Your business sells online and printed books, documents, etc. but includes corresponding interactive services. You zero-rate all sales but your new bookkeeper says the helpline etc. service should be standard-rated. Is she correct?
VAT rates
For most businesses deciding which rates of VAT to apply to their sales is straightforward but for others things can get tricky, especially but by no means exclusively in the catering, travel, entertainment and publishing sectors. The tricky bit occurs where a single sale consists of goods or services each of which is subject to different VAT rates. In this situation sales can be a mixed or composite supply. Deciding which is paramount for your invoicing, bookkeeping and VAT returns.
Mixed supplies
A mixed supply occurs when a transaction consists of multiple elements that are separate and clearly identifiable. However, by itself this doesn’t make a sale one of mixed supplies. A mixed supply is where one element is not an integral part of the other and that the elements are separate and clearly identifiable. For example, if you sell a book and an item of cookware to a customer, this is a mixed supply.
Mixed VAT treatment
Each element of a mixed supply is treated as a separate principal supply, and different VAT rates can apply to each element. If you sell a package of goods, e.g. buy a set of pans and get a cookbook free, the value of each element must be established, and the total price apportioned on a fair and reasonable basis and the appropriate VAT rate to each applied.
Mixed practical issues
Your bookkeeper must record sales of mixed supplies where different VAT rates apply as a split transaction, allocating a VAT rate to the value of each element of the sale.
Composite supplies
A composite supply is a single supply for VAT purposes consisting of a predominant supply plus one or more others that are ancillary, integral or incidental to it. For example, you sell books and guides, but buyers get access to related online services. In this case the additional service relies on the original supply of books etc.
Composite VAT treatment
The entire composite supply is treated as a single supply for VAT purposes. Consequently, only a single VAT rate applies, which is that for the main supply (online or printed books are zero-rated).
Composite practical issues
Your invoicing and accounting records need only reflect a single supply and the VAT rate applicable to the composite supply. The VAT treatment won’t change if, e.g. you split the values of the main and subsidiary supplies, say for the purpose of creating cost centres.
Tip. As already indicated, it doesn’t matter if you separately identify items in your records, including invoices; the VAT treatment of your supply isn’t affected. In other words, you cannot make a mixed supply a composite one simply by showing them as a single supply on an invoice. Equally, showing a number of supplies separately on an invoice doesn’t make the overall composite supply a mixed one.
If your services are integral to each other or one relies on the other, e.g. your main supply is of zero-rated books, guides, etc. but this allows customers access to advisory services (standard-rated), the VAT rate applicable to your sales is that for the main supply.