Deeks VAT News issue 40
Welcome to this months Newsletter January 2024 issue 40 Keeping you up to date on VAT changes In this months newsletter we cover the following: Why are Certificates Of Origin important? An overview Payments on account – update What is a proforma invoice and how can it be used? Contact lens services – taxable or […]
Welcome to this months Newsletter
January 2024 issue 40
Keeping you up to date on VAT changes
In this months newsletter we cover the following:
A VAT Did you know?
Roasted nuts in shells are zero rated, but if the shell is removed, they become standard rated.
Why are Certificates Of Origin important? An overview
What is a Certificate of Origin (CO)?
A CO is a formal, official document which evidences in which country a good or commodity was manufactured. The certificate of origin contains information regarding the product, its destination, and the country of export.
A CO is required for most treaty agreements for cross-border trade and have become more important since Brexit (no more single market alas).
Why is a CO important?
The CO is an important document because it determines whether certain goods are eligible for import, or whether goods are subject to duties.
CO – General
Customs officials expect the CO to be a separate document from other commercial documents such as invoices or packing lists. Officials may also expect it to be signed by the exporter, the signature notarised, and the document subsequently signed and stamped by a Chamber of Commerce. Additionally, the destination Customs authority may request proof of review from a specific Chamber of Commerce.
Some countries accept electronically issued COs which have been electronically signed by a Chamber of Commerce.
Types of CO
A CO can be either in paper or digital format and must be approved by the requisite Customs Authority.
There is no standard CO document for global trade, but a CO prepared by the exporter, has at least the basic details about the product being shipped.
Non-preferential COs, also known as “ordinary COs” indicate that the goods do not qualify for reduced tariffs or tariff-free treatment under trade arrangements between countries. If an exporting country does not have in place a treaty or trade agreement with the importing country, an ordinary CO will be needed.
This is for shipments between countries with a trade agreement or reduced tariffs and proves the goods qualify for reduced import duties.
Some countries require additional information to demonstrate the authenticity of the information in the CO. A Legalised CO is an ordinary CO that has been further authenticated. The legalisation process usually involves the CO being validated by various appropriate authorities to give more evidence to its authenticity.
A Certified CO is similar to an ordinary CO. However, it has been certified by a Chamber of Commerce, government agency or other relevant authority to confirm its authenticity.
Certification involves an in-depth review of all of the information declared on the CO, as well as a thorough side-by-side comparison with the requirements of the trade agreement and regulations of the country of import to ensure full compliance.
A EUR1 certificate is used in trade between the UK and partner countries. It is used to confirm that goods originate in the EU or a partner country so that the importer can benefit from a reduced rate of import duty.
EUR1 certificates are issued by Chambers of Commerce or Customs offices.
Contents of a CO
A CO will typically contain the following information:
- name and contact information of the manufacturer of the goods
- country of origin
- contact information of the exporting agent
- contact information of the receiver/importing agent
- description of the goods, including the appropriate product codes
- quantity, size, and weight of goods
- A waybill or bill of lading number
- means of transport and route information
- commercial invoice of payment
* A waybill is a document issued by a carrier giving details and instructions relating to the shipment of a consignment of cargo. It shows the names of the consignor and consignee, the point of origin of the consignment, its destination, and route.
How do I find out if I need a CO?
A business will need to check with its local Chamber of Commerce.
Payments on account – update
HMRC have updated its payments on account (POA) guidance.
What are POA?
These are advance payments towards a business’s VAT bill. They are mandatory.
HMRC will notify a taxpayer to make POA if a business renders VAT returns quarterly, and it owes more than £2.3 million in any period of 12 months or less.
Under the POA arrangement, businesses make interim payments at the end of months two and three for each return quarter. The interim payment is intended to cover part of the overall VAT liability for the that quarter. The balancing payment for the return’s VAT liability will be settled when the business submits its VAT return payment. Quarterly VAT returns are filed online as normal.
HMRC will calculate POA based on a business’s annual VAT liability in the period that it goes over the threshold. The annual VAT liability in that period will be divided by 24 to arrive at an instalment amount.
A taxable person who has been in business for less than 12 months will have POA calculated by HMRC on a pro rata basis.
POA start date and annual cycle
The payments on account cycle starts in the first quarter after a business exceeds the £2.3 million threshold.
The payments will remain the same until the start of the next annual cycle.
The annual cycle begins in April, May or June depending on which VAT return ‘stagger’ a business is on. HMRC bases the amount of payments during the annual cycle on the liability in the period known as the ‘reference year’.
POA due dates
The due dates for POA are the last working day of the second and third months of every VAT quarter no matter what the period end date is. The seven-day extension for paying electronically does not apply to POA.
POA that are not paid on time will be subject to late payment interest.
Due dates for quarterly balancing payments
Balancing payments are due with the VAT return and must clear HMRC’s bank account by the last working day of the month if standard period end dates are used.
If a business does not make POA or the balancing payment in full and on time HMRC will:
- take immediate action to recover the debt
- charge late payment interest
- consider charging late payment penalties on amounts unpaid after the balancing payment due date
- consider transferring a business from quarterly to monthly returns
Removal from a POA arrangement
If a business’s VAT liability falls below £2.3 million in the reference year HMRC will remove it from the arrangement six months later.
Alternative to payments on account
If making POA and submitting quarterly VAT returns does not suit a business, it can choose to make VAT returns and payments monthly.
As may be seen, it is important to recognise the POA limit and to make payments on time. There is an obvious cash flow impact and plans should be put in place if the VAT turnover is nearing the threshold.
What is a proforma invoice and how can it be used?
Proforma invoices (proformas) are preliminary documents usually sent to buyers in advance of a delivery of goods/provision of services. Proformas will typically describe details of the purchase of goods/services and other important information, such as the terms of the transaction. Proformas are not “official” documents and represent an informal agreement. Usually, requesting a proforma represents a more serious interest on the part of a buyer than a quote – a buyer is generally committed to making a purchase but want to understand the details before proceeding with the approval process and making a binding agreement with the seller. They are therefore a useful business tool and use of them may result in a beneficial cashflow position for VAT (please see below).
Proforma translates from Latin as “for the sake of form”, and this provides an indication that the document is provisional or a step in a process.
It is also worth noting that the use of proformas is not mandatory.
The difference between an invoice and a proforma
Invoices (also called commercial invoices, VAT invoices or tax invoices) are distinct from proformas. They may contain similar information but serve different purposes. It is important to avoid confusing the two, since only invoices are legal documents; that is, they evidence a transaction and is the document on which VAT may be claimed. An invoice must contain certain information and there are specific legal obligations for providing them.
It is a matter of law whether an invoice is valid and when they must be issued. A proforma is not required to follow any set form, apart from the facts that they must not have an invoice number and must state that it is a proforma invoice. We also recommend that a proforma does not show the supplier’s VAT number for the avoidance of doubt.
Contents of a proforma
Proformas can be considered as “dummy invoices”, and they are prepared by the seller usually to provide details of:
- the issuing business’s name, address, and contact details
- customer’s name and address
- date of issue
- length of time the pricing is valid
- the goods/services requested, including quantities, type, and physical specifications
- pricing, including individual costs as well as the total amount to be charged
- terms of sale, including eg; shipping and delivery dates
- payment terms
- whether VAT is applicable
However, there are no set formats for proformas.
Use for buyer
The purpose of a proforma is to provide the buyer with an accurate and complete good faith estimate they can use to decide whether or not to go ahead with a transaction. It also avoids surprises when the actual tax invoice is issued.
The main distinctions are that, compared to a tax invoice, a proforma:
- does not create a tax point
- the recipient is unable to recover input tax on a proforma
Very broadly, the tax point (time of supply) this is the earliest of; invoice date, receipt of payment, goods transferred or services completed. The tax point fact is helpful in tax planning for suppliers. Broadly, using proformas, requests for payment, or similar documents rather than issuing an invoice, defers a tax point and consequently when VAT is payable to HMRC. This is especially relevant to businesses which provide ongoing services (known as continuous supplies of services).
Please contact us if you require more information on the commercial use of proformas.
Contact lens services – taxable or exempt? The Vision Direct case
Latest from the courts
In the First-Tier Tribunal (FTT) case of Vision Dispensing Limited the issue was whether services linked to the online sale of prescription contact lenses were covered by the exemption at The VAT Act 1994, Schedule 9, group 7, item 1 (b) – the provision of medical care.
Generally speaking, opticians provide two types of supply
- exempt medical care; sight tests, measuring and fitting
- the standard rated supply of goods; spectacles, contact lenses, accessories etc
Almost always a customer pays a single amount which covers the services as well as the goods, so an apportionment is required. HMRC updated guidance on apportionment here.
The Appellant “VDL” supplies services in connection with the online sale of contact lenses and this appeal was concerned with the question whether those supplies are subject to VAT at the standard rate.
The legislation provides for exemption for medical care by a person registered or enrolled in either of the registers of Ophthalmic Opticians or the register of Dispensing Opticians kept under the Opticians Act 1989. The exemption is also extended to persons who are not registered/enrolled under the Act but are directly supervised by a person who is so registered or enrolled.
VDL is a UK incorporated company and a member of the Vision Direct corporate group. VDL has a sister group company called Vision Direct BV (“VDBV”) which is based in The Netherlands. VDL operates a warehouse facility in the UK. Goods (contact lenses and other optical products) belonging to VDBV were stored in the warehouse and dispatched to purchasers by VDL, using its own workforce. VDL also employed customer assistants, who deal with a range of enquiries from customers. VDBV operates the website, visiondirect.co.uk through which prescription contact lenses and other optical goods are supplied to UK customers. Customers purchasing prescription contact lenses or other optical products online enter two contracts: one with VDBV for the supply of contact lenses and one with VDL for the supply of dispensing services. There is also a contract between VDL and VDBV. VDL is not paid a fee by VDBV, its income comprises by the fee paid by customers.
HMRC contended that there is little evidence to support that there was advice being provided to customs by VDL and consequently, there were serious questions about whether healthcare services are being supplied. The supplies fall short of a number of regulatory requirements and that the supplies described as dispensing services cannot properly be described as professional clinical advice or therapeutic care. HMRC stated that VDL has never seen a single customer. Clinical advice cannot be delivered in an impersonal or generic way.
HMRC pointed out that:
- the website makes it clear that VDL does not provide advice on which customers can depend. Consequently, it cannot rely on the website as evidence of medical care
- there is no direct link between the use of the website and payments to VDL. For there to be a supply, there must be a direct link between the supplier and the recipient
VDL contended that its dispensing services are superior to those available on the High Street. Contrary to HMRC’s case, it is able to identify multiple examples of clinical advice and the purpose of its supplies is to assist in the treatment of defective eyesight. All services are directly supervised by those with the appropriate qualifications.
The FTT was required to determine whether VDL’s services constituted medical care and were those services wholly performed or directly supervised by appropriate persons?
It was agreed that the advice does not need to be complex or personalised to be covered by the exemption as long as it contributes to the efficacy of the overall therapeutic process. The material provided on the website was comprehensive and covered the entire process from an eye test, the diagnosis of an eye defect, and then the selection, measuring and fitting of spectacles or lenses to the supply of those spectacles or lenses.
It was concluded by the FTT that the provision of the website was by VDBV as in the T&Cs VDBV operates it and owns the intellectual property rights to its content. Consequently, the provision of the website could not be part of the supply by VDL. VDL supplied the material or reviewed its content for VDBV pursuant to a contract between the two companies.
The FTT concluded that:
- the quality, quantity, and nature of the optical information on the website was such that its provision could amount to medical care, but;
- the information on the website is not provided by VDL (but by VDBV)
- even if it were provided by VDL, the terms on which it is made available mean that it is not part of any supply made by VDL to customers and must be left out of account when it comes to characterising the supplies VDL does make
- what VDL does do is choose the correct lenses and dispatch them. There is no element of medical care in VDL’s supply
- there was little evidence as to how the opticians monitored the performance of the staff so that they could satisfy themselves that their performance was of a suitable standard, so it could not be said that there was direct supervision.
As a result, VDL did not provide medical care and in any case, the services were not wholly performed or directly supervised by appropriately qualified individuals so exemption could not apply.
The appeal was dismissed.
Opticians have long produced VAT challenges since the cases of Leightons and Eye-Tech in the 1990s. Any businesses using a similar business model are advised to review the treatment of their supplies in light of this case.
The Partial Exemption Annual Adjustment
What is the annual adjustment? Why is it required?
An annual adjustment is a method used by a business to determine how much input tax it may reclaim.
Even though a partly exempt business must undertake a partial exemption calculation each quarter or month, once a year it will have to make an annual adjustment as well.
An annual adjustment is needed because each tax period can be affected by factors such as seasonal variations either in the value supplies made or in the amount of input tax incurred.
The adjustment has two purposes:
- to reconsider the use of goods and services over the longer period; and
- to re-evaluate exempt input tax under the de minimis rules.
An explanation of the Partial Exemption rules is available here
Throughout the year
When a business makes exempt supplies, it will be carrying out a partial exemption calculation at the end of each VAT period. Some periods it may be within the de minimis limits and, therefore, able to claim back all of its VAT and in others there may be some restriction in the amount of VAT that can be reclaimed. Once a year the business will also have to recalculate the figures to see if it has claimed back too much or too little VAT overall. This is known as the partial exemption annual adjustment. Legally, the quarterly/monthly partial exemption calculations are only provisional, and do not crystallise the final VAT liability. That is done via the annual adjustment.
The first stage in the process of recovering input tax is to directly attribute the costs associated with making taxable and exempt supplies as far as possible. The VAT associated with making taxable supplies can be recovered in the normal way while there is no automatic right of deduction for any VAT attributable to making exempt supplies.
The balance of the input tax cannot normally be directly attributed, and so will be the subject of the partial exemption calculation. This will include general overheads such as heating, lighting and telephone and also items such as building maintenance and refurbishments.
Using the partial exemption standard method, the calculation is based on the formula:
Total taxable supplies (excluding VAT) / Total taxable (excluding VAT) and exempt supplies x 100 = %
This gives the percentage of non-attributable input VAT that can be recovered. The figure calculated is always rounded up to the nearest whole percentage, so, for example, 49.1 becomes 50%. This percentage is then applied to the non-attributable input VAT to give the actual amount that can be recovered.
Once a year
Depending on a businesses’ VAT return quarters, its partial exemption year ends in either March, April, or May. The business has to recalculate the figures during the VAT period following the end of its partial exemption year and any adjustment goes on the return for that period. So, the adjustment will appear on the returns ending in either June, July, or August. If a business is newly registered for VAT its partial exemption “year” runs from when it is first registered to either March, April or May depending on its quarter ends.
The majority of businesses use what is known as “the standard method”. However, use of the standard method is not mandatory and a business can use a “special method” that suits a business’ activities better. Any special method has to be “fair and reasonable” and it has to be agreed with HMRC in advance. When using a special method no rounding of the percentage is permitted and it has to be applied to two decimal places.
Commonly used special methods include those based on staff numbers, floor space, purchases or transaction counts, or a combination of these or other methods.
However, even if a business uses a special method it will still have to undertake an annual adjustment calculation once a year using its agreed special method.
De minimis limits
If a business incurs exempt input tax within certain limits it can be treated as fully taxable and all of its VAT can be recovered. If it exceeds these limits none of its exempt input tax can be recovered. The limits are:
- £625 per month on average (£1,875 per quarter or £7,500 per annum) and;
- 50% of the total input VAT (the VAT on purchases relating to taxable supplies should always be greater than the VAT on exempt supplies to pass this test)
The partial exemption annual adjustments are not errors and so do not have to be disclosed under the voluntary disclosure procedure. They are just another entry for the VAT return to be made in the appropriate VAT period.
If a business fails to carry out its partial exemption annual adjustment it may be losing out on some input VAT that it could have claimed. Conversely, it may also show that it has over-claimed input tax. When an HMRC inspector comes to visit he will check that a business has completed the annual adjustment. If it hasn’t, and this has resulted in an over-claim of input VAT, (s)he will assess for the error, charge interest, and if appropriate, raise a penalty. It is fair to say that partly exempt businesses tend to receive more inspections than fully taxable businesses.
Annual UK VAT statistics 2022 to 2023
HMRC has published VAT statistics for 2022 to 2023. This is an overview of VAT statistics, covering receipts information and the characteristics of the VAT trader population in the UK.
The Headlines total VAT receipts in the financial year 2022-23 increased by 1% to £160 billion
Thankyou for taking the time to read our first newsletter of the year. All the team at Deeks VAT Consultancy we would like to wish you a Happy New Year.
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