Value Added Tax

There are special VAT rules that allow businesses to standard rate the supply of most non-residential and commercial land and buildings (known as the option to tax). This means that subsequent supplies by the person making the option to tax will be subject to VAT at the standard rate.

The ability to convert the treatment of VAT exempt land and buildings to taxable can have many benefits. The main benefit is that the person making the option to tax will be able to recover VAT on costs (subject to the usual rules) associated with the property including the purchase and refurbishment of the property.

One interesting aspect of the rules concerns what happens if you make changes to a building after you have opted to tax. HMRC’s guidance sets out the following basic principles that apply to the most changes made:

Extensions. If you have opted to tax a building and you extend it at a later date, upwards, downwards or sideways, your option to tax will apply to the whole of the extended building.

Linked buildings. If prior to their completion buildings are linked by an internal access or covered walkway they are treated as a single building and an option to tax will apply to both parts. If a link is created after both buildings are completed, the option to tax will not flow through with the link.

Forming a complex. If you have a group of units that have been treated as separate buildings for the option to tax and you later decide to enclose them so as to form a complex, and which meets the description of what constitutes a building, then the option to tax will not spread to the un-opted units.

There are special rules, under which a VAT-registered business can sell certain goods and services to charities at the zero or reduced rate of VAT. Before charging VAT at a lower rate, you must be able to show evidence that the charity is eligible. This is usually done by obtaining suitable evidence of the charity’s status and a written declaration or ‘certificate’ confirming they meet the conditions for a particular VAT relief.

Charities are legally required to provide an eligibility certificate when you supply qualifying building or construction services to them at zero VAT. A declaration is not required for other supplies but is recommended to prove the charity is eligible for the relief. Completed declarations should be held for at least 4 years.

The reduced VAT rate applies on the sale of fuel and power in certain circumstances to an eligible charity. The zero VAT rate applies on a wider range of supplies including the aforementioned construction supplies and items including certain medical and veterinary equipment, aids for disabled people, advertising and items for collecting donations, drugs and chemicals and equipment for making ‘talking’ books and newspapers.

There are special rules to help ensure that goods sent from abroad are taxed appropriately and to ensure that UK businesses supplying goods in the UK, for example by having to compete with VAT free imports, are not disadvantaged. This includes goods that are new or used and bought online, bought abroad, and shipped to the UK and goods received as gifts.

This means that in order to receive your goods you may have to pay VAT, Customs Duty or Excise Duty if they were sent to:

• Great Britain (England, Wales and Scotland) from outside the UK
• Northern Ireland from countries outside the UK and the European Union (EU)

VAT is charged on all goods (except for gifts worth £39 or less) sent from:

• outside the UK to Great Britain
• outside the UK and the EU to Northern Ireland

Online marketplaces that are involved in facilitating the sale of goods are usually responsible for collecting and accounting for the VAT. If the VAT has not been collected, then you will have to pay VAT to the delivery company either before the goods are delivered or when you collect them.  If you have to pay VAT to the delivery company, it’s charged on the total package value which includes the value of the goods, postage, packing, insurance and any duty owed.

As a general rule, there is no Customs Duty payable on non-excise goods worth £135 or less. There are various rates payable above this level and on excise goods of any value.

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 VAT legislation. Using the Flat Rate scheme, businesses pay VAT as a fixed percentage of their VAT inclusive turnover. The actual percentage used depends on the type of business.

The scheme is open to businesses that expect their annual taxable turnover in the next 12 months to be no more than £150,000, excluding VAT.

However, there are a number of anti-avoidance exclusions highlighted in HMRC’s internal manuals.

The exclusions are as follows:

• Businesses that are eligible for group treatment, or are registered for VAT as a divisional registration, at the time of application – or have been in the preceding 24 months – are excluded. This is designed to reduce the threat of exploitation by larger companies.
• Businesses that acquire or intend to acquire capital items that are covered by the capital goods scheme are excluded. Analysis showed that the treatment of FRS businesses as fully taxable presented the potential for abuse by exempt companies and this exclusion is to prevent such avoidance schemes from developing.
• Businesses that are associated – or have been in the preceding 24 months – are excluded. This is a catch-all provision to prevent avoidance and abuse.

In addition, a limited cost trader test was introduced in April 2017. If a business meets the definition of a limited cost trader, then this would usually mean it may be more beneficial to leave the scheme and account for VAT using traditional VAT accounting.

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:

1. Visit GOV.UK and choose Making Tax Digital-compatible software. For many businesses, the software they are using should already be compatible with MTD.
2. Keep digital records starting from 1 April 2022 or the beginning of their VAT period
3. 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.