Tag: VAT

How do you create a Group using Share Exchange/Swap? Why is it done?

photo of man holding pen

Share for Share exchange is often used when you are re-organising or creating a group and benefits from tax relief.

Basically if you don’t do a share exchange you would need to sell the shares at market value creating both Capital Gains and Stamp Duty costs.

In order to do a Share exchange you must have bona fide commercial reasons for doing it and it can’t be just to avoid tax. So for example you might want to create a group in order to separate trading and investment activities and enable an investment company to obtain mortgage finance (most lenders probably would not lend to a single company doing both trading and investment in the same company as it puts the investment at risk).

Why?

Here is a common scenario, a developer buys a commercial property to develop into residential and sell, but when the project completes the market conditions have changed they want to keep the residential properties and rent them out.

During the development they will have reclaimed VAT and the first grant of residential is Zero Rated, so they get full recovery. An investor would not get this.

So to avoid partial exemption for VAT its best to move to a new company and there are bona fide Commercial Reasons too as previously noted.

Although the reclassification to investment will create a profit and tax charge a group structure will provide Group SDLT relief. See these blogs for details.

What if you move a Property from Fixed Asset Investment to Trading Stock or Vice Versa? Appropriations and Reclassifaction – Steve J Bicknell Tel 01202 025252

Do you pay SDLT on Properties Transfers within a Group? – Steve J Bicknell Tel 01202 025252

How?

The process basically has 4 stages.

Stage 1 – Form the new companies

Assuming you are now creating a new Holding Company with a New Investment Company, these need to be formed first.

Stage 2 – HMRC Clearance

Its not mandatory but it is best practice How to apply for clearance or approval of a transaction from HMRC – GOV.UK (www.gov.uk)

To get clearance you need to write a letter to HMRC setting out all the facts, the group structure and the commercial reasons, typically the letter is 6 to 10 pages long.

You can request advance clearances by sending an email to reconstructions@hmrc.gov.uk. You do not need to send a paper copy.

Attachments should be no larger than 2MB. Do not send self-extracting zip files as HMRC software will block them.

If possible we would like to reply by email, but we need your permission to do so by including the following statement:

‘I confirm that our client understands and accepts the risks associated with email and that they are happy for you to send information concerning their business or personal details to us by email. I also confirm that HMRC can send emails to the following address (or addresses)….’

If you’re making the application on behalf of yourself or your company adapt this wording as necessary.

Stage 3 – The Contract

This is normally done by a solicitor.

The contract deals with the acquiring company and the shareholders of the target company under which the shares are to be acquired with the consideration being shares in the acquiring company.

Stage 4 – Stamp Duty Relief

As the acquiring company is paying consideration for the shares (the issue of its own shares), then the transaction is subject to Stamp Duty. However, relief can be claimed under s77 FA 1986 if the conditions are met and the anti-avoidance rule of s77A FA 1986 does not apply. HMRC guidance is at STSM042000 starting at STSM042410. After the conditions have been checked and a claim prepared, see “How to Claim Relief” on GOV.UK. The claim needs to be made within 30 days of the contract date and, as HMRC outline, various information will need to be attached to the e-mail claim including the stock transfer form.

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

Spring Statement 2022

A summary of the Spring Statement 2022 is now available – click here

We have produced this newsletter to cover the main issues that are most likely to be of interest to you. You will also find useful commentaries to help you understand how the proposed changes may affect you personally. In addition, we have included a detailed calendar of the most important dates for 2022/23 that will help you with tax planning ahead of time. If you have any questions concerning the issues covered in this summary, or would like advice on the best possible course of action in a particular area, please contact us – click here

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

New Multiple Penalties for MTD ITSA and VAT!

The new HMRC penalties cover late submission, late payment and interest harmonisation and unlike the old penalties you will now get points and penalties even if you owe no tax or are due a refund! there will be no soft landing period.

The new penalties take effect:

  • for VAT taxpayers for their first VAT return period starting on or after 1st April 2022
  • for ITSA (Income tax and self assessment) taxpayers within income over £10k subject to Making Tax Digital (MTD) for their first tax year or accounting period starting on or after 6th April 2023
  • for ITSA taxpayers with income below £10k starting 6th April 2024

In theory the penalties are fairer but they can work out more expensive than the current penalties.

The new system is based on points, each late return gets a penalty point which expire after 24 months.

The points only apply to VAT and ITSA (not to other taxes at the moment)

Once the penalty threshold is reached there is a fixed penalty of £200 for each missed return, there is an appeals process.

Submission FrequencyPenalty Theshold
Annual2 points
Quarterly 4 points
Monthly 5 points

Total points will only be reset to zero once when the following 2 conditions are met

  1. A period of compliance based on their submission frequency
  2. All submissions that were due within the preceding 24 months have been submitted
Submission FrequencyPeriod of Compliance
Annual24 months
Quarterly12 months
Monthly6 months

Late Payment Penalty

Late Payment could potentially mean you get two penalties depending on when you pay!

The first penalty will be levied 31 days after the payemnt due date and will be based on a set percentage of the balance outstanding.

The second penalty will be calculated on amounts outstanding from day 31 until the principle balance is paid in full or a payment plan agreed.

Time to Pay Payment plans suspend penalties.

HMRC will notify the penalties separately.

PenaltyDays after payment due datePenalty charge
First Penalty0 to 15No penalty payable
16 to 29Penalty calculated at 2% of what was outstanding at day 15
30Penalty calculated at 2% of what was outstanding at day 15

Plus 2% of what is still outstanding at day 30
Second PenaltyDay 31 plusPenalty calculated as a daily rate of 4% on APR for the duration of the outstanding balance

There will be a ‘period of familiarisation’ for the first year which is based on 30 days.

Interest Harmonisation

The VAT interest rules will change to be inline with ITSA

  • When an amount is not paid by the due date, late payment interest will be charged to the taxpayer from the date that the tax becomes overdue until the date payment is received
  • VAT Repayment Supplement will be replaced with Repayment Interest. Repayment Interest will be paid from the later of:
    • the due date of the return
    • the date the return is submitted

If HMRC owe you interest it will be paid at the Bank of England Base Rate -1% but if you owe HMRC interest its at the Bank of England base rate +2%.

Other things to note

  • The Gateway will tell you how many points you have
  • The Gateway will tell how penalties have been calculated
  • Agents will not be able to pay the penalties
  • When appealing you will need to say who was to blame for missing the deadline
  • When claiming the deadline was missed due to a health issue a declaration of honesty is required

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

Zero Rating Commercial Conversion First Grant of Major Interest (Residential)

Conversion of Commercial Buildings for example Office Buildings, Shops, Warehouses, Barns into Residential qualify for 5% reduced rate VAT in relation to the Conversion Costs. But when the first major interest is granted it will be Zero Rated giving full VAT recovery.

Note that Building Materials supplied separately to the contract for the conversion will be charged at 20% standard rate but you will recover that VAT.

The most common approach is to create a group with the subsidiary carrying out the conversion work and granting the first major interest, either by directly selling the first major interest or transferring the completed residential property as first major interest to the holding company

A Group will qualify for Group SDLT Relief (subject to conditions).

This means that full recovery of VAT has been achieved and no SDLT suffered, however, the converted property will be transferred at Market Value which could create a profit in the developing subsidiary.

If this isn’t done and the subsidiary rents out the property partial exemption may apply reducing the VAT recovery or limiting it.

Below are the key sections relating to VAT.

VAT Notice 708 Section 5.3 Non-residential conversion

A ‘non-residential conversion’ takes place in 2 situations. The first is when the building (or part) being converted has never been used as a dwelling or number of dwellings (see paragraph 5.3.1) for a ‘relevant residential purpose’ (see paragraph 14.6), and it is converted into a building ‘designed as a dwelling or number of dwellings’ (see paragraph 14.2), or intended for use solely for a ‘relevant residential purpose (see paragraph 14.6).

The second situation requires that in the 10 years immediately before (see paragraph 5.3.2) the sale or long lease, the building (or part) has not been used as a dwelling or number of dwellings or for a ‘relevant residential purpose’ and it is converted into a building either ‘designed as a dwelling or number of dwellings’ (see paragraph 14.2), or intended for use solely for a ‘relevant residential purpose’ (see paragraph 14.6).

Examples of a ‘non-residential conversion’ into a building ‘designed as a dwelling or number of dwellings’ include the conversion of:

  • a commercial building (such as an office, warehouse, shop)
  • an agricultural building (such as a barn)
  • a redundant school or church

VAT Notice 708 Section 7 Reduced rating the conversion of premises to a different residential use

Section 7.3

A qualifying conversion includes the conversion of:

  • a property that has never been lived in, such as an office block or a barn

But Zero Rating (0%) applies on the first grant of a major interest where a developer has converted a non-residential building into a home.

VAT Notice 708 Section 5.6 First Grant of a Major Interest

Subject to the conditions at paragraph 5.1.2, you can only zero rate your first sale of, or long lease (see paragraph 4.2) in, a building (or part of a building).

If you enter into a second or subsequent long lease in the building (or sell the building after leasing it on a long lease) you cannot zero rate your supply and it would normally be exempt from VAT

VAT Notice 708 Section 4.2 Granting a major interest in a building

You’re granting a major interest in a building when you sell, assign or surrender:

  • the freehold
  • in relation to England, Wales and Northern Ireland, a lease for a term certain exceeding 21 years
  • in relation to Scotland, the estate or interest of the owner
  • in relation to Scotland, the tenant’s interest under a lease for a term of not less than 20 years

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