VAT Q&A – APRIL 2024

April 29th 2024

Can music business be split into two and deregister?
Q. My business trades as a limited company, selling musical instruments and giving piano lessons. All lessons are given by me, as I am the sole director and shareholder. The annual fees from lessons are £50,000 but the annual sales of instruments has fallen to £70,000. The company is VAT registered but can I split my business into two legal entities, so that I can then deregister?

A. There is an easier option for VAT, which is to disincorporate your business. This is because private tuition given by a sole trader or member of a partnership is exempt from VAT if the subject is ordinarily taught in a school or university. Piano lessons would definitely qualify as a relevant subject.

Exempt income is ignored for VAT registration purposes and your annual taxable supplies figure of £70,000 from the instrument sales is below the compulsory registration threshold of £90,000. Alternatively, it will be possible to split your business into two entities as long as you keep separate accounting records, bank accounts, invoices, etc. This is because the two trading activities are very different, so you are unlikely to be subject to a business splitting challenge from HMRC.

VAT charged on storage fees for overseas customer?
Q. Our business provides storage facilities in a UK warehouse, mainly to business customers who need to keep stock and assets there. We have agreed a long-term contract to store some goods for a French-based business, which is registered for VAT in France but not the UK. Do we charge VAT on our fees to this customer?

A. The answer here is “it depends”. If you give the customer a specific area of land in your warehouse to store their goods, you are making a land supply. In such cases, the place of supply for VAT purposes is where the land is based, which means you will charge UK VAT on your fee income. However, the customer will hopefully be able to claim a VAT refund from HMRC by making an overseas repayment claim. However, if you store goods in your warehouse without the customer getting a specific area of land, then you are making a supply of services which is covered by the general business-to-business rule, whereby the place of supply is where your customer is based, which is France. In such cases, you do not charge UK VAT because the customer will account for VAT on their French return by doing a reverse charge calculation. You can still claim input tax on any related expenses because the supply would be Vatable if charged to a UK customer.

Do we charge VAT to demolish building so that houses can be built?
Q. My business supplies construction services and I have been asked to demolish a derelict public house, which will then become a site for new houses to be built. The property owner/developer has not yet received planning permission to build houses but does not expect any problems with the local authority. Should we charge VAT on our services or are they zero-rated because they relate to new dwellings?

A. If your contract with the landowner was to demolish an existing building to bare land and then construct new dwellings, your services would be zero-rated, including the materials you supply as part of your work. However, as there is no planning permission in place to build houses now, it is premature to say that your work is directly linked to the preparatory work needed to construct new dwellings. You should therefore charge 20% VAT on your demolition work. The owner/developer will be able to claim input tax if their intention is to sell the houses when they have been completed, i.e. generating zero-rated sales rather than exempt rental income.

Can we claim input tax on gym membership scheme?
Q. As part of our policy to improve the health and fitness of our staff, we have signed a twelve-month contract with a local gym for corporate membership. The gym is VAT registered but can we claim input tax on the fee?

A. If a sporting or recreational facility is provided to all employees – which is clearly the case with a corporate membership scheme – then input tax can be claimed on the expense without output tax being payable on the benefit provided. The expense is deemed to be for the business purpose of rewarding and motivating your staff.

However, there would be a problem if a specific employee was given free membership as part of their remuneration package. Output tax would now be payable on the value of this facility provided to the individual, which will cancel out the input tax claim.