August Q&A
Can input tax be claimed on a gold watch for an employee?
Q. Our company plans to buy a gold watch as a gift to an employee as a reward for his 25 years of loyal service. It will cost £1,000 plus VAT. Can we claim input tax?
A. Assuming you get an invoice from the supplier, the answer is yes because you have purchased goods for a business purpose, i.e. the expense is a reward for the hard work and efficiency of your employee. This assumes that your business does not make exempt supplies where a restriction for partial exemption could apply.
However, that is not the end of the story. On the day when you present the gift, you have made a deemed supply of goods and must account for output tax on the return that includes this date. Output tax is payable on the value of the gift, which is what you paid for it. An exception would be if the value of the gift, plus other gifts given to the same employee in the previous twelve months, was less than £50 excluding VAT, in which case there would be no output tax to pay.
Can we claim input tax on zero-rated book purchase?
Q. Our engineering business purchased an expensive book on engineering from a local shop and a lot of stationery items at the same time. The cashier issued a tax invoice for £350 plus 20% VAT on the whole sale. This seems to be wrong because books are zero-rated. Can we claim input tax as the expense is wholly for a business purpose and we have paid VAT in good faith?
A. The expensive description for the book would indicate that it is not incidental to the purchase of the stationery, it has an aim in its own right and a mixed supply has taken place, i.e. you have purchased a zero-rated book and standard-rated stationery.
Your best option is to check how much you would have paid the shop if you only purchased the book and ask them for a VAT credit equal to 20% of this value. You can still claim input tax on the value of the stationery so will not be out of pocket.
Is tax due on additional drinks charge to pay for entertainment?
Q. Last year, our pub decided to have entertainment on Friday evenings between the hours of 9.30pm and 10.30pm as a way to attract extra customers and to give entertainment to our existing customers. We agreed a deal with three different singers that we would charge £1 extra on all alcoholic drinks for the period when they are performing. All of this money is paid to the singers and we pay them nothing else. We have treated the £1 receipts as a donation not subject to VAT on our returns. We make no profit on the arrangement. Is this correct?
A. The challenge with many VAT dilemmas is to stand back and ask the question: what are you supplying to your customers? There is no written contract between your business and your customers, which is often the starting point to work out the VAT liability of goods or services. The commercial reality is that you are supplying alcoholic drinks to your customers but at an inflated price of £1 for a limited period of time. You should treat the payment as being inclusive of VAT, e.g. £6.75 including 20% VAT, rather than £5.75 including 20% VAT and a £1 donation. There is no donation here because your customers are obliged to pay the extra £1 between the hours of 9.30pm and 10.30pm if they want a drink.
Do we charge VAT if we act as paymaster?
Q. I trade as a VAT-registered management consultant. A friend recently asked me to do some work, which was beyond my skill set, but I knew the perfect person to do the work, who is not VAT registered. However, the other consultant would only do the work if she could invoice me directly because we already have a letter of engagement in place. She therefore invoiced me for her services, obviously not charging VAT, and I recharged this to my friend without making a profit. I didn’t charge VAT because I treated it as a disbursement, but is this correct?
A. The answer here is that it depends. If you have a letter of engagement or contract in place with your friend, then your invoice would be linked to this contract, and you should charge VAT. However, in the absence of a contract, your treatment is reasonable, i.e. you have merely acted as paymaster between the two other parties. It seems that your friend knew they were dealing with an independent business, and customer perception is also important in answering the key question: who is supplying what and to whom? Your sales invoice hopefully included appropriate wording to support your decision, e.g. ‘disbursement invoice’ or ‘paymaster function’. In these circumstances, you should check HMRC’s detailed guidance about the conditions that must be met for a disbursement arrangement.
