Last reviewed 10 September 2020

Some recent court decisions have changed the way VAT is accounted for on deposits, cancellation fees and advance payments. It is often unusual, or infrequent, receipts that cause problems for VAT accounting. Most businesses know the VAT liability of the supplies that they make on a regular basis, but transactions that differ from the norm, or are unusual for the business are often treated incorrectly.

The present author has considerable experience in dealing with these unusual transactions. When a visiting VAT officer for HMRC (or Customs and Excise as it then was) these were the transactions that were the most fruitful to examine to see if a VAT assessment could be raised. To identify these, the cash book, petty cash records and sundry accounts would be examined to identify transactions where VAT had been accounted for incorrectly. Consequently, it is important to understand when VAT is chargeable on transactions.

When is VAT due?

VAT is due on any supply made of goods or services in the UK unless there is an exemption or zero-rate relief, or the supply is outside the scope of VAT. It should be noted that if the supply is not made in the UK the supply will be likely to be subject to VAT or a similar tax in the country where the supply is made. Determining the place of supply can also be difficult for VAT and where it is thought that a supply is made overseas it is advisable to obtain advice. For example, if you supply a service to a non-business person overseas this is frequently regarded as being made in the UK and subject to VAT, though there are exceptions to this general rule.

Zero-rating and exemption

No VAT is charged where a zero-rated or exempt supply is made. It is essential that the supplier, however, ensures that the supply is zero-rated or exempt. These supplies are exceptions to general rule of taxation (that is applying VAT) and as such will be applied narrowly; it could be said that if there is doubt the supply will be subject to VAT.

Common zero-rated supplies include exports, supplies of some foods, children’s clothing, some charitable supplies and new residential construction. Common exempt supplies are insurance, finance, property rents (unless subject to the option to tax) and some welfare services. The dividing line between supplies that are subject to VAT and those that are not can be narrow. For example, sporting services supplied by non-profit making bodies are exempt, but the same supplies supplied by a profit-making body are taxable. In cases of doubt advice can be sought.

The difference between a zero-rated supply and an exempt supply is that whilst VAT is not charged on either supply, VAT cannot be reclaimed on expenses that relate to an exempt supply. Where a zero-rated supply is made all VAT on expenses relating to the supply can be reclaimed.

A further relief from VAT is the lower rate of VAT of 5%. This applies to some health and welfare services, the supply of power to domestic and charitable properties and qualifying construction services converting, extending or renovation domestic properties. Property transactions are, therefore, extremely complex as they can be exempt, zero-rated, subject to VAT at 5% or 20% and some exempt transactions can be subject to VAT where the option to tax is exercised!

Unusual and sundry transactions

Businesses frequently make errors in respect of unusual, sundry or infrequent supplies. A few examples are given to highlight the problems that businesses incur.

Delivery charges: Businesses frequently do not charge VAT on a delivery charge as it is thought that as the Post Office does not charge VAT on stamps, that no VAT is due on a delivery charge. This is not the case. The delivery charge is regarded as part of the value of the supply of the delivered goods. Thus, if the goods are subject to VAT and cost £110 with a £10 delivery charge, the value for the supply of the delivered goods is £120. VAT is due on this amount (that is £20). Where, however, the delivered goods are zero-rated goods (such as newspapers) no VAT is chargeable, as the delivered goods are zero-rated.

Part-exchange: Where goods re part-exchanged there are two supplies. For example, if a van is sold in part-exchange for a new van, here is a supply of the old van to the dealer and the supply by the dealer of the new van to the business. VAT has to be accounted for on both transactions. Businesses can occasionally forget to charge VAT on the van part-exchanged. Where the item part-exchanged is not eligible for an input tax claim (such as a car) there is no VAT due on the part-exchange.

Sales of scrap, waste or rubbish: Businesses often forget to account for these sundry sales. Frequently, these are cash sales and do not go through the normal invoicing system. They are, however, subject to VAT and need to be accounted for (unless they are zero-rate or exempt supplies).

Deposits and advanced payments: Before 1 March 2019 HMRC allowed deposits received and advanced payments for goods not collected or services not used to be treated as outside the scope of VAT, that is no VAT was chargeable. After 28 February 2019 these payments are subject to VAT as soon as the payment is received or when an invoice is raised.

Compensation payments and early termination fees: These payments have until recently been regarded as outside the scope of VAT. This was because they were regarded as being payments for no supply. Recent Court judgements have made it clear that these payments are for contracted services and subject to VAT (unless they are eligible for a VAT relief). It should be noted, however, that if the payment is to compensate somebody for a loss and there has been no supply or contracted supply there may be scope to argue that the supply is not subject to VAT.

As can be seen, VAT can be complicated and the VAT liability of supplies can change. It is, therefore, worth reviewing business supplies and income to ensure all transactions are being accounted for correctly.