Category: VAT

TOMS for Rent to SA – Reducing the Fallout of the Sonder Europe Upper Tribunal Decision

a bedroom with an open terrace

The Upper Tribunal’s decision has significant implications for businesses that lease residential properties and rent them out as serviced apartments. It suggests that such activities may not fall within the scope of TOMS, potentially requiring these businesses to account for VAT at the standard rate on the full value of their supplies, rather than just on their profit margin. This shift could impact the VAT treatment of supplies made by similar operators in the serviced accommodation sector.​

As of March 22, 2025, Sonder Europe Ltd has applied for permission to appeal the Upper Tribunal’s decision regarding the applicability of the Tour Operators’ Margin Scheme (TOMS) to its serviced apartment operations. The Upper Tribunal had previously overturned the First-tier Tribunal’s ruling, siding with HMRC in determining that Sonder’s activities did not qualify for TOMS. We are currently awaiting the court’s determination on whether the appeal will be allowed.​

First-tier Tribunal (FTT): The decision was released on 5 July 2023. ​GOV.UK

Upper Tribunal (UT): The decision was released on 14 January 2025. ​GOV.UK

Discretionary Relief from Retrospective VAT Registration

If you didn’t register for VAT because you believed TOMS applied and the margin was below the VAT threshold, you would be required to do a back dated registration, however you could ask HMRC for Discretionary Relief.

Retrospective registration may not always be imposed if exceptional circumstances exist. HMRC may exercise discretion to waive backdating if it would be unreasonable to do so, or if the trader demonstrates a genuine misunderstanding or error at the time of registration

To make a compelling case to HMRC for discretionary relief from retrospective VAT registration, based on a genuine misunderstanding tied to the Sonder Europe case, you would need to write a detailed explanation highlighting the following points:

1. Establish the Context of the Misunderstanding

  • Explain that the decision to not register for VAT was based on reliance on the First Tier Tribunal (FTT) decision in favour of Sonder Europe. Emphasise that this decision created a reasonable belief that the application of TOMS to similar business operations was lawful and acceptable.
  • Reference the FTT’s decision, explaining how it shaped the industry practice and created precedent for similar businesses to believe TOMS was the correct VAT treatment for their supplies.Example: “The company relied on the First Tier Tribunal decision in the case of Sonder Europe, which ruled that TOMS applied to specific supplies. This ruling was widely understood in the industry as legitimate guidance for similar businesses. Consequently, the company believed that its operations fell within the scope of TOMS, and its taxable margin did not exceed the VAT threshold under this scheme.”

2. Demonstrate Good Faith

  • Establish that the business acted in good faith and sought to comply with VAT rules based on the prevailing interpretation at the time.
  • If applicable, include any evidence of professional advice or guidance sought (e.g., from accountants or tax advisors) that corroborated the decision to apply TOMS.Example: “The company sought professional advice from its tax advisor, who confirmed that the interpretation of TOMS, as outlined in the Sonder Europe FTT decision, was appropriate for the company’s operations. At no point did the company knowingly seek to avoid VAT registration or misapply the rules.”

3. Highlight the Impact of the Upper Tribunal Decision

  • Explain that the Upper Tribunal’s (UT) decision against the application of TOMS has now significantly changed the legal interpretation of VAT treatment for similar businesses. Emphasise that this decision was unforeseen and altered the business’s understanding of its VAT obligations.Example: “The Upper Tribunal’s decision to overturn the FTT ruling in the Sonder Europe case has fundamentally changed the interpretation of VAT law regarding TOMS. This decision was unexpected and directly affected the company’s prior understanding of its VAT obligations.”

4. Request for Discretionary Relief

  • Argue that it would be unreasonable to impose retrospective VAT registration under these circumstances, as the misunderstanding was genuine and based on a credible legal precedent at the time.
  • Highlight that forcing retrospective registration would impose undue financial and operational burdens on the business, particularly as the business acted reasonably and in good faith.Example: “In light of the genuine misunderstanding arising from reliance on the FTT decision and the subsequent unforeseen overturning of that decision by the Upper Tribunal, we respectfully request that HMRC exercise its discretionary care and management powers to waive retrospective VAT registration. We believe it would be unreasonable to impose retrospective liabilities in this instance, given the company’s good faith reliance on prevailing legal precedent.”

5. Propose Future Compliance

  • Reassure HMRC that the business is now fully committed to complying with the revised VAT treatment as clarified by the UT decision. Include a commitment to register for VAT moving forward (if required).Example: “The company is committed to ensuring full compliance with VAT obligations and will immediately register for VAT in accordance with the revised interpretation of the law. We are prepared to work with HMRC to ensure all future VAT returns are accurate and up to date.”

Should VAT Registered Business restate previous returns using Standard VAT?

The key issues include whether VAT must be restated retrospectively on the standard VAT scheme from the date of TOMS adoption or whether adjustments may be limited to future VAT returns. Additionally, if Sonder’s appeal proceeds should you keep using TOMS until thats ruled on?

Restating VAT Retrospectively
The UT ruling against the application of TOMS does not inherently require VAT to be restated retrospectively unless the UT decision explicitly mandates such action. Since HMRC policy typically supports prospective application of changes, operators may not need to restate VAT using the standard VAT scheme for prior periods unless exceptional circumstances apply 

Rules explicitly stating that the Upper Tribunal mandates retrospective action in VAT compliance are not absolute but situational. Retrospective compliance is only required:

  1. When the Upper Tribunal explicitly mandates such action in its decision.
  2. When the decision constitutes a reinterpretation of the law, which inherently requires retrospective application, as per HMRC Brief 24/11.

The relevant excerpt from HMRC Brief 24/11 is as follows:

“HMRC usually announces changes in its policy or its interpretation of the law in advance. Whilst changes in policy are given a future implementation date, a change in interpretation of the law will mean that the law should always have been applied in a certain way, so the change is retrospective. On this basis, HMRC has stated that it: will not require a correction of past errors, based on the old interpretation of the law, so the new interpretation can be applied from a current or future date; will accept a correction of past errors if the business will not be better off and HMRC no worse off than if the correction was not made; and may exercise its discretion not to collect outstanding VAT where the business has been misdirected by an HMRC officer (who gave a clear ruling when in possession of all the facts).” (11)

Adjustments for Future VAT Returns
HMRC is likely to require compliance with the UT’s ruling from the date of the decision. Future VAT returns should reflect the standard VAT scheme unless the UT ruling is overturned upon appeal

Effect of Sonder’s Appeal Request
Sonder’s request to appeal the UT decision may temporarily delay the implementation of the ruling until the appeal is resolved. However, unless a stay of execution is granted, the UT ruling remains binding during the appeal process. Businesses relying on the FTT decision should comply with the UT’s ruling unless the appeal is successful. The tribunal system allows for appeals to the Court of Appeal on points of law only.

Conclusion

When the decision first came out many advisors were of the opinion that retrospective corrections were needed, in the same way that many businesses which adopted TOMS retrospectively made reclaims as TOMS saved them significant amounts of VAT. This may still be required, as HMRC may now reject the switch to TOMS, however, as it hasn’t been mandated this would give the option to change to standard going forward, pending further developments.

steve@bicknells.net

Plain English guide to VAT for businesses

Getting to grips with the basics of accounting, financial management and business strategy can be a challenge. To make things easier, we’re starting a new Plain English guide to business.

This time, we’ll be looking at Value-Added Tax, or VAT as it’s generally known.

What is Value-Added Tax (VAT)?

Value-added tax (VAT) is a consumption tax. VAT is imposed on the value added at each stage of the production and distribution of many goods and services. Registered businesses charge VAT on their sales and can reclaim VAT paid on their purchases.

The standard VAT rate in the UK is currently 20%, with different reduced rates for certain goods and services that fall outside the standard rate.

How does VAT affect your business?

You can choose to register for VAT at any point. But registration does become mandatory once you hit the relevant threshold (see below). As a VAT-registered business, you’ll add a few tasks to your to-do list but will also benefit from claiming back any VAT expenses.

Here are your main VAT responsibilities:

  • Become VAT-registered – it’s mandatory to register for VAT once your company’s taxable turnover exceeds the rolling 12-months threshold (currently £85,000 per year)
  • File your VAT return – your business must file a VAT return (normally quarterly) that shows all VAT you’ve collected from customers, and all VAT expenses you’ve incurred.
  • Pay the collected VAT to HMRC – also every quarter, you’ll pay the VAT funds you’ve collected from your customers to HM Revenue & Customs (HMRC) less any reclaimable VAT you’ve paid to your suppliers.
  • Claim back VAT expenses – If there’s a refund – where the reclaimable VAT on your outgoings exceeds the VAT on your sales – you can claim that back from HMRC. This can be a helpful boost to your cashflow).

How can our firm help you with VAT?

Becoming a VAT-registered business brings a certain amount of professional kudos to your company – and it needn’t add too much to your financial workload.

As your adviser, we’ll let you know when you’re close to hitting the registration threshold and will be there to help you get VAT-registered. We’ll also make sure your VAT processes are as simple and streamlined as possible, and that you maximise your VAT expense claims. We can also help you decide whether one of the special VAT schemes might benefit you.

If you’d like to know more about registering for and managing VAT, we’ll be happy to explain.

How the Sonder Europe Ltd v HMRC Case Impacts on the Rent to Serviced Accommodation Business Model – VAT

In July 2023, a significant tax case, Sonder Europe Ltd v HMRC, shed light on the VAT implications for the “Rent to Serviced Accommodation” business model in the UK. This blog post aims to provide clear instructions and guidance on how this case impacts businesses in this sector.

Whether you are already involved in this industry or considering entering it, understanding the implications of this case is crucial.

Background

The provision of holiday accommodation in the UK is subject to a 20% Value Added Tax (VAT) rate. However, the Tour Operators’ Margin Scheme (TOMS) can be used to reduce the VAT payable, as it allows businesses to pay VAT only on the margin.

The margin is calculated as the difference between the selling price and direct costs, including rent and cleaning expenses. Under TOMS, VAT is due at 1/6th of the margin for accommodations within the UK.

The Case

In the Sonder Europe Ltd v HMRC case, the First-tier Tribunal examined whether the Rent to Serviced Accommodation business model should be considered eligible for TOMS.

Points considered and answered in the case

  1. What is material alteration – Furniture? Repairs? Decorating?
  2. Is R2SA eligible to be a Tour Operator

As is typical in this sector the agreements with landlords are often 6 months to 3 years.

Sonder Europe Ltd, a company providing short-term accommodation, argued that they should be eligible for TOMS and therefore be subject to reduced VAT payments.

The Tribunal Decision

Sonder Europe Ltd v HMRC [2023] UKFTT 610 (TC) (5 July 2023)

The First-tier Tribunal ruled in favour of Sonder Europe Ltd., stating that their accommodation services fall under the TOMS scheme. The Tribunal concluded that the company’s business model met the criteria for TOMS, allowing them to pay VAT based on the margin rather than the full 20% VAT rate.

Note – First Tier Tribunal decisions don’t set a precedent, the case was based on EU Laws applicable at the time and HMRC may Appeal or bring further cases, but this is a land mark decision and it should also be noted that the Tribunal Judge and President, Greg Sinfield, is someone with a long history in the realms of VAT Liability questions and the interpretation of the legislation.

Where TOMS applies it must be applied and that means that many operators may now have grounds to apply TOMS VAT going back 4 years and stand behind the Sonder case.

Implications for R2SA VAT

The Sonder Europe Ltd v HMRC case has significant implications for businesses operating in the Rent to Serviced Accommodation sector. Following the Tribunal’s decision, such businesses can potentially benefit from substantial VAT savings by utilising TOMS. This is because Rent to Landlords is a major cost and without TOMS allowing its deduction would lead to high VAT costs which would be based on Sales.

Step-by-Step Guidance

To successfully apply the implications of the Sonder Europe Ltd v HMRC case to your Rent to Serviced Accommodation business model, follow these steps:

  1. Understand your business model:
    Familiarise yourself with the specific details of your Rent to Serviced Accommodation business model. Ensure it aligns with the characteristics that allowed Sonder Europe Ltd to be eligible for TOMS.
  2. Analyse direct costs:
    Determine the direct costs associated with your accommodation services, including rent, cleaning, maintenance, and other relevant expenses. These costs are crucial for calculating the VAT margin.
  3. Calculate the VAT margin:
    Subtract the total direct costs from your selling price to calculate the VAT margin. This margin will form the basis for VAT payments under TOMS.
  4. Apply the TOMS VAT rate:
    Multiply the VAT margin by 1/6th (0.1667) to determine the VAT due on your accommodation services. This result represents the reduced VAT payment you are eligible for under TOMS.
  5. Maintain accurate records:
    Keep detailed records of your sales (tax point will be departure date), direct costs, and VAT payments. Transparent and accurate documentation is crucial for compliance and potential future audits.

Conclusion

The Sonder Europe Ltd v HMRC case has provided a positive outcome for the Rent to Serviced Accommodation business model in relation to VAT payments. Utilising TOMS based on the Tribunal’s decision can lead to significant VAT savings. By understanding the implications of this case and following the step-by-step guidance provided, you can successfully adapt your business model to benefit from reduced VAT payments.

Read our other blogs on TOMS

Is TOMS an option for Serviced Accommodation VAT? – Steve J Bicknell Tel 01202 025252

How are HMRC attacking the use of TOMS for serviced accommodation? – Steve J Bicknell Tel 01202 025252

If TOMS applies is the VAT threshold based on Sales or Margin? – Steve J Bicknell Tel 01202 025252

steve@bicknells.net

VAT Construction Reverse Charge – what does the Subcontractor Invoice need to look like?

laughing male constructor showing thumb up at working desk

For VAT reverse charge to apply the subcontractor must be able to answer these questions

  1. Is the work being done a construction activity (CIS340)
  2. Are both the Subcontractor and Contractor registered for VAT (and the VAT rate isn’t Zero) and CIS
  3. Does the contractor have an onward supply for Construction Services (in other words they aren’t the end user or an intermediary)

Assuming the answer to all 3 questions is YES then VAT reverse charge will apply and the subcontractors invoice need to look like this one.

Under the VAT Regulations 1995 invoices for domestic reverse charge supplies, when the customer is liable for the VAT, must include the reference ‘reverse charge’. The following examples fulfill the legal requirement:

•Reverse charge: VAT Act 1994 Section 55A applies

•Reverse charge: S55A VATA 94 applies

•Reverse charge: Customer to pay the VAT to HMRC  

The Subcontractors VAT return will look this.

All the major software providers have this covered for you, for example on Sage Accounting you just need to tick a box on Customers Account Settings.

steve@bicknells.net

Is that Invoice correct or invalid for VAT?

Its a common issue, how often do directors buy things in their own name or perhaps use their personal amazon prime account for convienence.

The invoice is then addressed to them not to the company!

VIT13400 – VAT Input Tax basics: when input tax can be claimed by the business on supplies to employees

You must take care in applying the supply rule when the third party is an employee. Here are some examples of supplies made to the employer, provided the employer meets the full cost, even when it may look as if the employee has received the supply:

  • road fuel and other motoring expenses;
  • subsistence costs such as meals and accommodation necessarily paid for whilst away from the normal workplace;
  • removal expenses arising from company relocations or transfer of staff;
  • sundry items such as small tools or materials purchased on site.

This list is not exhaustive.

You should decide whether the supply is legitimately paid for by the employer for the purpose of the business. If it clearly is then input tax should be recovered. This is in keeping with the intention of the legislation.

Simplified VAT Invoices for items worth less than £250 – these invoices don’t show the customers details

Simplified invoices only need to include the following information: 

  • The name, address and VAT registration number of the supplier
  • A unique invoice number
  • The tax point, also known as the ‘time of supply’ – (This is the date that the transaction actually takes place and is used for VAT purposes. The tax point may be different from the invoice date.) 
  • A description of the products or services that are sold
  • The VAT rate of each invoiced item – (If an item is VAT exempt or zero-rated, then the invoice must show that there’s no VAT charged on that item.)
  • The total amount, including VAT

Unlike an ordinary invoice, it’s not necessary to include your customer’s name and address, or the date the invoice was issued. Other information about prices and VAT, such as the total amount of VAT, the price of each item without VAT and the pre-tax total, can be omitted. 

What if the above don’t apply and you can’t get the supplier to correct the invoice? Will HMRC reject you VAT reclaim?

First you need to keep notes of your attempts to get a valid invoice.

Then to persuade HMRC that the VAT reclaim is valid you will need to prove

  1. There has been an actual supply of goods or services to your business
  2. Your business received the goods and services and that they don’t belong to another person or business
  3. You have some documentary evidence to support the claim such as contracts, purchase orders, correspondence, you may also be able to link the purchase to a sale

VIT31200 – How to treat input tax: alternative evidence for claiming input tax

Questions to determine whether there is a right to deduct in the absence of a valid VAT invoice

  • Do you have alternative documentary evidence other than an invoice (for example a supplier statement)?
  • Do you have evidence of receipt of a taxable supply on which VAT has been charged?
  • Do you have evidence of payment?
  • Do you have evidence of how the goods/services have been consumed within your business or evidence about their onward supply?
  • How did you know the supplier existed?
  • How was your relationship with the supplier established? For example:
  • How was contact made?
  • Do you know where the supplier operates from (have you been there?)
  • How do you contact them?
  • How do you know they can supply the goods or services?
  • If goods, how do you know they are not stolen?
  • How do you return faulty supplies?

Where:

  • the supply is of goods not specified as subject to widespread fraud and abuse; and
  • the taxpayer can provide satisfactory alternative evidence of the supply (questions 1-4); and
  • there are no grounds to suspect abuse or fraudulent intent on the part of the claimant

HMRC staff should normally exercise their discretion to allow the taxpayer to deduct the input tax.

steve@bicknells.net

How much VAT can you claim back for expenses before you became VAT Registered?

You don’t have to wait till you hit the £85,000 threshold to register for VAT, you can voluntarily register even before you make your first taxable supply (sale). You can even back date the registration!

VATREG21550 – Voluntary registration: intending traders: what is an intending trader?

An intending trader is a person who, on the date of the registration request:

  • is carrying on a business
  • has not started making taxable supplies
  • has an intention to make taxable supplies in the future.

Intending traders normally seek registration from a current date in order to reclaim input tax incurred in the setting up and development of their business. In some cases, the amounts involved may be substantial and cover a long period of time.

VATREG21650 – Voluntary registration: intending traders: requests from an intending trader for retrospective registration

Requests for backdating an EDR in cases of voluntary registration can only be considered at the time of initial application: see VATREG21150.

When you are considering such requests, traders must be able to provide evidence that they would have satisfied us at the time (that is, the earlier date requested) that they had a firm intention to make taxable supplies.

What Evidence is needed?

Examples would include

  • potential contracts
  • planning permission
  • items purchased for the business
  • patents applied for
  • application for option to tax land or buildings

What about new companies?

Companies don’t exist until they are formed (incorporated), so they can’t be registered until they exist, but you can still claim for pre-trading expenses, subject to the rules in the next few paragraphs. The VAT is reclaimed by submitting an expense claim to the company on the day the company was created (incorporated).

Purchases made before registration

There’s a time limit for backdating claims for VAT paid before registration. From your date of registration the time limit is:

  • 4 years for goods you still have, or that were used to make other goods you still have
  • 6 months for services

You can only reclaim VAT on purchases for the business now registered for VAT. They must relate to your ‘business purpose’. This means they must relate to VAT taxable goods or services that you supply.

You should reclaim them on your first VAT Return (add them to your Box 4 figure) and keep records including:

  • invoices and receipts
  • a description and purchase dates
  • information about how they relate to your business now

Personal Use

If the purchases have a element of personal use that must be excluded.

For example a mobile phone acquired before the business started or not on a business contract used for personal and business, only the business proportion can be claimed on your VAT return.

If the phone subsequently is replaced with a business contract then the whole cost can be claimed.

What Goods can the 4 year rule be applied to?

A good example would be Stock or Work in Progress and to support your claim you would need

  • Quantities and Descriptions
  • Invoices
  • Details of how they relate to your business now

Fixed Assets would also qualify, for example

  • Computers
  • Desks
  • Office Equipment

However, VIT32000 states a business may not use regulation 111 to recover VAT on supplies that were purchased for non-business or private purposes. The expense is not a business cost and no VAT can ever be recovered, regardless of any subsequent business use. This principle was confirmed in the case of Waterschap Zeeuws Vlaanderen (see VIT62520). For example:

  • an individual buys a van to use for wholly private purposes. Three years later the individual registers for VAT and uses the van exclusively within their business. The VAT paid on the van is permanently outside of the VAT system because there were no business activities at the time the van was bought. The VAT paid on the van can never be brought back in under the terms of regulation 111

What about the 10 year Capital Goods rule?

For capital items within the Capital Goods Scheme and acquired after 1 January 2011 there are different rules.

Capital items are defined as:

  • Land, buildings and civil engineering work or capital expenditure in relation to the same including construction, refurbishment, fitting out, alteration and extension, where the value is more than £250,000 (Land); or
  • Ships, boats or other vessels and aircraft including capital expenditure in relation to the same of construction, refurbishment, fitting out, alteration and extension, where the value is more than £50,000 (Ships and Aircraft); or
  • Single items of computer hardware where the value is over £50,000 (Computers).

Where the goods or services acquired prior to registration are capital items and when the business registers on or after 1 January 2011, even in cases where the registration is backdated to an earlier date, the normal regulation 111 time limits of six months for services and four years for goods on hand may not apply. Instead a business may be able to recover VAT incurred up to ten years prior to registration in respect of land and up to five years prior to registration for other capital items.

What counts as Services?

Examples could include

  • Subcontractors
  • Professional Services from Accountants and Lawyers
  • Software
  • Rent of Premises
  • Telephone and Internet
  • Equipment leasing

The main problem is deciding whether the services have been consumed/used up before registration for example Rent – the rental period could be expired before registration in which case it can’t be claimed (however that might not apply to warehouse holding stock or rent paid in advance). The same issues apply to Telephone and Internet – was the cost to generate future work or past work. In fact most types of service need to be carefully examined as they could be past or future, only those relating to period after registration can be claimed as these costs haven’t been ‘Consumed’.

In order to qualify

  1. The services must be for the business now registered for VAT
  2. Supplied for the purpose of the business and relate to taxable/Vatable activities (ie not exempt activities)
  3. Not related to goods consumed/disposed of before registration, for example if the subcontractor worked on a project sold before the Effective Date of Registration then you can’t claim it

steve@bicknells.net

Hospitality VAT rates – what is going on? Can I use Flat Rate and pay No VAT?

Serviced Accommodation/Furnished Holiday Lets (FHL) are currently enjoying special rates of VAT

The government made an announcement on 8 July 2020 allowing VAT registered businesses to apply a temporary 5% reduced rate of VAT to certain supplies relating to:

  • hospitality
  • hotel and holiday accommodation
  • admissions to certain attractions

The temporary reduced rate will apply to supplies that are made between 15 July 2020 and 31 March 2021.

These changes are being brought in as an urgent response to the coronavirus (COVID-19) pandemic to support businesses severely affected by forced closures and social distancing measures.

That rate is set to change to a new rate of 12.5% from 1 October 2021 to 31 March 2022

What is the Flat Rate scheme?

The Flat Rate Scheme is designed to simplify VAT because the Flat Rate % is applied to your turnover including VAT.

It doesn’t change the VAT rate charged to the client it just helps to calculate the VAT to be paid to HMRC.

You can join the Flat Rate Scheme if:

  • you’re a VAT-registered business
  • you expect your VAT taxable turnover to be £150,000 or less (excluding VAT) in the next 12 months
  • you get a 1% discount on the flat rate if you’re in your first year as a VAT-registered business.

You must leave the scheme if:

  • you’re no longer eligible to be in it
  • on the anniversary of joining, your turnover in the last 12 months was more than £230,000 (including VAT) – or you expect it to be in the next 12 months
  • you expect your total income in the next 30 days alone to be more than £230,000 (including VAT)

What are the Flat Rates?

Hotel or accommodation before 15 July 202010.5
Hotel or accommodation from 15 July 2020 to 30 September 20210
Hotel or accommodation from 1 October 2021 to 31 March 20225.5

Why would Flat Rate VAT help?

Example You bill a client for £1,200 including VAT, so thats £1,000 plus 20% VAT.

You’re a Holiday Let, so the VAT flat rate for your business is 0%.

Your flat rate payment will be 0% of £1,200, so nothing to pay

This is great news for Furnished Holiday Lets especially if they are just crossing the £85,000 VAT Threshold

Most Holiday Lets can’t increase their prices to incorporate VAT when they cross the VAT threshold because they would be uncompetitive so VAT is direct hit to their profits.

On the basis that the accommodation fee is unchanged but now includes a VAT element, if Flat Rate is used and the rate is 0% then no VAT is paid to HMRC.

That may not work for every business, it depends on whether you have a high level of VAT expenses which would offset the VAT and could result in a refund for example when you first register you may be able to reclaim VAT on pre-registration costs. Flat Rate restricts the recovery of expenses, you cannot reclaim the VAT on your purchases – except for certain capital assets over £2,000

Its also a problem if you’re classed as a ‘limited cost business’ if your goods cost less than either:

  • 2% of your turnover
  • £1,000 a year (if your costs are more than 2%)

This means you pay a higher flat rate of 16.5%.

steve@bicknells.net

Do you need a certificate from the client to zero rate or reduce rate construction VAT?

Dwellings

The rules are in the VAT Notice 708 and in section 17.1 it states

There’s no requirement to hold a certificate for zero-rated or reduced-rated supplies in connection with buildings that will be used as one of the types of dwelling described at paragraphs 14.2 to 14.5.

Zero Rating – an example would be building a new house

Reduced Rating – this applies to converting a non-residential building to a dwelling or multiple dwellings

If your builder needs further details just point them at VAT Notice 708.

Don’t accept invoices which have the wrong VAT rate on them, even if you can claim the VAT back because HMRC will only accept the recovery of VAT when its charged at the correct rate

When do you need a Certificate?

You need to hold, within your business records, a valid certificate when you make any zero-rated:

  • or reduced-rated supply in connection with a building that will be used solely for a ‘relevant residential purpose’ – see paragraph 14.6
  • supply in connection with a building that will be used solely for a ‘relevant charitable purpose’ – see paragraph 14.7

Possession of a valid certificate does not mean that you can automatically zero rate or reduce rate your charge. The certificate merely confirms that the building is intended to be used solely for a qualifying purpose. You must meet all of the conditions explained in the relevant sections of notice 708 to zero rate or reduce rate your supply.

The customer for the zero-rated or reduced-rated work issues the certificate. The certificates at section 18 of VAT Notice 708 can be used, or the issuer can create their own certificate provided it contains the same information and declaration.

The 2 available certificates confirm that you’re either eligible to receive:

  • zero-rated or reduced-rated building work (the certificate can be found at paragraph 18.1)
  • a zero-rated sale or long lease (the certificate can be found at paragraph 18.2)

What if you get it wrong?

If you issue an incorrect certificate, you may be liable to a penalty equivalent to the amount of VAT not charged. A penalty is not VAT and, if you’re registered for VAT, you will not be able to recover it as input tax.

A penalty will not be issued, or will be withdrawn, if you can demonstrate that there’s a reasonable excuse for issuing the incorrect certificate.

What if the use changes?

If you have obtained zero rating for the construction or acquisition of a building (or part of a building) because you certified that it would be used solely for a ‘relevant residential purpose’ or a ‘relevant charitable purpose’, HMRC expect that the building will be used solely for either or both of those qualifying purposes for a period of, at least, 10 years following completion of the building.

If the building ceases to used solely for either or both of those qualifying purposes within that 10-year period, if that use decreases or if the building is disposed of, a taxable charge comes about, on which you must account for VAT.

What about Materials?

Retailers and builders merchants charge VAT at the standard rate on most items they sell.

Builders charge VAT on ‘building materials’ that they supply and incorporate in a building (or its site) at the same rate as for their work. Therefore, if their work is zero-rated or reduced-rated, then so are the ‘building materials’. But some items are not ‘building materials’ and remain standard-rated.

steve@bicknells.net

How to Defer VAT – COVID-19

For VAT, the deferral will apply from 20 March 2020 until 30 June 2020.

 

All UK businesses are eligible. How to access the scheme

 

This is an automatic offer with no applications required. Businesses will not need to make a VAT payment during this period. Taxpayers will be given until the end of the 2020 to 2021 tax year to pay any liabilities that have accumulated during the deferral period. VAT refunds and reclaims will be paid by the government as normal.

 

Customers who normally pay by direct debit should cancel their direct debit with their bank if they are unable to pay. Please do so in sufficient time so that HMRC do not attempt to automatically collect on receipt of your VAT return.

 

https://www.gov.uk/government/publications/guidance-to-employers-and-businesses-about-covid-19/covid-19-support-for-businesses

steve@bicknells.net

Construction Industry Reverse Charge from October 2019

New VAT rules are coming into force from 1st October 2019 to create a domestic reverse charge for Construction, known as Construction Services Domestic Reverse Charge.

HMRC are introducing the change to combat missing trader fraud.

VAT registered construction clients will need to account for reverse charge as it was a self supply, the supplier won’t charge them VAT. This then removes the risk of deducting input tax when the output tax has never been paid.

The new system will not apply to Zero Rated Supplies.

Unlike some other “reverse charge” schemes, amounts accounted for under the CSDRC will not count towards the VAT registration limit. This means that if a customer is not already required to be registered for VAT, the CSDRC “deemed self-supplies” will not change this.

Subcontractors will see a loss of cashflow under the scheme and its likely to cause issues for customers as they need their Making Tax Digital systems to be able to cope with the change.

Subcontractors also need to be sure that their services are within CSDRC before agreeing not to charge VAT.

CSDRC will follow the CIS rules to determine what is within the scope of CSDRC.

In the first 6 months HMRC has suggested they will apply a light touch to the new rules.

steve@bicknells.net