Your VAT queries answered

Welcome to this quarter’s VAT blog highlighting some of the most common queries we’ve answered lately.

It covers:

• Can my VAT returns be monthly rather than quarterly?
• What bookkeeping software packages are compliant with the new Making Tax Digital rules from 1^stApril 2019?
• Does Nordens have an insurance cover to protect me against HMRC?
• What is the liability regarding deposit payments and refunds?
• Does the Flat Rate Scheme regarding company vehicles apply to me?

Answers:

Can my VAT returns be monthly rather than quarterly?

You can request monthly VAT returns by completing a VAT484 form, section 3. However, there is specific criteria that your company must meet to be approved for this: your VAT returns must always be in a repayment position, whereby HMRC owes you money. If your situation should change and your VAT return shows that you owe a payment HMRC, they would remove you from the monthly process.

What bookkeeping software packages are compliant with the new Making Tax Digital rules from 1^st April 2019?

There are many bookkeeping software packages that are compliant with the MTD rule changes that come into play from 1^st April.  The most popular are Xero, Quickbooks, Kashflow and Sage. We recommend Xero and Kashflow as the best products to use as they’re particularly user-friendly.

Does Nordens have an insurance cover to protect me against HMRC?

You’ll be pleased to hear that we work with a company called Abbey Tax which provides insurance to our clients. This can protect you against a variety of things including, most importantly, any tax investigations that you may find yourself involved in.  If you would like to take out this insurance with us, please get in touch with Lisa Gold: lisa.g@nordens.co.uk. It is important to note that there are capped amounts for certain covers, but we’ll explain all this to you if you’d like to go ahead with the cover.

What is the liability regarding deposit payments and refunds?

This is a slightly longer question and answer…  One of our clients has asked this question and it’s a useful case study that could apply to you too.  A newly vat registered limited company, hires out plant and machinery to UK construction companies. They have introduced charging a security deposit when the customer collects the goods, which is refunded on their safe return. There have been times where the goods have been found to be damaged on return, therefore the company only refunds a part of the deposit or the deposit is taken in full. What is the liability of this payment?

The company also charges a 20% deposit as an advance payment, in order to secure the future hire of goods. Occasionally customers cancel their order or do not show up by the agreed time, and in these situations, the company keeps the deposit. Is there any output tax to declare on this?

The answer…

A security deposit does not represent “consideration for a supply” and therefore does not create a tax point. This is because the payment is to be returned in full to the customer for the safe return of the goods hired. If the goods are not returned in their original state or in accordance with the terms in the contract and the company decides to retain the security deposit, whether in full or in part, the money retained is outside the scope of VAT as a compensation payment.

The customer has breached the terms of the contract by damaging the goods. A deposit paid to secure a piece of equipment would create a tax-point, as this is “advance consideration for that supply” as per section 6(4) of VATA 1994. A tax point arises when a VAT invoice is issued or a payment is received prior to the service being completed. If the order is then cancelled, this may be a breach of contract so the amount originally taken can be treated as compensation. Or, it may be that the customer has the right to cancel, and because no supply takes place, the cancellation charge is outside the scope of VAT. Output tax accounted for on receipt of the deposit can then be reversed. This is quite a complicated scenario so please feel free to call us for a plain English, jargon-free explanation.

Does the Flat Rate Scheme regarding company vehicles apply to me?

This is another case study that might apply to you.  Another client trades as a limited company and operates using the Flat Rate Scheme for small businesses (FRS). The company purchased a car in 2015 which was used for business and private purposes. He also bought a van for £18,000 + VAT, which had minimal private use. No VAT was recovered on the purchase of the car but he did claim it on the van. This client is now selling both of the vehicles; do we need to account for the VAT on the sales?

The answer:

Businesses using the Flat Rate Scheme cannot generally recover input tax; this is because the flat rates have been calculated to incorporate an allowance for input tax. However, VAT can be recovered on some goods of a capital nature purchased by the business where there is a single purchase, and the amount of the purchase is £2,000 or more including VAT.

This provision to allow recovery of input tax on capital expenditure goods would have allowed this client to recover VAT on the van. Whether a business calculates its VAT using the FRS or normal accounting, as a general rule it cannot recover VAT on the purchase of a car. The exception to this rule is when the car is bought, imported or acquired in one of the following circumstances:

• as stock in trade of a motor manufacturer or dealer;
• intended to be used primarily as a taxi, driving instruction car, or self-drive hire; or
• to be used exclusively for the purposes of the business and not to be made available for anyone’s private use.

As the client bought the car for both business and private use, the input tax is blocked.  Where a car, on which input tax was not recoverable, is sold, the sale is exempt. For a business accounting for VAT under the normal rules, this would mean that output tax would be accounted for on the sale of the van, but not on the car.  However, because the FRS captures exempt sales, a Flat Rate business must account for output tax on the car sale by including it as Flat Rate turnover.  The sale by a Flat Rate business of an asset on which input tax has been recovered is dealt with outside the FRS, meaning that VAT on the sale of the van will be accounted for at 20% as charged, not at the Flat Rate percentage.

If you have a VAT-related query that you’d like us to answer, please call the VAT team on 020 8530 0720.

With all the best for a successful 2019!

Kirsty, Svetla, Maria, Jody, Stacey and Harjeet