The Fizz! Blog

One supply or two?

A common theme of VAT cases is attempts by businesses to claim that they are selling two separate things when they're actually only selling one.  The reason that you'd try and do this is that some things have VAT on them - meaning that if you sell them you have to give some money to the taxman - but some things aren't - meaning that you can keep all of the money.

Though sometimes a claim will succeeds, often they're audacious or just silly.  The benchmark for some time has been Sky TV's claim that their subscribers were buying a) satellite TV and b) a monthly magazine.  If they'd succeeded in that claim, they would have been able to cut their VAT payments, as there's no VAT on magazines.  Of course, they didn't succeed, as it was a ridiculous claim, and every level of tribunal and appeal quite rightly found that the prospect of a magazine didn't enter into a customer's mind when they signed up - it was very much incidental to the main supply of TV channels.

But, following a VAT tribunal case in the summer, Sky have lost the crown for the most ridiculous claim, which now belongs to Purple Parking.  They're one of the companies that provide parking near airports, and then drive you from the car park to the terminal.  Their - undeniably imaginative - claim was that their customers are purchasing two things - a) car parking and b) a ride in a bus.  When the tribunal had stopped laughing, they told Purple Parking that their customers were plainly buying parking - the clue is kind of in the name Purple Parking - and that the bus ride part is incidental to that.  Sometimes you do wonder how much thought goes into making these claims, particularly bearing in mind the hefty professional fees that must be involved.  Although you often have to applaud creative attempts to minimise tax burdens, this isn't one of those cases!

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Are Pringles crisps?

This is a question of vital importance to HM Revenue & Customs, and it has been rumbling through the courts for some years.  But it's now all over, and the verdict is...

Yes, Pringles are crisps.  This is bad news for Mr Pringle, but good news for the VATman, because it means that Mr Pringle needs to hand over some VAT every time he sells a tube of his delicious snack.

The central question in the dispute has been whether Pringles (which are around 42% potato, 33% fat and 25% other stuff) are "made of" potato.  For obscure reasons I won't go into, VAT rules mean that if they're "made of" potato then VAT is due on their sale but if they're not "made of" potato then it isn't.  Ironically, given that he's probably generally reluctant to boast about the small quantity of potato in his potato-based snack, Mr Pringle had taken the position that there is so little potato in his products that you couldn't really say they're made of potato.  On the other side, the VATman has been saying that the man on the Clapham omnibus would consider Pringles to be made of potato, regardless of the precise quantity of potato contained within.

To cut a very, very long story short the judges agreed with the VATman - that common sense says that Pringles are made of potato.  Their position can be summarised in this excellent passage from the judgement:

VAT legislation uses everyday English words, which ought to be interpreted in a sensible way according to their ordinary and natural meaning. The "made from" question would probably be answered in a more relevant and sensible way by a child consumer of crisps than by a food scientist or a culinary pedant. On another aspect of party food I think that most children, if asked whether jellies with raspberries in them were "made from" jelly, would have the good sense to say "Yes", despite the raspberries.

Although I'm not sure what the child would say if presented with a pudding that was 42% jelly, 33% fat and 25% other stuff.  I guess that's trifle, thinking about it, so they'd probably be quite happy.

Incidentally, while this case might seem trivial, the amounts of VAT that were at stake were certainly not trivial at all - in the first instance the cost to Mr Pringle of this verdict is £100m, with a further £20m a year cost from now on!

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Entertaining overseas clients

A verdict in the European Court of Justice has given UK businesses the opportunity to reclaim VAT on the costs of entertaining overseas customers.

A long time ago, businesses were allowed to reclaim VAT when they incurred costs entertaining overseas customers, but not when they entertained UK customers.  Then Customs changed their approach and blocked the recovery of VAT on all entertaining of customers.

However, in the cases of Danfoss and AstraZeneca it has been decided that this change was disproportionate compared to the problem Customs were trying to solve, and that it may be ineffective as a result.  This has opened the door for businesses to claim VAT back on the costs of entertaining overseas customers, and they can go back as far as 1 May 1997 - though a claim going back to then will have to be submitted by the end of this month.  There's detail about what you actually need to do on the HMRC website.

Obviously, this verdict isn't going to be of a great deal of use to most UK businesses - by and large, where businesses do entertain customers they are likely to be from the UK.  But for a few businesses it will be very good news.

Fizz provide a complete range of accounting and taxation services for SMEs, in Oxfordshire, Buckinghamshire and further afield.  Visit us at www.fizzhq.com or call us on 01844 215682.

VAT change - the practicalities

By far the biggest news for small businesses in yesterday's Pre-Budget report was the decrease in the standard VAT rate from 17.5% to 15%.  There’s both some thinking and admin to be done, and not much time to do it.  The key points as follows:

Selling to consumers
If you’re a VAT-registered business selling to private individuals, then you’ll need to decide what you’re going to do with your prices.  Do you keep your net prices the same and add on the new lower VAT rate, making your products or services cheaper to the consumer?  Or do you increase your net prices slightly and add on the new lower VAT rate, making your prices to the customer exactly the same as they were before, effectively keeping the VAT saving for yourself?  The government is hoping you’ll do the former, but there’s nothing to stop you doing the latter, unless you’re in a highly price-competitive market where your competitors will drop their prices and effectively force you to do the same.  In some cases it could be completely reasonable to not pass the VAT reduction on to the customer.  If I had lots of menus and wine lists printed up for a pub, restaurant or take-away, I’d be highly reluctant to have them all reprinted just because the government want me to reduce sausage and mash from £8.95 to £8.76.  And is the Argos catalogue going to be reprinted?

Incidentally, the rate of duty on petrol, alcohol and tobacco has been simultaneously increased so that the price of those items to the consumer will remain unchanged.  As is often the case, what governments give with one hand they take away with the other.

Selling to other businesses
If you’re a VAT-registered business selling to other VAT-registered businesses, this is obviously an admin change that will make no difference to your income at all.   You pay the VAT on your sale to the taxman, your customer reclaims it from them.  So if you keep your net price the same, you’ll be in the same position financially as before.

Accounting Software
Whether you’re selling to consumers or businesses, from next Monday the invoices you send them obviously have to change, showing and charging VAT at 15% not 17.5%.  If you do your invoicing and recording of transactions in, say, Excel, as many people do, then it should be pretty easy to just change the VAT rate in whatever template you use.  If you’re using accounting software, then you’ll need to change the VAT rate that the software uses – probably by setting up a brand new VAT code on the system.

Flat-Rate Scheme
If you’re on the flat-rate scheme, then the rate for your industry has probably been revised downwards.  The main list of rates on the HMRC site hasn’t been updated yet, but the new rates are in Annex E to this document.

A last thought on the VAT change
Spare a thought for an accounting firm which encourages its clients to pay by a monthly standing order.  All those standing orders have to be revised very, very slightly downwards, in the next seven days, even though it will make no difference to the firm’s income or the cost to its VAT-registered clients.  If you pay Fizz by standing order I’ll be in touch in the next few days to get the amount changed…

The Revenue & Customs page on the changes is here.

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Car-derived vans

A pretty obscure subject and of limited interest to most people!  But, for the few people who may be interested:

If a VAT-registered business buys a car, it can't reclaim the VAT on it (in 99.99% of cases).  When it buys a van, it can.  Therefore if there's a dispute over whether a vehicle is a car or a van, the taxpayer will argue van and the taxman will argue car.

A car-derived van is, as you'd think, a van based on a car - no rear seats, no back windows etc.  Whether the taxman considers it a car or a van depends upon the exact design.  Helpfully, they have published a list of such vehicles here:

http://tinyurl.com/59h58o

Hopefully this is of use to someone!

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Made an error on your VAT return?

If so, there was a change that was hidden away in the Budget that's actually quite useful.

For the last 10 years at least, if you realise you've made a mistake on your VAT return, then you've been able to just correct it on your next return, as long as the error was of £2,000 or less.  Any more than that and you have to fill in a special form.

Now, that threshold has been increased to £10,000, (or 1% of turnover, up to a maximum of £50,000, if that's greater - but if your turnover is less than £1million then £10,000 is the right figure) which means that many more errors can just be amended on the next return without jumping through hoops.

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