Many businesses and charities are currently adapting their usual business practices in response to the COVID-19 outbreak measures. Some are seeking to improve cash flow and are taking various measures to do so including diversifying from their normal business activities. Whilst business development and sales diversification can certainly create additional income, it is necessary to consider the potential VAT impacts. This document aims to provide an overview of some of the main VAT issues which a business or charity may wish to consider when offering new products for sale or carrying out its activities in a different way.
VAT liability of supplies
With many pubs and cafes having to close their doors to customers some are turning to providing take away services. Many of the take-away supplies will still be subject to VAT. However, where cold-take away food is being supplied there is scope for zero-rating supplies and businesses should ensure they recognise this in order to gain the benefits associated with making such supplies (VAT recovery on costs with no VAT on sales.)
Where a business is operating the Flat Rate Scheme for VAT, it should ensure that the percentage being applied is still appropriate.
If the change to your business activity is significant you may wish to check the VAT position with your usual adviser or contact Constable VAT to discuss the implications.
VAT and delivery charges
Some businesses may be delivering goods because customers cannot visit in person. If a charge is made for delivery it is important this is treated correctly for VAT purposes. HMRC’s Guidance is useful on this topic and can be read here. However, the general position is that, where an additional charge is made to customers for delivery, that the additional charge should follow the VAT liability of the goods.
The position is not affected by whether the charge for delivery is separately itemised or invoiced to the customer. In either case there is a single supply of delivered goods for which the VAT liability is based on the liability of those goods.
If you are relying on a third party for delivery it is important that the contractual position is clearly understood and transparent. In most cases, HMRC will expect you to treat the delivery charge as your supply. If you do not want to do this (for example you are working with a local taxi firm) then it must be clear that the customer is contracting with you for the goods and the other party for the delivery service.
Cancellations, refunds and VAT
Unfortunately, many events have been cancelled and many businesses in the hotel/self-catering business sector are in a position of making refunds to customers. If your business refunds a payment, the VAT which was accounted for on that supply can be recovered from HMRC. However, this is not the case if a refund is not made. For example, if a hotel was forced to close and refunded its customers, it could recover the VAT which it had declared on those supplies. If a customer simply did not turn up and no refund was issued, the VAT cannot be recovered; failure of the customer to make use of a supply does not cancel the supply (not to be confused with an outside the scope late cancellation penalty charge). HMRC’s Guidance on this subject can be found here. This area of VAT can become quite complex and establishing the correct VAT procedure may require professional advice.
Businesses may find online sales increasing or may be entering into this market for the first time. This could give rise to new challenges particularly if there is an increase in demand from non-UK customers.
This is particularly the case when making sales to private individuals and non-business customers within the EU. Each Member State has a “Distance Sales” threshold. Sales into the Member States by a UK company arise in the UK and attract UK VAT until the threshold is breached. At this point, the place of supply shifts to the country in which the recipient belongs. This creates a requirement for the UK business to register in that country and to charge and account for VAT there (please note, after the Brexit transitional period this may change).
This is a key consideration for businesses which sell goods to consumers in the EU as it may be necessary to consider overseas compliance and to seek domestic professional advice.
The VAT registration threshold for a business established in the UK is £85,000 per annum, this means that a business does not have to VAT register until it has taxable sales at this level. This will be an important consideration for any businesses which previously have not had to monitor taxable sales but are now diversifying their activities to include taxable supplies or have found that business has increased more quickly than expected at this time. It is essential to monitor taxable supplies as failure to register for VAT on time will result in penalties from HMRC. It is possible to agree exception from VAT registration where the increase in turnover is unexpected and short term.
VAT return periods
Businesses that are usually entitled to a VAT refund when submitting VAT returns are entitled to submit monthly VAT returns. If you are ordinarily in the position of paying HMRC or have in the past elected to reclaim VAT quarterly to avoid more frequent submissions you should consider whether in the foreseeable future you might be entitled to and benefit from submitting monthly VAT returns. This will accelerate VAT refunds to you. Businesses, or their agents, can apply online to request to change to monthly VAT returns. Visit GOV.uk and search for “change VAT details.” This may be helpful if your VAT costs will remain at present levels but the VAT that you would normally be expecting to charge on sales will fall dramatically, pushing the business into a net VAT reclaim position. Most VAT repayments are made by HMRC within 5 days.
Even if a business does not wish to opt for monthly returns, prompt submission of the quarterly return will help cash flow.
Unfortunately, more businesses will suffer a down-turn as a result of this crisis than will be doing well. Such businesses may wish to consider deregistration. This is particularly beneficial for those small businesses servicing the public, such as hairdressers etc, who may be able to retain prices at the same level. Deregistering from VAT means that it is no longer necessary to charge VAT to your customers or account for VAT to HMRC.
VAT on costs cannot be recovered when a business is not VAT registered, therefore any decision needs to take this into account, along with the potential for an obligation to pay VAT in relation to goods on hand at the time a VAT registration is cancelled. Finally, thought needs to be given to the position of your customers. Business customers that can reclaim VAT will expect you to charge less if you deregister. Customers who cannot reclaim VAT may be prepared to pay the same gross fee (whether it includes VAT will not impact on their total cost).
For example, drawing on the example of a hairdresser, a hair salon that was VAT registered that charged £60 for a haircut would pay £10 in VAT to HMRC. If the same salon deregisters for VAT, it may be able to charge the same amount and retain the additional £10 which it would previously have paid over to HMRC.
It should be noted that deregistering for VAT creates an output VAT charge on goods held at the time of deregistration on which input VAT has been recovered; this is only the case where the VAT on the assets (valued in their current state) would be £1000 or more. Whether deregistration would be the right decision for your business must be assessed on a case by case basis. Before deregistering from VAT, it is recommended that you seek professional advice.
If your business is partly exempt it may be that a change on activity will have an impact on VAT recovery and calculations. This can be a complicated area and it may be worth seeking professional advice as it may be possible to change the method of calculation to produce a more beneficial outcome.
Businesses that are not currently partly exempt and face no restrictions should consider whether changes caused by COVID-19 will lead to partial exemption problems. For example, a housebuilder that has historically reclaimed VAT in full based on an intention to make zero-rated sales of new houses may elect to let property in the short term to allow the housing market to stabilise. This might lead to VAT exempt income and:
- a need to restrict current VAT claims and/or
- repay VAT that has already been reclaimed.
Equally, a charity which relies on zero-rated income from charity shops which are forced to close throughout the pandemic will need to make similar considerations.
It is impossible to cover all of the potential scenarios that could arise and that is not our aim. However, careful thought and precautionary measures could in some cases save considerable sums of VAT.
Businesses and charities may consider renting out any extra commercial space, or selling any extra buildings, which they own in order to generate extra income. If this is the case, it is important to consider the VAT implications of this before any sale or rental takes place as this activity could impact on previous VAT recovery. This is particularly important if you have recovered VAT on building houses and are now considering renting them instead of selling.
Opting to tax land can be helpful in avoiding input VAT recovery restrictions. However, there are complex rules around opting to tax buildings, and the circumstances in which options are disapplied. As this area can involve high value supplies and is particularly complex, we advise seeking professional advice before engaging in any commercial property transaction. Whilst we always advise seeking fact specific advice, our general coverage of the Option to Tax can be read here.
Invoicing – tax points for continuous supplies of services
Where businesses are above the cash accounting threshold and obliged to use date of invoice accounting, the business might consider sending an application for payment if it makes continuous supplies of services. An invoice creates a tax-point for a supply of continuous supply of services determining which VAT period the output VAT must be accounted for within whereas an application for payment does not (an invoice is issued when payment is received).
The benefit for the business is it is not accounting for output VAT before it has received the money from the customer. This may be of particular value when payment is more doubtful or expected to take longer. The tax point for claiming input VAT on supplies received will remain the date of the invoice received.
Tax points and continuous supplies is an area that can provide significant benefits but must be managed correctly to avoid a systematic error and to ensure compliance with the VAT rules.
We have many further ideas that might assist businesses to improve cash flow during these difficult times. Please do contact us if you would like to discuss any of the points above or to see if we could offer advice more tailored to your specific circumstances. You may speak to us without any commitment to pay fees and in the first instance we will always try to steer you to free HMRC advice if it is apparent to us that the matter you are raising can be addressed easily.