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Error made with the 12.5% VAT rate.
I read Neil Warren’s recent article in Taxation (‘Fourth rate’, 26 August 2021, page 14) about the new 12.5% rate which took effect for most supplies made by the hospitality industry from 1 October, to replace the 5% rate.
I have realised that I wrongly advised a sports club client back in the summer which is having a social event in November for which ticket sales are £50 plus VAT per person. My client charged 12.5% VAT on all payments for tickets in August and September; in other words, £56.25 per person.
I now realise that they should only have charged 5% because of the absence of anti-forestalling legislation; that is to say, normal tax point rules apply.
My question is simple: can my client account for 5% VAT on his September return, ie £56.25 x 1/21 per ticket? Or should he declare 12.5% VAT, even though the rate did not exist until 1 October, on the basis that this rate has been charged to the advance payers?
Readers’ thoughts would be appreciated.
Query 19,826 – Showtime Charlie.
The basic tax point is when the service will be performed.
There are special rules for supplies which ‘straddle’ a change in the VAT rate or liability of the supply – in the sense that the tax point on one basis falls one side of the change, and on another basis it falls the other side. In this case, the ‘basic tax point’ (VATA 1994, s 6(3)) is when the service will be performed, in November, when the rate will be 12.5%. The receipt of payment or the issue of a tax invoice in August or September advances the tax point under s 6(4), allowing the supplier to account for only 5% output tax. On some other occasions of increases in rate or liability, anti-forestalling provisions have prevented traders taking advantage of this, but HMRC confirmed soon after the 5% rate was introduced that there was no intention to take such action in this case.
On the face of it, then, the trader has accounted for the wrong rate. However, VATA 1994, s 88 gives traders a choice if a supply straddles a change of rate in this way: the trader can use either the old rate or the new rate. It is more likely that a trader would want to use the ‘new’ rate when it is reduced, but in effect this client has exercised the option allowed for under s 88(2) – ‘the rate at which VAT is chargeable on the supply… shall if the person making it so elects be determined without regard to s 6(4)’. The output tax would still be due on the return that includes the date of receipt, but the VAT is properly calculated at 12.5%. This is explained further in Notice 700 at section 30 (tinyurl.com/2f9f8cuh). Although the 12.5% rate ‘did not exist’ in August and September, it has been known to be coming since March.
It would also be possible for the trader to change the choice that has been inadvertently made and correct what would then be a liability error. Because it appears that the price has been set at ‘net plus VAT’, and there is an implication that VAT invoices have been issued, this correction would require the issue of credit notes and refunds to the customers. If the price had been set without mentioning VAT to the customers, and no VAT invoices had been issued, it would be permissible simply to account for output tax at 1/21 of the receipts; but if the customers have been told that they are paying 12.5% VAT within the price, they should be refunded. – Gardener.
Refunding VAT to customers may be complicated.
There are two issues raised here: the time of the supply and correcting the error.
For clarity, the reduced rate of 5% that applied to the hospitality industry was in place for supplies made between 15 July 2020 and 31 March 2021. Following the chancellor’s Budget 2021 announcement, the reduced rate of 5% was subsequently extended to 30 September 2021. Thereafter a reduced rate has continued to apply, but at 12.5%. The current position is that the 12.5% rate (which has been in place for supplies made on or after 1 October 2021), will remain until 31 March 2022 to assist businesses in managing to transition back to the standard rate by 1 April 2022.
With respect to the time of supply, there can be several different tax points. Typically, the position is as follows:
- In circumstances where no invoice is needed, the tax point will usually be the date of the supply.
- Where a VAT invoice is issued, the tax point will usually be the date of the invoice.
- However, in circumstances where the VAT invoice is issued 15 days or more after the date of the supply, then the latter will be deemed to be the tax point.
- Where payment or an invoice is made or issued in advance of the supply, then the tax point will be the date of payment or the invoice (whichever is earlier).
- Where payment is received in advance of a supply but no VAT invoice is issued, then the tax point will be the date on which payment is received.
It is assumed that the client has issued the tickets for the event and, on the basis that it was taking place in November, applied the rate of 12.5% (as opposed to the 5% in force at the time). HMRC’s manual indicates that, in circumstances where there is a change of rate, it may be possible to adopt the rate or liability in force at the basic tax point for supplies affected by a change of rate or tax liability (see: HMRC’s VAT Guide Notice 700 at 30.7.2). However, there are a few points to bear in mind as set out below.
First, it is occasionally argued that a payment is held in trust by a supplier until the supply is made (such as the client selling tickets for an event to take place in the future). This was the basis of the appeal in Richmond Theatre Management Ltd [1995] STC 190, which related to advance ticket sales. The company did not account for VAT until the date of the performance, asserting that payments were held in trust on behalf of the ticket-holder. Although this argument was accepted by the tribunal, it was overturned in the High Court where it was held that such arrangements do not amount to holding the money in trust.
Second, the time and place of supply. VATA 1994, s 6 states that the starting point for the supply of services is that they shall be treated as taking place at the time when the services are performed (s 6(3)). There are of course exceptions to this, and the most relevant one in the current circumstances is as follows: if the person making the supply issues a VAT invoice in respect of it or if they receive a payment, then the supply shall be treated as taking place at the time the invoice is issued or the payment is received (s 6(4)). In most cases, it will be clear from the nature of the services whether there is a charge for admission and an underlying event. For example, entry to watch a sporting event in a stadium. The payment is for admission and the main purpose is to enter the stadium and watch the event. Conversely, there are circumstances where a payment is for hosting an event rather than admission. For example, a business may pay a third-party provider to host and organise a conference for the business’ staff. The provider is therefore supplying the event (as opposed to admission to it) (see: HMRC's VAT Place of Supply of Services Manual at VATPOSS08254).
In the present case, the client appears to have issued tickets for an event it will be hosting in November. At the time of sale, the VAT rate was 5% and at the time of the event the VAT rate will now be 12.5%. Certainly, there are arguable grounds that, applying the tax point supply rules, the client should have charged VAT at 5%. On that basis, it would appear they have over charged VAT. A claim can be made to HMRC for those funds to be reimbursed to the client. However, such applications are lengthy in process. HMRC will want to be satisfied that the repayment is appropriate, and may require confirmation that the refunded VAT will be passed on to the client’s customers who have been over charged VAT. To do the latter, the client will need to issue credit notes to each customer. This may prove administratively burdensome, but will be something to discuss with the client. – Dilpreet K Dhanoa, Field Court Tax Chambers.
