VAT – common problem areas and an update on recent developments 24 February 2012 MemNet Membership Excellence Conference.

VAT – common problem areas and an update on recent developments

24 February 2012

MemNet Membership Excellence Conference

What we are going to cover?

Common problem areas

• Liability of supplies

• Partial exemption

– standard method

– de-minimis input VAT

– annual adjustment

– special methods

• Grant funding

• Business and non-business apportionment

What we are going to cover?

• Subscriptions

• Single/multiple supplies

• Place of supply rules

• VAT exemptions

Recent developments

• Penalty regime

• Cost sharing exemption

Questions and answers

Liability of supply

Supply

Outside the scope of VAT

ExemptTaxable

StandardRate20%

Lower Rate 5%

Zero Rate0%

Schedule 9 VATA 1994

Schedule 8 VATA 1994

Method of determining liability

1. Schedule 8 Zero rated

2. Schedule 9 Exempt

3. Lower Rate Specific

4. Outside the scope Specific

5. Standard rated

Zero rating takes priority over exemption

Exemptions

Schedule 9, VATA 1994 provides a list of exempt items:

Group 1 Land

Group 2 Insurance

Group 5 Finance

Group 7 Health and welfare

Group 9 Trade unions and professional bodies

Partial exemption - overview

XYZ is partially exempt as some of its turnover is standard rated and some is exempt.

Input Tax

Inputs are recoverable to the extent that they relate to a taxable supply (sale).

Need to apportion residual input tax of £25,000 between taxable and exempt supplies to determine recoverability.

£15,000 £25,000

?

£60,000

Taxable Turnover£100,000

Exempt Turnover£398,000

Partial exemption – standard method

Input Tax

The standard method of apportionment is:

Taxable supplies (excluding VAT)

Total supplies (excluding VAT)

This fraction should be expressed as a % and rounded up to the next whole number.

The percentage should then be applied to the residual input VAT.

When calculating this fraction you should exclude supplies of land, capital goods or self supplies. You should aim to have a fraction reflecting normal trading activities and anything strange should be excluded.

Taxable Turnover£100,000

Exempt Turnover£398,000

£15,000 £60,000£25,000

Partial exemption – standard method

Input Tax

For example

100,000 x 100 = 21%

100,000 + 398,000

Round up from

20.08%

Taxable Turnover£100,000

Exempt Turnover£398,000

£15,000 £60,000£25,000

Partial exemption – standard method

Input Tax

The inputs that relate to taxable supplies are recoverable.

The inputs that relate to exempt supplies are irrecoverable.

Taxable Turnover£100,000

Exempt Turnover£398,000

£15,000 £60,000£25,000

21% 79%

= £5,250 = £19,750

Partial exemption – de-minimis input VAT

It is possible to reclaim the input VAT relating to exempt supplies if the amounts involved are below a certain limit.

To be de-minimis the total exempt input tax must be less than or equal to:

• £625 per month on average, and

• 50% of total input tax.

Must be

both!

Partial exemption – annual adjustment

• Partial exemption calculations are performed every quarter

– input tax is therefore reclaimed on a quarterly basis

• These calculations are not final

• At the end of the VAT year the membership organisation must perform an annual calculation using annual supplies and annual input tax figures

– the de-minimis is then applied on an annual basis

• The membership organisation should calculate the correct reclaim for the year based on these figures – this will then be compared to the quarterly reclaims and any difference is

known as the annual adjustment

Partial exemption – special methods

Standard method applies by default.

Membership organisation can agree a special method with Customs.

Methods can be based on:

– number of transactions

– floor area

– staff numbers

– inputs

– time

Once a special method has been agreed with Customs, the membership organisation must apply the method until both parties agree it is no longer appropriate.

Approval or direction of special methods must be in writing.

Fairer apportionment

of residual VAT

Other problem areas

• Grant funding

• Business and non-business apportionment

• Subscriptions

– voluntary payments or donations

– subscriptions which include a donation

– subscriptions from overseas members

• Transactions with more than one element

– single/multiple supplies

Other problem areas (continued)

• Property issues

• Place of supply rules

• VAT exemptions:

– referable to the aims

– British Association of Leisure Parks, Piers & Attractions Ltd

– right of admission

– not available where a payment other than a membership subscription

– supplies to non-members

Recent developments – Penalty regime

• Single regime for all taxes

• Compliance spectrum “innocent to guilty”

• Penalty system based on “behaviour”

Recent developments - Penalty regime

• 4 types of penalties:

– “careless” inaccuracy 30%

– “deliberate but not concealed” inaccuracy 70%

– “deliberate and concealed” inaccuracy 100%

– neglect penalty 30%

• Potential lost revenue

Recent developments - Penalty regime

• More than one inaccuracy

• Offset over-declarations/under-declarations

• Mitigation “reduction for disclosure”

– careless – up to zero penalty

– deliberate but not concealed – minimum 20% penalty

– deliberate and concealed – minimum 30% penalty

• Error correction notifications (voluntary disclosures)

– lower than £10,000

– between £10,000 and £50,000 but does not exceed 1% of box 6

Recent developments - Cost sharing exemption

• EU law since1977

• Not adopted in the UK as previously perceived to be “too difficult”, now pressure from the EU to adopt

• Economy of scale and “staff costs”

• Cost Sharing Group (CSG):

– SPV with no direct control

• Services “directly necessary” for exempt/non-business activity

• Minimum level of exempt/non-business activity

• 2012

Questions and answers

Bob JonesIndirect tax partner

DDI: 020 7516 2295Email: [email protected]

Luigi LungarellaIndirect tax managerDDI: 020 7516 2228

Email: [email protected]

Questions to consider

• Is your organisation partially exempt?

– If so is there an approved partial exemption special method?

– If so, when was it last updated?

• Does your organisation receive grant income or is it under contract to national/local government organisations?

– If so have you considered the VAT implications?

• Do you review your VAT accounting procedures on a regular basis to ensure full compliance in respect of the penalty regime?

This seminar and the accompanying handouts cover topics only in general terms and are intended to give a wide audience an outline understanding of issues relating to accounting applicable to entities in general, and therefore cannot be relied upon to cover specific situations; applications of the principles would depend on the particular circumstances involved. Furthermore, responses given in the seminar to questions are only based on an outline understanding of the facts and circumstances of the cases and therefore do not form an appropriate substitute for considered specific advice tailored to your circumstances. We recommend that you obtain professional advice before acting, or refraining from acting, on any of the contents. We would be pleased to advise you on the application of the principles demonstrated at the seminar, or on any other matters, to your specific circumstances, but in the absence of such specific advice, we cannot be responsible or held liable.

© Littlejohn