Q&A – July 2023

Can services be zero-rated?
Q. We have decided to build a bungalow next to our farmhouse so that my partners elderly mother can live in it and be close to us. We have obtained planning permission for the project and have appointed a builder to start the work. The builder will supply labour and materials. However, there is a restriction in the planning consent which means that the farmhouse and bungalow can only be sold together to the same buyer at the same time. Does this cause a VAT problem for the builder?

A. Unfortunately, the answer is “yes”. There are four conditions that must be met for a building to be classed as a new dwelling and therefore benefit from zero-rated building services. All four conditions must be met, one of which is that the “separate…disposal of the dwelling is not prohibited by the terms of any covenant, statutory planning consent or similar provision”. The builder is not constructing a new dwelling, it is an extension to an existing dwelling, i.e., the farmhouse. His charges for labour and materials will therefore be standard rated.

Are one-to-one golfing lessons subject to VAT?
Q. My business trades as a limited company and I am the only director and shareholder. The only activity of the company is to buy and sell golfing equipment and it is registered for VAT. I have been asked to provide golfing lessons to a client and I understand that this income will be exempt from VAT for the company. Is this correct?

A. The answer is “no”. If private tuition is given by either a sole trader or a member of a partnership or LLP, then the income will be exempt from VAT if the subject is ordinarily taught in a school or university, e.g., music lessons. However, the definition of “private” does not include income earned through a limited company, even though you are the only director and shareholder. The income is therefore standard rated.

As an alternative, you might consider providing the lessons in a separate legal entity – perhaps as a sole trader – and then you can earn up to £85,000 per year from giving lessons before you need to register for VAT. To avoid a challenge from HMRC that the income belongs to your company and is subject to VAT, you must have separate accounting records, bank accounts and invoicing procedures for your sole trader activities.

Auto-enrolment only after probation?
Q. It has been suggested that we only auto-enrol new employees who are eligible into our workplace auto-enrolment pension scheme once they’ve successfully completed their probation period. Is this acceptable?

A. If you require your employees to successfully complete a probationary period before they start working for you on a permanent basis, you can choose to postpone auto-enrolment. However, this is only possible for probationary periods that are no longer than three months.

You can decide to postpone auto-enrolment until the employee successfully completes their probation period and their employment on a permanent basis has been confirmed. In this situation, you must issue them with a postponement notice. Also, be aware that the employee must still exercise their right to opt in to your pension. Providing they still meet the auto-enrolment criteria when their permanent employment is confirmed, they must be auto-enrolled at that stage.

Health and safety consultant – which flat rate?
Q. I trade as a health and safety consultant, and I have used the flat rate scheme for many years because it means I do not have to keep input tax records. I have always used the category for management consultancy and paid 14.5% VAT on my gross sales. But I wonder if this category is correct because I am not trading as a management consultant. Should I check with HMRC?

A. The choice of flat rate category must be made by the owner of the business and HMRC will not challenge your choice retrospectively if it is reasonable. Your choice of management consultancy has logic but is not correct because, as you say, you are not a management consultant.

There is no specific category for health and safety consultants so you should use the category for “business services not listed elsewhere” which has a rate of 12%.
However, if your business spends less than £250 per quarter including VAT or 2% of your gross turnover on “relevant goods” then you will be classed as a limited cost trader and must apply a rate of 16.5%. The list of goods that do not qualify as relevant goods is lengthy, so you should review VAT Notice 733, specifically section 4.

Should you lease or buy business cars?
Q. Our business has always purchased new cars for our sales staff. However, I understand there is a VAT advantage in leasing rather than buying our vehicles. Is this correct?

A. If you buy a car and are charged VAT by the seller, you can only claim input tax in two main circumstances. Firstly, where you use the vehicle as a tool of trade, e.g., you trade as a driving school or taxi firm; secondly, where it is a genuine pool car that is available for general business use and is not kept overnight at the home of either business owners or employees.

However, if you lease a car (not including hire purchase agreements) then you will be charged VAT on your monthly leasing payments and can claim 50% input tax. This is a fixed percentage specified by law and does not depend on how much business/private travel is carried out in the vehicle. It is worth considering this option for your future purchases, but you should also consider the impact of other taxes.

Do we need an Irish VAT number?
Q. Our business is VAT-registered in the UK. We have received an order to supply an expensive piece of CCTV equipment for a firm in Ireland. I understand that we might need to register for VAT in Ireland in order to claim import VAT when the goods arrive because we will deliver them to the customer’s premises. Is this correct?

A. Your business is importing goods into Ireland and selling them on, so you will need an Irish VAT registration number in order to claim import VAT when the goods arrive and are declared for both VAT and duty purposes, and you will charge Irish VAT on your supply to the Irish customer. You are making supplies of goods in Ireland where a zero-registration threshold applies to a non-Irish business.

However, a more straightforward route might be for your customer to be declared as the importer, effectively taking ownership of the goods when they arrive in Ireland. They will hopefully claim input tax on their Irish VAT return, assuming they are registered, and you will not need to register for Irish VAT. Your invoice to the customer will be zero-rated for UK VAT purposes as an export of goods.