VAT pitfalls: prevention is better than cure

As with most things in life, prevention is better than cure.

This is particularly so when it comes to effective tax planning, where problems seen in advance can negate their effects later on. VAT in the UK is of course no different, where it is much easier to avoid problems upfront, rather than trying to remedy them after the event. In many situations, VAT really should not be a cost in the supply chain, however, there are unfortunately many pitfalls.

Property transactions

Property transactions are often high value and complex. Property developers, despite regularly dealing with VAT on land transactions can get it wrong and this risk is even greater for businesses where property transactions are not a core part of their day to day activities. This can lead to some common pitfalls:

Leases granted for nil premium and a peppercorn rent

In such situations, as there is no consideration provided by the purchaser, it is unclear whether there is a supply taking place at all. HMRC has sometimes argued that the vendor is not even ‘in business’ and so is not entitled to recover VAT on costs relating to the transaction. This could include VAT incurred on the acquisition of the land and on any development works that have taken place.

Barter transactions

Barter transactions are not just specific to property but tend to occur more frequently in land and property deals. Some businesses can lose sight of the fact that, for VAT purposes, there are two supplies taking place and both sides need to consider whether VAT is due on their respective sales. Additionally, there can be questions as to what is the correct value to be applied when there is both monetary and non-monetary consideration paid. Further, there has been some property deals where one of the parties considered that there was an unequal value (for example ,the value of the non-monetary consideration provided by ‘company A’ was, in their view, not the same as that provided by ‘company B’), which led to differences in the VAT amounts payable and the potential for unexpected VAT charges.

Option to tax

For commercial property it is possible for businesses to elect to charge VAT. There are often misunderstandings about the process of ‘how’ an option to tax is made and ‘why’ they would do so. In a recent property transaction the purchaser was under the misapprehension that they would automatically inherit the vendor’s option to tax, which was not the case, and which potentially threatened their recovery of VAT incurred on the property purchase. In addition, a valid option to tax can be one of the key conditions for Transfer of a Going Concern (TOGC) treatment applying where the business assets include land or buildings. An option to tax can help to prevent VAT costs in supply chains where there should be no need for them to arise.

International trade

Evidence of removal from the UK

This is a principal VAT risk area for UK exporters of goods.

A key condition for not accounting for standard-rate VAT on sales of goods that are removed from the UK (the sales become zero-rated) is that the supplier holds valid commercial evidence of export. This is a common area for HMRC to review during a VAT inspection and an area where we frequently see assessments being raised for underpaid VAT. Exporters from the UK need to ensure they have robust processes in place and liaise with their freight agents to ensure that the relevant documentation is retained, and within the right time periods. A particular risk area is where the customer collects or arranges for the shipment from the UK as suppliers may not ever be provided with copies of the required shipment evidence.

Import VAT reclaims

Post Brexit the UK implemented Postponed Import VAT accounting (PIVA) which brings cash flow benefits by deferring payment (and recovery) of import VAT to the VAT return. The old system also operates in parallel and there are still some organisations who pay import at the time goods are imported and then reclaim the VAT on their VAT return several months later. We still come across businesses unsure as to what methodology they are applying and this risks unexpected import VAT costs arising.

Other points

Failure to charge VAT on cross-charges between members of the same corporate group

Generally, recharges of costs and supplies of services between UK entities are VATable supplies and the default position is that VAT at 20% is due. Some businesses fail to raise VAT invoices and fail to account for VAT on these cross-charges and this can present easy targets for HMRC during VAT audits. Where the recipient entity is partly exempt or unable to reclaim VAT then a failure to account for VAT by the supplying entity is even more significant as there are anti-avoidance rules that can create annual tax points and an increased risk of unexpected VAT costs arising.

Routine errors in the preparation of VAT returns

It is not uncommon for businesses to have a standard VAT return template that is rolled-forward from return to return. This may have been set-up by someone who is no longer within the organisation or the person using the template may not understand the reasons behind certain calculations or adjustments. In such instances basic errors can creep in, such as incorrect exchange rate calculations overstating the amount of VAT to be reclaimed and formulae errors where incorrect amounts are summed or cells are missed. Making Tax Digital for VAT was introduced a few years ago and requires the digital preparation and submission of VAT returns, together with the retention of certain digital records. This regime helps to reduce the risk of errors but does not eliminate

Summary

In most of these situations, the law doesn’t intend there to be a VAT cost, but because of the way that the transactions were carried out, one has arisen. VAT is a fact specific tax, so specialist advice should always be sought to prevent costly and unexpected surprises arising. Prevention is better than cure, so it is best that this advice is sought up front and not after the event as a way of avoiding unexpected, and unwanted, surprises.

If you would like to discuss this further, please contact Robert Marchant, or your usual Crowe contact.

This article was first published on Forbes on 9 July 2024.