Q&A: VAT myth buster
19 Nov 2019
In our regular Q&A series from Croner Taxwise, Hilary Budd is myth busting five VAT questions from taxable turnover for Making Tax Digital to input tax on electric vehicles
19 Nov 2019
Q. A client is adamant that their car dealer has advised them that VAT incurred on the purchase of an electric car is recoverable in full? Is this correct?
A. Myth, an electric car is no different to a car which runs on any other fuel; input tax is blocked from recovery unless the car meets one of the exception conditions detailed in VAT Notice 700/64, section 3, summarised briefly below.
The exceptions are for cars which are:
- stock in trade of a motor manufacturer or dealer;
- intended to be used primarily as a taxi, for driving instruction, or for self-drive hire; and
- will be used exclusively for the purposes of the business and would not be made available for the private use of anyone.
Q. If a building or a piece of land is itself opted to tax, does that option continue after the building is transferred to a new owner?
A. Myth, it is not the land or building which is opted to tax, but the ‘interest in’ that land or building held by the entity which has made the decision to opt to tax, and the option to tax is only binding on that entity, or a relevant associate of theirs in a VAT group situation.
An ‘interest in’ property means any interest in, right over or licence to occupy property.
In most cases the decision to opt to tax is driven by the wish to recover input tax incurred in relation to the building, but can also be a requirement for the purchaser of a building opted to tax by the seller, to acquire it ‘VAT free’ as part of the transfer of a business as a going concern.
To illustrate this point: if the landlord of a building has opted to tax, that option does not flow through to the tenants. If the tenant is subletting, and wants the rent they receive to be taxable income, they will need to notify HMRC of their own option.
Detailed information on Opting to Tax Land and Buildings is available in HMRC VAT Notice 742A.
The conditions required to be met when transferring property as part of a transfer of a going concern are covered in section 2.3 of VAT Notice 700/9.
Q. Exempt and outside-the-scope supplies of goods and services do not form part of taxable turnover for VAT registration or Making Tax Digital threshold purposes, but zero rated supplies of goods or services do (including exports). Is this true?
A. Correct, taxable Turnover includes supplies of goods and services at the standard, reduced and zero rate of VAT. Exempt supplies are not taxable supplies.
Examples of outside scope supplies are:-
- business to business services supplied to customers outside the UK which under the place of supply of service rules are supplied where the customer belongs (see VAT Notice 741A); and
- supplies of goods which never come into the UK, eg, goods purchased from a supplier with stock held outside the UK and delivered direct to a customer’s premises outside the UK.
Both the above are examples of ‘supplies which would be taxable if made in the UK’ but as the supplies are not made in the UK, they do not count as taxable turnover in the UK.
Q. Exempt and zero rated supplies are both included when calculating the gross turnover on which VAT is to be declared on the Flat Rate Scheme (FRS). Outside-the-scope supplies of goods and services are not. Is this true?
A. Correct, it is a common misconception that exempt supplies in particular are excluded from the FRS turnover calculation. This often catches out FRS users with property letting income.
Information on supplies to be included/excluded from FRS turnover is available in HMRC Flat Rate Scheme VAT Notice 733 Sections 6.2 and 6.3.
Q. Expense recharges are disbursements. Is this correct?
A. Myth, when a consultant or any other kind of businesses recharges the costs it has incurred in the course of providing its services to its customers, that recharge is not a disbursement.
As per HMRC guidance on disbursements in section 25 of Notice 700: The VAT Guide, a disbursement is the result of acting as a disclosed agent between your customer and a third party to facilitate a supply of goods or services between those parties, and the supply made must be used by the customer - not the agent.
There are eight conditions which need to be met for a payment made to a third party on behalf of a client to be treated as a disbursement:
- you acted as the agent of the client when the third party was paid;
- client actually received and used the goods or services provided by the third party (this condition usually prevents the agent’s own travelling and subsistence expenses, phone bills, postage, and other costs being treated as disbursements for VAT purposes);
- client was responsible for paying the third party (examples include estate duty and Stamp Duty payable by your client on a contract to be made by the client);
- client authorised you to make the payment on their behalf;
- client knew that the goods or services you paid for would be provided by a third party;
- your outlay will be separately itemised when the client is invoiced;
- you recover only the exact amount which you paid to the third party; and
- the goods or services, which you paid for, are clearly additional to the supplies which you make to your client on your own account.
Recharges of a business’ own travel, subsistence or other costs are not disbursements - the customer is not using the transport, eating the meal or doing the miles in the case of a mileage rate.
The recharge is correctly treated as further consideration for the goods or services supplied. In the case of a consultant, the fee for the job is in effect a daily rate for the job plus costs.