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HI Sonaso
Thanks to your query. It sounds to me as though the supply is liable to UK VAT.
I know that people get confused about place of supply issues when invoices go to one country but the supply goes to another, so what you need to do is to establish the country in which the client belongs for VAT purposes. It is quite common within corporate groups for certain costs to be approved and paid at group management level, but that doesn’t change the place of supply for VAT purposes.
You’d have to check out the place of belonging rules in VAT notice 741a section 3, which are here: http://tinyurl.com/7yrzydt.
If your contract or engagement letter is with the UK company and services relate to the company’s activities in the UK, then it seems quite clear to me that the place of supply is the UK and VAT should be charged.
As a VAT consultant, I do tend to on the side of caution in these situations and in fact I’ve recently had a query from one of my overseas clients about the VAT liability of my own services, so I know that the issue is not straightforward. I think most accountants tend to take the position that if that client is registered for VAT in the UK and could recover the VAT as input tax on their UK VAT return, they would charge the VAT even if there was some possibility that the place of supply is outside the UK. It’s your VAT liability and you don’t want to leave yourself liable to pay VAT to HMRC that should have been charged on a VAT invoice.
MarieHi Dave
I’m not sure that I can say anything else that will be very useful in this situation simply because it would take me a long time to consider all of the points in your latest post and look into all of the VAT aspects!
However there is one point here that I think is worth bearing in mind. You rightly made the point that it’s difficult to know whether or not VAT has been charged on the sale of any second-hand item, whether it be antique, cars, works of art etc. The whole point about the second-hand scheme is that it exists to remove the inequity that would apply if VAT is charged on the same item which has previously been owned by a non-registered person; i.e. a member of the public who cannot recover the VAT. Of course, the way this scheme works means that the revenue does benefit from the VAT that has to be paid on the profit margin; but this would always be significantly lower than charging VAT on the full selling price. So it least it means that the sale of second-hand goods previously owned by people who are not registered for VAT do not fall fully within the VAT net.
Normally, VAT is calculated on the sellers margin by treating it as a VAT inclusive figure. In other words if the profit is £100, the VAT is calculated at 100 divided by six which comes to £16.66, rather than £20 if it were charged on the basis that the margin is exclusive of VAT. It sounds to me as though South Yorkshire police may be making the calculation on the VAT exclusive basis rather than the correct basis which would normally be on the VAT inclusive basis.
You don’t normally see VAT charged on the VAT inclusive basis because of the way auctioneers and sellers of second-hand goods do their invoicing for VAT purposes. There are specific rules that require them to set out the invoices in a particular way (that are explained in the VAT notice) so that normally, purchasers cannot see how much VAT they have been charged other than the fact that it has been included on the profit margin. That is why you would never know whether VAT is charged on the sale of antiques receipt.
Based on this, it sounds to me as though South Yorkshire police could have calculated VAT on the VAT inclusive value rather than charge it on top of the full value. But unfortunately, without talking to South Yorkshire police I simply don’t know why they’ve done this. Of course, you could write to their accounts department or you could try writing to the local VAT office to ask them to look into the issue on your behalf.
I’d be happy to look into this on a formal basis for you, but I suspect that you wouldn’t want to incur the cost of this, especially if in the end I simply end up confirming that South Yorkshire police are correctly charging VAT and that there is no way for you to recover any of the VAT paid on the original selling price in Spain. I do charge a lower hourly rate for private individuals, but it would take me a long time to look into this properly and that would probably mean a minimum fee of around £200 £300 plus VAT.
If I were in your position, I would try writing to the SYP accounts department and/or local VAT office to see if you can get them to look into the issue for you.
Marie
Hi Mustangu
Unfortunately that’s not how it all works. You can if you wish deregister from VAT as your turnover will be beneath the VAT threshold, however you will have to repay the VAT that you claimed on the purchase price of the property to HMRC. The rule applies to any goods that you have on hand at the date of deregistration. see HMRC’s guidance on the subject here http://www.hmrc.gov.uk/vat/managing/change/cancel.htm.
So you basically have two choices: remain registered and charge your tenant the VAT on top of the existing rent; or alternatively to deregister and repay the VAT to HMRC and charge your tenant a higher rent to take into account the fact that you had to refund the VAT to HMRC.
I would be careful about deregistering too quickly: I appreciate that the prospective tenant isn’t registered for VAT, but you may find other tenants in the future who are registered and would be able to recover the VAT that you would have to charge them on the rent. Depending on the purchase price of the property, it may be possible to reregister at a later date and claim back some of the VAT. In principle, your option to tax would remains valid for 20 years when you can can cancel it. So if you become registered at a future date because of any other business activities, and subsequently make any further supplies of the property, such as leasing to a different tenant or the freehold sale during that time period, you’d have to charge if you simply want to deregister and not have to worry about VAT.
It is possible to revoke an option to tax within six months if certain conditions are fulfilled: see HMRC VAT notice 742a, Section 8 http://tinyurl.com/84rcl2m. This would certainly make life easier as although you’d have to refund the VAT you paid on the purchase price to HMRC, it would mean that you don’t have to add any VAT to the rents or sales proceeds at any point in the future.
The option to tax is a complex area VAT and obviously I can only point you in the direction of the general rules here. But it does seem that there are two options; either remain registered and charge VAT on rent or other income in the future OR deregister and repay the VAT to HMRC, revoking the option to tax if possible.
Marie
Hi Tricia
I’m a bit confused by your question because you say that the property was originally used as an office and “I had an option to tax on the property”. It’s not clear whether you mean that VAT was charged when you purchased the property; or whether you made an option to tax on the property yourself.
Furthermore, it’s not clear why you would have needed to make an option to tax on the property unless you were letting it yourself and were concerned about recovering VAT on initial purchase or any cost incurred at the time. And, the option to tax does not apply to dwellings. It doesn’t matter what the dwellings being used for; the simple fact is that if the property is a dwelling then any option to tax on the property can’t apply. So even if you’ve made an option to tax, the option won’t apply.
So how do you know whether or not the property is a dwelling? Well in simple terms, the property is a dwelling if it is self-contained living accommodation. There are specific definitions for VAT purposes; see the guidance given in VAT notice 708, section 14 http://tinyurl.com/d4ujj74. As you’ll see, this applies to most houses, flats and any other properties that fulfil the requirements of self-contained living accommodation. I assume that for Council tax purposes, the property is regarded as a dwelling; albeit that there has been some or business use of the property.
So when it comes to releasing the property or selling the freehold of the property, if it falls within the definition of self-contained living accommodation, then the option to tax won’t normally apply regardless of how the tenant/purchaser intends to use the property.
Of course, if you carried out any work to the property during your period of ownership which means that it’s no longer a dwelling within these definitions, then the option to tax may apply. Unfortunately that’s not the sort of issue I can go into in any detail here on the forum, and in any event it sounds as though the VAT office are happy that the option to tax won’t apply in your case. However, if you are in any doubt, I would suggest that you write to the VAT office quoting your VAT registration number and giving them full details so that you get from them a proper written reply confirming the advice that they have given you verbally.
However, if I was giving you formal advice, I would want to know about the circumstances relating to your own option to tax before I would formally confirm that the option to tax won’t apply to the sale or lease. I appreciate that the cost of any kind of professional advice may be prohibitive for you in this situation, so in that case I’d strongly recommend that you get a written ruling from the VAT office.
I hope this helps but VAT and propertyrules are very complicated. Even if something seems to be relatively straightforward, I strongly recommend taking professional advice or at the very least ensuring that the advice you’ve received from the VAT office is in writing so that it can be relied upon should any issues arise in the future.
Marie
Hi Sharon1962
It’s not clear from your query whether the turnover of the new co will be below the VAT registration limits.
As long as it is a separate legal entity, newco can have its own VAT registration, or alternatively you may prefer to have a VAT group registration to simplify administration so that there is only one VAT return. See http://www.hmrc.gov.uk/vat/start/register/groups.htm for information on this subject.
However I assume that your preference would be to keep newco unregistered for VAT and that your concern is whether or not HMRC would regard this as “disaggregation” of the business activities.
You’ve obviously already read up on this subject so I won’t spend any time going into the basic issues involved but in your case, it is important to understand that there are two separate issues when it comes to disaggregation as follows:
• The first is whether both business activities are being carried out by separate entities or one single entity. In this case, HMRC can treat all of the activities as being carried out by a single entity, in your case this would be the existing limited company and require this company to account for VAT on all supplies made from both business activities.
• The second is that there is a genuine separate legal entity, but the effect of having a separate legal entity means that one or both of them is not required to register for VAT because it’s turnover is below the VAT registration limits. It is particularly important to be aware that HMRC don’t have to demonstrate that the intention of separating the business activities is to avoid VAT; it’s enough that one of the effects of separating the business activities is to avoid VAT registration. So in principle, genuine arrangements can be caught by the legislation just as well as deliberate attempts to avoid VAT registration.
I’m not surprised that you had conflicting advice about this issue as every accountant or tax adviser will doubtless have their own experiences with clients and this is one of the most grey areas of VAT practice that most of us will have dealt with. If you look at the VAT cases involved – i.e. those situations where businesses have appealed to the VAT tribunal against HMRC’s decision over the years – there are some judgements that seemed to follow HMRC viewpoint and others that go against HMRC. Unfortunately, there’s no one defining thread so it’s very difficult to give any firm recommendation on the issue.
In your case, while there may be a good commercial argument for having 2 separate companies, I think it would be difficult to persuade HMRC that there is a separate business activity simply due to the practical arrangements of having the same premises and directors. For example, I assume that each of you would interchange your activities during the day from one company to the other so it would be difficult to argue that either one of you is fully occupied on either companies activities at any one time.
As you know, anything I put on these forums is not formal advice, but I would have to say that if you are coming to me as a client and ask if a formal opinion, I would probably say that the likelihood that HMRC would regard your situation is falling within those businesses which are artificially separated for VAT purposes is somewhere around 80%. If you think about it from a practical point of view, it’s not that unusual to go into a retail shop and see a wide range of different goods and services available and will attract different customers. And I think that’s really what’s happening in your case. The fact that one activity is online and the other may not be online also doesn’t make that big of a difference, as pretty well every retailer in the UK has an online presence nowadays.
It may well be the case that if I looked at your situation in more detail, I would find other information to support your position. However whenever I’m dealing with small businesses, I always stress the fact that if you choose to keep things separate and thus avoid paying VAT on certain business activities, you have to balance the potential VAT saving up with the long-term hassle that would arise should HMRC carry out an inspection of the existing VAT registered business at some point in the future. Not only would you have to do pay the outstanding VAT, but you may also be faced with interest and penalties, plus the potential professional costs of sorting it out, not to mention your own time and the worry involved. I’ve seen many situations over the years where small business owners have taken the decision to register for VAT in these circumstances simply because they know how much hassle would be involved down the road once they’ve looked at the broader picture. You also have to bear in mind that any savings on VAT would simply be additional profit/income that may be liable for corporation tax, so once you’ve done the sums it may be that there’s not much of a saving that you’d anticipated.
The other thing is to ensure that your businesses, both existing and the potential new business – take advantage of the VAT flat rate scheme so as to minimise amount of VAT that you have to pay to HMRC. My own personal view is that small businesses should be entitled to use the reduced rate of VAT at 5% or some other reduced rate, unfortunately I don’t think that the Chancellor is likely to agree to this at any time in the foreseeable future!
Finally, while I suspect that some of the “advice” you’ve received is that there wouldn’t be any problem in NOT paying VAT on Newco’s income, I suspect you’d find that any professional adviser when faced with a similar situation for their own business, would play things very safe and simply accept that they should pay the VAT rather than face the potential cost and hassle at a later date.
At the end of the day, the onlyway you can be certain would be to write to HMRC with full facts and ask them to confirm whether or not they would regard this as disaggregation for VAT purpose. Certainly if I was in your position that’s what I would do. It is possible that they’d agree with you, but the only way you’re going to find out is by asking and in that case you have to be prepared for them to disagree with you.
I know I haven’t given you any definitive answer here, but I hope what I said at least helps you decide how to proceed.
MarieHi Molliejo
In principle you only include the value of services made in the UK for VAT registration purposes. Marketing services would normally follow the “general rule” which means that the supply takes place in the customer’s country – i.e. outside the UK- when the customer is an EC VAT registered business or anyone belonging outside the EC. So services supplied to customers in non-EC countries don’t have to be included.
I assume, therefore, that you won’t need to register so your question query about your French client is irrelevant! However in the event that you end up being registered at some point and this same issue arises, the simple answer is that it shouldn’t make any difference to the VAT liability who PAYS for a service which is covered by the “general rule”. So if a UK company pays on behalf of a French client who is registered for VAT, then in principle the supply is still outside the scope of UK VAT and you wouldn’t have to charge UK VAT on the invoice. The French customer would account for reverse charge VAT on its French VAT return instead.
Marie
Well there’s no such thing as a “Reverse Charge sales list” as such – but yes you include the supply of services which are liable to the reverse charge made to business customers in other member states on your EC sales list (or “ESL”), so yes in practice it’s the same document.
MarieHi Dave
Unfortunately I don’t think that SY Police or anyone else following this practice are doing anything wrong – obviously i don’t know the exact details of the transactions involved and could not give definitive advice without such information. For example, I don’t know how the age of the vehicle and how long it’s been used in Spain before coming to the UK.
And I doubt it’s a case of SY Police boosting their coffers. If they’re charging VAT on the sale of anything, they have to pay it to HMRC like any other “business”. They don’t get to keep the VAT just because they’re a police force.
BUT this is what I think is happening. You have to pay VAT on the purchase of most new vehicles in other EC countries, unless it’s going to be exported to the UK within 6 months & has been used for less than 6,000 km See the rules here http://www.hmrc.gov.uk/vat/sectors/consumers/personal-vehicles.htm. And in this case, you’d have to pay full UK VAT on entry to the UK.
Assuming it’s an older vehicle then I’m not aware of any way of recovering the Spanish VAT, but the way I understand it, no VAT would have been paid when the car was brought into the UK.
Sales of second hand cars are usually VAT free in the UK UNLESS AND TO THE EXTENT THAT ANY PROFIT IS MADE OVER THE PURCHASE PRICE PAID BY THE SELLER.
ANY VAT CHARGED HAS TO BE PAID TO HMRC.
In your case, the seller is SY Police and as they haven’t paid anything for the purchase of the car, they have to pay HMRC VAT on the amount they get for the sale. So as long as they pay the VAT that you’ve been charged to HMRC, then as far as I can see, they are treating teh transaction correctly for VAT purposes.
Normally, sellers calculate their VAT on a cash inclusive value, ie say you pay £1,000, they’d calculate the VAT as £1,000 x1/6, i.e. £166.66 and I guess that this is what the other vendors are doing. But I don’t think that there is anything to stop them quoting a price then adding the VAT on top, ie £1,000 plus 20%, i.e. £200.
So it seems unlikely to me that you’d be able to recover the VAT charged either in Spain or here in the UK.
Marie
Hi elec
Yes in principle – see HMRC VAT Notice 725, The Single Market. Section 17 explains when ESLs are required here http://tinyurl.com/6evmwas and subsection– 17.3 lists supplies to be included and includes: supplies of services subject to the reverse charge in your customer’s Member State.
Electronically supplied services are normally subject to the reverse charge. So have a look at the notice and I think you’ll conclude that your sales should be included on ESLs.
Marie
Hi Hanobaby
In principle, the answer would be no, B would not have to charge VAT to A if A imports the goods.
UK VAT is chargeable either on a supply of goods or services made in the UK. It’s also chargeable on imports of goods and certain services into the UK.
So you have to establish whether a supply of goods is made in the UK. See section 4.8 of VAT Notice 700 which explains the place of supply rules. http://tinyurl.com/6g5884w
A supply of goods is made in the UK if the goods are physically located in the UK when they are supplied. A supply is regarded as made outside the UK if the goods are physically located outside the UK when the goods are supplied. In that case, UK is only due if and when the goods are imported into the UK.
So in the situation you describe, B would not charge VAT to A, but A would pay import VAT when the goods arrive in the UK from China. A can reclaim the import VAT on its VAT return under the normal rules as set out in VAT Notice 702: Imports.
Marie
Hi Wilson
Glad that the information helped.
Just to clarify one point – re your services being “outside teh scope” of UK VAT – the place of supply is where the customer belongs, not where your services are physically carried out. So supposing your services were “taxable in the UK” eg consultancy services, your customer could be a company belonging in Germany and you could be physically carrying out the services in the UK. In that case, because the customer is a business belonging in Germany, your services would be “outside the scope”.
However you could be physically carrying out the services in Germany for a company belonging in the UK. In that case you would charge UK VAT as the place of supply would be the UK.
Kind regards
MarieHi Jon The Drainage Guy
Unfortunately there isn’t a simple answer to your query as it raises a whole load of different VAT issues and it’s not possible to explain them all here on the forum. In fact I wouldn’t normally try to deal with such situations here but I do get a lot of queries about subcontractors and VAT so it’s worth spending a bit of time explaining the main principles.
I’m sure you’ll be able to work out how to proceed once you’ve sorted the contractual arrangements as I’ve explained below. However I would strongly suggest that you find a good accountant to help you sort things out if you’re still confused.
The main reason that you can’t find any helpful information on the HMRC website is that the situation you describe is very unclear – you talk about subcontractors and partnerships and it’s not clear who will be supplying the final customer with the services.
Subcontractors and VAT
Under a typical subcontractors’ arrangement, the subcontractor supplies services to the main contractor, who then makes an onward supply to the customer. This fits into the VAT system as follows:
• The subcontractor charges VAT on their invoice to the main contractor. The VAT charged is the subcontractor’s output tax and the main contractor’s input tax.
• The main contractor recovers the VAT charged by the subcontractor on its VAT return and charges output tax on the invoice to the final customer.
This setup is very typical for services in the construction and related business sectors. Like any normal commercial situation, the VAT basically flows through the “chain of supply” so that one business charges the VAT and another business recovers it.
So before you can work out the VAT position, you need to establish the proper contractual position between yourself, the subcontractor and the final customer. You’ll need to discuss this with the subcontractor but I suspect that they’ll expect to invoice you for their services and for you to invoice the customer. It is possible that they could see the arrangement as a partnership, but there really wouldn’t be any VAT benefits for doing this.
And on the basis that you are acting as a main contractor as outlined above, I suspect you’ll find that the subcontractors are familiar with dealing with this sort of situation so will already have established contracts and invoicing arrangements in place.
Registering for VAT?
So given that situation, the important issue is whether or not you, i.e. your limited company, should be registered for VAT. It’s not clear from your question whether or not you want to be registered, or whether the issue has simply risen because of the fact that you have to get the VAT registered company involved in order to win this contract.
There are both advantages and disadvantages from being registered for VAT.
The main implication is that once you (i.e. Jon the Drainage Guy’s company) register for VAT, you have to charge/pay VAT on all of your income. This means that the services you provide to both private and commercial customers are liable to VAT.
Disadvantages of being registered
As a service supplier this could mean that your services to private customers are more expensive than businesses that are not registered for VAT, so you might want to continue not being registered for the time being in order to keep your prices as low as possible, especially useful when you’re starting up a new business. So being registered could be a disadvantage when it comes to doing business for private customers.
Advantages
The main advantage of registering for VAT is that it enables you to recover VAT on the businesses purchases and expenses and particularly in respect of services supplied to VAT registered suppliers and customers. So I assume that you want to register because in this case, you’re dealing with business customers who can claim back the VAT.
NB You mention that your quote states that you are working in partnership with the subcontactor. However I suspect that you’re not referring to any formal sort of partnership arrangement, simply the subcontractor arrangement explained above. But if you want to be in partnership, the partnership would have to be registered for VAT and this would simply add another level of administration and I certainly wouldn’t recommend it for VAT purposes.
Do you have to register?
Even though you’ve mentioned VAT on the quote and the other company is VAT registered, it still doesn’t mean that your company has to register for VAT unless the value of this work takes your company over the VAT registration limit. But if you don’t register, you won’t be able to issue a VAT invoice to the customer or recover the VAT charged to you by the subcontractor.
However you can choose to register on a voluntary basis even if your company’s turnover is below the VAT registration limits, regardless of this particular contract.
So I’ve set out below two alternative illustrations for invoicing depending on whether or not you are registered for VAT.
NB When you say that you got the other company to cost the work, I assume that they gave you a quote in writing, rather than sending it to the ultimate customer. I assume that you want to issue the final bill to the customer rather than have the sub-contractor billing the customer direct so that you can add your profit on top and issue the invoice to the customer in your company’s name.
Invoicing
There are 2 different ways of doing it depending on whether or not you’re registered for VAT:
Not registered
If you don’t want to register then you’d take the price they have quoted (including VAT – e.g. £20,000 net plus £4000 VAT; £24,000 in total) and added your own percentage on top, e.g. £1000, so that the total price to the customer is for £25,000. As you are not registered for VAT, you can’t add VAT on to the final invoice, so the total cost to the customer is £25,000.
The obvious downside in this case is that the customer doesn’t have an invoice addressed to it that it can use to recover the VAT from the other company, so the job ends up costing them an extra £4,000 because you aren’t registered for VAT and can’t claim the VAT back on the subcontractor’s invoice.
Registered
If you register the company for VAT, then you would be able to recover the VAT (ie using the above example £4,000) on the cost of the subcontractors’ work as input tax.
You would then issue an invoice to the final customer incorporating the net cost of the work, i.e. £20,000, plus your own percentage, i.e. £1000, so that the net value of the work is £21,000. You would then add VAT at 20% to this amount; i.e. £4200.
The total of the invoice would therefore be £21,000 plus £4200, i.e. £25,200. Assuming that the customer is registered for VAT (and is entitled to recover its’ input VAT), they could then recover the £4200 VAT as input tax. So the cost to them after claiming the VAT would actually be £21,000.
You must not charge VAT on an invoice unless you are registered for VAT. If you do so, the VAT charged is payable to HMRC as though you were registered, plus charging VAT when you’re not registered for VAT is both criminal and civil offence. HMRC take such offences very seriously. So make sure that you’ve got your VAT registration sorted out before billing the customer.
In these circumstances, I guess that you’ll want to register for VAT but I’m sure you appreciate that the VAT issues can be complicated and messy and I’ve only been able to give some very general guidance, not advice in any formal sense. However I hope this information helps you to decide how to proceed, but I’d strongly recommend that if you’re still in any doubt, you should find a good accountant who can help you sort out the accounting and VAT issues properly.
Marie
Unfortunately that’s not how the VAT system works! Forgive me if I’m telling you stuff you already know but it sounds as though you have very limited knowledge of VAT so here’s a very brief explanation.
You are correct that under the normal rules, if you registered for VAT, you could recover VAT (ie your “input tax”) on the cost of the discs, plus other business related costs. However you’d also have to charge VAT on the sale of the discs (this is called “ouput tax”) and pay the difference to HMRC.
If you’re selling to businesses who can recover the VAT, then this isn’t a problem as you simply issue them with a VAT invoice. But you’d have to pay the VAT out of your retail price for retail sales. So you have to do the sums to work out whether or not you’d benefit by being registered for VAT.
For example: if you bought a disc for £10 plus £2 VAT (your input tax), and sold it to a business for £15 plus £3 VAT (your output tax), you’d pay the difference of £1 to HMRC. So in effect if you sell to businesses, then the VAT on your sales is charged to them and is no extra cost to you. So you would benefit by being able to recover the input tax.
If you’re selling to private individuals who can’t recover VAT, you’d calculate the output tax as 1/6th of the selling price. For example if your retail selling price is £18, you’d pay £18/6, ie £3. You’d still be entitled to claim the input tax, but you have to remember that the output tax comes out of your gross retail price and can eat away at your profit.
So what you need to do is to work out how much VAT you’d have to pay to HMRC as output tax on your current sales. If your sales are all or mostly to private consumers, then I suspect that you’d end up paying more VAT on your sales than the £50 a month you could recover. Plus once you’re registered for VAT, you have to pay VAT on all of your income which is liable to VAT (ie excluding zero-rated or exempt sales) so this could eat away further at your profit.
Most very small businesses simply don’t bother to register for VAT because any input tax benefit is simply wiped out by the output tax they have to pay. But you have to do the sums to see how it would work in your situation. There are various schemes that might help reduce your VAT liability but I can’t explain them all here. However have a look at HMRC’s Introduction to VAT page here http://www.hmrc.gov.uk/vat/start/introduction.htm for more information on how it works and the schemes that are available for small businesses.
And no, it won’t help to move the website overseas or anything like that. VAT is based on where the goods are sold and if you are buying and selling in the UK, then you are subject to UK VAT rules.
Marie
Hello Videoman
Thanks for your query. I understand your frustration and concern about your daughter’s situation. I know that all small retail businesses have a very difficult time dealing with VAT and it seems very unfair to me that a small business which keeps four people employed as well as the directors should have to pay 1/6 of its income to HMR see as VAT.
I’ve seen many such situations over the years and unfortunately there is no easy way of dealing with them. Obviously I can only provide some very general guidance here on the forum, not specific advice, but I do know from experience that trying to separate businesses to avoid VAT normally causes more hassle than is worth the money it saves.
First of all, it’s important to know that HMRC have built up a lot of experience and knowledge about practices of certain trade sectors and what they might do to avoid VAT. This includes hairdressers. They are VERY well aware of the things hairdressers and other small retailers/service businesses do to avoid paying VAT.
Plus your daugher’s business is already on HMRC’s radar and she should have been registered for VAT from the time her turnover exceeded the registration limit. So she could already have an outstanding VAT debt from the date she should have been registered.
And frankly, I doubt that they’d accept the ex’s proposed set up. This is because one of the effects of separating the business into two separate companies would be to avoid the need to register for VAT.
HMRC don’t have to prove that separation of the business is done just to avoid VAT, all that they have to do is show that the VAT saving is a consequence of separation of the business
HMRC Guidance
I’d suggest that you look at the guidance given by HMRC in fact notice 700/1: Should I be registered for VAT? Section 13 of the notice http://tinyurl.com/5ss6ofh sets out HMRC’s statement of practice about artificial separation of businesses. It confirms that the separation of business activities where one of the effects is to avoid the need to be registered for VAT or to reduce the VAT bill could be regarded as artificial. Even having separate entrances, rooms, bank accounts isn’t normally sufficient. There are several more aspects to consider. And I certainly wouldn’t recommend anything along the ex’s proposals if I was formally advising a client on the subject.
Alternatives?
Unfortunately I’m not aware of any ways of dealing with this other than the ones you’re already thought of – ie by downsizing the business so that the turnover falls below the VAT registration limit or seeing if the VAT bill can be reduced by using the fixed percentage calculation.
This is called the flat rate scheme. Basically the way it works is that instead of calculating the VAT liability by taking one sixth of the turnover (i.e. the output tax) and offsetting this by claiming a deduction for VAT incurred on purchases and expenses (i.e. the input tax), you simply apply a basic flat rate fixed percentage to the turnover, but don’t claim any input tax.
Information about the flat rate scheme is here http://www.hmrc.gov.uk/vat/start/schemes/flat-rate.htm and you will see that the fixed-rate percentage for hairdressers is currently 13%. What you need to do is to calculate whether your daughter/s business would be better off using this fixed-rate percentage or by calculating its VAT liability using the normal method.
Obviously, I don’t know the exact details of your daughters income and expenditure, but I thought it would be helpful to give you some indication how much the Flat Rate Scheme might save.
Comparison of VAT liability using FRS
Based on turnover of £85,000, the output tax under the normal method would be just over £14,000. I assume that the business does not incur very much input tax as most of its costs will be staff related, but there will be some VAT on the cost of utilities, telephone bills, equipment, towels etc. For the sake of this illustration, let’s assume that the annual input tax would be £1500. This means that the VAT liability under the normal method would be (£14,000 minus £1500) 12,500.
By comparison, the VAT liability under the flat rate scheme would be just over £11,000. This would mean an annual saving of £1500 per annum. Not a huge saving but at least if you look at the figures, you’ve got a better idea of how much VAT could be involved. One point is that HMRC don’t normally allow retrospective applications for teh flat rate scheme so if your daughter should have been registered in the past, she’d have to pay VAT under the normal method on any past income.
I hope these comments help you with your daughter’s situation. I appreciate that you are in a very difficult position here, given the family relationships involved and the fact that services such as hairdressing very price sensitive. Even increasing the cost of a hair cut by 50p or a pound to cover the cost of VAT could put customers off, or make them take their business elsewhere. Everybody knows some hairdresser who isn’t registered for VAT and can provide the same service as a lower price and it is a very price sensitive business. But since the merger between the VAT office and the Inland Revenue, the VAT office has full access to information about all businesses income and they do look into these things as a matter of course nowadays.
But it sounds as thought your daughter should already be registered for VAT and she will end up with penalties from HMRC if she doesn’t deal with the situation as soon as possible. I’d strongly recommend finding a good local accountant who can help her sort things out and decide what to do in the future.
Marie
Hi Kenca
The way I understand the 3rd & 4th bullet points of 14.2.1 are that the new build property can be used and sold independently of any other property. For example some “granny flat” annexes don’t satisfy these criteria as they can only be occupied and sold in conjunction with the primary dwelling.
So as long as the newbuild property can be both used and sold independently of any other property and the other criteria at section 14.2.1 are satisfied, then the zero-rating criteria should be satisfied. Even if the property is to be used for holiday accommodation at some point, then the same criteria should apply.
I wish I could give 100% certainty on this issue as I appreciate that the VAT liability is a major cost factor in your situation. The frustrating point is that although taxes are one of the 2 inevitablities in life (and probably even less popular than death!), the application of the tax rules are not simple and it’s always possible that the rules could change in the future or that there is some factor about your situation that I can’t cover here on the forum. Even formal advice is never 100% certain as the VAT treatment of any transaction always depends on a number of factors, so you’d find that any advice will include a whole load of caveats, partly to cover ourselves as advisors and partly so that you appreciate that nothing can be guaranteed. For example, it’s always possible that HMRC could bring in some rule about use of “dwellings” as holiday accommodation that affects the liability of the construction.
But you’ve done your homework on this and if the builder is happy that his supply is zero-rated and the rules seem to support this position, as we’ve discussed here, it does seem that the construction will be eligible for zero-rating.
I’m happy to have a chat – at no obligation – about this so please give me a call if you want to discuss it. It might be helpful just so that I can explain the other factors that you may need to consider and then you can decide if you need formal advice. I suspect that you’ll decide that you don’t need formal advice but having a chat might help to put your mind at rest. The best time to contact me is between 2pm – 6pm weekdays (see my contact details for my number).
Marie