Value Added Tax

The deadline for businesses with a turnover above the VAT threshold to keep digital records for VAT purposes using Making Tax Digital (MTD), is almost here. For VAT returns periods starting on or after 1 April 2019, businesses with a turnover above the VAT threshold (currently £85,000) will have to:

• keep their records digitally (for VAT purposes only), and
• provide their VAT return information to HMRC through MTD functional compatible software.

Businesses need to sign up for MTD for VAT in order to submit VAT returns digitally. In a recent update, HMRC has clarified that businesses that pay VAT by Direct Debit cannot sign up in the 7 working days leading up to, or during the 5 working days after sending a VAT Return.

Penalties eased during first year

HMRC has confirmed that during the first year of the changes, they will take a light touch approach to digital record keeping and filing penalties where businesses are doing their best to comply with the law. HMRC is clear that this does not mean a blanket 'no penalties promise' and businesses need to do their best to meet the MTD requirements.

HMRC has also said that no business will be forced to go digital for their VAT returns if they are unable to; any businesses that are currently exempt from online filing of VAT will remain so under MTD. There are also provisions for those who cannot adapt to the new service due to age, disability, location or religion, to apply for an exemption.

If your business has a turnover under the VAT registration threshold, you are not currently mandated to use the MTD for VAT service but can opt to do so if you wish.

In a letter being sent to businesses across the country, HMRC has published the following information on the effect a no-deal Brexit would have on changes to VAT IT systems.

We have reproduced below a summary from the letter of the main announcements made by HMRC on this issue.

Changes to VAT IT systems

If the UK leaves the EU without a deal you will no longer be able to use certain EU VAT IT systems. If you currently use any of these systems, you should be aware of the following:

EU VAT Refund Electronic System

To make EU VAT refund claims for 2018 using EU VAT Refund Electronic System, you should submit these before 29 March 2019, instead of the normal deadline of 30 September 2019. After we leave the EU, UK businesses will be able to reclaim VAT from EU countries, by using the existing processes for non-EU businesses.

EU’s VAT number validation service (VIES)

If you use VIES to check a customer or supplier’s VAT number, UK VAT numbers will no longer be part of this service after 29 March. A UK-only online VAT number checker will be available on GOV.UK from 29 March. You will still be able to use VIES to check the validity of EU VAT numbers.

UK VAT Mini One Stop Shop (MOSS)

If you currently use MOSS to declare and pay VAT on sales of digital services to EU consumers, you should submit your return for supplies made between 1 January 2019 and 29 March 2019 via the UK portal by the normal deadline of 20 April 2019. If you want to continue to use MOSS for sales you make after the UK leaves the EU, you will need to register for MOSS in an EU Member State. You should do this by 10 April 2019.

If you are affected by any of the above, you would be advised to take action ASAP.

As a general rule, most deposits made by customers serve as advance payments and create a VAT tax point when the deposit is received. It is important that businesses ensure that the VAT element of any deposits received is accounted for correctly. Usually this will mean that VAT is due on a deposit when it is received and not when the supply is actually made.

VAT does not apply to some types of deposit. For example, a deposit received as security to ensure the safe return of goods hired out does not create a tax point. In this case the deposit would be refunded when the goods are returned safely or forfeited to compensate the supplier for loss or damage to the goods.

HMRC’s policy in respect of the VAT treatment of retained payments and deposits changed from 1 March 2019. This change relates to businesses that retain payments and deposits for goods and services which customers do not take up. HMRC previously let businesses treat these payments as outside the scope of VAT where the customer did not use the service or collect the goods in relation to which a deposit had been paid.

Following judgements of the Court of Justice of the European Union, HMRS’s new policy is that VAT is due on all retained payments for unused services and uncollected goods. This change clarifies the VAT treatment on payments for goods and services where there is an unfulfilled supply.

The deadline for the introduction of VAT filing changes is now just weeks away. For VAT returns periods starting on or after 1 April 2019, some 1 million businesses with a turnover above the VAT threshold (currently £85,000) will be required to start keeping their records digitally (for VAT purposes only) and provide their VAT return information to HMRC by using compatible software.

HMRC has published a press release to help remind businesses to get ready for the change and suggested the following action points:

• Take steps to find out if your business is affected by the Making Tax Digital process and what you need to do if it is – most businesses above the VAT threshold have to start keeping their records digitally and sending their VAT return to HMRC direct from their software for VAT periods starting on or after 1 April 2019.


• Talk to your accountant or other agent – if you use one to manage your VAT affairs – about how they are making returns Making Tax Digital compliant.


• Speak to your software provider if you already use accounts software to ensure it will be compatible.


• If you’re either not represented by an accountant, and/or do not already use software, you’ll need to select software to use and sign-up to Making Tax Digital – GOV.UK webpages provide information on a wide variety of products, from free software for businesses with more straightforward tax affairs, to increasingly sophisticated paid solutions. There are also products that can be used in conjunction with a spreadsheet for those businesses who don’t want to change their underlying record keeping system.

HMRC has advised that during the first year of the changes they will take a light touch approach to digital record keeping and filing penalties, especially if businesses are doing their best to comply with the law. However, this does not mean a blanket ‘no penalties promise’.

Planning note

If you are VAT registered, with turnover above £85,000, and you have not yet converted to the use of accounts software that will link with HMRC’s systems, please call as we can help you deal with the updates and changes required.

The VAT paid in other EU countries is often recoverable by VAT- registered businesses in the UK, who bought goods or services for business use. The exact rules that govern the amount of VAT refundable depends on the other countries’ rules for claiming input tax. It is important to note that VAT incurred in foreign countries can never be reclaimed on a domestic UK VAT return. There are a number of conditions which must be met in order for a claim to qualify.

Claims must be made electronically via the tax authority in which the claimant is established i.e. a claim from a UK company to any other EU country must be submitted electronically to HMRC. The deadline for the submission of a refund request for expenses incurred in other EU member, states during the 2018 calendar year is usually 30 September 2019.

However, HMRC’s guidance has been updated to make it clear that in the event the UK leaves the EU without a deal, the existing electronic process for making a claim will no longer be available to UK businesses. If you want to use the EU VAT refund electronic system to submit a refund claim for 2018, you’ll need to do so by 5pm on 29 March 2019. If there is a no deal Brexit, then claims submitted after that date will not be forwarded to the relevant EU member state.

Going forward, if there is a no deal Brexit, UK businesses will need to apply for VAT refunds from EU member states using the same existing process for businesses based outside the EU. This will apply to any outstanding claims for 2018 and for 2019.

Where an error on a VAT return is discovered, VAT registered businesses have a duty to correct the error as soon as possible.

As a general rule, you can use a current VAT return to make an adjustment to a past VAT return. However, in order to be able to do so, there are three important conditions that must be met:

1. The error must be below the reporting threshold.


2. The error must not be deliberate.


3. The error can only relate to an accounting period that ended less than 4 years ago.

Under the reporting threshold rule, taxpayers can make an adjustment on their next VAT return if the net value of the errors is £10,000 or less. The threshold is extended if the net value of errors found on previous returns is between £10,000 and £50,000, but does not exceed 1% of the box 6 (net outputs) VAT return declaration figure for the return period in which the errors are discovered.

VAT errors of a net value that exceed the limits for correction on a current return or that were deliberate should be notified to HMRC using form VAT 652 (or providing the same information in letter format), and should be submitted to HMRC’s VAT Error Correction team. HMRC can also charge penalties and interest if an error is due to careless or dishonest behaviour.

A joint venture is a commercial enterprise undertaken by two or more parties who otherwise retain their own separate identities. The parties to the joint venture usually bring together different resources and areas of expertise to help fulfil a specific project or business activity.

HMRC’s published guidance on how a joint venture is treated for VAT is as follows. Where two or more separate entities work together on a business or project as a joint venture, this may be considered by HMRC as a partnership. This can be the case even if there is no formal partnership agreement. If this happens, then a new and separate VAT registration would be required for the joint venture if the turnover of the joint venture is over the current £85,000 VAT threshold. The existing businesses would continue to use their individual VAT registrations for any business activity outside the joint venture.

The rules can be different if the joint venture is in place to buy, let or develop land. The terms of any agreement need to be carefully considered to determine the right way to proceed.

Charities pay VAT on all standard-rated goods and services they buy from VAT-registered businesses. They pay VAT at a reduced rate (5%) or the ‘zero rate’ on some goods and services.

Charities pays 5% VAT on fuel and power if they’re for:

• residential accommodation (for example, a children’s home or care home for the elderly),
• charitable non-business activities (for example, free daycare for the disabled),
• small-scale use (up to 1,000 kilowatt hours of electricity a month or a delivery of 2,300 litres of gas oil).

If less than 60% of the fuel and power is for something that qualifies, charities pay the reduced rate of VAT on the qualifying part and the standard rate (20%) on the rest.

Qualifying fuel and power include gases, electricity, oils and solid fuels (such as coal). It does not include vehicle fuel.

Certain costs may qualify for the zero VAT rate. For example:

• advertising and items for collecting donations,
• aids for disabled people,
• construction services,
• drugs and chemicals,
• equipment for making ‘talking’ books and newspapers,
• lifeboats and associated equipment, including fuel,
• medicine or ingredients for medicine,
• resuscitation training models,
• medical, veterinary and scientific equipment,
• ambulances,
• goods for disabled people,
• motor vehicles designed or adapted for a disability,
• rescue equipment,
• VAT-free goods from outside the EU.

Charities don’t pay VAT on goods imported from outside the EU as long as they’re benefiting people in need by providing: basic necessities, goods to be used or sold at charity events, equipment and office materials to help run charities for the benefit of needy people and goods to help deal with disasters within the EU.

Planning opportunity

Any opportunity to reduce costs – by paying VAT at less than the standard rate on specific services and supply of goods – will be welcomed by charities and is advice that practitioners can readily supply.

There are special VAT rules that allow businesses to standard rate the supply of most non-residential and commercial land and buildings (known as the option to tax). This means that subsequent supplies by the person making the option to tax will be subject to VAT at the standard rate.

The ability to convert the treatment of VAT exempt land and buildings to taxable can have many benefits. The main benefit, is that the person making the option to tax will be able to recover VAT on costs (subject to the usual rules) associated with the property including the purchase and refurbishment of the property.

If you make changes to a building (such as an extension) after you have opted to tax then the option to tax will usually apply to the whole of the extended building. However, care needs to be taken for linked buildings and forming a complex where the option to tax will not always apply depending on the exact circumstances.

It is also possible to exclude a new building from the effect of an option to tax where the building is constructed on land that has been the subject of an option to tax. Care should be taken before making a final decision as this can affect entitlement to input tax recovery on associated costs. It is important to remember that once an option to tax has been made, it can only be revoked under certain limited circumstances.

HMRC has published what appears to be the final online quarterly edition of VAT notes which includes a summary of recent changes to the VAT rules. HRMC has confirmed that from January 2019 ‘VAT Notes’ will no longer be published online as VAT updates are published in real time on GOV.UK. The small number of businesses that are exempt from online filing will continue to receive a printed version of the VAT Notes with their quarterly paper returns. 

The main topics covered in the latest edition are as follows:

• Small supplies of digital services to consumers in the EU. A new threshold to determine the place of supply of digital services to private consumers comes into effect from 1 January 2019. This will allow UK businesses whose total supplies of digital services to consumers across the EU is less than €10,000 (£8,818) to account for VAT in the UK rather than accounting for VAT in the country where their customers are located. Businesses below this threshold will continue to be able to use the current rules if preferred.
• Fulfilment House Due Diligence Scheme. The new Fulfilment House Due Diligence Scheme opened for online applications on 1 April 2018. Businesses that store any goods imported from outside the EU on behalf of others need to apply for approval from HMRC before it can be registered for the scheme. Businesses that only store or fulfil goods that they own, or only store or fulfil goods that are not imported from outside the EU, are not required to register. There are penalties and the possibility of criminal convictions for late applications. Businesses risk having goods seized and will not be able to continue trading legally if they have not been approved by HMRC from April 2019.
• VAT repayments. HMRC is reminding businesses that are due a VAT refund that the money can be paid straight to their bank account. To receive repayments electronically you need to provide HMRC with your bank details which must be in the name of the registered person or company. It can take up to 14 days for the payment to be shown in the bank account.
• A summary of new and revised VAT notices.