In order to be able to establish the correct VAT treatment of business transactions, you need to understand the legal and accounting issues involved AND explain them properly to the VAT officer.
I’m not talking about routine sales or purchases, but one off or non-contractual payments that aren’t consideration for a supply.
One of the main reasons that VAT assessments get issued is that the business has not been able to prove to the VAT officer that a payment isn’t liable to VAT. The primary job of any VAT officer is to safeguard the tax revenue, so they tend to take a very safe view and issue an assessment if they are in any doubt.
Dealing with VAT assessments can be time-consuming and costly, particularly if you have to pay for professional advice. So the best advice is to avoid getting one in the first place.
Last weeks’ Revenue & Customs Brief about the VAT treatment of excess car parking charges was an excellent example of how you need to understand certain legal or business issues in order to establish whether payments are liable to VAT. See my forum entry here https://vatexchange.co.uk/node/38 where I comment on the technical issues in more detail.
HMRC have confirmed in the Brief that where excess car parking charges are made because the customer has breached the terms of the original contract, the charges are not consideration for a supply and thus not liable to VAT.
Cases about the VAT liability of non-contractual payments come to the Tribunal or the Courts time and time again and it always amazes me that it gets so far. Of course there will be times when there is a genuine dispute about an unusual set of circumstances which ends up at the Tribunal because the taxpayer and HMRC cannot agree on the facts. But if a payment is not consideration for a taxable supply, it isn’t liable to VAT. Period. As the Americans would say.
But this is where it gets difficult.
How do you know what is a supply for VAT purposes?
A good starting point is the HMRC VAT Guide, Notice 700, which includes a section about how VAT works and what is a supply for VAT purposes. The obvious things, such as sales of goods or services, are of course supplies. So if you are buying a table, or paying the plumber for installing a new bathroom, there is very little doubt that these are supplies.
It gets difficult when you are talking about less tangible situations. For example, the VAT Guide says that agreeing to refrain from doing something in return for consideration is a supply. So if I make a payment as compensation for breaching a contract, such as staying too long in a car park, you might think that the compensation payment is actually made to the operator to agree to refrain from any further legal action.
If I had to rely on the advice given in the VAT Guide, I would say that this is a supply for VAT purposes. But it isn’t. However it’s taken me over 25 years worth of experience and knowledge to be able to make that distinction. A busy VAT officer with less experience might not make that distinction, so it’s up to you to provide accurate information.
This just reminds me of what many of us in the VAT world have known for years, which is that in order to be able to establish the correct VAT treatment of business transactions, you need to understand the legal and accounting issues involved AND explain them properly to the VAT officer.
Okay, I’m repeating myself here and all of the rules about writing blogs say that you shouldn’t repeat yourself. But it’s important. It’s not just that the VAT rules are complicated, but you have to know what you’re talking about before establishing the VAT position. And you have to prove the facts if you want to avoid getting a VAT assessment for something that isn’t liable to VAT.
How many of you have challenged a VAT assessment that was later withdrawn but could have been avoided if you’d provided proper information in advance? I bet there are more than a few. We’d be interested to hear of any such cases here at vatexchange.co.uk.
There is a lot of information about payments which aren’t liable to VAT on the HMRC website in the public notices and HMRC internal guidance, if you know where to look. So if you need any help in finding information or VAT support on any such issues, you can post your queries on the forum and we’ll do our best to help you.