Value Added Tax

The VAT Capital Goods Scheme (CGS) is a means of adjusting the initial VAT recovery in respect of certain assets over either 5 or 10 years. The scheme seeks to agree a fair and reasonable attribution of VAT to taxable supplies and non-taxable supplies relating to the use of an asset over its lifetime.

The adjustment period for land and buildings is 10 years and for other CGS assets, 5 years. This adjustment period also considers any non-business use of the asset. The CGS is intended primarily for partly exempt businesses. However, businesses can change direction over the adjustment period and be subject to making CGS adjustments some years after an asset was purchased.

The CGS currently applies to:

• Land and building (including extensions, alterations and refurbishments) with a cost (net of VAT) of £250k or more.
• Computers, or computer equipment, with a cost (net of VAT) or £50k or more.
• Ships and boats with a cost (net of VAT) of £50k or more.
• Aircraft with a cost (net of VAT) of £50k or more.

The scheme does not apply if:

• the assets are acquired solely for resale;
• you spend money on assets which are solely for resale; and
• assets are acquired, or you spend money on assets, which are wholly used for non-business purposes.

The VAT Flat Rate Scheme (FRS) has been designed to simplify the way a business accounts for VAT and in so doing reduce the administration costs of complying with the VAT legislation. The scheme is open to businesses that expect their annual taxable turnover in the next 12 months to be no more than £150,000.

The limited cost trader test was introduced in April 2017 to help tackle abuse or perceived abuse of the VAT FRS by businesses that spend a small amount on goods. Businesses that meet the definition of a 'limited cost trader' are required to use a fixed rate of 16.5%. The highest 'regular' rate is 14.5%.

A limited cost trader is defined as one whose VAT inclusive expenditure on goods is either:

• less than 2% of their VAT inclusive turnover in a prescribed accounting period; or
• greater than 2% of their VAT inclusive turnover but less than £1,000 per annum if the prescribed accounting period is one year (if it is not one year, the figure is the relevant proportion of £1,000).

For some businesses – for example, those who purchase no goods, or who make significant purchases of goods – the outcome of the test will be self-evident. Other businesses need to complete a simple test, using information they already hold, to work out whether they are obliged to use the higher 16.5% rate. Businesses using the scheme are expected to check that they use the appropriate flat rate percentage for each accounting period.

If a business is a limited cost trader, it may be more beneficial to leave the FRS and account for VAT using the normal rules.

HMRC’s VAT Notice 701/14: food explains what types of foods are zero rated and standard rated for VAT. The notice includes many examples of different food categories. The notice covers some general VAT liability rules. For example, food supplied in the course of catering is standard rated for VAT. This includes hot take-away food. Most basic food stuffs intended for human consumption and not supplied in the course of catering are zero rated for VAT. However, the definition of 'basic' is not straightforward.

The following food and drinks must usually be standard rated:

• Ice cream, similar products, and mixes for making them. Note that frozen yoghurt that’s designed to be thawed before being eaten is zero rated.
• Confectionery, apart from cakes and some biscuits. Drained cherries and candied peel are zero rated.
• Alcoholic beverages.
• Other beverages, and preparations for making them. Exceptions that are zero rated include milk and milk drinks, tea, maté, herbal tea, coffee and cocoa, preparations of yeast, meat and egg.
• Potato crisps roasted or salted nuts and various other savoury snack products.
• Products for home brewing and wine making.

Produce that’s unfit for human consumption, such as waste and contaminated food products (including used cooking oil), may be eligible for zero rating as animal feeding stuffs.

Since 2018, online marketplaces (such as eBay or Amazon) have been required to help tackle online VAT fraud. These measures, known as joint and several liability (JSL) for marketplaces aim to ensure that all businesses selling goods in the UK follow the same rules and pay the correct amount of VAT.

Legislation allows HMRC to hold the operator of an online marketplace jointly and severally liable for unpaid VAT where:

• An overseas seller operating on the marketplace should have registered for UK VAT and has failed to do so.
• The online marketplace knew or should have known that an overseas seller should be UK VAT registered.
• HMRC tells them that a seller operating in their marketplace is not meeting its VAT obligations.

HMRC’s guidance states that if you believe an overseas seller should be paying UK VAT, you should check:

• that they have a valid VAT Registration Number (VRN);
• the location of the seller;
• the location of the goods that will be sold by the seller;
• if the seller, or those directing the seller, have been removed from your online marketplace before;
• how quickly the seller is able to fulfil orders from UK customers;
• how the seller fulfils orders from UK customers; and
• if there’s any information that the seller, HMRC or a third party gives you that might indicate dishonest conduct or failure to meet their VAT obligations.

Whilst most businesses in the UK charge VAT at the standard rate of 20%, there are a number of different VAT rates and exemptions that businesses should be aware of. In the UK, there are three separate VAT rates, the standard rate @ 20%, reduced rate @ 5% and the zero rate @ 0%.

HMRC has published an updated version of their guidance titled VAT rates on different goods and services. The guidance provides a list of goods and services showing which rates of VAT apply and which items are exempt or outside the scope of VAT.

The guidance lists the following construction services which can be taxed at the zero or 5% rate.

Taxed at the zero rate:

• Substantial reconstructions to protected buildings that are buildings used as a dwelling, for a relevant residential purpose or for a relevant charitable purpose     
• The installation of a bathroom or lavatory, constructing ramps and widening doorways or passageways for disabled people in their own home   
• Construction and first freehold or long leasehold sale of a new building for a relevant charitable purpose  
• Construction and first freehold or long leasehold sale of a new building for relevant residential purposes
• Construction and first freehold or long leasehold sale of new domestic buildings  
• First freehold or long leasehold sale of a commercial building converted into a dwelling or dwellings
• First freehold or long leasehold sale of buildings converted for relevant residential purposes         
• First freehold or long leasehold sale of buildings converted for relevant charitable purposes         

Taxed at the reduced rate of 5%:

• Converting existing premises by increasing the number of dwellings within the building 
• Renovating a dwelling that has been empty for at least 2 years

The furnished holiday let (FHL) rules allow holiday lettings of properties that meet certain conditions to be treated as a trade for some specific tax purposes. As an FHL is treated as a business, it is important to remember that VAT must be accounted for on furnished holiday lettings once the VAT registration threshold is surpassed. 

This means that all FHL income would be subject to VAT at the 20% standard rate once the VAT registration threshold, currently £85,000, is breached.  Anyone with an FHL with gross rentals exceeding £85,000 in the previous 12 months or expected to exceed £85,000 in the next 30 days is required to register for VAT. If the owners of an FHL business already hold a VAT registration in relation to other business activity, then the FHL income would be subject to VAT from the start. Of course, VAT registration may offer some benefits in allowing for the VAT recovery on refurbishment, maintenance and day-to-day running costs associated with the property in question.

In order to qualify as a furnished holiday letting, the following criteria need to be met:

• The property must be let on a commercial basis with a view to the realisation of profits. Second homes or properties that are only let occasionally or to family and friends do not qualify.
• The property must be located in the UK, or in a country within the EEA. 
• The property must be furnished. This means that there must be sufficient furniture provided for normal occupation and your visitors must be entitled to use the furniture.

In addition, the property must pass the following 3 occupancy conditions. 

1. Pattern of occupation condition. The property must not be used for more than 155 days for longer term occupation (i.e. a continuous period of more than 31 days).
2. The availability condition. The property must be available for commercial letting at commercial rates for at least 30 weeks (210 days) per year. 
3. The letting condition. The property must be let for at least 15 weeks (105 days) per year and home owners should be able to demonstrate the income from these lettings.  

The VAT Flat Rate Scheme has been designed to simplify the way a business accounts for VAT and in so doing reduce the administration costs of complying with the VAT legislation. The scheme is open to businesses that expect their annual taxable turnover in the next 12 months to be no more than £150,000.

A limited cost trader check was introduced in April 2017 and can increase the VAT flat rate percentage used by VAT registered businesses that use the Flat Rate scheme. If you meet the definition of a 'limited cost trader' you are required to use a fixed rate of 16.5%. The highest 'regular' rate is 14.5%.

A limited cost trader is defined as one whose VAT inclusive expenditure on goods is either:

• less than 2% of their VAT inclusive turnover in a prescribed accounting period;
• greater than 2% of their VAT inclusive turnover but less than £1,000 per annum if the prescribed accounting period is one year (if it is not one year, the figure is the relevant proportion of £1,000).

For some businesses – for example, those who purchase no goods, or who make significant purchases of goods – the outcome of the test will be self-evident. Other businesses need to complete a simple test, using information they already hold, to work out whether they need to use the higher 16.5% rate. If so, the use of the flat rate scheme will probably not be beneficial.

When you issue an invoice to your customer, you must ensure that you charge the correct rate of VAT. Whilst most businesses in the UK charge VAT at the standard rate of 20% there are a number of different VAT rates and exemptions that you should be aware of. 

In the UK, there are three separate VAT rates, the standard rate @ 20%, the reduced rate @ 5% and the zero rate @ 0%.

There are special rules when charging VAT where there are discounts or free gifts. The rules are complex, but we have summarised the main aspects below.

Discounts and free gifts

VAT for most work on houses and flats by builders and similar trades, like plumbers, plasterers and carpenters, is charged at the standard rate of 20%. However, there are a number of exceptions where special VAT rules apply and a reduced or zero rate of VAT may apply. 

A builder may not have to charge VAT (zero rate) on some types of work if it meets certain conditions, including:

• building a new house or flat
• work for disabled people in their home

A builder may be able to charge the reduced rate of 5% for some types of work if it meets certain conditions, including:

• installing energy saving products and certain work for people over 60
• converting a building into a house or flats or from one residential use to another
• renovating an empty house or flat
• home improvements to a domestic property on the Isle of Man

There are also special VAT rules for work on certain types of buildings that are not houses or flats, including approved alterations and substantial reconstructions to protected buildings and converting a non-residential building into a house or communal residential building for a housing association. 

In addition, there are certain other types of communal residential building that builders do not have to charge VAT. These include children’s homes, residential care homes, hospices and student accommodation.

In all cases, it is the supplier’s responsibility to charge VAT correctly and to ensure they hold proper evidence to support the fact that a customer is eligible for a supply at the reduced or zero VAT rate.

For most fully taxable businesses, VAT can be reclaimed on goods and services used in the course and furtherance of their business activities. This means that businesses must consider where there is personal or private use of goods or services bought for the business and can usually only reclaim the business proportion of any VAT charged.

For example, VAT is recoverable on all the costs of mobile phones provided to employees where no personal use is allowed. Where businesses allow private calls to be made at no charge the VAT recovery must be apportioned on a fair and reasonable basis. Where employees pay for the private use of their phones the business is allowed to reclaim the input tax in full provided an output tax charge is accounted for in respect of private use.

You cannot reclaim VAT for:

• anything that is only for private use;
• goods and services your business uses to make VAT-exempt supplies;
• business entertainment costs;
• goods sold to you under one of the VAT second-hand margin schemes;
• business assets that are transferred to you as a going concern.

There are different rules for a business that incurs expenditure on taxable and exempt business activities. These businesses are partially exempt for VAT purposes and are required to make an apportionment between their activities using a 'partial exemption method' in order to calculate how much input tax is recoverable.