CTA Examination: VAT on UK Domestic Transactions (inc SDLT)
QUESTION 1:
Email: Direct Tax Manager
From: VAT Manager
Subject: Farmer Giles and Sir Archie Fettrich
Date: 5/5/12
Farmer Giles
Farmer Giles has probably not reported the shooting activities to HMRC as he did not view it as a
business activity.
HMRC released Business Brief 2105 to determine what a business activity is for VAT purposes.
This could be seen as an activity carried out for pleasure so it would not be seen as a business.
However, it is 'actively pursued with continuity' as it has been running for four years and the
contributions covers costs with an amount left over which could be seen as profit.
Therefore, I think it will be seen as a business activity.
Further to this, the contributions are adjusted to reflect the number of days of shooting which shows
there is a link between the consideration and the supply. Following the decision of the Apple and
Pear Development council case, a link of this kind means the supply is a VAT supply so it will be a
business activity.
He has also purchased a shooting licence which shows he is properly pursuing this activity.
His takings in the last year were approximately £71,000 so if this activity it seen to be separate from
his farming business he would be below the registration threshold and would not have to charge
VAT on the amounts paid by the members. He is likely to breach the threshold soon so you should
tell him to monitor his turnover closely.
This is similar to the Lord Fisher case and that was seen to be a business activity so I think this will
definitely be the view of HMRC.
Sir Archie Fettrich
This is also similar to the Lord Fisher case where the sale of carcasses was seen to be a business
activity so Sir Archie was right to recover input tax on the purchase of the helicopter.
From 1/1/11 helicopters are within the Capital Goods Scheme with adjustments made each year for
five years based on taxable use of the asset.
Non-business activity is reflected within the adjustment and so as he has used to helicopter for 20%
non-business purposes he will have to make an adjustment:
£60,000 x 80% =
£48,000
£12,000 should be paid to HMRC on the VAT return for period ending June 2012 as adjustments are
paid in the 2nd VAT return of the year.
Each year he will then have to look at how much private use occurs with the helicopter and this
should be reflected in the adjustment. He should only have recovered £48,000 on the purchase as he
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only used it for 80% business purposes in the first year. It is this percentage which is then used each
year to calculate the required adjustment.
Please let me know if you have any further questions.
VAT manager
QUESTION 2:
Our Address
Your Address
Date
Dear Chris,
I write further to your letter regarding HMRC's stance on penalties
Client X
Client X became liable to be registered for VAT on 30/6/11. He should have notified HMRC within 30
days and then should have become registered on 1/8/11. He should then have started charging VAT
at 20% on his supplies.
As his failure was not deliberate the maximum penalty HMRC would apply is 30% of the VAT he
should have paid since 1/8/11. As his failure occurred less than 12 months ago HMRC could reduce
the penalty to 10% for a prompted disclosure or 0 for an unprompted disclosure.
For a maximum reduction, Client X must tell HMRC why the failure occurred, give them help in
quantifying the amount of VAT due and provide them with access to all relevant information.
As HMRC have not yet picked up this error, his disclosure will be unprompted. Therefore, if Client X
discloses everything fully to HMRC and looking at past cases, HMRC are likely to reduce his penalty
to 0.
Client Y
In normal circumstances Client Y would not be allowed to backdate his registration as HMRC would
say it is his own fault he was out of time on claiming the pre-registration input tax.
However, as he rang HMRC's advice line before he registered and they gave him bad advice he may
have grounds to succeed in a claim. If he had been given correct advice in August 2010 when he
applied for registration he could have stated on the VAT1 form he wanted to backdate his
registration to 1 June 2010.
Looking at recent cases, if Client Y has proof they called HMRC and received this advice (eg, emails to
advisors stating why he was registering then) then he could be successful in appealing HMRC's
decision and the courts may allow him to backdate his registration.
If he is not allowed to backdate his registration, HMRC could charge a maximum penalty of 30% of
their potential lost revenue which was £20,000 (x 30% = £6,000).
He has been prompted by HMRC so the minimum amount they would reduce his penalty to for full
disclosure would be 15% (= £3,000).
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Client Y may have to pay this penalty before he can appeal HMRC's decision unless he can prove it
would cause him financial hardship.
Another option would be to argue part of the costs incurred related to goods rather than services.
Sassoon Bury were successful in part when they argued this which meant the proportion of the costs
that were goods were not out of time as you can claim for the previous four years on reclaiming
input tax on goods.
Therefore, you should look at Client Y's invoices carefully to see whether this would be successful in
arguing part of the costs were goods.
I hope this answers your queries.
QUESTION 3:
1)
S1 1993/2001 art 11 states payments on account are 1/24 of the tax payable between 1
October and 30 September.
1.3 million + 1.2 million +1.2 million + 900,000 = 4.6 million
4.6 million x 1/24 = £191,667
2)
A payment can be reduced if, as stated in S1 1993/2001 art 13, Fresco plc's VAT liability falls to
less than 80% of the amount they are to pay as a payment on account (200,000 x 80% =
£160,000) then they can write to HMRC to request that their payments be reduced. They
cannot reduce the payment until they have had written approval from HMRC.
3)
Some surcharges are being reduced in court due to the courts viewing them as "plainly
unfair". Enersys and Total Technology were successful in having their penalties rescinded. The
court looked at how many days late they were compared to the size of the penalty and the
company's profit. They also took into account the company's past compliance record. Saint
Gobain were not successful in their appeal as they were eleven days late whereas Enersys and
Total Technology were one day late. Therefore as the penalty here is £4,000 for eight days late
I do not think this will be seen as plainly unfair so they will have to pay.
QUESTION 4:
Fitness Classes
The trainer would not be able to rent the room free of VAT because under sch 9 Group 1 Item 1(m)
VATA 94, the grant of facilities for participating in physical recreation would be standard rated.
Therefore, Bounce Ltd would be paying some VAT but less than in their current structure.
The trainer would not have to charge VAT on their fees as long as their turnover was below the
registration threshold of £73,000. They would also have to prove that the member was in contract
with the trainer rather than the gym and so something would have to be put in the membership
contract to make sure they were not receiving these supplies from Bounce Ltd.
HMRC may look at the principals of the CPP case to see whether it was a single supply of
membership, but as long as the contracts were structured correctly they should be able to not
charge VAT on the classes.
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New Gym
If Mr Davies could argue the new gym and Bounce Ltd were separate companies he would be
entitled to use the Flat Rate Scheme as long as his taxable turnover did not exceed £150,000. He
would not be able to recover any input tax and would have to pay 8.5% output tax on his VAT
inclusive turnover. He would still have to charge his customers 20% VAT.
HMRC may see this as artificial separation and instruct Mr Davies to treat the 2 gyms as one business
and their total turnover would be £150,000 so the FRS would not be available.
The businesses would be very similar and he would own 100% of both so they would have financial,
economical and organisational links. Therefore, they would be seen as one business so I do not think
this plan would work.
QUESTION 5:
Our Address
Your Address
Date: 5/5/12
Dear Horace
I write further to your letter dated 1/5/12 on the VAT and SDLT implications of your proposed barn
conversions.
Haycroft Barn
This will be a conversion of a non-residential building into a dwelling. Therefore, it falls within Sch7A
Group 6 VATA 94, so the builder should be charging VAT at 5% which would mean only £10,000 of
VAT would be charged. You should inform the builder of this and he should reduce the amount of
VAT he plans to charge accordingly.
You should be able to recover the VAT you pay through the submission of a DIY House Builders
Refund claim. Even though you are not converting the barn for yourself as long as you do not charge
Lizzie anything for the property you will still be entitled to submit a claim for a refund of the VAT
incurred on the goods incorporated into the building and the services carried out by the builder. If
you use an architect or surveyor you will not be able to reclaim VAT on their services and they will
have to charge VAT at 20%.
You will have to submit your claim no later than three months after the completion of the building
(March 2014). You must also submit a certificate of completion, invoices of all the goods supplied by
the builder, your planning permission and a certificate signed by a surveyor/architect stating the
goods were incorporated into the building.
Windrush Barn
This is a conversion of a non-residential building to commercial workshops/offices so VAT will be
charged on the works at 20%.
As you do not want to charge VAT on the rent you will have to make exempt supplies of the units
which means the VAT incurred on the conversion will be directly attributable to exempt supplies so
will be irrecoverable. The only way to recover the VAT would be to opt to tax the units but as you do
not want to charge VAT on the rent this is not an option available to you.
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As you will be making exempt supplies this will make your business partially exempt. However, as
you make mainly taxable supplies the £30,000 exempt supplies will mean your recovery percentage
is 99%. Therefore, the amount of exempt input tax relating to your overheads will be less than
£7,500 which means it will be de minimus so you will be able to recover all input tax in future.
Burford Barn
This will not be a conversion to a dwelling for VAT purposes because the planning consent restricts
that only a farm worker can reside in the building and for a building to be classed as a dwelling there
must be no restrictions.
Therefore, VAT will be charged at 20% and will be fully recoverable as it relates to the taxable
supplies of your farming business.
SDLT
SDLT will be charged at 1% on the transfer of Haycroft Barn out of the business as its transfer value is
£240,000. However, the SDLT rates could have increased by 2014.
There will be no SDLT implications of the other conversions.
I hope this satisfies your queries.
QUESTION 6:
Notes for presentation on TOGCs
General Comments
TOGCs are significant because they allow sales of assets to be treated as outside the scope of VAT
and so no VAT is charged on the sale.
When drafting sales agreements clauses should be included that state if anything occurs that results
in one of the TOGC conditions being breached so VAT is due on the sale then the party at fault must
pay the VAT.
In accounting records as TOGCs are outside the scope they are ignored when carrying out partial
exemption calculations. When items are acquired as TOGCs that are within the Capital Goods
Scheme accounting records should be obtained regarding any prior adjustments as the CGS
requirements pass to the person acquiring the asset.
The CGS interval would end the day before the TOGC takes place and the next one would start on
the following day.
The conditions for a TOGC are in S1 1995/1268 art 5:
- The person acquiring the asset must use it for the same kind of business.
- If the transferor is registered for VAT the transferee must be or become registered.
- There must be no significant break in trade.
- If the property is opted to tax the transferee must opt to tax.
- The transferee must notify the transferor that their option to tax will not be disapplied.
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1)
This will not be a TOGC as supplies within VAT groups are disregarded for VAT purposes so the
lease from H to C will not be a VAT supply so H is not carrying on the same kind of business as
A.
2)
This would not be a TOGC because the trustees are not carrying on a business.
3)
This can be a TOGC as long as the tenant is committed. It does not matter if the lease has not
yet been granted but as long as the tenant has signed a contract saying they will enter a lease
then it is the transfer of a tenanted property so can be a TOGC.
4)
A lease surrender follows the VAT liability of the lease. Therefore as Z's lease to R was exempt
the surrender will also be exempt so the transfer will not be outside the scope of VAT but will
be exempt so should not impact on Z's cashflow.
It cannot be a TOGC as the lease would be ending so there would be a break in trade and the
conditions would not be satisfied.
QUESTION 7:
Memo
To: Dermot
From: Doug
Date: 5/5/12
Subject: AXcess
Holiday Scheme
The holiday scheme will be a standard rated supply as it does not fall within any of the exemptions
for charities. However, the Local Authority will be able to reclaim the VAT under s33 VATA 1994 so
the fact that VAT is being charged should not cause an issue.
Sibling Days
This supply will fall within Sch9 Group 10 Item 3 VATA 94 and so will be exempt from VAT. Therefore,
the VAT inclusive price will be VAT free.
To be permitted to use this exemption AXcess must be an eligible body so it must make sure it does
not make any profit from this activity and satisfy other "not for profit" conditions but as it is a
registered charity this should not be an issue.
Database
This does not fall within any exemptions but again the LA would be able to recover the VAT under
s33.
Building works
If AXcess are using the building solely for charitable purposes then if it was classed as being
"reconstructed" rather than being refurbished then the building works could be zero rated under Sch
8 Group 5 Items 2 + 4 VATA 94. Note 18 of this group states for a building to cease to be an existing
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building it must be demolished so that no more than a single facade remains. So if AXcess demolish
it first then it would be being reconstructed. Abuse of rights should not be an issue in this case.
I hope this satisfies your queries.
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