying from you.

One of the most common reasons to register for VAT voluntarily (i.e. before turnover creates an obligation to register) is to recover VAT incurred in start-up costs. For example, a new coffee shop may spend significant sums on creating a café and buying equipment. The VAT element of those costs can be reclaimed and return that cash flow to the business sooner than waiting until turnover exceeds £85,000.

We’ve already hinted at the drawbacks of registering for VAT. You’ll need to submit VAT returns to HMRC four times per year and you’ll need to account for VAT on taxable income regardless of who the client is.

If your turnover exceeds the VAT threshold, there’s no decision to be made – you’re legally required to register for VAT.


Do I have to register for VAT even if I’m a sole trader?

If your annual turnover is above the VAT threshold then the answer is yes. There are no special exemptions from VAT registration just for sole traders or partnerships.

As with limited companies, sole traders have to register for VAT if their annual turnover exceeds the VAT threshold.

If your annual turnover falls below the VAT threshold, you don’t need to register for VAT – but you can register voluntarily if you wish.


How do I register for VAT?

You can register for VAT via Gov.uk’s VAT registration pages.

This applies whether you decide to register voluntarily or whether registration is compulsory (because your annual turnover exceeds the VAT threshold).


How does VAT work once my business is VAT registered?

Once your business is registered for VAT, you’ll gain access to the part of the Gov.uk website that will let you complete your VAT returns. From the VAT point of view, the year is generally split into quarters, meaning that you’ll need to log in to the website four times per year to submit an online VAT return.

You’ll be given a VAT number. You’ll need to include this on all sales invoices you issue from that point onwards. You won’t need to worry about changing or re-issuing any invoices you issued from before the time you were VAT registered. For this reason, it’s important to keep a note of your effective date of VAT registration.

As well as quoting your VAT number on your invoices, you’ll need to add the relevant VAT charges to your invoices. In most cases, this means adding 20% (the current VAT rate) to the net charge.

At the end of each quarter, you’ll need to log in to the Gov.uk site to complete your VAT return – that’s the point where the VAT you’ve charged is declared to HMRC.

The VAT return is a summary of your earnings (which includes the VAT you’ve charged for your goods and services) plus your expenses (which includes the VAT you’ve paid for goods and services). The difference between these amounts will determine how much you need to pay or claim in your quarterly VAT return.

The summary above covers the most common way of registering for and running your VAT account. There are other methods of handling VAT, including the cash-accounting method and the Flat Rate Scheme. These have their own pros and cons, and discussing them in detail goes beyond the scope of this article. However, if you need advice on which method may be best suited for your small business, that’s something we can discuss during a consultation call.


Do VAT rules differ across the UK?

No. Whether you’re in Dundee or Dorset, the VAT rules are the same across the UK. Thresholds, percentages, forms – it’s all identical.

That’s good because we know that our VAT advisory service can offer you the same even-handed advice regardless of where in the UK your business is based.


What if I have questions about VAT?

HMRC publishes plenty of guidance about VAT and VAT registration via the government’s website. Specific questions are often best directed to HMRC’s telephone helpline. Be prepared to wait for your call to be answered and don’t expect an expert personal consultation that deals with every possible financial question.

Though we can’t make specific recommendations here, we do have many years of experience in helping new business owners get up and running. If you book a consultation call with us, we can take the time to walk you through the facts, showing you how VAT may be relevant to your business. To find out more, get in touch with Alan below.

Like all important decisions, you have to choose the path that you feel is right for you. Our job here is to present the facts in a clear way so that you have the best possible chance of making the best choice for you and your business.

You can find out more about our corporate tax and VAT advisory services on our VAT page.


Next steps

OK, we’ve taken a look at VAT registration and have hopefully given you some useful points to consider.

While we can’t say what’s best for your business, we can invite you to talk to us so that we can understand more about where you are and where you want to go.

We’ve got just the right person for you – Alan Davis, our Chairman. Alan worked for HMRC for 16 years and is one of our VAT specialists.

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Temporary VAT Reduction for Tourism & Hospitality Sectors

***As announced on Thursday 24th September, The Chancellor has extended the 15% VAT cut for the tourism and hospitality sectors until the end of March 2021***.


The Chancellor’s summer economic update introduced a significant reduction in the UK VAT rate from 15 July 2020 to 12 January 2021. The changes will apply to the Tourism and Hospitality sectors, where it is hoped that a new 5% rate for ‘specific supplies’ will help to stimulate consumer spending as we enter the next phase of our recovery from the Covid-19 pandemic. The measures will cover the following:

  • Food and non-alcoholic drinks – The reduced (5%) rate of VAT will apply to the on-premises supplies of food and non-alcoholic drinks from pubs, restaurants, bars, cafés and similar premises across the UK.  The reduced rate will also apply to supplies of hot takeaway food and drinks. 
  • Accommodation and attractions – The reduced (5%) rate of VAT will apply to supplies of hotel and holiday accommodation (including caravan & camping fees) and admission fees to attractions such as theatres, theme parks, museums, amusement parks, cinemas, safari parks, zoos & similar cultural events and facilities across the UK (it does NOT apply to sporting events)

Taken together with the easing of some lockdown restrictions, and other initiatives such as the Eat Out to Help Out scheme, it’s clear that the hospitality and tourism industries are a focus of the government’s efforts to support businesses affected by forced closures and social distancing.

There are two potentially competing drivers for this VAT reduction.  As there is no legal requirement for businesses to reduce prices to reflect the lower tax rate, the ‘benefit’ of the reduction could be to leave more of the day’s takings in the hands of the business and support the business.  However, if businesses pass on the tax saving (as Nandos, Pret A Manger and Starbucks have said they will), hard-pressed consumers will feel the benefit and perhaps increase their spending.  

However, some businesses may not experience increased demand due to social distancing and may have limited ability to deliver on increases in demand if social distancing makes it difficult to take on additional staff or reinstate furloughed staff.  Until these constraints ease and more restrictions lift, it might be commercially difficult for businesses to cut the price they charge.

Never was the ‘In it Together’ mantra more pertinent – many businesses in the tourism and hospitality sector have been closed and without income for months.  They need the support of consumers.  But consumers need the encouragement of a price reduction to come out and trade with local businesses.  Some middle ground and understanding should see improved confidence for both as we work our way out of lockdown.


Alan Davis, Chairman & Head of VAT, MHA Henderson Loggie

Implications of VAT Grouping

This article highlights the advantages, disadvantages, and practical implications of forming a VAT group.

Two or more companies or limited liability partnerships (“corporate bodies”) can register as a single taxable person for VAT if:

  • each has its principal/registered office in the UK, and
  • they are under common control.

The Implications of VAT Grouping

There are a number of implications of VAT Grouping, both advantages & disadvantages, along with some practical points which may be either advantages or disadvantages in the context of your operational setup. 


Advantages

  • The ‘Representative Member’ (a nominated ‘lead’ company) accounts for any tax due on supplies made by the group to third parties outside the group on a single VAT return. This can be helpful where accounting is centralised.  There may also be disadvantages to this – e.g. where accounts departments are disparate, filing deadlines may be more difficult to meet
  • The group is treated as a single taxable person and therefore it is not necessary to account for VAT on goods or services supplied between group members. This will be advantageous as it means there is no need for VAT on invoices for these supplies
  • Invoicing to Accounts Payable is potentially more straightforward, where suppliers can invoice the wrong company – as long as the companies are in the same VAT group, the VAT is recoverable and there is not the same need to ensure correct invoicing/addressing simply to ensure VAT is recovered through the correct VAT registration
  • Any poor compliance history of previous VAT registrations (and the VAT registration numbers themselves) will end with the closure of their individual VAT registrations – potentially ‘wiping the slate clean’

Disadvantages

  • VAT grouping brings joint & several liability for VAT due on the Group VAT return
  • The good compliance history of previous VAT registrations (and the VAT registration numbers themselves) will end with the closure of their individual VAT registrations
  • Any approvals or agreements reached with HMRC under the old VAT registration will strictly end, though it may be possible to carry those forward.  That may mean that any existing special partial exemption method would be lost – though that may also be regarded as an opportunity – to agree a more suitable method
  • Fixed financial limits in VAT regulations apply to each VAT registration number so aggregation to a group may not be helpful, for example;
    • For voluntary disclosures, the £10,000 limit for corrections to be disclosed on the next VAT return will cover a VAT group declaring more VAT – with more scope for error
    • The Payments on Account threshold of £2.3m net VAT per year will apply to the group as a whole and not the individual members
    • The partial exemption annual deminimis limit is £7,500 for a VAT group, so by aggregating, further £7,500 ‘allowances’ for individual companies are forgone, and
    • Default surcharges for late submission/payment may be calculated on larger sums, bringing more cost risk if net tax payable is high

Practical Considerations

  • A new VAT registration number will be required for the group. Although not necessarily a major issue, any stationery, letters and similar correspondence that carry the original VAT numbers would need to be amended to reflect the new VAT registration number.  It is, however, possible to give a single undertaking to HMRC to declare any VAT due under old registration number stationery under the new registration – useful to allow the exhaustion of existing stocks
  • The online process will be ‘driven’ from one seat – this would include submission and payment of a single aggregated VAT return but also the submission of any other data required by HMRC – e.g. Intrastat and EC Sales Lists
  • A new EORI number to deal with imports and exports will be required for a new VAT group
  • VAT inspections will only be required to one VAT number, but they may be more detailed as the returns will be more complex given the consolidated nature.  The larger the VAT grouped-business, the more likely that VAT assurance visits will be carried out by the Large Trader team in HMRC, potentially meaning a more systematic approach to assurance, and
  • There are detailed rules and anti-avoidance conditions where members are partly exempt or part-owned / managed by third parties.

Impact on VAT Cashflow

Where businesses currently have differing VAT periods, with a VAT group there will only be one period to consider.  This may affect VAT cash flows; if any businesses are currently in a typically VAT repayment position, by grouping these will be offset against others who may be regular VAT payers.  It may also be the case that inter-company charges create a positive cashflow benefit with the related VAT, so the overall impact of a single return for both/all companies should be considered fully ahead of any group application.  Depending on the size of the returns for each business this may still result in overall repayments for the group in each period and monthly group returns may be appropriate.


Next Steps

If you have any questions on VAT grouping, please discuss with your usual MHA Henderson Loggie contact or our VAT contacts noted below.

Alan Davis | VAT Partner & Chairman | alan.davis@hlca.co.uk

Allan Easton | VAT Consultant | allan.easton@hlca.co.uk

VAT on new house building: Are there any special rules that apply?



Are you a new house builder and are unsure about the rules & restrictions for VAT?

In this short video Alan Davis, VAT Partner here at MHA Henderson Loggie, shares some insight into the Value Added Tax rules for new house builders.

Covered in this video:

✅ Common misconceptions about VAT for new house builders
✅ What are the VAT restrictions?

If you have any questions about VAT for new house builders, please contact Alan directly at alan.davis@hlca.co.uk


Edited video transcript


VAT for new house builders

Generally speaking, when I’m advising builders who make new houses, they’re typically aware that there are VAT restrictions on input tax on the costs of building those new builds, but I find very often that the people who are dealing with these points quite often change. You’ll have somebody who’s changed jobs, and the next person will either not be aware that there are restrictions or will forget over time. One of the things I do when I’m talking to them is ensure that they’ve got good systems in place to ensure that everyone’s aware of the implications of VAT and new house building.


Common misconceptions

It’s a common misconception that VAT becomes part of the financial annual audit and that accountants are looking at the treatment of VAT as part of their audit. Historically, I would have thought that was the case as well when I was in HMRC, and that’s not the case. It’s a common misconception. It’s really down to you to focus on VAT and know the rules about what you can recover VAT on and what you can’t. The information in this video is quite general, and so we would always recommend that you take specific professional advice of your own to ensure that you get the VAT position correct.


What are the rules applying to house building?

Well, the main one is the treatment of white goods. You’re restricted from recovering VAT on things like refrigerators, washing machines, dishwashers, and so on. In addition, the treatment of flooring is quite important. You’re not entitled to recover VAT on carpets, but if you lay down a hardwood floor, that VAT is recoverable. Similarly, most new house builders have sales and incentive schemes, for example, part exchange and the extra furnishings, curtains and so on. Each of those have VAT implications and specific VAT treatment. You’d really need to keep an eye on those.


Any questions about VAT for new house builders?

If you’re involved in the construction of new houses or the VAT treatment of the costs of doing so, or if you’ve got questions or comments, please feel free to contact Alan directly at alan.davis@hlca.co.uk

The information is this video is of a general nature and seeks to highlight some of the issues which could be affecting you and/or your business, including changes to financial regulation and legislation. Viewers should not rely on this information without seeking professional advice on its application in their circumstances.