Deemed supplies or self-supplies?

TaxTalk - June 2022

read timeRead time: 4 mins

Are you up to date with which party pays the VAT on an online purchase? And what happens in a case of self-supply? If not, here’s a guide to common VAT scenarios.

The best things in life may be free but HMRC, like most of us, is rarely satisfied with just sunshine, love and the stars above. Indeed, in an effort to collect VAT beyond the classic ‘supply and consideration’ model, UK VAT legislation goes a step further to capture activities that might otherwise remain VAT-free.

Welcome to the complex area of deemed supplies and self-supplies.

What are deemed supplies?

Deemed supplies are transactions which would not otherwise be treated as supplies of goods or services but can be ‘deemed’ to be such. Examples of these are: accounting for VAT on business gifts; putting business assets to private or non-business use; and goods held at the time of de-registration.

The challenges of online marketplaces (OMPs)

HMRC is aware that advances in technology have dramatically impacted how businesses connect with consumers. So it is keen to harness – via the deemed supplier rules – the revenue-raising power of digital platforms that bring sellers and buyers together in a virtual marketplace.

Although the legal relationship remains with the real seller and the end-consumer, the OMP sometimes steps into the shoes of the seller for the purposes of VAT, depend on where the goods are located at the time of sale and on the profile of the customer: whether they are a business or a private individual.

If the goods are located in the UK, and the supply is made to a non-business customer (B2C), the supply between the seller and the OMP is considered to be zero-rated for UK VAT purposes and the OMP will be deemed to have made the supply to the UK customer. This means the OMP may need to register for, and account to HMRC for, UK VAT. The OMP doesn’t take title to the goods but is still treated as the seller, with the obligation to collect VAT from the customer.

Where the goods are located outside the UK, and the value of the supply is under £135, the seller will be deemed to have made a B2B supply to the OMP (which falls outside the scope of UK VAT for both B2B and B2C transactions). So there should be no UK VAT obligations for the seller. The OMP is treated as the seller and must collect UK VAT from private customers and then pay it over to HMRC.

The case of self-supplies

Self-supplies, on the other hand, trigger a VAT charge so that goods and services are treated as both supplied to and by, that person. This ensures that there is no VAT saving in situations where VAT should not have been recoverable.

Consider a motor dealer who takes a car out of the forecourt to use it privately outside of the business. Since the dealership already recovered input VAT on the car’s purchase, the now ‘private’ vehicle is effectively secured tax-free. To counteract this advantage, the dealer must account for output VAT on the self-supply to himself.

Beware self-supply charges

Ever since the introduction of VAT, there have been many examples where businesses have claimed input VAT relief under a relevant provision, only to be issued with a penalty notice for failing to account for output VAT under the self-supply rules.

In the case of Balhousie Holdings Ltd v CRC [2021] STC 753, HMRC attempted to claw back the benefit of zero-rating on the construction of a building used for relevant residential purposes. HMRC claimed the appellant’s sale and leaseback of a residential care home triggered a self-supply charge. But the Supreme Court ruled that the sale and leaseback transactions between the appellant and the counterparty should in fact be treated as a single transaction. This meant it was not a disposal of the entire interest in the property and that the self-supply argument did not apply.

The application of the deemed supply and self-supply rules to a company’s circumstances can be complicated, and expensive if they are not implemented correctly. PKF’s VAT team not only understands the intricacies of the regulations, but also has a wealth of practical experience on how HMRC is likely to react to a given situation.

We would not be surprised if there were a legal challenge to the OMP rules, which effectively make the OMP responsible for any VAT liability errors made by the seller in respect of goods sold via the OMP. Watch this space for further updates.

For more information on the issues raised in this article, please contact Natalie Braier.