VAT, as M&S’s clients know, can be both confusing and a real pain to get right. Recent court decisions have added to the confusion by changing the way VAT is accounted for on deposits, cancellation fees and advance payments.
At the heart of this problem are unusual, or infrequent, receipts. These, in our experience, frequently cause problems for VAT accounting. Most businesses know the VAT liability of the supplies they make on a regular basis, but when transactions are outside that comfort zone, or in some other way unusual for the business, they are often treated incorrectly.
Let’s start with a basic question: when is VAT due?
VAT is due on any supply made of goods or services in the UK unless there is an exemption or zero-rate relief, or the supply is outside the scope of VAT. That, in theory, is simple enough. Now let’s look at zero-rating, exempt and reduced rate.
No VAT is charged where a zero-rated or exempt supply is made. However, it is up to the supplier to ensure that the supply is zero-rated or exempt. This is an essential part of your accounting.
Common zero-rated supplies include exports, supplies of some foods, children's clothing, some charitable supplies and new residential construction. Common exempt supplies are insurance, finance, property rents (unless subject to the option to tax) and some welfare services.
The difference between a zero-rated supply and an exempt supply is that whilst VAT is not charged on either supply, VAT cannot be reclaimed on expenses that relate to an exempt supply. Where a zero-rated supply is made, all VAT on expenses relating to the supply can be reclaimed.
A further relief from VAT is the lower rate of VAT of 5%. This applies to some health and welfare services, the supply of power to domestic and charitable properties and qualifying construction services converting, extending or renovation domestic properties. Consequently, property transactions can be extremely complex as they can be exempt, zero-rated, subject to VAT at 5% or 20% and some exempt transactions can be subject to VAT where the option to tax is exercised! If you are in any doubt, consult a tax specialist (we can suggest one!).
Unusual and sundry transactions
As noted, it’s unusual, sundry or infrequent supplies that cause problems and these are were errors are made. For example:
Delivery charges: Businesses frequently do not charge VAT on a delivery charges to customers. This is because people think that because the Post Office does not charge VAT on stamps no VAT is due on a delivery charge. This is not the case. A delivery charge is regarded as part of the value of the supply of the delivered goods. Thus, if the goods are subject to VAT and cost £110 with a £10 delivery charge, the value for the supply of the delivered goods is £120. VAT is due on this amount (that is £20). Where, however, the delivered goods are zero-rated goods (such as newspapers) no VAT is chargeable, as the delivered goods are zero-rated.
Part-exchange: Where goods are part-exchanged there are two supplies. For example, if a van is sold in part-exchange for a new van, there is, a) the supply of the old van to the dealer, and b) the supply by the dealer of the new van to the business. VAT has to be accounted for on both transactions. Businesses can occasionally forget to charge VAT on the van part-exchanged. Where the item part-exchanged is not eligible for an input tax claim (such as a car) there is no VAT due on the part-exchange.
Sales of scrap, waste or rubbish: Businesses frequently forget to account for these sundry sales. Generally, these are cash sales and do not go through the normal invoicing system. Despite this, they are subject to VAT and need to be accounted for (unless they are zero-rate or exempt supplies).
Deposits and advanced payments: Before 1st March 2019, HMRC allowed deposits received and advanced payments for goods not collected or services not used to be treated as outside the scope of VAT (i.e. no VAT was chargeable). After 28th February 2019, these payments became subject to VAT, which applies as soon as the payment is received or when an invoice is raised.
Compensation payments and early termination fees: These payments have until recently been regarded as outside the scope of VAT. This was because they were regarded as being payments for no supply. However, recent court judgements have made it clear that these payments are for contracted services and subject to VAT (unless they are eligible for a VAT relief). However, if the payment is to compensate somebody for a loss and there has been no supply or contracted supply, there may be scope to argue that the supply is not subject to VAT.
VAT can be very complicated and the VAT liability of supplies can, as I’ve noted here, change from time to time. We recommend that you review your business supplies and income to ensure all transactions are being accounted for correctly.
Should you have any queries or would like a review of your VAT please get in touch.
Julie Downie, Accounts Manager