Category Archives: EC

VAT Simplification (We can but hope)

By   November 13, 2017

This month The Office Of Tax Simplification has published a document called “Value added tax: routes to simplification”. This includes 23 recommendations on how VAT may be simplified in the UK.   This is the first Office of Tax Simplification review to focus specifically on VAT and it takes a high level look at areas where simplification of either law or administration would be worthwhile.

The report specifically covers the following areas:

  • VAT registration threshold
  • VAT administration
  • Multiple rates
  • Partial exemption
  • Capital Goods Scheme
  • The option to tax
  • Special accounting schemes

The dominant issue that came out of the report is the level of turnover above which a business is required to pay VAT, known as the VAT threshold. At £85,000, the UK has the highest VAT threshold in the EU. The report considered a range of options for reform, in particular setting out the impact of either raising or lowering the threshold to avoid the current “cliff edge” position (many business restrict growth in order to avoid VAT registration, creating a “bunching” effect.  For example, lowering the threshold may create less drag on economic growth but would bring a larger number of businesses into the VAT system. Alternatively, a higher threshold could also result in less distortion but it would clearly raise less tax.

Legislation

It was noted that since the introduction of VAT in the UK, the relevant legislation has grown so that it is now spread across 42 Acts of Parliament and 132 statutory instruments while still retaining some of the complexities of the pre-1973 UK purchase tax system.

Brexit

The report notes that: unlike income taxes, the VAT system is largely prescribed by European Union rules, so Brexit may present an opportunity to consider areas which could be clarified, simplified, or just made easier. It is not clear at present how Brexit will unfold so this review does not embrace aspects of the VAT system which are part of the Brexit negotiations, such as financial services, or focus specifically on cross-border trade.

Recomendations

The summary of the 23 recommendations are reproduced here:

  1. The government should examine the current approach to the level and design of the VAT registration threshold, with a view to setting out a future direction of travel for the threshold, including consideration of the potential benefits of a smoothing mechanism.
  2. HMRC should maintain a programme for further improving the clarity of its guidance and its responsiveness to requests for rulings in areas of uncertainty.
  3. HMRC should consider ways of reducing the uncertainty and administrative costs for business relating to potential penalties when inaccuracies are voluntarily disclosed.
  4. HM Treasury and HMRC should undertake a comprehensive review of the reduced rate, zero-rate and exemption schedules, working with the support of the OTS.
  5. The government should consider increasing the partial exemption de minimis limits in line with inflation, and explore alternative ways of removing the need for businesses incurring insignificant amounts of input tax to carry out partial exemption calculations.
  6. HMRC should consider further ways to simplify partial exemption calculations and to improve the process of making and agreeing special method applications.
  7. The government should consider whether capital goods scheme categories other than for land and property are needed, and review the land and property threshold.
  8. HMRC should review the current requirements for record keeping and the audit trail for options to tax, and the extent to which this might be handled on-line.
  9. HMRC should establish a target to update guidance within a short, defined, period after a legal change or new policy takes effect.
  10. HMRC should explore ways to improve online guidance, making all current information accessible, and to gauge how often queries are answered by online guidance.
  11. HMRC should review options to reduce the uncertainty caused by the suspended penalty rules.
  12. HMRC should draw greater attention to the facility for extending statutory review and appeal time limits to enable local discussions to take place where appropriate.
  13. HMRC should consider ways in which statutory review teams can deepen engagement with business and adviser groups to increase confidence in the process, and for providing greater clarity about the availability and costs of alternative dispute resolution.
  14. HMRC should consider introducing electronic C79 import certificates.
  15. HMRC should consider options to streamline communications with businesses, including the process for making payments to non-established taxable persons.
  16. HMRC should looks at ways of enhancing its support to other parts of government (for example, in guidance) on VAT issues affecting their operations.
  17. HMRC should review its process for engaging with business and VAT practitioner groups to see if representation and effectiveness can be enhanced.
  18. HMRC should explore the possibility of listing zero-rated and reduced rate goods by reference to their customs code, drawing on the experience of other countries.
  19. HMRC should consider ways of ensuring partial exemption special methods are kept up to date, such as giving them a limited lifespan.
  20. The government should consider introducing a de minimis level for capital goods scheme adjustments to minimise administrative burdens.
  21. The government should consider the potential for increasing the TOMS de minimis limit and removing MICE businesses from TOMS.
  22. HMRC should consider updating the DIY House builder scheme to include clearer and more accessible guidance, increased time limits and recovery of VAT on professional services.
  23. HMRC should consider digitising the process for the recovery of VAT by overseas businesses not registered in the UK.

Next Steps

The Chancellor of the Exchequer must now respond to the advice given.

Commentary

A lot of the areas identified have long been crying out for changes and the recommendations appear eminently sensible and long overdue. As an example, the partial exemption de minimis limit has been fixed at £7500 pa for 23 years and consequently the value of purchases it covers has reduced significantly with inflation.  A complete read of the report with prove rewarding as it confirms a lot of beliefs that advisers have long suspected and highlights areas the certainly do require simplification. I am particularly pleased that the complexities of both partial exemption and TOMS have been addressed. Fingers crossed that these recommendations are taken seriously by the government and the Chancellor takes this advice on-board. I am however, not holding my breath. It is anticipated that the early indications of the government’s thinking may be set out in the next Budget.

VAT: Don’t forget to make EC 13th Directive claims

By   November 6, 2017

The deadline for a business to make a 13th Directive claim is fast approaching – don’t miss out!

What is a 13th Directive claim?

A non-EU based business may make a claim for recovery of VAT incurred in the UK. Typically, these are costs such as; employee travel and subsistence, service charges, exhibition costs, imports of goods, training, purchases of goods in the UK, and clinical trials etc.

Who can claim?

The scheme is available for any businesses that are not VAT registered anywhere in the EU, have no place of business or other residence in the EU and do not make any supplies in the UK.

What cannot be claimed?

The usual rules that apply to UK business claiming input tax also apply to 13th Directive claims. Consequently, the likes of; business entertainment, car purchase, non-business use and supplies used for exempt activities are usually barred.

Process

The business must obtain a “certificate of business status” from its local tax or government department to accompany a claim. Claims must via hard copy submission to HMRC as online filing is not yet available. The application form is a VAT65A and is available here  Original invoices which show the VAT charged must be submitted with the claim form and business certificate. Applications without a certificate, or certificates and claim forms received after the deadline are not accepted by HMRC. It is possible for a business to appoint an agent to register to enable them to make refund applications on behalf of that business.

Deadline

Claim periods run annually up to 30 June and must be submitted by 31 December of the same year. Consequently, any UK VAT incurred in the twelve months to 30 June 2017 must be submitted by 31 December 2017.

With the usual Christmas rush and distractions it may be easy to overlook this deadline and some claims may be significant. Unfortunately, this is not a rapid process and even if claims are accurate and the supporting documents are in all in order the claim often takes some time to be repaid.

Note

Please note; there is a similar scheme for businesses incurring VAT in the UK which are based in other EU Member States. However, the process and deadlines are different. Additionally, if you are a UK business incurring VAT (or its equivalent) overseas, there are mechanisms for its recovery. Please contact us if you would like further information.

 

 

VAT – Littlewoods compound interest Supreme Court judgement

By   November 6, 2017

Latest from the courts

The Littlewoods Limited case

This is a long running case on whether HMRC is required to pay compound interest (in addition to simple statutory interest) in cases of official error (Please see below for details of how the overpayment initially arose). Such errors are usually in situations where UK law is incompatible with EC legislation.  Previous articles have covered the progress of the case: here and here

Background

Littlewoods was seeking commercial restitution for overpayments of VAT previously made. It’s view was that an appropriate recompense was the payment of compound interest. It was accepted by all parties that statutory interest amounted to only 24% of Littlewoods’ actual time value loss from the relevant overpayments. There are many cases stood behind this case, so it was important for both taxpayers and HMRC.

Decision

The Supreme Court rejected Littlewoods’ claim for compound interest of circa £1.25 billion on VAT repayments of £205 million for the years 1973 to 2004. The court held that the correct reading of the VAT Act is that it excludes common law claims and although references are made to interest otherwise available these are clearly references to interest under other statutory provisions and not the common law. To decide otherwise would render the limitations in the VAT Act otherwise meaningless. Further, it held that the lower courts were wrong to construe the Court of Justice of the European Union’s (CJEU) requirement of an “adequate indemnity” as meaning “complete reimbursement”. The Supreme Court construed the term as “reasonable redress”.

The above reasoning was based on the following reasons:

  • They read the CJEU’s judgment as indicating that the simple interest already received by Littlewoods was adequate even though it was acknowledged to be only about 24% of its actual loss
  • It is the common practice among Member States to award simple interest with the repayment of tax. If the CJEU intended to outlaw that practice they would have said so
  • The reading “reasonable redress” is consistent with the CJEU’s prior and subsequent case law.

Implications

The Supreme Court ruling means that claims for compound interest in cases of official error cannot be pursued through a High Court claim. It would appear that, unless other appeals which are currently listed to be heard are successful, (extremely unlikely given the comments of the Supreme Court) this is the end of the road for compound interest claims.

History of the overpayment
During the period with which this case is concerned, the claimants Littlewoods carried on catalogue sales businesses. It distributed catalogues to customers and sold them goods shown in the catalogues. In order to carry on its businesses, it employed agents, who received a commission in return for their services. They could elect to be paid the commission either in cash or in kind. Commission was paid in cash at the rate of 10% of the sales achieved by the agent. Commission paid in kind took the form of goods supplied by Littlewoods, equal in price to 12.5% of the sales achieved by the agent.
As suppliers of goods, Littlewoods were obliged to account to HMRC for the VAT due in respect of their chargeable supplies. Between 1973 and 2004, they accounted for VAT on the supplies which it made to its agents, as commission paid in kind, on the basis that the taxable amount of those supplies was reduced by the enhancement in the commission, that is to say by 2.5%. On a correct understanding of VAT law, the taxable amount of the supplies was actually reduced by the entire 12.5% which constituted the agents’ commission. Consequently, Littlewoods accounted for and paid more VAT to HMRC than was due.

VAT: The ECJ decides that bridge is NOT a sport

By   October 27, 2017

The English Bridge Union Limited (EBU) case

Further to my article on contract (or duplicate) bridge here which covered the Advocate General’s opinion that it could be considered a sport, the Court of Justice of the EU has ruled that it does not qualify as a sport and therefore certain supplies by The EBU are subject to UK VAT.

The court decided that “…the fact that an activity promotes physical and mental health is not, of itself, a sufficient element for it to be concluded that that activity is covered by the concept of ‘sport’ within the meaning of that same provision….

The fact that an activity promoting physical and mental well-being is practised competitively does not lead to a different conclusion. In fact, the Court has ruled that Article 132(1)(m) of Directive 2006/112 does not require, for it to be applicable, that the sporting activity be practised at a particular level, for example, at a professional level, or that the sporting activity at issue be practised in a particular way, namely in a regular or organised manner or in order to participate in sports competitions…

In that respect, it must also be noted that the competitive nature of an activity cannot, per se, be sufficient to establish its classification as a ‘sport’, failing any not negligible physical element.”

As my aged father has always said; it can only be sport if the players wear shorts and sweat…

He may not have been far off you know. I still have difficulty considering pub games as sport, but I am sure there will be many who think that darts and pool are indeed sport.  It is also interesting that, inter alia, HMRC consider; baton twirling, hovering (not “hoovering as I first read it) octopush, dragon boat racing and sombo as sport.

HMRC VAT information “out of date and flawed”

By   October 23, 2017

In a recent report published by the House of Commons Committee of Public Accounts, HMRC’s estimate of VAT lost in cases of online fraud and error is “out of date and flawed”. The report also recommends that HMRC get tougher with fraudsters and that it should work closer with online marketplaces. Additionally, it also states that HMRC should carry out an assessment of the fulfilment house industry.

This failure by HMRC means that honest businesses suffer as a result of fraudulent and ignorant set ups who can sell goods VAT free. These are usually overseas entities which have no intention of; registering for VAT, charging VAT in addition to the price of goods, and paying over this VAT to the authorities. Let us hope that HMRC do indeed use the significant powers it has in dealing with this type of unwanted activity.

Due Diligence Scheme

Note: There is a HMRC fulfilment house Due Diligence Scheme for overseas sellers being introduced in 2018. In the 2016 budget the Chancellor of the Exchequer announced that HMRC would be given more powers to deal with overseas sellers selling into the UK via marketplaces such as eBay and Amazon who do not pay UK VAT.

As HMRC states in VAT Notes 2017 Issue 1 published 10 May 2017  “More and more UK retail businesses have a presence online and are having to compete with thousands of overseas online sellers, some of which are evading VAT. This abuse has grown significantly and now costs the UK taxpayer £1 billion to £1.5 billion a year. HMRC is taking action to protect the thousands of UK businesses from this unfair competition.”

Assistance

If any overseas businesses who sell into the UK and would like advice on the UK VAT requirements – please contact us. We have experience of dealing with the authorities, including negotiation with HMRC on the retrospective VAT position and mitigation of the impact of any penalties and interest.

VAT: Distinction between goods and services. Mercedes Benz Financial Services case

By   October 17, 2017

In the CJEU case of Mercedes Benz Financial Services (MBFS) the issue was whether certain supplies where of goods or services.

Technical Background

Before looking at the case, it is worthwhile considering the difference between goods and services and why the distinction is important. For most transactions the difference is clear, although sometimes (such as in this case) it is not immediately apparent. A starting point is that services are “something other than supplying goods”. Difficulties can arise in areas such as; provision of; information, software and, as MBFS discovered, Hire Purchase (HP)/leasing.

The distinction is important for two main reasons:

  • VAT liability – Goods and services may have different VAT rates applicable
  • Tax point – goods and services have different tax point rules, see here

The difference between HP and Leasing arrangements:

In an HP agreement the intention is usually for the ownership of the goods to pass when the final payment has been made. The transaction therefore relates to a supply of goods. If title to goods does not pass, this is leasing and represents a supply of services.

Case Background

MBFS offered certain contract purchases which were similar to many personal contract purchase deals for vehicles. These featured regular monthly payments with a final balloon payment. In the MBFS arrangements in question a significant difference to “usual” personal contract purchase agreements was that the balloon payment represented over 40% of the price of the car and payment of this fee was entirely optional.

The EU rules set out that there is a supply of goods where “in the normal course of events” ownership will pass at the latest upon payment of the final instalment. Consequently, the focus here was on whether the optional final payment meant that in the normal course of events the ownership of the car would pass to the customer.

Decision

The CJEU decided that the supplies were those of services rather than goods. This was based on the fact that, although the ownership transfer clause is an indicator of the transaction representing a supply of goods, there was a  genuine economic alternative to the option being exercised. The circa 40% of the car price was a significant amount and it did not immediately follow that all customers would make this final payment. It was observed that in a “traditional” HP arrangement making the final payment was the “only economically rational choice”.  This meant that the supply was one of services.

VAT Impact

As this was ruled to be a supply of services, output tax was not due from MBFS at the start of the contract (as would have been the case if the supply had been one of goods). This results in a significant cashflow saving.

Commentary

Any business which provides vehicles via HP or leasing arrangements should review its supplies and contracts to determine whether it can take advantage of this CJEU ruling. We are able to assist in this process.

New Customs Bill White Paper – VAT implications

By   October 12, 2017

A new Customs Bill White Paper has been issued.

As a result of the Brexit vote new domestic legislation is due to enter Parliament later this autumn which will provide for most negotiated outcomes, as well as a contingency scenario.

This Bill will be referred to in this paper as the “Customs Bill”. The purpose of the White Paper is to set out the government’s approach to the Bill. It sets out how the current customs, VAT, and excise regimes operate for cross border transactions, why the Bill is necessary, and what the Bill will contain.

Unfortunately, although being “sold” as containing concrete details, unsurprisingly there is nothing particular of substance. I shall refrain from adding any political comments, but just to observe that any process will be confusing, complex, and very unhelpful for businesses.

Good luck everyone…

Brexit: The future of Customs arrangements

By   August 21, 2017

In a paper called Future Customs arrangements: A Future Partnership Paper the Government have given us some idea of what the UK’s relationship with the EU may look like after Brexit.

It is a paper which is part of a series which sets out the key issues and forms part of the Government’s stated vision for the relationship (called a “partnership” in the document) and is said to explore how the UK and EU will “work together” with respect to Customs. The aim is to facilitate the “most friction-less trade possible in goods between the UK and the EU”.  It is noted that this approach is purely “aspirational” and represents the first steps in exploring the position. However, it does inform on the Government’s thinking. The two main approaches may be summarised as:

  1. The Streamlined Arrangement

A highly streamlined customs arrangement between the UK and the EU, streamlining and simplifying requirements, leaving as few additional requirements on EU trade as possible. This would aim to;

  • continue some of the existing arrangements between the UK and the EU
  • put in place new negotiated and potentially unilateral facilitations to reduce and remove barriers to trade
  • implement technology-based solutions to make it easier to comply with Customs procedures

This approach involves utilising the UK’s existing third country processes for UK-EU trade building on EU and international precedents, and developing new innovative facilitations to deliver as friction-less a Customs border as possible.

  1. A New Partnership

A new customs partnership with the EU, aligning the UK’s approach to the Customs border in a way that removes the need for a UK-EU Customs border. One potential approach would involve the UK mirroring the EU’s requirements for imports from the rest of the world where their final destination is the EU.

This is of course unprecedented as an approach and could be challenging to implement and the UK Government will look to explore the principles of this with business and the EU.

The document also considers that the Government would seek to introduce an interim period for implementing changes to Customs arrangements.

Discussions with affected businesses will continue before the publication of a Customs Bill in the autumn.

We will monitor this situation and bring you information on any developments. In the meantime, those businesses which carry out cross-border transactions in goods may want to review their current procedures in anticipation of the changes which will surely be introduced in one form or another.

Alas, as with anything Brexit related, nobody can be sure what the future holds and there will be a great deal of uncertainty until we know the actual outcome and consequently, the impact on business.

VAT EU Claims – A Reminder

By   August 9, 2017

Refunds of VAT for UK businesses incurring other EC Member States

If a business incurs VAT in another EC Member State it is possible to recover it.  It is not claimed on a UK VAT return, but via a special claim procedure.  Details of how this process works and what may be claimed are set out in my previous article

The deadline for these claims is 30 September 2017.

Any applicant must not be registered or registrable in the Member State from which they are claiming a refund, nor must they have a permanent business establishment in that EU country. There are a number of other rules to be considered as well, so it pays to ensure that the claim is valid before time and effort is expended in compiling a claim.  We are happy to advise on this.

Applications relating to VAT incurred in the year 2016 must be submitted by 30th September 2017 and there is no leeway to extend this deadline.

 

Incoterms. What are they, how can they be of use for VAT?

By   August 3, 2017
VAT – Cross border sales of goods

Incoterms stands for International Commercial Terms. These are published by the International Chamber of Commerce (ICC) and describe agreed commercial terms. These rules set out the responsibilities of buyers and sellers for the supply of goods under a contract. They are very commonly used in cross-border commercial transactions in order that both sides in a transaction are aware of the contractual position. They help businesses avoid costly misunderstandings by clarifying the tasks, costs and risks involved in the delivery of goods from sellers to buyers. The latest terms were published in 2010 and came into effect in 2011.

The use of Incoterms for assistance for VAT purposes

One of the most difficult areas of providing VAT advice is obtaining sufficient detailed information to advise accurately and comprehensively.  Quite often advisers are given what a client believes to be the arrangements for a transaction. This may differ from the actual facts, or the understanding of the other party in the transaction.

Pragmatically, this uncertainty about the details may be increased if; a number of different people within an organisation are involved, it is a new or one-off type of transaction, there are language difficulties, or communication and documentation is less than ideal. In such cases, incoterms will provide invaluable information which gives clarity and certainty and usually give a sound basis on which to advise. This enables the adviser to establish the place of supply (POS) and therefore what VAT treatment needs to be applied.

So what is this set of pre-defined international contract terms?

They are 11 pre-defined terms which are subdivided into two categories:

Group 1 – Incoterms that apply to any mode of transport are:

EXW – Ex Works (named place)

The seller makes the goods available at their premises. This term places the maximum obligation on the buyer and minimum obligations on the seller. EXW means that a buyer incurs the risks for bringing the goods to their final destination. The buyer arranges the pickup of the freight from the supplier’s designated ship site, owns the in-transit freight, and is responsible for clearing the goods through Customs. The buyer is also responsible for completing all the export documentation.

Most jurisdictions require companies to provide proof of export for VAT purposes. In an EXW shipment, the buyer is under no obligation to provide such proof, or indeed to even export the goods. It is therefore of utmost importance that these matters are discussed with the buyer before the contract is agreed.

FCA – Free Carrier (named place of delivery)

The seller delivers the goods, cleared for export, at a named place. This can be to a carrier nominated by the buyer, or to another party nominated by the buyer.

It should be noted that the chosen place of delivery has an impact on the obligations of loading and unloading the goods at that place. If delivery occurs at the seller’s premises, the seller is responsible for loading the goods on to the buyer’s carrier. However, if delivery occurs at any other place, the seller is deemed to have delivered the goods once their transport has arrived at the named place; the buyer is responsible for both unloading the goods and loading them onto their own carrier.

CPT – Carriage Paid To (named place of destination)

The seller pays for the carriage of the goods up to the named place of destination. Risk transfers to buyer upon handing goods over to the first carrier at the place of shipment in the country of Export. The Shipper is responsible for origin costs including export clearance and freight costs for carriage to named place (usually a destination port or airport). The shipper is not responsible for delivery to the final destination (generally the buyer’s facilities), or for buying insurance. If the buyer does require the seller to obtain insurance, the Incoterm CIP should be considered.

CIP – Carriage and Insurance Paid to (named place of destination)

This term is broadly similar to the above CPT term, with the exception that the seller is required to obtain insurance for the goods while in transit. CIP requires the seller to insure the goods for 110% of their value.

DAT – Delivered At Terminal (named terminal at port or place of destination)

This term means that the seller covers all the costs of transport (export fees, carriage, unloading from main carrier at destination port and destination port charges) and assumes all risk until destination port or terminal. The terminal can be a Port, Airport, or inland freight interchange. Import duty/VAT/customs costs are to be borne by the buyer.

DAP – Delivered At Place (named place of destination)

The seller is responsible for arranging carriage and for delivering the goods, ready for unloading from the arriving conveyance, at the named place. Duties are not paid by the seller under this term. The seller bears all risks involved in bringing the goods to the named place.

DDP – Delivered Duty Paid (named place of destination)

The seller is responsible for delivering the goods to the named place in the country of the buyer, and pays all costs in bringing the goods to the destination including import duties and VAT. The seller is not responsible for unloading. This term places the maximum obligations on the seller and minimum obligations on the buyer. With the delivery at the named place of destination all the risks and responsibilities are transferred to the buyer and it is considered that the seller has completed his obligations.

Group 2 – Incoterms that apply to sea and inland waterway transport only:

FAS – Free Alongside Ship (named port of shipment)

The seller delivers when the goods are placed alongside the buyer’s vessel at the named port of shipment. This means that the buyer has to bear all costs and risks of loss of or damage to the goods from that moment. The FAS term requires the seller to clear the goods for export. However, if the parties wish the buyer to clear the goods for export, this should be made clear by adding explicit wording to this effect in the contract of sale. This term can be used only for sea or inland waterway transport.

FOB – Free On Board (named port of shipment)

FOB means that the seller pays for delivery of goods to the vessel including loading. The seller must also arrange for export clearance. The buyer pays cost of marine freight transport, insurance, unloading and transport cost from the arrival port to destination. The buyer arranges for the vessel, and the shipper must load the goods onto the named vessel at the named port of shipment. Risk passes from the seller to the buyer when the goods are loaded aboard the vessel.

CFR – Cost and Freight (named port of destination)

The seller pays for the carriage of the goods up to the named port of destination. Risk transfers to buyer when the goods have been loaded on board the ship in the country of export. The shipper is responsible for origin costs including export clearance and freight costs for carriage to named port. The shipper is not responsible for delivery to the final destination from the port (generally the buyer’s facilities), or for buying insurance. CFR should only be used for non-containerised sea freight, for all other modes of transport it should be replaced with CPT.

CIF – Cost, Insurance and Freight (named port of destination)

This term is broadly similar to the above CFR term, with the exception that the seller is required to obtain insurance for the goods while in transit to the named port of destination. CIF requires the seller to insure the goods for 110% of their. CIF should only be used for non-containerised sea freight; for all other modes of transport it should be replaced with CIP.

 Allocations of costs to buyer/seller via incoterms

Summary Chart

Incoterms Chart