Making Tax Digital (MTD) for VAT is to be extended to cover businesses with a turnover below the VAT threshold from April 2022. The MTD for VAT regime started in April 2019 when businesses with a turnover above the VAT threshold of £85,000 became mandated to keep their records digitally and provide their VAT return information to HMRC using MTD compatible software.
The extension of MTD from April 2022 will apply to all VAT registered businesses with turnover below the VAT threshold of £85,000. This change was first announced in July 2020 and about a third of businesses mandated to sign-up from April 2022 have already voluntarily chosen to use MTD.
If you are affected and have not yet signed up, we would urge you to start the process as soon as possible.
To sign up to MTD for VAT, businesses, or their agent need to:
- Visit GOV.UK and choose Making Tax Digital-compatible software. For many businesses, the software they are using should already be compatible with MTD.
- Keep digital records starting from 1 April 2022 or the beginning of their VAT period
- Sign up and submit their VAT Return through Making Tax Digital
A small number of VAT-registered businesses may be eligible for an exemption from MTD, if it is not reasonable or practicable for them to use digital tools for their tax. If a business has previously been granted an exemption for VAT online filing, this will carry over to MTD VAT requirements.
Since 1 January 2021, businesses registered for VAT have been able to account for import VAT on their VAT return, often referred to as postponed VAT accounting. For most businesses, this means that they can declare and recover import VAT on the same VAT return. The normal VAT recovery rules regarding any VAT that can be reclaimed apply.
This applies to all customs declarations that require businesses to account for import VAT, including supplementary declarations, except when HMRC have notified a business otherwise.
These rules save businesses from having to pay import VAT (at the port of entry) and to recover at a later date. This offers cashflow benefits for affected businesses. HMRC has confirmed that the postponed VAT accounting rules are to remain in place permanently.
Businesses are able to account for import VAT on imports into Great Britain (England, Scotland and Wales) from anywhere outside the UK. Businesses in Northern Ireland can use the postponed VAT accounting for goods imported from outside the UK and EU. The VAT rules for the movement of goods between Northern Ireland and the EU have not changed and remain subject to the Northern Ireland Protocol.
VAT registered businesses do not need any specific approval from HMRC in order to account for import VAT on their VAT return.
There are special VAT rules that allow two or more corporate bodies to be treated as a single taxable person for VAT purposes. This is known as a VAT group. Eligible persons are bodies corporate, individuals, partnerships and Scottish partnerships, provided certain conditions are satisfied. Bodies corporate includes companies of all types and limited liability partnerships.
Under a VAT group registration, the representative member accounts for any tax due on supplies made by the group to third parties outside the group. This is particularly helpful for those whose accounting is centralised. As a VAT group is treated as a single taxable person, they do not normally account for VAT on goods or services supplied between group members. Only one VAT return is required for the whole group and all members of the group are jointly and severally liable for the tax due from the representative member.
There are other important points to be aware of in respect of a VAT group registration. For example, the representative member must have all the necessary information to submit a VAT return for the group by the due date. The partial exemption de minimis limits apply to the group as a whole and not the members individually.
The VAT liability of the supply of driving lessons is an interesting issue that can be of relevance to other supply scenarios such as hairdressers and other workers in the beauty industry.
In HMRC’s internal manuals the guidance identifies three possible scenarios that can apply to someone providing driving lessons to the public:
- The driving school employs its own instructors under contracts of service. HMRC comments that this method is probably only used in a minority of cases. When this is the case, the driving school is supplying the tuition to its pupils and must account for output tax on the full value of fees received. The driving school is making the supply of tuition to its customers and there is no supply by the individual instructors, who are simply receiving remuneration (wages) for their services as employees.
- The instructors supply their services to the school under a contract of services. They need only account for output tax on these supplies if the value exceeds the registration limits. The school must account for output tax on the full value of the fees received from pupils.
- Each individual instructor supplies tuition services directly to their pupils using the driving school as an agent. Output tax is only due on the value of those supplies if an instructor exceeds the registration limits. However, payment made by each instructor to the school is consideration for a supply of agency services by the school, and the school must declare output tax accordingly.
The transfer of a business as a going concern (TOGC) rules cover the VAT liability on the sale of a business. Normally the sale of the assets of a VAT registered or VAT registerable business will be subject to VAT at the appropriate rate.
Where the sale of a business includes assets and meets certain conditions, the sale will be categorised as a TOGC. A TOGC is defined as 'neither a supply of goods nor a supply of services' and is therefore outside the scope of VAT. Under the TOGC rules no VAT would be chargeable on a qualifying sale.
All the following conditions are necessary for the TOGC rules to apply:
- The assets must be sold as part of a 'business' as a 'going concern'. In essence, the business must be operating as such and not just an 'inert aggregation of assets'.
- The purchaser intends to use the assets to carry on the same kind of business as the seller.
- Where the seller is a taxable person, the purchaser must be a taxable person already or become one as the result of the transfer.
- Where only part of a business is sold it must be capable of separate operation.
- There must not be a series of immediately consecutive transfers.
- There are further conditions in relation to transactions involving land.
The TOGC rules can be complex, and both the vendor and purchaser of a business must ensure that the rules are properly followed. The TOGC rules are also mandatory which means that it is imperative to establish from the outset whether a sale is or is not a TOGC. For example, if VAT is charged in error, the buyer has no legal right to recover it from HMRC and would have to seek to recover this 'VAT' from the seller.
In general, VAT does not have to be accounted for on business gifts to the same person as long as the total cost of the gifts does not exceed £50 (before VAT) in any 12-month period. The definition of business gifts includes items from brochures, posters and advertising matters, gifts to trade customers, long service awards and retirement awards and goods given to customers as a ‘thank you’.
Where the total cost of business gifts given to the same person in any 12-month period exceeds £50, and the business was entitled to claim VAT on the purchase, then output tax must be accounted for on the total value of the gifts. It is acceptable to adopt any 12-month period that includes the day on which the gift is made.
There is no requirement for businesses to account for VAT if the gift is a free sample given for marketing purposes and that meets the following definition used by HMRC:
‘A specimen of a product which is intended to promote the sales of that product, and which allows the characteristics and qualities of that product to be assessed without resulting in final consumption, other than where final consumption is inherent in such promotional transactions.’
There are a number of conditions that must be satisfied in order for an activity to be within the scope of UK VAT. One of the conditions that needs to be carefully considered when deciding whether an activity is within the scope of VAT is the concept that the supply must be made in the course or furtherance of business.
This idea of 'business' is one of the less well-known rules. However, this is an important condition that drives the liability of a business to charge VAT on their sales, known as output VAT and on its ability to recover VAT, known as input tax.
In most cases, it will be clear whether an activity is ‘business’ related and should fall within the scope of VAT. However, in cases where the result is less clear cut, HMRC can use a business test to help. The test is based on a historic court case where the court identified six factors or indicators to determine whether an activity was ‘business’ related. The test should be applied to individual activities separately.
HMRC’s internal manuals provide the following example:
Imagine a person registered as a self-employed plumber who now and again renovates old cars. They do not automatically have to charge tax when selling those cars. This is because it would be hard to see the activity of car renovation being included within their business as a plumber.
On the other hand, if the car activity can be seen to have the attributes of a business in its own right then the plumber would have to charge tax on the sales.
There are special VAT rules for building contractors and sub-contractors that came into effect on 1 March 2021. The new rules make the supply of most construction services between construction or building businesses subject to the domestic reverse charge. The reverse charge only applies to supplies of specified construction services to other businesses in the construction sector.
This means that since 1 March 2021, sub-contractors no longer add VAT to their supplies to most building customers, instead, contractors are obliged to pay the deemed output VAT on behalf of their registered sub-contractor suppliers. This is known as the domestic reverse charge.
There is an interesting exception for users of the flat rate scheme that means that reverse charge supplies are not to be accounted for under the scheme. Flat rate scheme users who receive reverse charge supplies therefore must account for the VAT due to HMRC and recover it simultaneously on the same VAT Return. Users of the scheme should consider if it’s still beneficial for them bearing in mind that under the scheme they cannot recover VAT incurred on purchases of materials and other expenditure subject to a VAT charge.
The VAT bad debt relief rules allow businesses to claim bad debt relief and reclaim the VAT they have paid to HMRC. This can happen when an invoice has been issued to a customer and no payment has been received after an extended period (usually 6 months after the due date) has elapsed.
Under the normal VAT accounting rules, a business supplying goods or services usually accounts for VAT at the time an invoice is raised irrespective of whether payment has been received or not. There are conditions which must be met to claim bad debt relief.
Bad debt relief may be claimed in respect of supplies made under margin schemes, subject to a maximum of the VAT on the margin. If the debt is equal to or less than the profit margin, bad debt relief may be claimed on the VAT fraction of the debt. However, if the debt is greater than the profit margin, bad debt relief is limited to the VAT fraction of the profit margin – since this is the amount of VAT that the supplier has paid to HMRC.
There are a few VAT margin schemes. The margin schemes work by allowing qualifying businesses to account for VAT on their profit margin i.e., on the difference between the cost of acquiring an item and its sale price rather than on the full selling price.
Without the margin scheme the business would have to account for VAT on the full selling price of each item. If an item is sold for less than was paid for it, then no VAT is due on the sale.
The eligible goods are:
- Second-hand goods – defined as tangible movable property that is suitable for further use as it is or after repair, other than works of art, collectors’ items, or antiques and other than precious metals or precious stones as defined.
- Works of art and collectors’ items. The legal definition of works of art includes pictures, paintings, collages, and drawings executed by hand by the artist
- Antiques. The legal definition of an antique is an item, other than a work of art or a collectors’ item, which is over one hundred years old.
It is the businesses responsibility to provide satisfactory evidence of an item’s eligibility for the scheme. A list of ineligible goods can be found in Notice 718 The VAT Margin Scheme and global accounting.