'Out of Scope of VAT' purchases v Vat Return Box 7 - To include or not?

[Deleted member 246573]

Despite what I thought, HMRC just told me on the phone that 'Out of the scope' of VAT purchases do actually go into box 7 IF they are considered as a SUPPLY to your business. The only 'Out of the scope of VAT' purchases that do not go into box 7 are the ones that are NOT A CONSIDERATION FOR A SUPPLY (like charity payments, road tax etc), as mentioned in the list of things 'not to include' in Box 7 VAT NOTICE 700-12 paragraph 3.8 (You can find this via gov.uk)

In this notice, as the VAT helpline woman explained to me, HMRC states that some 'Out of the scope of VAT' purchases don't go into box 7 because they are
"income which is outside the scope of VAT because it is NOT CONSIDERATION FOR A SUPPLY."

The point being that these purchases are BOTH outside the scope of Vat AND not a consideration for a supply, as the HMRC woman put it, e.g. a payment to charity.

The example of an out of scope purchase I wanted clarity on how to account for was a purchase of a website plugin from a US based company which gave mention of 'reverse charge VAT' or any EU VAT registration on its invoice. I can therefore assume, according to HMRC lady, that VAT doesn't come into the purchase i.e. that it is 'out of the scope of VAT'. She said, however, that it should be included in box 7 because it is a SUPPLY TO MY BUSINESS nonetheless, even if there will no mention of actual VAT to reclaim in box 4. She also explained that a charity payment I make, for example, would not be included in my box 7 because it is BOTH 'out of the scope of VAT' AND not considered as a supply to my business.

My questions:

- Is this correct? It makes sense to me but I'm not an accountant so I could easily be wrong. Any thoughts from someone who knows VAT? I have read another blog which says the opposite: (Google difference between zero exempt out of scope vat)

- Why do they use the word 'income' at the beginning of the sentence of the sentence I quoted above when we're talking about box 7 'purchases' i.e. inputs. Do you think it's a typo and they meant to write 'input'?

Full paragraph:
700-12 3.8 Filling in box 7

"Box 7 The total value of purchases and all other inputs excluding any VAT

Show the total value of your purchases and expenses but leave out any VAT.

You must include the value of:

• imports
• acquisitions from VAT registered suppliers in other EC Member States (that is any figure entered in box 9)
• ‘reverse charge’ transactions (see paragraph 4.6).

However, you do not include the value of any of the following:

• wages and salaries
• PAYE and National Insurance contributions
• money taken out of the business by you
• loans, dividends, and gifts of money
• insurance claims
• Stock Exchange dealings (unless you are a financial institution)
• MOT certificates
• motor vehicle licence duty
• local authority rates, or
• income which is outside the scope of VAT because it is not consideration for a supply

Paul
YogaMonkey

 

[teddys]

'Out of scope' should not be confused with 'exempt' supply. An example of out of scope of UK VAT is a B2B supply made to a business within the EU where the buyer accounts for VAT, applying the place of supply rules. You do not show that supply on your vAT return.

If the place of supply for a B2B purchase made from the US is the UK then you ought to account for the purchase under the 'reverse charge' mechanism and you do need to put it on your VAT return.

 

[Onion4Sage]

However, you do not include the value of any of the following:

• ...
• income which is outside the scope of VAT because it is not consideration for a supply

Paul
YogaMonkey

My own personal take on this is that the above is a clumsy way of trying to describe expenditure incurred regarding goods/services supplied by persons/entities who are not VAT registered and not required to be registered for VAT. It is income in the hands of the unregistered business and it is their status that is key to regarding the transaction as "outside the scope of VAT".

The only way I can make sense of it is to expand it as noted in red below:

• Expenditure incurred which, in the hands of the supplier, is income which is outside the scope of VAT because it is not consideration for a taxable supply

These expansions reflect a view that it is both the status of the supplier and the nature of the supply which determine whether something is VATable - not just the nature of the supply. Opinion seems to be split on this point.

HMRC's definitions (emphasis in green added):

• taxable person: any business entity that buys or sells goods or services and is required to be registered for VAT - this includes individuals, partnerships, companies, clubs, associations and charities
• taxable supplies: all goods and services sold or otherwise supplied by a taxable person which are liable to VAT at the standard, reduced or zero rate

I think it reasonable to conclude that goods or services supplied by non VAT registered persons are not taxable supplies (irrespective of the nature of the goods or services supplied). When such goods or services are purchased (as opposed to sold) I think it equally reasonable to consider both the status of the supplier and the nature of the goods or services supplied in determining whether a taxable supply has taken place.

 

[Deleted member 246573]

Hi Ian,

Thanks for your input. The points you raise about the "taxable supply" and the "taxable person" make great sense but don't match what it says in 700-12 3.8, nor what the HMRC VAT helpline lady told me. Sadly, I am beginning to see that everyone has a different view. I will phone teh VAT helpline one last time to put forward the conflicting views I have been given and see if I get another one, or if they concur.

Best,

Paul

 

[David Griffiths]

At the end of the day, it doesn't matter. With one exception, the only time that I've seen a query raised about the value of box 7 is when the input tax claimed is more than than 20% (at today's rate) of box 7.

The solitary exception was by a clueless VAT inspector trying to tie up box 7 with cost of sales in the accounts of a motor dealer, but didn't know enough to make an adjustment for stock movements. That was over 30 years ago, and I've not seen the figure even mentioned since then.

 

[Deleted member 246573]

Yes, I agree that it shouldn't really matter, but I've got a VAT records inspection on Friday and I realise there are loads of things like this that I have misunderstood for years so I'm trying to get my facts in order before trawling through 16 VAT returns and correcting them all. Oh, joy is me!

 

[Onion4Sage]

Paul,

Good luck with your quest. I'd be interested if you get any clarity. Here's another nugget to confuse matters more!

VAT notice 700 3.2

Supplies are outside the scope of the tax if they are:

• made by someone who is not a taxable person

Regards,

Ian

 

[teddys]

@OP

Looks like you're interested in the technical part of it. So here we go:

1. The primary law behind VAT is VATA 1994
2. In order to claim input VAT, generally speaking, you should be making taxable supplies (s.26(2) here.
3. When you buy services, of the nature that you mentioned, from countries like the US, the place where it is treated as supplied is important when it comes to UK (or even EU) VAT treatment. This notice explains this in detail.
4. See s.3 for more on why place of supply is important.
5. In your case you bought some services and the place of its supply is the UK. So you need to account for using the 'reverse charge mechanism' which means you will be deemed to be the seller besides being the buyer and will show it on your VAT return adding it to sales and purchases.
6. Why this system of double accounting? Let us assume you're not registered for VAT, your only business is about buying these services and you continue to buy these services. If these purchases exceed the UK VAT registration threshold then you will be liable to register for UK VAT!!
7. Accounting for reverse charge - read 4.6 here

 

[Deleted member 246573]

Thanks Teddy. I'll look into that tomorrow before I phone the HMRC again.

 

[Deleted member 246573]

So, I just had a one hour phone conversation with the HMRC's VAT helpline to check that expenses classed as being 'out of scope of UK VAT' yet still classed as a 'supply to your business' do actually go into box 7. The answer is yes based on a number of VAT notices that we checked to confirm this.

The deliberations leading to our conclusion - which was also confidently expressed by the other VAT Helpline operator on Friday - again centred around this section from VAT Notice 700/12 3.8:

"However, you do NOT include the value of any of the following:

• ...
  
• income which is outside the scope of VAT because it is not consideration for a supply."

Dave, the helpful VAT helpline guy, reiterated that this sentence does not refer to expenses that are just 'out of the scope of VAT', but instead refers only to items that are 'out of the scope of VAT' BECAUSE they are not classed as a business supply.

We both searched for a VAT notice that clearly lays out the definition of items that are 'not a consideration for a supply' to a business, but didn't find one. Dave agreed that this applies to things like charity payments, where no actual supply takes place, and also applies to the other items mentioned in 700/12 3.8, like MOT certificates and local authority rates, but accepted that there should be a section which clearly lists exactly what is not 'considered a supply' for your business, and therefore shouldn't figure on the VAT return at all.

He has escalated a case to request that more information is provided in VAT notices.

So that satisfies me, and hopefully guidance will be improved. Job done.