Paying too much VAT on vehicle fuel?

Car fuel rules


 Although our VAT rules are largely set by Europe, HMRC can modify them by a derogation if they get EU permission first. One derogation relates to car and other fuel paid for by businesses. However, it seems HMRC exceeded the terms of the permission they obtained from the EU.

Private use

If your business pays for fuel some of which is used for non-business purposes eg an employee's travel from home to work, EU rules say this is a supply of goods upon which VAT is due. Identifying the cost of non-business fuel would mean keeping a log of all private journeys.  To avoid this fiddly record-breaking HMRC's derogation allows your business to pay a road fuel scale charge (RFSC)  instead to cover the private use. (The present rate and how they are calculated can be found here .) 

Income Tax

Many businesses ask employees to reimburse the cost of fuel used privately to avoid a benefits-in-kind charge to income tax or national insurance. To do this workers need to keep a record of all their private mileage - in effect, they are folloeing the EU's rules on car fuel. 

However, HMRC still expect the business to pay VAT according to RFSC which in most cases is way more than would be due according to the worker's personal mileage record.

TIP

HMRC now admit they got it wrong and here workers reimburse the cost of private fuel, you can in future account for VAT on this amount not RFSC. Even better HMRC also say you can reclaim VAT for previous years but is vague as to how far back you can claim. He says it is four years but I think it may be further.

Summary 

You no longer have to pay VAT based on HMRC's fuel scale charge where your employees reimburse you for the cost of private mileage. If it is cheaper, you can pay VAT on the amount reimbursed instead.

Make the pub my home!

Recent months have brought enquiries from people buying pubs,  to convert for private use as their main dwelling, or to use for a mixture of business and private purposes. 


I thought it useful to summarise the main VAT issues that arise for those investing in properties to convert into your own home. 


This article isn’t for those buying properties for business purposes, such as buying to let, though some of the issues mentioned may apply. 


It’s for those of you buying such properties for personal use. 


 Although this article focuses on buying a pub, the principles apply to the purchase of any type of commercial property you intend to using as a dwelling.   The information given is for general information purposes. 


Whilst your own situation may be similar to the scenarios below, I recommend  you take proper VAT advice, whether from myself or another VAT adviser, before investing your hard earned money. 


It is particularly important to do this if the vendor has told you that the building is liable to VAT, as you will have to take certain action before you exchange contracts or make any payment or do anything else that could “legally fix” the price, to avoid paying  VAT. 


For most of us, buying a home is the most costly purchase we make . I have seen situations where people have paid thousands of pounds in fees to solicitors, surveyors and agents and even gone to the expense of paying contractors to carry out conversion or refurbishment work on the property before realising that they haven’t taken into account the VAT on costs. This can mean the difference between having a financially viable and saleable home or a very beautiful but overpriced property.


Please bear in mind: no matter how good your solicitor, or experienced your building contractor and how well the property agent knows the local market , none of them will be able to advise you properly on the VAT implications of your proposed purchase.


Purchasing the property As private individuals, most of us will have purchased our homes free of VAT, because the VAT legislation either exempts or zero rates the sale of dwellings. This means that most of you won’t have come across the concept of paying VAT on property. This is in keeping with EC VAT principles that the supply of homes for private individuals should be free of VAT. 


On the other hand, most new commercial properties are liable to VAT and owners of older commercial properties can “opt to tax” their properties, a procedure which means that they normally have to charge VAT on rent or sale proceeds.


Most homebuyers will be surprised if told that the vendor has opted to tax the property and will be charging VAT on the selling price, but it’s not necessarily a problem as there is a procedure that enables you to (legally!) avoid paying the VAT.


Furthermore, even if the vendor has opted to tax the property, VAT can only be charged on that part of the property used for commercial purposes. So, in the case of a pub or similar property,  VAT should never be charged on any existing dwellings, such as a self-contained flat. Vendors should apportion the selling price between the commercial part and any dwellings, so that they only charge VAT on the commercial property. 


Using the certificates You would only be charged VAT if you purchase an existing commercial property or part of a commercial property – such as a pub - for use as or conversion into your home. 


However, it is possible to prevent the vendor from charging VAT by issuing a certificate to him confirming you intend using the property as a dwelling. As long as the vendor receives the certificate before the price for the property is legally fixed (see below), he must sell the property to you free of VAT. 


You can find guidance about the use of such certificates in HMRC's VAT notice 742a: Opting to tax land and buildings which is available here  . 


Section 3 of the notice explains when such certificates can be issued. Different certificates apply to situations when properties are to be used/converted as dwellings, or for certain other residential or charitable purposes .


The certificate applicable for conversions into dwellings is VAT 1614D which can be downloaded here  . 


These certificates must be given to the vendor before you legally fix the price of the property. This is normally the earlier of the dates on which contracts are exchanged and/or any payment is made to the vendor. Most solicitors are good at ensuring that these certificates are in place when required, but it is your own investment so check up on the rules yourself and make sure you have the right certificate ready to provide to the vendor at the right time.


What if you're buying at auction? Normally, buying at auction entails making some payment on the day and signing an agreement to pay the bid price. So if you're intending to bid, you should contact the vendor or auction house before the auction to see whether they'll accept a certificate in advance, or alternatively, how this would be handled on the day itself. 


Most commercial property vendors, especially the larger breweries, are familiar with the certificates and will normally have a procedure set up to deal with such situations. 


The key with any tax issue is to make sure you're prepared well in advance so that you’re not taken by surprise if the subject of VAT arises. So if you're tempted by the idea of buying a pub or other commercial property to convert to a dwelling, whether for yourself or to sell, make sure that you prepare in advance by checking up on the VAT rules and making sure that your solicitor and agent are familiar with the rules. 


What about VAT on the conversion costs? The other major VAT issue is the VAT cost of converting any such property. 


Most construction work on existing buildings is liable to VAT at 20%. 


However certain conversion work is liable to VAT at the reduced rate of 5% where it relates to the first time conversion into a dwelling or a change to the number of dwellings in a property. The information relating to this subject is included in HMRC’s somewhat lengthy VAT Notice 708: Buildings and Construction, section 7 found here  .  


The VAT liability of construction work is very complex and there are many different rules to consider. For example, while certain services may be eligible for the reduced rate, goods and materials supplied in connection with those services might not qualify for the reduced rate. 


Also, if you purchase goods separately, and engage a contractor to install those goods, you have to pay 20% VAT on the purchase of the goods, even if the services of installation are liable to the 5% rate. 


So it’s important to read the VAT liability rules to make sure that you're taking full advantage of the reduced rate of VAT. The rules are quite complicated and a number of different conditions have to be fulfilled before any of the conversion work will qualify for the reduced rate. 


Many building contractors are experienced at dealing with the VAT rules and will be able to work with you to identify those parts of the conversion work that are eligible for the reduced rate. 


If the contractor charges at the lower rate for work that HMRC think is liable to the standard rate, the contractor is ultimately liable to pay the difference to HMRC, not the customer. 


What if I don’t get planning permission for conversion to dwellings or have to let the property before I move in? As mentioned earlier, the VAT issues relating to property are complicated and it’s not possible to cover every situation here. Each scenario raises its own issues and has to be considered in the context of the business use of the property. In these situations, I’d strongly recommend you take proper VAT advice, preferably well in before purchasing the property. 


Is there a way to claim VAT on the costs of conversion from HMRC? In certain very limited circumstances, it is possible to arrange the property transactions so that you can recover the VAT on the conversion costs. 


However, this involves selling the property after its conversion to a separate legal entity, for example a limited company and therefore treating the project as a business for VAT purposes. 


It sounds like a good idea.  Before you get carried away by the possibility of claiming back the VAT on the conversion costs, you should consider other issues that apply to businesses. These include the costs of setting up a business, whether a limited company or partnership, the costs of preparing and submitting accounts and tax returns for that business and, of course, any tax the business might have to pay on its profit. 


You can easily see how the potential VAT benefit could be wiped out. In the event that you incur massive amounts of VAT on your conversion, or if you want to convert commercial properties into dwellings as a business activity, it's certainly worth considering this option. But I definitely recommend taking proper professional advice from an accountant about the other tax and accounting issues that would be involved and preferably before you have purchased the property in the first place.

Claiming bad debt relief

If your customer doesn't pay up, you can claim the unpaid VAT from HMRC as bad debt relief (BDR) . What must you get right to ensure you get maximum relief?


When can you claim? You can claim BDR for VAT you have charged your customers if it remains  unpaid six months after the due date. You must make the claim within 4 1/2 years of issuing the invoice.


How do you claim? You will need to keep a "bad debts" account within your book-keeping system. You make the claim by adding the refund to the input tax claimed in Box 4 of the VAT return.


You do not reduce the output tax due in Box 1.


Tip Although the debt has been written off in the BDR account, this is only for VAT purposes. You can still continue to pursue the debt in full.


How much can you claim? You can claim the output tax originally charged. It's irrelevant if the VAT rate has subsequently changed. Similarly, you pay VAT at the original rate, not the rate applicable when payment is received. 


If your customer has made payments on account, you can only claim for the VAT included in the outstanding balance.


The amount of bad debt relief is normally the VAT fraction of the outstanding amount. However, the Upper Tribunal has held that in very limited circumstances relief may be given for the entire unpaid sum.

The appellant was a firm of solicitors. It supplied services in connection with insurance claims. In compliance with an agreement between HMRC and the insurance industry, it issued VAT-only invoices to VAT-registered insured parties (the main charge being invoiced to the insurer). The Upper Tribunal decided that any amount of such VAT-only invoices which remained unpaid after six months was available in full for bad debt relief. (Simpson and Marwick v HMRC [2011] UKUT 498 (TCC)) - viewable here .

Changes to EU sales list reporting

Your VAT return has to include figures for EU purchases and sales. You may also have to Provide EC sales lists or Intrastat reports. When do these apply? How are they changing?


EU VAT statistics  Vat returns provide important statistics regarding European trade as well telling HMRC how much VAT you owe. If you buy or sell goods to or from a EU country, the value of these transactions has to be entered in boxes 8 and 9 of the return. What happens next?


EC sales list and Intrastat If HMRC find entries in either box 8 or 9 HMRC will send you an EC sales list form. Unless the value of your EC trade falls below certain limits, you must provide details of the transactions for goods and services on the form.


European Sales Lists If your business only makes a low level of supply of goods to VAT-registered customers in another EU country you don’t usually need to fill in the full European Sales List (ESL). Instead there’s a simplified version which you can apply to HMRC to use where:

• the value of your total taxable turnover in a year isn’t more than the VAT registration threshold plus £25,500.
• your supplies to customers in other EU countries aren’t more than £11,000 a year.
• your sales don’t include New Means of Transport (see here  for what counts as a new means of transport).

If HMRC agrees that you can use the simplified ESL it means that you:

• never need to fill in the actual value of your supplies to each customer - instead you enter a nominal value of £1
• only have to complete the form once a year - you agree with HMRC when you’re going to send it in.

However, if the value of EU goods including shipping costs (but not services) bought or sold  exceeds:

• £600,000 for purchases, HMRC call these arrivals; and
• £250,000 for sales, also called despatches,

a Supplementary Declaration (SD) is required.

This is known as Intrastat (more details can be found here .)


Awkward thresholds Intrastat has its own method of calculating thresholds. They are set for a calendar year. So, for example, if if your EU sales or purchases exceed the corresponding limit for the first time in November 2012,    you will have to make an Intrastat declarations for November, for the rest of 2012 and the whole of 2013. However, if your EU turnover in 2013 is less tjan the thresholds Intrastat will not apply to 2014 unles, or until, the month in which either threshold is breached.


TRAP HMRC takes Intrastat very seriously. Errors in the reports or failure to render  them can be a criminal offence carrying a maximum fine of £2,500 each although HMRC only impose this level of fine in extreme cases of multiple failure. The more usual level of fine is £250.


Intrastat changes HMRC have recently updated their guidance on Intrastat - Notice 60 (the latest version can be found here ). 


It includes details of  two important changes:

• From April 2012 all Intrastat reports must be submitted online. Paper version will no longer be accepted.

The deadline for submitting the reports is to be brought forward. Instead of the end of the month following the period covered, it will be the 21st of the month following the period covered.


TIP You don't have to use HMRC's forms for the reports. HMRC will accept CSV reports, which most computerised accounting systems can generate. This can save a lot of time.

A comma-separated values (CSV) file stores data (numbers and text) in plain-text form.

Many accounting and bookkeeping programs allow data stored to be “exported” to a spreadsheet program, such as Excel, in CSV format so that it can be viewed by others who don’t have the same accounting  software as you.

HMRC will accept Intrastat data in CSV file format. For details of the data required in CSV format visit:

http://www.businesslink.gov.uk/bdotg/action/detail?itemId=1081739688&type=RESOURCES

VAT fraud amnesty

From 31 January 2012 HMRC will offer a new Contractual Disclosure Facility (CDF), under which those suspected of fraud will be able to avoid criminal investigation by taking advantage of the facility.

Under the CDF HMRC will contact a taxpayer, in writing, to inform him that he is suspected of serious tax fraud.


 HMRC will offer the taxpayer the opportunity to enter into a contract to disclose that fraud within 60 days. In return, HMRC will agree not to criminally investigate, removing the risk of prosecution by HMRC. The investigation will then be carried out usingcivil powers, with a view to a civil settlement for tax, interest and a financial penalty. Those who do not respond positively to HMRC's offer will face a full investigation by HMRC, possibly a criminal investigation with a view to prosecution. Moreover, HMRC say that anyone who signs the contract but does not go on to admit and disclose fraud will also face the possibility of a criminal investigation.

In addition, taxpayers who are not under investigation but who want to admit to tax fraud may fill out a form to voluntarily request that HMRC consider their suitability for a CDF arrangement. In these circumstances HMRC will retain discretion to decide which cases are dealt with civilly, and which are investigated with a view to criminal prosecution.

Reclaim VAT on your home/office conversion

With more people now working from home, the question of what can be done with the VAT on the conversion costs is a common issue. What are  the rules, and how can you go about reclaiming that VAT?


Example The Managing Director of a company, Mr P, works from home a lot, and is considering having his loft converted into an office to give him more room. The office will contain the usual computers, desks, etc., and be decorated and furnished in line with the proposed use. The full cost of the building work, decorations and equipment will come to £20,000 plus VAT which the company will pay because it will all be used for business purposes. The VAT on the work and equipment will come to £3,000, and Mr P wonders if the company can recover this.


Classic solution  The normal answer is that the company can recover the VAT on the equipment, as they own it, and it is for business use. However, the VAT on the building work and decorations cannot be recovered because, prima facie, it is specifically blocked by the VAT legislation. (VAT 1994 s 24 (3) and (7)). This states,


“where a company purchases, acquires, or imports goods or services which are used or to be used in connection with the provision of domestic accommodation by the company for a director, those goods or services are not treated as used or to be used for the company's business, and any input VAT is not recoverable”.


Tip There is a little-known (even to HMRC) concession allowing the recovery of input VAT in certain circumstances. HMRC’s published and internal guidance states,


“Where a domestic room or rooms is put to business use, you may agree to an apportionment using an objective test to the extent to which the room is put to business use” (HMRC Manual V1-13, Section 14, para 14.7, and VAT Notice 700, Section 33,)


This means that if Mr P can show he intends using the loft conversion for entirely business purposes, then the company will be able to recover the VAT on the building work and materials. If he can show that the carpets and decorations are for a business purpose as well, than the company will be able to claim that VAT back too. The staff dealing with written VAT enquiries are more experienced in this area than normal VAT Officers, and have more time to consider the matter without the pressure to make a quick assessment. If you make a reasonable case, you should have no trouble getting the VAT back.


The same principle would also apply to extensions, garage conversions, and even using a shed at the bottom of the garden as your office. Provided there is genuine business use, and the purchases and decorations are in line with the proposed use, the VAT should be recoverable by the company.


[ On a more general tax note, the effect of exclusive business use of part of one's main residence on eligibility for CGT Principal Private Residence Relief should be considered, as well as home insurance, and possibly even council tax and business rates]

A new way to contact HMRC

At last HMRC have agreed to accept emails but only for VAT queries. What are the limitations and benefits of using this service?


Good Communication The government continues promoting its online services but until now HMRC has resisted pressure to use email as a means of communication allegedly for security reasons.


Addressee only If HMRC send you a letter it usually contains personal or confidential information. As the envelope is addressed to the business owner or individual concerned HMRC can be reasonably sure it will be opened by the addressee.


Similarly, HMRC's security checks when you phone them ensure they do not disclose your personal details unwittingly to a third party.


Email addresses, however, are not so secure and can be shared or even accessed by others. HMRC have to find ways round this.


Security 1) HMRC have restricted email enquiries to VAT only, as thrse are least likely to contain personal information.


2) Rather than have a general email address, HMRC have set up a secure online email service accessible through the HMRC website only here .


When you use this service, the response may not be in the same format. HMRC say where they will reply contains confidential information, they will write by post instead. 


Advantages  1) You will have immediate confirmation of receipt of your communication.


2) The stencil Emails HMRC provide will help you frame your question by prompting you for relevant information.


However, your enquiry is limited to a maximum of 2,000 characters and there is no easy way of keeping an electronic copy.


TIP Use a PDF printer to keep an electronic copy. There are plenyy of free ones downloadable from the web. Try here .

Chair Rental Challenge

Many salon owners overhearing golf club gossip think if they rent a chair to an operative the rental is exempt from VAT. This is NOT so, but some VAT savings can be obtained. How?


Chair rental Basically the idea is to make your operatives self-employed and then rent them a chair in your establishment. Rents are exempt from VAT and - hey presto! - there's no VAT to pay on the rental income. The proprietor's taxable turnover falls below the de-registration threshold (currently  £73,000) so they can de-register and save on their own salon earnings as well. Sounds too good to be true.


WARNING It is! This scheme is two decades out of date. The reality is the operatives are paying for a range of services they use in the establishment all of which are standard-rated. The bad news is that you have to account for output tax on the income from your operatives.


The nature of this supply has given rise to numerous tribunal decisions culminating in a set of guidelines issued as long ago as 1992 between Customs and Excise (as it was then called) and the National Hairdressers' Federation which treats this as a standard-rated supply to carry on business in the establishment, including use of the chair and access to other facilities rather than an exempt licence to occupy.


Perm solution In a February 2011 case (Glen-Jones t/a Sophisticuts which can be read here) Mrs Glen-Jones argued that chair rental supplies made to independent operatives were exempt supplies of a licence to occupy land. 


HMRC countered by arguing it was a supply of hairdresser's facilities taxable at the standard rate.


The First Tier Tribunal found the supply to be essentially a taxable supply of hairdressing services and the non-exclusive right of an operative to occupy the basement was merely a minor element of that supply.


Are the operatives self-employed?  In a recent case the First Tier Tribunal commented that had the tenancy agreement been correctly drafted, it could have seen two supplies - a licence to occupy land and a supply of supporting services. VAT exemption would have applied to the licence to occupy land if the plan attached to the agreement had clearly identified the occupied area AND the references to the ancillary services had formed part of a separate VATable service contract.


TIP Separate the licence to occupy land from from the supply of any other services. Draw up proper legal documents identifying the area each operative occupies on a plan. Have a fixed rent, not one based on a share of each operative's takings. 

Get the VAT back on clothing

So you have to spend heavily on staff clothing. Golf club gossip says you can claim the VAT back. Is this so? What conditions apply to a successful claim?


Business expense HMRC says VAT incurred on uniforms or protective clothing can be claimed as input tax because it is a business expense.


The wig, gown and bands a barrister is required to wear in court are considered to be a uniform and the VAT incurred is therefore claimable as input tax.


Proving it's a business expense This can be tricky. A VAT Tribunal dismissed the taxpayer's argument that an art consultant required a high dress standard "to create a professional image."


The provision of clothing is normally a personal responsibility. A claim that business reasons require a high standard of dress does not justify allowing the VAT incurred to be claimed as input tax.


In another VAT Tribunal case it was stated "to dress well in order to conform with the standards of a particular lifestyle" was not a business expense.


Rock on! A classic case involved a musician who claimed the VAT back on a wig! HMRC paid him a visit (enough to raise anybody's follicles) and disallowed the VAT. He claimed the wig was needed to maintain his image as a musician. Photographs, posters, record and cd covers, press releases, and artwork (on which his business relied) would all need reprinting if his appearance changed.


He appealed to the VAT Tribunal who decided the wig had indeed been purchased for the purpose of his business and he could reclaim the VAT.


The  VAT on clothing used solely as stage costumes is reclaimable. Ordinary clothing worn by an entertainer or celebrity will usually be worn privately as well in which case the VAT is NOT reclaimable.


Treat it as a gift Use the business gift rules to claim back the VAT on "perk" clothing (neither uniforms nor protective clothing). Perks are an accepted business expense so if you provide your staff with clothing the VAT incurred is a business expense. However, if the clothes cost more than £50 in any twelve-month period, you will have to account for output VAT on their value. Make sure the clothes are worth less than £50 excluding VAT. 

Avoiding registration by splitting

So your business is growing. You want to avoid having to register for VAT. The golf club gossip is that you can avoid registration and save VAT by splitting your business. Is this true?


Close to VAT threshold A common problem for a small business dealing directly with the public and approaching the VAT registration threshold (currently £73,000), is how can they pass on the 20% VAT charge without losing business or reducing profit by absorbing the additional cost themselves.


Example V Gogh is a one man band painter and decorator dealing largely with private individuals. Lately, he's also been winning some commercial contracts and this pushes him close to the registration threshold. If he registers, he'll have to put up his prices to domestic customers by 20% or absorb it. Can he avoid VAT registration?


Split the business He could split the business in two, one part dealing with commercial contracts and the other with work from private individuals. How can he achieve this without upsetting HMRC?


TIP If he's going to split the business, it must be real and not just on paper. He needs to set up a limited company or partnership to deal with the commercial contracts while continuing to run the domestic side as a sole proprietor. Each side - commercial and domestic - has its own bank account, accounting records and purchases are all made through the correct legal entity  and NOT by having a common stock for both businesses.


What can HMRC do? If he does all this and continues doing it, HMRC can only issue him with a direction ( a disaggregation direction) to treat the businesses as one from a current date. 


TIP If he splits the business properly. he can still save all the VAT up to the time HMRC issue him with a direction.


Beating HMRC If he can show HMRC the two businesses are not economically connected, he may avoid registration altogether (assuming both businesses remain below the registration threshold). For example Wilf, a sole proprietor runs a gas fitting business and sells used cars on the side. The combined turnover of both businesses counts towards his VAT registration threshold. However, if he puts one into a limited company or partnership the turnover of each business will be looked at separately and HMRC cannot direct them to be treated as one.


WARNING If Wilf gets it wrong....doesn't have separate bank accounts etc, HMRC will say there never were two business and compulsorily register him from a much earlier date. Wilf will then have to account for all VAT on all the turnover of both businesses from the day their combined turnover exceeded the VAT registration threshold, plus penalties and interest.


TIP This type of VAT planning is common in the licensed trade where, typically, the wife runs the food side as a separate, unregistered business. If you are doing something similar (sharing premises) make sure you charge rent   to the unregistered business in exactly the same way as you would to a third party.

Channel Islands loophole closes

HMRC withdraws the Low Value Consignment Relief (LVCR) from April 1, 2012. What you need to know.


VAT-free Under LVCR goods having a value of less than £15 can be imported free of Vat. Many high street retailers have exploited this concession to set up operations (typically in the Channel Islands) to sell mail order Cds, Dvds, books and small items. Although this is good for consumers, it badly hit small independent traders unable to compete with the big boys.


Better for all? Under pressure from small business associations HMRC hs announced that from April 1, 2012 LVCR will no longer be available to goods imported into the UK from the Channel Islands. The government state this will bring increased fairness to businesses, benefit the economy and protect millions in tax revenue. Let's see what happens to the price of Cds etc!


Stage Change At first the government reduced the LVCR threshold from £18 to £15 with effect from November1, 2011 and this applies until April 1, 2012.


VAT TIP The change to LVCR does not affect the existing import reliefs for gifts from outside the EU, including the Channel Islands, which apply to non-commercial consignments eg gifts sent to family members or friends.