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VAT Update –…

VAT Update – May 2021

By Nick Hart, Alison Hone and Sean McGinness

26 May 2021

In this month’s VAT Update we note HM Revenue and Customs’ (HMRC’s) initial approach to Making Tax Digital (MTD) compliance; comment on two new Revenue and Customs Briefs; remind clients that time to register for the VAT deferment payment scheme is fast running out; highlight a new consultation on simplifying VAT on land and property transactions; consider the implications of a recent FTT judgement on open market value; and finally highlight HMRC’s position on VAT and electric car recharging costs.

Making Tax Digital VAT compliance

In our April VAT update we reported on the potential penalties HMRC can levy on a taxpayer for failing to comply with MTD requirements. The ICAEW has recently reported that HMRC has identified 100,000 VAT-registered persons who should be filing their VAT returns under the MTD process (because their annual taxable turnover exceeds £85,000) but are not. We understand that HMRC intends to tackle the issue by removing the ability to file VAT returns through the online VAT service, thus forcing businesses to purchase functionally compatible software, register for and then file under MTD requirements.

Initially, HMRC will target a small population of VAT-registered businesses which it considers are non-compliant under MTD. It will write to them in advance of disabling the VAT online service.

Comment: Whilst we are only a year away from MTD becoming mandatory for all VAT-registered businesses, HMRC seems to be taking proactive steps now to ensure those with a current MTD obligation are meeting the requirements. It will be interesting to see the effect the approach described has. If businesses are unable to file a VAT return later this year, they would also run the risk of default surcharge penalties and central assessments being applied.

We would strongly recommend all VAT-registered businesses register for MTD and file their VAT returns through compatible software, even if the requirement for them to do so does not arise until 1 April 2022.

VAT Deferral New Payment Scheme

HMRC is reminding businesses that deferred their VAT payments between 20 March and 30 June 2020 that they have one month left to join HMRC’s VAT Deferral New Payment Scheme. The online portal for the new payment scheme closes on 21 June 2021.

Businesses that have not yet registered have missed the March, April and May joining dates but can still spread their payments across up to eight monthly instalments, interest free, providing they join by 21 June 2021.

Businesses that do not opt to use the scheme will need to make alternative arrangements to pay their deferred VAT in full by 30 June 2021, or approach HMRC to agree time to pay.

Please see our March VAT Update for more information on the scheme, and the potential penalties due for business that do not opt-in, or fail to pay deferred VAT by the deadline.

Comment: Businesses that have not yet taken advantage of the extended payment scheme should not delay if they wish to take advantage of the opportunity to spread their payments. Failure to take any action with respect to a deferred liability may result in penalties being levied.

HMRC is still willing to enter into specific time to pay arrangements with individual businesses, so if you have any concerns about paying your outstanding VAT liabilities you should discuss this with HMRC as soon as possible.

Construction sector: window blinds can be zero-rated

HMRC has issued Revenue and Customs Brief 5 (2021) in reaction to the First Tier Tribunal’s (FTT’s) decision in the case of Wickford Development Co Ltd (Wickford) TC07864 to confirm manual blinds/shutters are considered as ‘building materials’ for the purposes of construction services. As a result, they are zero-rated when installed as part of a residential new build, and VAT can be reclaimed by DIY housebuilders who purchase the goods.

Previously, HMRC considered roller blinds and ‘other window furniture’ did not meet the definition of building materials and therefore were standard rated and input tax recovery blocked for the developer.

The change in policy takes effect from 5 October 2020 and in cases where VAT was previously disallowed, an adjustment can be made.

It should be noted that HMRC maintains motorised blinds are not considered building materials but rather they are electrical appliances and so specifically excluded from being building materials.

Comment: DIY housebuilders seeking to reclaim VAT incurred on building materials can now include the purchase of manual blinds in their claims. Elsewhere, the change in HMRC policy is likely to benefit the smaller developers as, in our experience, larger housebuilders tend not to install blinds as part of the standard build.

What is and what is not a building material, and the VAT implications either way, can be a complicated and often misunderstood area so it is always worth taking advice with respect to things such as fitted furniture and floor coverings before charging or reclaiming the VAT incurred.

Please contact Sean McGinness, VAT Partner, for further details.

Food: VAT liability of juice cleanse programmes

In another Revenue & Customs Brief, HMRC has confirmed its position on the VAT liability of beverages, in particular the approach to take to determine whether a product is a beverage or food in liquid form. RCB 6 2021 has been published following the Upper Tribunal case of The Core (Swindon) Ltd UT/2019/0049. The case concerns juice cleanse programmes, and whether they should be treated as a standard rated beverage or a zero-rated meal replacement product.

HMRC appealed the decision of the First Tier Tribunal due to concerns it had over the emphasis placed on how the product was marketed. Ultimately, the Upper Tribunal agreed with the FTT that the product was zero-rated as liquid food.

Originally, the FTT decided that fruit and vegetable juices sold as meal replacements were food and not beverages, and therefore should be zero-rated. This finding was based mainly on how the juice cleanse programme was marketed, with additional evidence being in the form of two of the programme’s customers and the testimonials on The Core’s website.

The Upper Tribunal confirmed the need for a more fact-specific approach, claiming that in all cases involving classification for VAT purposes it is necessary to carry out a multifactorial assessment, taking into account a range of relevant elements.

Comment: Determining whether a product is a beverage or a meal in liquid form can be highly subjective and the Upper Tribunal’s view that many different factors need to be considered is the correct one. Each case will inevitably be different and focusing too heavily on how a product is marketed may not give the right result.

The world of food and VAT continues to produce up interesting cases, although this particular development may not spark the collective imagination as much as the iconic Jaffa Cake case.

To discuss the implications of the case, please get in touch with Nick Hart, VAT Director.

Connected parties: open market value

When HMRC considers that a supply between connected parties has been under-valued they have the power to issue a direction that the open market should be used to calculate the VAT due. Such directions would apply where the recipient is not able to reclaim all of the VAT it incurs (because it has exempt income or non-business activities) and it pays for the supply in money (rather than another form of consideration).

HMRC took this approach with Jupiter Asset Management Group Ltd (JAMG) and issued an assessment for VAT on what it considered to be the open market value of services supplied. JAMG appealed in the case of JAMG vs HMRC (TC/2014/03366) but the FTT agreed with HMRC in that the management services being supplied by JAMG to a connected company were undervalued and the method used to determine an open market value would be correct to include all costs incurred in making the supply. In this case, JAMG had not included certain non-VAT bearing costs in the amount it was charging, but the FTT agreed with HMRC that the value of the service must include such costs.

Comment: This is an interesting case and whilst not binding it is a reminder that HMRC do have the powers to issue open market valuations where the necessary conditions are met. Where an open market value is difficult to determine because of the specific or unique nature of a particular supply, it would be expected that the value being charged would at least take into account the full cost of making a supply.

Businesses supplying connected companies that are not able to reclaim the VAT they incur in full should take note of HMRC’s success in this case, and whilst a supply may be being valued in accordance with a transfer pricing policy, that is not necessarily going to mean an open market value for VAT purposes.

Time for land and property VAT reform?

As many businesses know, the VAT rules relating to land and property are complex and failing to understand them or apply them correctly can result in large and unexpected VAT costs. HMRC is now asking for views on simplifying these VAT rules (more details can be found here). We will be consulting with our clients and responding to the consultation before the deadline of 3 August 2021.

Comment: HMRC’s consultation on the land and property VAT rules is an acknowledgement of just how complex some of them have become. This is a good opportunity for businesses, agents, advisers and other stakeholders to make their views known in response to specific questions raised by HMRC. Whilst this is welcomed, there is no guarantee the consultation will result in any changes. HMRC has, in the past, sought to improve VAT legislation in this area with mixed results. In the case of Schedule 10, for example, in an attempt to make the position clearer, certain elements have become even more complicated.

Please get in touch with your usual Saffery Champness partner if you are involved in land and property-related activities and you have views to be shared on the VAT complexities associated with the sector.

Electric vehicles: the VAT treatment of recharging costs

HMRC has issued guidance to clarify its position on the VAT treatment of charging of electric vehicles when using charging points situated in public places.

HMRC has confirmed that supplies of power to charge electric vehicles through charging points in public places are subject to VAT at the standard rate without any exemption or reduced rate relief. The de minimis limits that apply to domestic supplies of electricity do not apply in this case because of the public location of the charging points. The reduced rate of VAT continues to apply to supplies of electricity to an individual’s home.

In considering the recovery of VAT incurred on recharging costs, HMRC has also set out that sole traders who charge their vehicle at home and where the purpose is wholly related to their taxable business, they can recover the input tax incurred. If there is a private element to the cost then an apportionment is necessary to calculate the recoverable VAT element.

Businesses are not entitled to recover the VAT incurred by employees charging their electric vehicle at home, as HMRC considers this to be a cost incurred by the individual rather than the business. There is an opportunity for the business to reclaim VAT on vehicle recharging costs, if the recharging takes place at the place of business and there is the option of whether to claim all of the VAT and pay VAT on the element relating to private use, or to only reclaim a proportion of the VAT incurred.

Comment: HMRC may have considered applying a reduced rate or even an exemption to electric vehicle recharging costs not least to encourage their wider use for environmental reasons, however the RCB issued confirms that the standard rate of VAT applies.

In terms of VAT recovery on recharging costs, there are certain scenarios which HMRC has not covered in its guidance, including vehicle recharging costs incurred by employees during a journey which is wholly for business purposes. There are often misunderstood rules regarding VAT recovery on the purchase of road fuel in similar circumstances and care is recommended when considering whether VAT on vehicle recharging costs is recoverable for a business or not.