Wednesday, 30 January 2013

VAT on Legal Fees are not Always Recoverable

Issue 12: VAT on Legal Fees 
It is quite common for a business to pay the expenses incurred by a third party.

Imagine you are moving into your business premises and as part of the negotiation for the lease you agree to pay the landlord’s legal expenses. Now you are thinking “that’s a small price to pay for such a fabulous building plus I can recover the VAT”. WRONG!

Remember, one of the basic VAT rule is who is the legal services being supplied to? In this instance it’s the landlord, so you my friend cannot recover the VAT even though you are the one that paid it. Don’t cry because I bear glad tidings.

Assuming that the landlord is VAT registered and the rent they are charging you is standard rated, this is how you get out of that trap:

Get the solicitor to send you the bill with just the net amount and ask them to send a VAT only invoice to the landlord. Simples.

What that does is you only pay the net legal fees and the landlord recovers the VAT. Just always be aware of any transactions that involve three parties.

I am Marlon “Mr. VAT” Appleton

Wednesday, 23 January 2013

VAT: Be Careful When Planning

Issue 11: Change of Plans
Following on nicely from issue 10, over an awful cup of coffee at 4:22am, I want to share this one with you.

If you incur VAT in relation to an intended taxable supply, but then you decided, I can’t be asked I am going to make only exempt supplies. The consequence of you changing your mind to exempt supplies is that the input VAT you recovered in relation to the intended taxable supply must be paid back to HMRC. Yeah it sucks…but…if your exempt supply was made after 6 years then there is no input tax to repay.

Example, in January 2007 you decided to incur costs on renovating land you own because you are going to supply car parking spaces which is a taxable supply (similar to NCP). The VAT you incur is therefore fully recoverable. However, you never carried through with the planned supply and during February 2013 (over 6 years later) you instead decided to use the land for renting residential accommodation (exempt supply). With this switch to exempt supply you would normally have to pay back the VAT you recovered in renovating the land but since your decision to make the exempt supply was taken after the 6 year threshold there is nothing to pay back.

Law: VAT Regulations 1995 (SI 1995/2518), reg. 108 and 109

Wednesday, 16 January 2013

For VAT Your Intention Matters

Issue 10: Abort, Abort
I love this energy that I have. It’s 3:48am and I am buzzing with excitement about writing this next VAT article.

If you incur VAT in relation to a supply that you wish to make but it never takes place (aka Abrotive Supply), then your input VAT is fully recoverable if your intending supply would have been a taxable supply. Quite a mouthful I know but check out this example.

Imagine you set up your company with the intention of selling widgets (fully taxable). You did all the profitability studies and incurred a considerable amount of expense and VAT. You then decided it’s not worth it and you abort your plans to buy and sell widgets. Now normally you cannot recover your input tax if you are not carrying on a taxable business but because that was initially your intention then recovery is allowed

The good guys at HMRC have confirmed that you can recover your input tax if it directly relates to your intended/abortive taxable supply so please give them a virtual hug.

Case law: INZO v Belgian State; Beaverbank Properties
HMRC information Sheet 8/01
HMRC Business Brief 14/04

Wednesday, 9 January 2013

What To Do If You Lose Your VAT Invoice

Issue 9: The Dog Ate My VAT Invoice
Its Boxing Day 21:40 pm, and I have a little beauty for you guys.  

Imagine this scenario, you are a model member of society, you pay your taxes like the rest of us and you help old ladies across the street like some of us.

Now it’s time to do your VAT returns and you realize you have lost an important purchase invoice that you desperately need so you can recover the VAT and, to add to the worry, your supplier is unable to send a copy to you on time. You therefore decided to put it in your return and lo and behold the VAT inspector decides to pay you a visit this time around (Murphy’s Law).

But guess what, there is no need to worry (or implicate your dog). VAT law gives you the opportunity to estimate your input tax and use alternative evidence so you may recover the amount in question. 

Please however notify HMRC in writing before you proceed. They are actually nice people once you get to know them J.  

Law: VAT Regulations 1995 (SI 1995/2518), reg. 29
Principal VAT Directive: Article 182
HMRC manual: VIT31000

For further clarification please contact Marlon Appleton