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A transfer of a going concern for VAT purposes is when a business is sold by one organisation to another. Reading your question, I don’t think that is what’s happening here.
Given your mention of the VAT2 form, I’m assuming that you and your brother currently have a partnership VAT registration, and you’ll be removing him and adding your wife. In which case, according to HMRC’s manual https://www.gov.uk/hmrc-internal-manuals/vat-registration-manual/vatreg35200 there won’t be any change to the VAT register – the same VAT registration will be receiving income from tenants before and after the change.
Who has opted to tax the property – you and your brother individually, or the VAT registered partnership? I suspect that it’s the latter – if so a sale of your brother’s share to you can’t really be a supply by the partnership, so wouldn’t be impacted by the option to tax.
Provided that your brother has never been VAT registered and hasn’t exceeded the registration threshold yet, he could apply for voluntary registration retrospectively. HMRC’s policy on handling such applications is here: https://www.gov.uk/hmrc-internal-manuals/vat-registration-manual/vatreg21300.
The supply chain is unaffected, as you would still be an undisclosed agent. You brother originally bought the goods. So, subject to time limitations (see: https://www.gov.uk/vat-registration/purchases-made-before-registration) and still holding VAT invoices from his supplier, he would be able to reclaim the VAT on his purchase. The £600 you paid him is for the sale of the goods on to you. Following registration he would have to pay HMRC the £100 VAT content of this, leaving him with £500. He can issue a VAT invoice to you, which allows you to recover that £100 VAT. You will still need to pay HMRC the VAT content of your £700 selling price. The overall benefit is the value of the VAT on your brother’s purchase. Your brother will be worse off from the registration (by £100 less whatever VAT he paid his supplier), while you will be £100 better off.
But, he can’t just register for this transaction, and he can’t do a retrospective voluntary deregistration. He will have to pay HMRC VAT on all of his business’ turnover since whatever date the voluntary registration is backdated to. Whether that’s worth doing is likely to depend upon factors such as how much other business he does, whether his customers are VAT registered, what proportion of his expenditure includes VAT and what his margins are.
If the goods being sold are second hand, the margin scheme in HMRC’s Notice 718 may be useful – see https://www.gov.uk/guidance/the-margin-and-global-accounting-scheme-vat-notice-718.
Otherwise, there is very little scope for VAT recovery. Being an undisclosed agent has made you an extra step in the supply chain. You can’t reclaim VAT on the £350 that your brother has paid his supplier, as that purchase was made by him rather than you. You also can’t reclaim VAT on the £600 that you’ve paid him, because he isn’t registered so hasn’t charged you VAT. All that you can reclaim VAT on is any expenses that you’ve incurred (e.g. any selling fee charged by the website), as these are services which have been supplied to you.
If you’re planning to do this again, it would be better to buy the items direct from your brother’s supplier, as this would allow you to recover the VAT.
The law on registration under what is known as the”forward look” says:
“a person becomes liable to be registered if, at any time, there are reasonable grounds for believing that the value of his taxable supplies in the period of 30 days then beginning will exceed the registration threshold.”
At this moment you don’t know whether you will get this work or not, so cannot be required to register due to it.But – if you are successful, there will be a point in time at which you have been awarded the contract, but have not yet supplied the service. Assuming that the £120k has a single “tax point” (more on this later…) at that point you will know that you will exceed the threshold, and so be required to register then. The full £120k would then be liable to VAT.
Neither exception nor exemption would apply. These are technically different terms. Exception can only apply to registrations required on the “backward look” (last 12 months’ turnover), and is generally where the supplier would be entitled to deregister immediately. Exemption is where your taxable turnover exceed the threshold due to zero rated supplies.
There’s the practical aspect about how you deal with your supplier. Are they a business that would be entitled to reclaim any VAT charged on their VAT returns? If so, explain to them that the contract would require you to VAT register. You could agree to bill them for £144k, and then issue a receipted VAT invoice (which would allow them to recover the VAT) as soon as your registration number came through.
Another possibility regarding tax point. You mention that you’re supplying software as a service. Would this £120k cover use of the software over a period of time? If so, consider invoicing periods. The tax point of a “continuous supply of services” is generally the date of each invoice (see HMRC notice 700 paragraph 14.3). So if it’s use of the software for a year, could you agree in the contract to (say) invoice £30k per quarter? You’re then not required to register under the “forward look”, as you’ll only be getting £30k plus your other taxable turnover in the next 30 days. You will only need to register under the “backward look” once the previous 12 months’ taxable turnover exceeds the £85k. Based on your figures, you might not reach that point until the third quarter, by which stage there will only be one quarter left liable to VAT.
Thanks for your reply. Hopefully it will help if I explain the logic behind my questions. I was the in-house VAT advisor within local authorities with housing and social services functions for over 20 years, and never came across an arrangement like this!
Supplies covered by VAT exemption are detailed in Schedule 9 of the VAT Act 1994. The potentially relevant extracts are as follows. The word “land” here also includes “buildings”:
Quote:Item 1: The grant of any interest in or right over land or of any licence to occupy land, or, in relation to land in Scotland, any personal right to call for or be granted any such interest or right, other than:
…
(d) the provision in an hotel, inn, boarding house or similar establishment of sleeping accommodation or of accommodation in rooms which are provided in conjunction with sleeping accommodation or for the purpose of a supply of catering;
…
Note 9: “Similar establishment” includes premises in which there is provided furnished sleeping accommodation, whether with or without the provision of board or facilities for the preparation of food, which are used by or held out as being suitable for use by visitors or travellers.So first I was trying to ensure that there were no other elements to the supply which would prevent it falling within item 1. Then I needed to be sure that it wouldn’t be excluded from exemption due to the exception in (d). The final issue was to ensure that your friend’s company actually did both “receive” and “make” supplies of the properties, rather than just acting as more of a letting agent.
In my opinion these appear to have all been met – assuming that the “other organisations” providing any care and support aren’t “related” to your friend’s company, and provides their services direct to the LA or young person, rather than via your friend’s company. The arrangement wouldn’t seem to be caught by the exception (d). And the fact that the landlords grant a tenancy to your friend’s company, which then grants Excluded Licence Agreements – often for different periods and with different terms and conditions (the “house rules”) to the individual young people, shows that the company is receiving and making supplies of the properties. Therefore I believe that the income from the LAs would not count towards the VAT registration threshold for the company.
As far as I know, there’s nothing in the forum rules that would prevent members offering paid advice “off-forum” – however I’ve always chosen not to. If I were to provide paid advice, I would want to be able to “back” it with the type of professional guarantees that you’d expect from an advisory firm – which isn’t practical for me to do for the occasional opinions I post on forums! However, other advisors on here may be prepared to offer a paid consultation – in which case the information and opinions here would provide useful background information. Another alternative might be for your friend to seek their accountant’s view on the opinions I’ve given. If they’re prepared for a small fee to write confirming they agree with the opinion, your friend has something to hold on file just in case HMRC ever did ask questions. Ultimately the key with VAT is to always be able to demonstrate that you have taken what HMRC refer to as “reasonable care” – and even seeking advice here would help with that.
Hope this helps – but if you or your friend have any further queries or doubts, please feel free to post them here.
If the company is simply renting “unfurnished” residential accommodation, then furnishing it and renting it on as “furnished” residential accommodation, their supply to the Local Authority (LA) will be exempt from VAT – in the same way as the landlord’s supply to them would be exempt from VAT. Income which is exempt from VAT does not count towards the £85k threshold.
However – are they providing anything else? You mention that the accommodation is “semi-independent” – so are there also (for example) any supplies of care, catering or cleaning – or maintenance other than that for which a landlord would normally be responsible? You mention that the charges are processed weekly – so are the supplies of accommodation potentially short-term, which might be more aligned to provision by B&Bs? Or is the company just a management agency – i.e. are there two separate leases (landlord to company and company to LA), or is there just one lease (landlord to LA) with the company just handling rents and providing furnishing? The exact nature of what is being supplied needs to be known in order to be certain of the VAT liability, and the key to this will probably be in the contract between the company and the LA. It may be that there is nothing extra being provided by the company – but if that was the case, I can’t see why the LA wouldn’t contract with the landlords directly?
In the event that the exact nature of the supplies make the charges potentially liable to VAT, bear in mind that LAs are generally able to recover from HMRC any VAT that they are charged. This means that (subject to any contractual terms) if VAT registered, the company could add VAT to their charges at no cost to the LA. This would then entitle the company to reclaim the VAT incurred on furniture and any other VATable purchases … so VAT registration might be beneficial. But this is only possible if the income is not exempt.
Normally, you are only entitled to recover VAT that you incur on expenditure used for making taxable supplies to your customers. For these purposes, “taxable” includes zero rated income (e.g. basic food items, newspapers,etc.), but excludes VAT-exempt income (e.g. most property lets, some education, some healthcare).
Under Partial Exemption (see HMRC’s Notice 706), you are entitled to also reclaim VAT incurred in relation to exempt income only if the total amount does not exceed certain limits. These are currently (and have been for many years, so no real chance of any increases!) the lower of
- half of the expenditure VAT incurred for the period.
- an average of £625 per month.
You can reach that limit very quickly!
However it’s not just the letting agent’s fees where VAT recovery should be blocked or count towards these limits. It’s any expenditure that your business incurs in connection with its VAT-exempt activities. Also any expenditure covering a range of activities has to be apportioned. For example, if your main business was a shop and you’re letting the flat above it, any general costs relating to the entire building would have to be apportioned between the shop and the flat.
See HMRC’s notice 744B, sections 3 and 4:
https://www.gov.uk/guidance/vat-on-freight-transport-and-associated-services-notice-744bUnder section 3, the place of supply for your services is where your customer is – i.e. Ireland. The example at the end of section 3.4 shows that this is still the case even when the whole of the journey is within the UK. The location of the journey is only significant where customers are not businesses.
Therefore you don’t need to charge UK VAT to your customer.
The last paragraph of section 4.3 does say that you may be liable to register for VAT in your customer’s country. I’ve found the following guidance on the Irish Revenue’s website, which details when a foreign supplier must register for Irish VAT regardless of their turnover there:
https://www.revenue.ie/en/vat/foreign-suppliers-doing-business-in-ireland/non-established-traders-supplying-goods-and-services-in-ireland.aspxThe service that you’re supplying isn’t covered by the list, because (presumably) your customer is VAT registered there, and no part of the journey is in Ireland. Your customer will pay your invoice (no VAT), and they will then be required to account for Irish VAT with the Irish Revenue.
Although the link you’ve provided is a good summary, it’s worth looking at the detail in:
- HMRC’s public notice 708/6: https://www.gov.uk/guidance/vat-on-energy-saving-materials-and-heating-equipment-notice-7086
- HMRC’s internal manual, intended for use by their own staff: https://www.gov.uk/hmrc-internal-manuals/vat-energy-saving-materials-and-grant-funded-heating-supplies
- and the legislation itself (VAT Act 1994, schedule 7A, group 2): https://www.legislation.gov.uk/ukpga/1994/23/schedule/7A/part/2/chapter/2
None of the above make any specific mention of planning permission, which makes me think your inspector is hoping to find something on it which will help prove whether or not your supplies were eligible for the 5% rate. For example, part of the criteria is that the works must be carried out in residential accommodation – see section 2.20 of the public notice. Might the inspector have any doubt over whether the premises are “residential” – as this may be clarified in planning permission documentation? Could there be any doubt over the nature of the materials used, which may be clarified by detail within planning documents? Or are the buildings fairly new – as if the works are carried out in the course of a zero rated construction, they too will be zero rated rather than reduced rated – see section 2.20. Again, planning documentation may give some clarity over whether the works were part of the build, or undertaken separately later. There may also be other reasons that I haven’t been able to think of!
If based on the full guidance documents you’re still happy that your supplies fully met the conditions for reduced ratings, then I’d suggest replying explaining that you didn’t request planning documents from your customers as they weren’t required under the guidance, and also explaining for each case they’ve identified how you consider that the criteria are met. For example, was it under the social policy conditions in section 2.3 (in which case did you get any declaration by the customer?), or under the 60% test in section 2.4 (if so, provide any calculations). If you haven’t already done so, provide full details of the materials used – is there any relevant documentation produced by the manufacturer? If you can provide a detailed explanation as to why you’ve deemed the works to be eligible to the 5% rate, it’s then for HMRC to set out their reasoning more clearly if they still disagree.
As a final point, if you don’t currently get any customer declarations regarding their eligibility to the social policy conditions in section 2.3, it might be worth starting to do so. Although the responsibility is on you to ensure that the correct VAT rate is applied, you won’t know whether the customer is in receipt of any of the specified benefits, so holding a signed declaration from them that you have no reason to believe to be incorrect is the most you could reasonably be expected to do.
HMRC’s guidance is in notice 741A: https://www.gov.uk/guidance/vat-place-of-supply-of-services-notice-741a
The first step is to work out whether your supply is B2B or B2C. This depends on whether your customer makes any business supplies. See section 2.4 – if you’re still uncertain, you may need them to confirm.
Then work out whether any specific place of supply rules apply, or whether you default to the general rule. The only specific rule that I think might apply is in section 9, if your supply is deemed to be B2C.
In summary:
• B2B transaction, place of supply is Ireland
• B2C transaction and section 9 applies, place of supply is Ireland
• B2C transaction and section 9 doesn’t apply, place of supply is UK.If the place of supply is the UK (the last option above), you would be required to charge UK VAT.
If the place of supply is Ireland (either of the first two options) you don’t have to charge UK VAT – but there may be implications for your customer. A VAT registered customer must pay over VAT as if they were the supplier, and reclaim it as the customer. This is called the reverse charge – see section 5 of the HMRC notice for an explanation of how UK customers do this when receiving services in the UK from foreign suppliers. Obviously the reverse charge can’t be done by a customer that isn’t VAT registered, as they won’t have a VAT return to make the entries on. In the UK, HMRC require such customers to include the value of any supplies where a reverse charge adjustment would be required when assessing whether their turnover exceeds the £85k VAT registration threshold (section 5.7 of HMRC’s guidance). The rules in Ireland appear to be different – the link below is to their guidance. Your customer would need to determine from this whether they were required to register for Irish VAT due to this transaction:
https://www.revenue.ie/en/vat/vat-on-services/exceptions-to-the-general-place-of-supply-rules-for-services/received-services/index.aspxThat’s probably more of a contractual / accounting issue than a VAT one! Would it be your money anyway – or when you sold the business, did the new owner effectively buy all its assets and liabilities – including any amounts that may be due from the management company?
Realistically, you can’t keep the VAT registration open just in case the management company may decide that you’re entitled to something at some point in the future! But if you do get income later, you’ll need to establish what the formal “tax point date” of the transaction is. That’s largely going to be down to the detail of the contractual relationship between you, the management company, the hotel (if different) and the guest(s) staying there – so not easy to advise on via a forum! If the tax point date is during the period you were registered, then you could probably treat it as an error in the quarterly return covering the tax point date and notify HMRC. If the tax point date is after the end of your registration, you would technically need to determine whether you were liable to re-register.
Hi Ed – you’ve got the right principle about VAT only being due on your standard rated (“VATable”) sales, not those that meet the criteria for a zero ratings. A couple more points to bear in mind:
The threshold is £85k and you’re required to notify HMRC within 30 days of the end of the month in which you exceed the threshold. Your registration effective date is then the first day of the month after that. For example – say you exceeded the threshold in May. You would have to notify HMRC by the end of June (30 days after the end of May), and VAT would only apply to turnover from 1 July. So, depending upon when in May you exceeded the £85k, there’s an additional one to (nearly) two months’ worth of turnover that won’t be subject to any VAT. You only need to look at your turnover since the effective date of your registration, calculated as above.
VAT is 20% of a VAT-exclusive amount (the “net” amount), not the amount you received from your customers (the “gross” amount). Assuming that you’re not able to go back to your customers and charge them an extra 20%, the VAT that you’ll need to pay HMRC is only 1/6th (20/120ths) of the income, not 20% of it. For example, if £12k of the turnover you’ve received since the date you should have been registered relates to standard rated sales, you owe HMRC £2k, not £2.4k. This is because the £12k is £10k net turnover + 20% VAT.
Having said that, who are your customers? If they are VAT registered businesses, they may well be able to reclaim any VAT that you charge them – so might be prepared to pay you an extra 20% on a VAT-only invoice once you’re registered.
Finally, once registered you will be able to reclaim VAT on your business expenditure – in relation to both standard and zero rated sales. There is also the potential to reclaim VAT on some expenses incurred prior to your registration – general limits are services up to 6 months pre-registration, and goods up to four years pre-registration provided that they are still owned by your business. Obviously your accountant will go through this in greater detail with you, but if there is a delay before you can see them, it would be worth making sure that you’ve got documentation to support these pre-registration purchases (e.g. invoices from your suppliers) to hand.
HMRC’s notice 700/11 contains a link for cancelling a VAT registration online – that may be the best option. See section 2.2 for instructions. I’m assuming that the new owner will have VAT registered in their own right, rather than your registration being transferred.
https://www.gov.uk/government/publications/vat-notice-70011-cancelling-your-registration/vat-notice-70011-cancelling-your-registration#basic-informationI’ve never done a deregistration, but the guidance implies that you give the reason for deregistering (in your case, compulsory due to taxable activity having ceased) as part of the process.
Provided that the professional fees invoice is dated prior to the end of August, you can include it in the Jun-Aug return, then cancel your registration as above.
Assuming that the VAT registration number hasn’t transferred to the new owner, you shouldn’t need to be involved in their VAT return. Theirs may not be Jun-Aug anyway, different businesses’ VAT quarters end in different months. The management company will presumably only be providing you with figures covering the period up to the sale (not the end of August) and will provide figures to the new owner from the sale to whenever their VAT quarter ends.
Hi – the fact that you’ve both been operating your businesses independently for a number of years helps. HMRC try to prevent new or existing businesses avoiding VAT registration by artificially splitting into two smaller ones, and they’ll then investigate how “independent” the two businesses really are. But in your case, HMRC presumably wouldn’t currently question whether your businesses were truly independent – so you just need to be sure that nothing suggests they’re being merged.
I can see why you’ve considered the option of renting a separate office space, but I don’t think that would necessary prove anything. It wouldn’t in itself prove the independence of the two businesses, as a single business could operate from multiple locations – and you can often get numerous totally unrelated small businesses operating from a shared workspace. Just continue to keep the ownership and practical operation of the two businesses separate. If there are ever any transactions between them (e.g. an advert on one website for the other’s products?), ensure that they are done on proper commercial terms – with the appropriate documentation and charges being invoiced and paid in the businesses accounts. Effectively, make sure that you both treat each other’s business in the same way that you would treat any other competitor business. If the only change that happens to the two businesses is their owners sharing an address, you should be fine.
Hi – not sure what is happening with this site – I couldn’t get into it for a while, and now I’m seeing different versions of it depending on what browser I’m using! So hopefully this reply will get through, and you’ll be able to see it…
I hadn’t considered a management company in my previous reply. They are (probably) right, in that if they’re issuing a “self-billing” invoice to you with a payment, the tax point of your transaction is that shown on their invoice – later than the date you sold the room.
If that is the final invoice, then technically the time limit for de-registering would start from then – as that is the point at which you know that you’ll no longer have taxable business income. Although if you’ve been trying to get replies from HMRC since late July (and you’ve got evidence of this), it would be good justification if it turns out that you’ve missed a deadline. But you should now contact them and notify them that your taxable activity has ceased.
You then have two options. You could ask them to defer the deregistration for the six months and submit the next two returns as normal, assuming that you’ll have the professional fees invoice within that time. Alternatively, there’s nothing to stop you now submitting the June-Aug return straight away (you don’t need to wait until the first week of October) so that it gets through before your de-registration is processed – then you’ll just have to use the VAT427 to reclaim the VAT on the professional fees.
