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Businesses normally do care when filing their VAT returns but still there could be an error when filing a VAT return. Where an error on a past VAT return is uncovered, businesses have a duty to correct the error as soon as possible. As a general rule, any necessary adjustment can be made on a current VAT return. However, in order to be able to do so, there are three important conditions that must be met:

• The error must be below the reporting threshold.
• The error must not have been deliberate.
• The error can only relate to an accounting period that ended less than 4 years ago.

https://www.gov.uk/vat-corrections

Under the reporting threshold rule, businesses can make an adjustment on their next VAT return if the net value of the errors is £10,000 or less. The threshold is further increased if the net value of errors found on previous returns is between £10,000 and £50,000 but does not exceed 1% of the box 6 (net outputs) VAT return declaration figure for the return period in which the errors are discovered.

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VAT errors of a net value that exceed the limits for correction on a current return or that were deliberate should be notified to HMRC using form VAT 652 (or providing the same information in letter format) and should be submitted to HMRC’s VAT Error Correction team.

Inaccuracy penalties:

• The inaccuracy penalty, applies where there is an understatement of a VAT liability (or a false or inflated repayment claim), and
• The inaccuracy must be careless, deliberate or deliberate and concealed
• There is a further penalty if HMRC issues a VAT assessment which understates the tax due, and the taxpayer does not take reasonable steps to notify HMRC of the error within 30 days.

The penalty does not apply where the taxpayer has, in the view of HMRC, taken reasonable care in filing returns but makes an innocent mistake. Where it does apply, it is calculated as a percentage of ‘potential lost revenue’ as follows:

• Lack of reasonable care errors – up to 30% of ‘potential lost revenue’
• Deliberate errors – between 20% and 70% of ‘potential lost revenue’
• Deliberate and concealed errors – between 30% and 100% of ‘potential lost revenue’

HMRC may also charge penalties and interest if an error is due to careless or dishonest behaviour.

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The coronavirus VAT payment holiday gave businesses the chance to defer the payment of any deferred VAT or VAT liabilities between 20 March 2020 and 30 June 2020. The option for businesses to defer their VAT payments ended on 30 June 2020.

https://www.gov.uk/guidance/deferral-of-vat-payments-due-to-coronavirus-covid-19

There are two options available for repaying this VAT.

The first option is to pay the deferred VAT in full on or before 31 March 2021. No interest or penalties will accrue on deferred payments that are paid by the new due date and there is no requirement to contact HMRC.

The second option, added by the Chancellor when delivering his Winter Economy Plan, is to further defer the amount of VAT due. The new VAT deferral payment scheme will allow businesses the option to pay the deferred VAT in smaller payments over a longer period. Instead of having to repay the full amount by 31 March 2021, businesses will now be able to make smaller interest-free payments during the 2021-22 financial year and pay the VAT due by 31 March 2022.

Businesses will need to opt-in to the new payment scheme. HMRC has published updated guidance confirming that the opt in process will be available in early 2021. Businesses will also need to opt in themselves and will not be able to use an agent to do this for you.

The new payment scheme will allow businesses to pay their deferred VAT in instalments without adding interest and select the number of instalments from 2 to 11 equal monthly payments. Businesses must meet certain conditions to use the scheme including being up to date with their VAT returns.

Please visit our VAT services page.

If you need any further information, feel free to contact us.

If a business is registered for VAT it charges VAT on the goods it sells in the course of its trade. This rule applies not only products and services but anything the business sells. However, there’s a rule which overrides the normal VAT treatment that is when a business is sold as going concern.

Where a business is sold as a going concern, the transaction is outside the scope of VAT. That means VAT isn’t chargeable, even on items on which you would normally charge it, e.g. stock. Applying the TOGC rules correctly is very important for the purchaser.

The transfer of a business as a going concern (TOGC) rules concern the VAT liability on the sale of a business. Normally the sale of the assets of a VAT registered or VAT registerable business will be subject to VAT at the appropriate rate.

https://www.gov.uk/hmrc-internal-manuals/vat-transfer-of-a-going-concern

Where the sale of a business includes assets and meets certain conditions the sale will be categorised as a TOGC. A TOGC is defined as ‘neither a supply of goods nor a supply of services’ and is therefore outside the scope of VAT. Under the TOGC rules no VAT would be chargeable on a qualifying sale.

Have a look at our VAT services page.

All the following conditions are necessary for the TOGC rules to apply:

• The assets must be sold as part of a ‘business’ as a ‘going concern’. In essence, the business must be operating as such and not just an ‘inert aggregation of assets’.
• The purchaser intends to use the assets to carry on the same kind of business as the seller.
• Where the seller is a taxable person, the purchaser must be a taxable person already or become one as the result of the transfer.
• Where only part of a business is sold it must be capable of separate operation.
• There must not be a series of immediately consecutive transfers.
• There are further conditions in relation to transactions involving land.

The TOGC rules can be complex and both the vendor and purchaser of a business must ensure that the rules are properly followed. The TOGC rules are also mandatory which means that it is imperative to establish from the outset whether a sale is or is not a TOGC. For example, if VAT is charged in error, the buyer has no legal right to recover it from HMRC and would have to seek to recover this ‘VAT’ from the seller.

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The Job retention scheme is ending on 31 October 2020 and has been replaced by another support scheme called Job Support Scheme (JSS). This scheme is designed to help businesses and employees to deal with fresh spike of the virus and a winter of uncertainty.

The JSS is now split into two parts, the JSS Open for businesses which remain open and the JSS Closed for businesses that are forced to close because of local or national lockdown measures. The two parts of the scheme will run in parallel for 6 months until 30 April 2021.

The provisions of the JSS Closed are more generous and reflect the fact that the employee is unable to work. This would mean they are under Tier 3 restrictions in England or similar lockdown regulations in Scotland, Wales or Northern Ireland.

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Under the specific terms of the JSS Closed, the government will pay two-thirds (67%) of employees’ salaries, up to a maximum of £2,083.33 a month. Employees must be off work for at least 7 consecutive days to benefit from the expanded scheme. Businesses will only be able to use the JSS Closed whilst they are subject to specific lockdown measures that require the closure of their business premises.

Employers will have the discretion to top-up the payments if they so wish. This will help protect employee incomes, limit unemployment, and retain employer-employee matches so that these premises are able to reopen as quickly as possible when circumstances allow.

In line with the JSS Open, the grant will be paid in arrears, reimbursing the employer for the government’s contribution. An employer can claim the JSS Open and JSS Closed at the same time for different employees, for example a retailer with some premises that remain open and some that are forced to close.

Affected employees under the JSS Closed may also be entitled to additional financial support, including Universal Credit.

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Cash Accounting Scheme generally, VAT is payable on sales irrespective of the customer has paid and can lead to a claim for Bad Debt Relief. There VAT schemes available as below:

• Flat rate scheme
• Annual accounting VAT scheme
• Cash accounting scheme

In this article we will explain some salient features of the Cash Accounting Scheme as follows:

Under the Cash Accounting Scheme, VAT does not need to be paid over until the customer has paid. With cash accounting, you account for VAT when you’re paid as opposed to the date you invoice a customer.

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A business can enter this scheme provided their estimated VAT taxable turnover for the next VAT year is not more than £1.35 million in the next 12 months. The business can continue to use the scheme until their VAT taxable turnover exceeds £1.6 million.

Businesses can’t use the Flat Rate Scheme together with the (CAS). However, the Flat Rate Scheme has its own cash based method for calculating turnover. Businesses are also ineligible to use the scheme if they are behind with their VAT payments, late filing returns or have committed a VAT offence in the last 12 months.

Businesses do not need to complete an application form or advise HMRC to start using the (CAS). They can commence using the Cash Accounting Scheme at the beginning of any VAT period or if they are not already registered for VAT from the day their VAT registration starts.

Businesses can leave the (CAS) voluntarily at the end of any VAT accounting period. They do not need to notify HMRC. They can then re-join the scheme at the beginning of any VAT accounting period, provided they continue to meet the necessary criteria.

If you need further information; feel free to book a free consultation with us.

The businesses which are struggling with their cash flows will happy to know that the deferment of VAT liabilities is now extended. During pandemic the coronavirus VAT payment holiday gave businesses the option to defer their  VAT liabilities arising between 20 March 2020 and 30 June 2020. This option for businesses to deferment of VAT payments ended on 30 June 2020.

In delivering his Winter Economy Plan to Parliament, the Chancellor confirmed that businesses will now have the option to pay back any deferred VAT in smaller payments over a longer period. Instead of having to repay the full amount by 31 March 2021, businesses will now be able to make smaller interest-free payments during the 2021-22 financial year and thus clear the VAT due by 31 March 2022. https://www.gov.uk/guidance/deferral-of-vat-payments-due-to-coronavirus-covid-19

Businesses will need to opt-in to the new scheme and more information on the process is expected to be published over the coming months. Businesses that can pay their deferred VAT can still to do so by 31 March 2021. No interest or penalties will accrue on deferred payments that are paid by the new due date.

If you have cancelled your Direct Debit to HMRC to take advantage of the deferral, you will need to set up a new Direct Debit arrangement in time for the first payment after 30 June.

Payments due after 30 June must be paid in full as normal and you must continue to file your VAT return on time.

The choice to defer VAT payments was optional and businesses could still choose to pay any VAT due as normal. The deferral did not cover payments for VAT MOSS or import VAT. HMRC has continued to process VAT reclaims and refunds as normal during this time.

HMRC has published a new Revenue and Customs Brief on the VAT treatment of early termination fees and similar compensation payments following recent judgments of the Court of Justice of the European Union (CJEU). HMRC has said that this will impact anyone who charges their customers to withdraw from agreements to supply goods or services.

Previous HMRC guidance said when customers are charged to withdraw from agreements to receive goods or services, these charges were not generally for a supply and were outside the scope of VAT.

Following the CJEU judgements, HMRC is of the opinion that these charges are normally considered as being for the supply of goods or services for which the customer has been contracted. Most early termination and cancellation fees are therefore liable for VAT. This is the case even if they are described as compensation or damages.

HMRC guidance on charges described as compensation or early termination fees in a contract, have been changed to make it clear that they are generally liable for VAT. This marks a significant change from HMRC’s previous position that early termination payments described as compensation payments would ordinarily not be subject to VAT.

A business that has failed to account for VAT on such fees should correct the error unless a specific ruling has been obtained from HMRC stating that such fees are outside the scope of VAT.

Value Added Tax

A business that incurs expenditure on taxable and exempt business activities is partial exemption for VAT purposes. This means that the business is required to make an apportionment between the activities using a ‘partial exemption method’ in order to calculate how much input tax is recoverable.

HMRC’s guidance explains that as a VAT-registered business, you can recover the VAT on your purchases which relates to taxable supplies that you make or intend to make. There are some items where input tax recovery is ‘blocked’. Supplies that are made outside the UK that would be taxable if in the UK and certain exempt supplies to non-EU customers also give the right to recover VAT, but there are special rules. In principle, you cannot recover VAT that relates to any exempt supplies, although you may be able to if the VAT is below certain limits.

There are a number of partial exemption methods available. The standard method of recovering any remaining input tax is to apply the ratio of the value of taxable supplies to total supplies, subject to the exclusion of certain items which could prove distortive. The standard method is automatically overridden where it produces a result that differs substantially from one based on the actual use of inputs. It is possible to agree a special method with HMRC.

The VAT incurred on exempt supplies can be recovered subject to two parallel de-minimis limits.

An exemption that applies where a person registered for VALUE-ADDED TAX makes both taxable supplies and exempt supplies as a result of which not all of the INPUT TAX may be recoverable.

HMRC has updated its guidance on the VAT partial exemption treatment relevant to businesses who supply goods by way of hire purchase agreements. A policy paper entitled Revenue and Customs Brief 8 (2020): change to partial exemption VAT treatment was first published on 10 June 2020 and updated on 20 August 2020.

The policy paper was released following the Court of Justice of the European Union (CJEU) judgment C-153/17 Volkswagen Financial Services (UK) Ltd.

HMRC’s view is that a business supplying goods on hire purchase should be allowed input tax recovery on its overheads where the recovery is fair and reasonable. It does not follow that the recovery will simply be fifty-fifty.

In the policy paper, HMRC provides details of its recommended method for an output values-based method of apportionment of VAT incurred on overheads. The method set out is HMRC’s preferred industry method but is not compulsory and businesses can continue to apply any fair and reasonable partial exemption method already agreed with HMRC.

A partial exemption method must produce a result which enables you to recover a proportion of input tax which fairly reflects the extent to which the purchases on which it was incurred are used to make taxable supplies (and other supplies with the right to deduct).

A partial sales and use tax exemption allows certain manufacturers, researchers and developers to pay a lower sales or use tax rate on qualifying equipment purchases and leases. PARTIAL TAX EXEMPTION. LAW CHANGES.