VAT SERVICES
(scotland) Limited
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UK Government Promise
(1973)
“VAT will be a simple tax”
(Anthony Barber
Chancellor of the Exchequer)
The Reality
(since 1973)
“VAT is like a fiscal theme park, in which factual
and legal realities are suspended or inverted”
(Lord Justice Sedley 2001)
The Solution
Promises and reality are often different in Government.
Our mission at VAT Services (Scotland) Ltd is to try to make the reality simple and
understandable for your staff, so that your business or organisation complies with VAT regulations
with as little difficulty as possible. We do this by offering:


  LATEST VAT NEWS

Our July round-up leads off with a summary of the VAT implications of the Chancellor’s Summer Statement, issued by Rishi Sunak on 8 July, in which he attempted to assist the hospitality, tourism and attractions sectors of the economy.

Chancellor’s Summer Statement – 8 July 2020
The Chancellor's Summer Statement has received some mixed reactions. Here we only consider the VAT implications and not those in connection with furlough and other non-VAT items.

Rishi Sunak announced a reduction in the VAT rate from 20% to 5% for supplies related to the hospitality, tourism and attraction sectors. The rate reduction will apply to supplies which include supplies of food and non-alcoholic drinks from restaurants, bars, cafes and similar premises, supplies of accommodation and admission to attractions (theatres, fairs etc). The change will be a temporary measure for the period 15 July 2020 to 12 January 2021. It remains to be seen if businesses will pass on the reduction in the VAT rate to their customers or if prices will remain the same and the businesses will benefit from increased profit margins.

Food and drink supplied by restaurants, bars, cafes and similar qualify for the reduced rate of VAT of 5% for the following (as outlined in HMRC Notice 709/1 – Catering, takeaway food):

  • hot and cold food for consumption on the premises on which they are supplied;
  • hot and cold non-alcoholic beverages for consumption on the premises on which they are supplied;
  • hot takeaway food for consumption off the premises on which they are supplied; and
  • hot takeaway non-alcoholic beverages for consumption off the premises on which they are supplied.

These new regulations may seem beneficial for a cafe but in reality may be awkward for a cafe to implement correctly. For example, where a customer buys the following to take away, the VAT liabilities may appear confusing/complex: a cold sandwich, a hot panini, a can of coke, a coffee, a packet of crisps and a bar of chocolate. The hot items (the panini and the coffee) which would ordinarily be standard rated (VAT at 20%), qualify to be temporarily 5%. The cold sandwich remains zero-rated, but the can of coke, the packet of crisps and the chocolate bar which would ordinarily be standard rated (VAT at 20%) remain standard rated as it is only ‘hot takeaway food and hot non-alcoholic drinks’ that benefit from this temporary 5% rate. This may cause issues for cafes unless they have their tills configured to accurately record the income received.

Not included in HMRC’s updates in connection with drinks is that low/non-alcoholic drinks also qualify for the reduced rate of 5% if the ABV is less than 1.2%. Therefore if you are not certain as to the VAT liability of a supply, we recommend VAT advice is sought to ensure you are complying with new regulations and perhaps not accounting for additional VAT when you are not required to do so.

Supplies of accommodation qualify for the reduced rate of VAT but there is some complexity where:
(a) deposits were received before 15 July 2020 and the stay is between 15 July 2020 and 12 January 2021; and
(b) when deposits are received between these dates and the stay is after 12 January 2021.

It is recommended VAT advice is sought if your business or your client’s business takes deposits from customers. HMRC has updated Notice 709/3 – Hotels and holiday accommodation, to assist businesses in this sector.

HMRC has also confirmed that the hire of motorhomes qualifies for the reduced rate if they are held out as ‘holiday accommodation’, as a motorhome falls within the definition of holiday accommodation within the VAT legislation (VATA 1994, Sch 9, Group 1, Note 13).

Entrance fees to attractions but not sporting events qualify for the temporary reduced rate. More detail is contained in this link to HMRC HERE

Flat Rate Scheme (‘FRS’)
A number of small businesses use the Flat Rate Scheme to calculate and submit their VAT returns. To join the FRS the annual taxable turnover of a business cannot exceed £150,000. The following types of businesses have had their FRS VAT % reduced temporarily for the period 15 July 2020 to 12 January 2021:

  • Catering services (including restaurants, cafes and takeaway) – 4.5% (from 12.5%);
  • Hotel or similar accommodation – 0% (from 10.5%); and
  • Pubs – 1% (from 6.5%).

Tour operators using the Tour Operator Margin Scheme (‘TOMS’)
As the reduced rate of VAT of 5% temporarily applies to the hospitality, holiday accommodation and attraction (cinemas, theatres etc) sectors, HMRC has amended its Notice on TOMS, Notice 709/5. Should your business operate TOMS we recommend this notice is read to ensure you operate your TOMS calculations accurately during the period 15 July 2020 to 12 January 2021.

Retail schemes
Due to the temporary reduced rate of VAT of 5%, catering businesses using retail schemes may have to alter their accounting systems for the period 15 July 2020 to 12 January 2021. If you have a bespoke retail scheme agreement, you should review it and if you think an alteration is needed, contact your large business Customer Compliance Manager, or if you are not a large business customer you should contact This email address is being protected from spambots. You need JavaScript enabled to view it.. In addition, you may wish to look at section 7 of HMRC Notice 727 – Retail Schemes which provides an update on the reduced rate for catering supplies.

‘Eat Out to Help Out’ scheme
The Chancellor in his summer statement also outlined an ‘Eat Out to Help Out’ scheme, this will entitle every diner to a 50% discount of up to £10 per head on their meal, at any participating restaurant, cafe, pub or other eligible food service establishment.

It is not compulsory for businesses to join this scheme and offer this discount. Should a business wish to join the scheme they will require to register to use it. The discount can be used unlimited times and will be valid Monday to Wednesday on any eat-in meal (including any non-alcoholic drinks) for the entire month of August 2020 across the UK. Participating establishments will be fully reimbursed for the 50% discount up to £10 per head.
Although this scheme is not directly VAT related, there is a VAT implication that businesses who operate this scheme require to be aware of. Should a diner spend £20 on food and soft drinks then he will only require to pay £10 to the business and the business will be reimbursed the other £10 from the Government (if the business applies to join the scheme). In these circumstances where the business is reimbursed it needs to account for VAT on £20 and not just the £10 it receives from the diner as the value of the supply made to the diner is £20 (and not £10) and the Government’s contribution is regarded as third party consideration (or part consideration) for the supply and not a discount as such.

VAT Countdown to Leaving the EU – Five months to go and counting…
There are only five months until the start of 2021, the big question which remains unanswered is whether the UK will leave the EU, following the end of the transitional period, with or without a deal. We will continue to cover issues which are likely to affect businesses in the event of us leaving the EU without a deal being struck with our EU counterparts.

We have already prepared articles on the following:

  • Acquisitions/imports and dispatches/exports – see our June 2020 newswire article; and
  • Call-off stock and consignment stock – see our news article of 15 July 2020.

We are proposing to issue update articles as when appropriate. However, if you currently supply goods to businesses or consumers in the EU or acquire goods from the EU we strongly recommend as a matter of urgency you review the supply chain and obtain advice as to how the end of the transition period on 31 December 2020 is going to affect your business.

HMRC extend time period in which businesses have to notify them (HMRC) of their Option to Tax
On 23 June 2020 HMRC extended the time period in which businesses have to notify them of an Option to Tax. Options to Tax usually need to be advised to HMRC within 30 days of a business making the decision to Opt to Tax. However, as a result of Covid-19, HMRC has increased this to 90 days. This extension will apply to all decisions to Opt to Tax taken in the period 15 February to 31 October 2020. HMRC’s update can be accessed HERE

Two new Revenue & Customs Briefs (“RCBs”) issued by HMRC in July 2020
RCB 10/2020 – 9 July 2020 - Guidance on the temporary reduced rate of VAT for hospitality, holiday accommodation and attractions
On 8 July 2020, the government announced that it would introduce a temporary 5% reduced rate of VAT for certain supplies of hospitality, hotel and holiday accommodation, and admissions to certain attractions. This cut in the VAT rate from the standard rate of 20% was effective from 15 July 2020 to 12 January 2021. These changes are being brought in as an urgent response to the coronavirus (COVID-19) pandemic to support businesses severely affected by forced closures and social distancing measures.

More detail can be found above in our section on the ‘Chancellor’s Summer Statement’. The RCB can be accessed HERE

RCB 11/2020 – 29 July 2020 – VAT and Stamp Duty Land Tax when existing leases between landlords and tenants are varied
It is important to note there have been ‘no changes’ to HMRC’s policy re VAT and Stamp Duty Land Tax (‘SDLT’). However, HMRC has released this RCB to remind landlords and tenants of the VAT and SDLT/LBTT implications when leases between landlords and tenants are varied, as during this time of Covid-19 many leases are being varied. Examples of variations include periods of reduced rents, rent-free periods and rent holidays.

A variation to the lease may occur where a landlord offers a tenant a 12-month rent-free period in return for the tenant undertaking repairs and renovations to the property. When this happens there are two equal and opposite supplies. A supply from the landlord to the tenant (a rent charge) and a supply from the tenant to the landlord (services of repair and renovations). The supply by the landlord is an exempt supply unless the landlord has Opted to Tax the property. The services supplied by the tenant are taxable supplies if the tenant is VAT registered. More details in connection with this can be found in para 5.3 of this RCB which can be accessed HERE

VAT cases from First-tier Tribunal through to European Court of Justice
First-tier Tribunal (‘FTT’) found a houseboat did not qualify as construction of a ‘building’ as a dwelling - [2020] UKFTT 0282 (TC) - Edward Burrell v HMRC – HMRC won
Edward Burrell (‘EB’) appealed against HMRC’s decision to refuse his claim for a VAT refund in the sum of £4,140.70. EB’s claim was made under the Do-It-Yourself (‘DIY’) Housebuilders’ Scheme. The claim was made in respect of the construction of a houseboat. The background facts are undisputed by EB and HMRC, although they disagree as to whether the houseboat qualifies under the DIY scheme.

EB obtained planning permission and this permission described the permitted development as the incorporation of land as a residential mooring at The Boathouse, Lower Hampton Road, Sunbury. EB subsequently constructed the houseboat on land by creating a steel structure on rails. A concrete foundation was then laid onto the steel structure for stability and a crane was then used to lift the structure before placing it on water, where it remains. EB then submitted a claim for a VAT refund.

HMRC refused the claim advising that a newly constructed dwelling would only qualify for a VAT refund under the DIY scheme if it is a ‘building’ designed as a dwelling, for VAT purposes. HMRC arrived at this decision that the houseboat was ineligible for a DIY refund as EB had not constructed a building. EB requested a review of the decision and the original decision was upheld. The review’s conclusion highlighted that the planning permission obtained by EB was not planning permission to either ‘construct a building designed as a dwelling’ or, to ‘convert a non-residential building into a building designed as a dwelling’. As such HMRC rejected the DIY claim by EB as the work must result in a ‘building’ in order for there to be eligibility for a VAT refund.

EB’s argument/case can be summarised as follows:

  • The question in this appeal is whether his home is a houseboat or a building;
  • The houseboat was clearly designed as a dwelling and not for any other purpose;
  • VATA 1994, s35(1A) applies as EB was constructing a building designed as a dwelling, which
    was only to be used for a relevant residential purpose;
  • The houseboat meets the requirements VATA 1994, Sch 8, Group 5, Note 2 because the
    construction was designed as a dwelling. It consists of self-contained living
    accommodation, with no provision for direct internal access from the dwelling to any
    other dwelling, or part of a dwelling. The use of the structure is not prohibited in any way
    and planning consent has been granted;
  • The houseboat was never a vessel. At no stage could it have been used as a vessel. It has
    always looked like a dwelling; and
  • The houseboat meets the definition of a building. It is a structure that has been built and it is fixed to the adjoining land. It is built for occupation.

Against EB’s argument HMRC opined as follows:

  • The construction of a houseboat does not fall within VATA 1994, s35(1A)(a) and the
    operative word is ‘building’;
  • VATA 1994, Sch 8, note 4 reinforces the word ‘building’;
  • The Dr Parkinson case further sets out what is eligible in terms of a building.
  • The planning consent granted relates to the creation of a mooring. The email from
    the planning officer states that no permanent structures or building on the land are
    permitted; and
  • he structure is a houseboat and it does not comply with the statutory requirements.

The FTT considered the planning permission and this was what subsequently resulted in EB losing his appeal. Planning permission stated ‘no permanent structures or building placed on the land are permitted’. This express prohibition of a ‘building’ (referred to in s35(1A)(a) ultimately resulted in EB’s appeal being flawed and therefore not successful.

Court of Appeal (‘CoA’) found the NHS Trust could recover the VAT incurred on leased cars - [2020] EWCA Civ 874 – HMRC v Northumbria Healthcare NHS Foundation Trust (‘The Trust’) – HMRC lost
HMRC appealed the Upper Tribunal decision to the CoA. The Trust as part of a salary sacrifice scheme provided some of its employees and those of other NHS Trusts with leased motor cars. The Trust recovered 100% of the VAT it incurred as a result of SI 1992/630. In 1992, when salary sacrifice arrangements began to be offered to employees, the Treasury issued SI 1992/630. This stated where an employee gave up part of their salary and received the right to use a motor car in return, the provision of the right to use the car was not to be treated as a supply of goods or a supply of services. The objective of SI 1992/630 was to ensure that no VAT was due in relation to the provision of the car.

The Trust, as a result of the services it undertakes, is not regarded as undertaking an economic activity when it delivers its core NHS services. As a result, that would ordinarily prevent it from being able to reclaim input tax (VAT) incurred on goods and services supplied to it. However, under VATA 1994, S41 special rules apply to government departments and similar public bodies whereby, in order to minimise the impact of VAT, such bodies are allowed to reclaim the VAT incurred on non-business (or non-economic) activities.

The Trust’s opinion, in line with SI 1992/630, considered that its provision of cars under its salary sacrifice arrangements should be treated as neither a supply of goods nor a supply of services and therefore it was entitled to reclaim the input VAT it had paid on the purchase of the cars. HMRC disagreed as it considered that the concepts of (a) a supply and (b) an economic activity were separate. HMRC argued that the leasing of cars was an economic activity although SI 1992/630 stated that the provision of a motor car under a salary sacrifice arrangement was not to be regarded as a supply. In summary, HMRC were seeking to differentiate between a supply and an economic activity.

The CoA did not agree with HMRC’s arguments and found them to be incorrect. The fact that SI 1992/630 prevents there being a supply of cars by the Trust means there is no economic activity. As there is no economic activity, the Trust under VATA 1994, s41 is entitled to reclaim 100% of the VAT that it had incurred on the cars.

Other HMRC and Government Updates
Potential taxation of online marketplaces
The Treasury's business rates review sets out two potential alternatives which could, in principle, replace the current system of business rates. Rather than the current system of tax based on the rental value of non-domestic property, which arguably imposes an unreasonable burden on traditional retail businesses in comparison to online retailers, the proposal would seek to level the playing field by either:

  • levying a tax on companies based on their online sales. Connected to this potential option would be the requirement for online marketplaces, i.e. Amazon, requiring to collect and remit VAT on sales to HMRC; or
  • consideration of an alternative capital values tax based on the current combined capital value of the land and the property, with liability falling on the owner rather than on the occupant of the property.

Postponed VAT accounting
From 1 January 2021, UK VAT registered businesses will, in some circumstances, be able to account for import VAT on their VAT return for goods imported from anywhere in the world, meaning that the business can declare and recover import VAT on the same VAT return, i.e. no time delay in paying over the VAT to HMRC and recovering it in the next VAT return. HMRC has published new guidance on when a business can and cannot account for import VAT on their VAT return. Guidance has also been published on how to complete a VAT return for businesses using postponed VAT accounting after the end of the transition period. These guidance notes can be accessed HERE and HERE

Contact us

Should you wish further information on the above, please do not hesitate to contact us using the details outlined below.

Gary Moore
Direct line 0141 636 9353
Mobile 07812 061582
Email This email address is being protected from spambots. You need JavaScript enabled to view it.