Tag Archives: Specified Supplies Order

Constable VAT Budget Focus: Autumn 2018


Philip Hammond has delivered the last Budget before the UK leaves the EU in March 2019. He has based the Budget on an assumption of an average free trade deal being struck between the UK and the EU. However, if no agreement can be reached between the two parties, the Chancellor has stated that a different strategy would be necessary and the UK has been working on contingency plans for different possible Brexit negotiation outcomes. Here we look at the key VAT issues which have been covered in the announced Budget issued but will provide continued coverage of any progression in line with Brexit negotiation results.


VAT registration and deregistration thresholds

The VAT registration threshold of £85,000 has stayed at the same level again in this Budget, as has the de-registration threshold of £83,000. It has been confirmed that these will stay in place for the next two years. The effect of this measure, when inflation is factored in, is that there will be an increased number of smaller businesses that are required to register for VAT.


VAT grouping eligibility to be extended

The Government has announced that it will extend the eligibility to join a VAT group to certain non-corporate entities in the Finance Bill 2018-19. This extension will allow partnerships and sole traders to benefit from VAT grouping provided the entry criteria are met.


The treatment of vouchers from 1 January 2019

The Government intends to introduce legislation to give effect to an EU Directive in the UK providing for the VAT treatment of vouchers issued on or after 1 January 2019. It will impact vouchers for which payment has been made and which will be used to make a purchase.

The aim of the measure will be to harmonise the rules for the taxation of vouchers within the EU and, ideally, to prevent any non-taxation or double taxation of goods or services. This is not a true Budget measure as the new rules were agreed sometime after extensive discussions within the EU.


Specified Supplies Order

For a brief summary and an analysis of the Specified Supplies Order, we recently provided coverage of the issues presented by Brexit and the Specified Supplies Order on our website. There has been some clarification around some of the issues associated with the Order offered as part of the Budget 2018. In essence, the Order allows companies who export certain financial services from the EU to third countries to reclaim input VAT on what would normally be an exempt supply giving no right to recovery.


HMRC believe the Order is currently being abused by companies who form agreements with associates located outside the EU and re-supply those services back to UK consumers meaning that the company can reclaim the input VAT on the specified supply and gain a VAT advantage. This measure seeks to prevent “looping” by restricting the applicability of the Order to cases where the final consumer is not in the UK. We are not convinced that either existing UK measures or the proposed measures are compliant with the EU VAT directive and, were the UK to remain in the EU, we would be surprised to find that the proposed measure is not challenged in the Courts. Brexit may nullify this consideration.


VAT reverse charge anti-avoidance amendment

A measure has been introduced which allows for the disapplication of the existing anti-avoidance provision in relation to any specified reverse charge. Originally the provisions were introduced to prevent criminals avoiding reverse charge measures by supplying non-VAT registered businesses instead and charging VAT. This measure will allow regulations to be made to prevent unintended consequences for small businesses who trade below the VAT threshold which will remain at £85,000.


VAT and higher education

It has been announced that the Government will amend VAT law to enable bodies registered with the Office for Students, in the approved (fee cap) category, to exempt supplies of education. This is a measure aimed at ensuring continuity of VAT treatment for English higher education providers following the Higher Education and Research Act 2017. Constable VAT will follow the development of this policy, if your business is likely to be affected then please do not hesitate to contact Constable VAT.


Unfulfilled supplies and prepayments

HMRC’s policy around the VAT treatment of prepayments where customers have been charged for a supply but have failed to collect or use what they have paid for and have not received a refund. These prepayments will be brought into the scope of UK VAT from 1 March 2019 and VAT will be due on the prepayment.


Increase or decrease in consideration after supply (Regulation 38)

Regulation 38 requires businesses to adjust their VAT account where there has been a change in the value of the supply on which VAT is due, and a corresponding change in the amount of VAT charged.


It has been announced that legislation will be introduced to ensure that a credit note is issued to customers who receive a discount to ensure a higher degree of transparency with businesses, ensuring that they do not benefit by reclaiming VAT that should be refunded to either the customer or paid to HMRC.


Alternative method of VAT collection for online sales

Following a recent consultation, the Government is considering introducing a split payment model for collecting VAT on sales made online by overseas sellers. An industry Working Group is to be set up by HMRC to work with relevant stakeholders to consider this further.


The effects

If you require further information or assistance on any of the points raised above, please speak with your usual Constable VAT contact.

CVC VAT Focus 18 October 2018


HMRC are having difficulty dealing with DIY Housebuilder VAT refund claims and that some claims are being approved and paid up to four months later than the usual 30 days. If you are a housebuilder or are considering submitting a VAT refund claim, in order to mitigate any cash flow issues which may arise as a result of this, please call Constable VAT to see if there is anything we can do to help your particular case.

VAT MOSS exchange rates for 2018

Find currency exchange rates for VAT Mini One Stop Shop (VAT MOSS) businesses registered in the UK to complete declarations.

Charity funded equipment for medical and veterinary uses (VAT Notice 701/6)

HMRC has updated its guidance regarding zero-rated supplies of medical and research goods and services that have been funded by charities.

Making Tax Digital Update

Making Tax Digital for VAT will now not be mandatory until 1 October 2019 for businesses falling into one of the following categories considered by HMRC to be ‘more complex’ businesses. Additionally HMRC has issued more guidance on making Tax Digital for VAT.  The businesses regarded as complex and a list of the new guidance can be found on our website.



Brexit Blog

We have a new article about the potential impact of Brexit on VAT recovery for businesses in the financial services and insurance sectors. In this piece we ask the question “If you had to make a guess on whether your business will be allowed to reclaim more VAT or less VAT if the UK leaves the EU without a withdrawal agreement what would you say?” Consideration is given to The VAT Specified Supplies Order 1999. If you are impacted by this legislation then this will be of particular interest to you.

Opinion of Advocate General

The Advocate General (AG) has handed down his opinion in the Morgan Stanley CJEU case, which considers VAT recovery rules for costs incurred by overseas branches. Our coverage of this opinion can be found on our website.

This opinion adds another dimension to Brexit planning, which can involve creating new EU businesses with multiple establishments as well as longstanding multi-establishment arrangements. Whilst the CJEU decision need not follow the opinion of the AG, in most cases it does.

If you operate using overseas branches then you should consider your input VAT recovery position now. Constable VAT will be happy to assist in this exercise.




1. Refusal of right to deduct input VAT by the tax authorities

This referral concerned whether EU law on VAT precludes tax authorities from refusing the right to deduct input VAT on the grounds that the company in question failed to submit VAT returns for the period in which the right to deduct VAT arose.

The company, Gamesa, was declared an “inactive taxpayer” by the Romanian tax authorities as it did not submit VAT returns for a six month period in 2011. In 2015 Gamesa was subject to a VAT inspection and was issued with an assessment for the output VAT which should have been declared on the missing VAT returns. The assessment did not allow the deduction of the relevant input tax. Gamesa alleged that this practice infringed the principle of proportionality and the principle of neutrality of VAT.

Giving regard to these principles and the relevant EU legislation on the matter, the Court reduced the issue to one question: is it permissible for the tax authorities to refuse, on account of a failure to submit tax returns, a taxable person the right to deduct input VAT? This was answered succinctly, “As the Court has repeatedly pointed out the right of deduction […] is an integral part of the VAT scheme and in principle may not be limited.”

The Court held in favour of Gamesa and stated that the relevant EU law precludes tax authorities from using this practice.

Constable Comment: This case illustrates the fundamental nature of the right to deduct input VAT in the EU VAT system. It confirms that even if a business has made VAT accounting errors or failed to disclose certain sales, a VAT assessment can be mitigated by demonstrating, accurately, the amount of input tax incurred in the period being assessed which relates to taxable supplies. If you have received a VAT assessment and are concerned about the amounts involved or the entitlement to deduct input VAT has not been taken into account, do not hesitate to contact Constable VAT.


First Tier Tribunal

2. HMRC Best Judgment

This case was an appeal by Derbyshire Motors Ltd (DM) against a best judgment VAT assessment issued by HMRC and a civil penalty for dishonesty. The appellant had declared taxable motor repair services as MOTs which are outside the scope of VAT. DM admitted that this had taken place after initially denying the wrongdoing, albeit not convincingly.

DM was struggling to stay afloat when the “credit crunch” began to take serious hold of the UK economy in 2008/09. Owing to a lack of capital reserves no more money could be pumped into DM to keep it going. Mr Derbyshire, the director and owner, made the decision to treat some repair works as MOT tests to improve the cash position of the business. When HMRC discovered this in 2014 DM no longer had VAT records for the relevant period. HMRC therefore relied on figures from later years to calculate the assessment for underpaid VAT. DM submitted that HMRC had not used best judgment as the assessment was based on material relating to other years.

Analysing previous case law and relevant tests for the application of best judgment were considered and the assessment was upheld. The penalty was also upheld in full.

Constable Comment:  This demonstrates well that simply not having records and not being compliant for years does not mean that tax evasion is untraceable. If taxpayers discover any irregularities or suppressed sales it is always best to be honest and notify HMRC. If you co-operate fully and make an un-prompted disclosure then penalties can be mitigated. Attempting to hide from and mislead HMRC is likely to result in the highest possible penalty being applied. Please contact Constable VAT if you are worried about notifying a disclosure to HMRC, we will be happy to be of assistance.


3. Calculating VAT when prompt payment discount is offered

Virgin Media Limited (VML) made supplies of telecommunications to its domestic customers. 95% of these customers paid a monthly subscription fee, the remaining 5% paid one lump sum for a 12 month subscription which amounted to less than 12 monthly instalments. Output VAT was calculated for all customers using the lower price based on the suggestion that if a “prompt payment discount” is offered then output VAT should be calculated using the discounted amount even if the customer did not take advantage of this discount.

HMRC disagreed with this assertion and stated that output VAT may only be accounted for on the discounted amount where this sum is paid within a specified time period and is taken to satisfy the full amount.

The FTT considered that VML’s supplies could, in theory, benefit from this prompt payment discount pricing. However it was considered that VML, in reality, makes two different supplies at different amounts albeit of the same services.  It was not disputed that where the prompt payment discount is taken by customers that this is the value which should be used for calculation of output VAT. However, since the change in the rules around prompt payment discounts in 2015 it is no longer permissible to account for VAT based on the reduced price unless taken within the time period specified.

Constable Comment: It used to be the case that offering a prompt payment discount allowed businesses to account for output VAT on the reduced price even if this were not taken by the customer. This has since changed and now the discount must be taken in order to account for VAT on the lower amount. If your business offers prompt payment discounts you should consider how to reflect these when accounting for VAT.