Category Archives: International

Ding Dong – Avon calling (for VAT)

By   December 21, 2017

Latest from the courts

The CJEU case of Avon Cosmetics Limited considered the validity and completeness of a specific UK derogation called a “Retail Sale Direction”.

Background

Avon Cosmetics Limited (‘Avon’) sells its beauty products in the UK to representatives, known colloquially as ‘Avon Ladies’, who in turn make retail sales to their customers (‘direct selling model’). Many of the Avon Ladies are not registered for VAT. As a result, their profit margins would not normally be subject to VAT. As an example; an Avon Lady may buy goods from Avon at £50 and sell them at £70. In HMRC’s eyes, the £20 difference is not taxed.

“Lost VAT” Derogation

That problem of ‘lost VAT’ at the last stage of the supply chain is typical of direct selling models. In order to deal with the problem, the UK sought and obtained a derogation from the standard rule that VAT is charged on the actual sales price. In Avon’s case that derogation  allowed HMRC to charge Avon VAT, not on the wholesale price paid by the unregistered Avon Ladies, but instead on the retail price at which the Avon Ladies would go on to sell the products to the final consumer. However, the way the derogation is applied does not take into account the costs incurred by the unregistered representatives in their retail selling activities, and the input tax that they would normally have been able to deduct had they been VAT registered (‘notional input tax’). In particular, where Avon Ladies buy products for demonstration purposes (not to resell but to use as a selling aid) they cannot deduct VAT on those purchases as input tax.  The result is that the disregarded notional input tax in relation to such costs ‘sticks’ in the supply chain and increases the overall VAT charged on the direct selling model over that charged on sales through ordinary retail outlets.

Challenge

The appeal by Avon concerns the interpretation and validity of the Derogation.

In particular

  • whether there is an obligation to take into account the notional input tax of direct resellers such as the Avon Ladies
  • whether there was an obligation for the UK to bring the issue of notional input tax to the EC’s attention when it requested the Derogation, and
  • what would be/what are the consequences of failing to comply with either of those obligations?

Result

The CJEU found that neither the derogation authorised by Council Decision 89/534/EEC of 24 May 1989 authorising the UK to apply, in respect of certain supplies to unregistered resellers nor, national measures implementing that decision infringe the principles of proportionality and fiscal neutrality. Therefore, output tax remains due on the ultimate retail sale value, but there is no credit for any VAT incurred by the Avon Ladies.

VAT – A Christmas Tale

By   December 12, 2017
Well, it is Christmas…. and at Christmas tradition dictates that you repeat the same nonsense every year….
Dear Marcus

My business, if that is what it is, has become large enough for me to fear that HMRC might take an interest in my activities.  May I explain what I do and then you can write to me with your advice?  If you think a face to face meeting would be better I can be found in most decent sized department stores from mid September to 24 December.

First of all I am based in Greenland but I do bring a stock of goods, mainly toys, to the UK and I distribute them.  Am I making supplies in the UK?

If I do this for philanthropic reasons, am I a charity, and if so, does that mean I do not pay VAT?

The toys are of course mainly for children and I wonder if zero rating might apply?  I have heard that small T shirts are zero rated so what about a train set – it is small and intended for children. Does it matter if adults play with it?

My friend Rudolph has told me that there is a peculiar rule about gifts.  He says that if I give them away regularly and they cost more than £150 I might have to account for VAT.  Is that right?

My next question concerns barter transactions.  Dads often leave me a food item such as a mince pie and a drink and there is an unwritten rule that I should then leave something in return.  If I’m given Tesco’s own brand sherry I will leave polyester underpants but if I’m left a glass of Glenfiddich I will be more generous and leave best woollen socks.  Have I made a supply and what is the value please?  My feeling is that the food items are not solicited so VAT might not be due and, in any event; isn’t food zero-rated, or is it catering? Oh, and what if the food is hot?

Transport is a big worry for me.  Lots of children ask me for a ride on my airborne transport.  I suppose I could manage to fit 12 passengers in.  Does that mean my services are zero-rated?  If I do this free of charge will I need to charge air passenger duty?  Does it matter if I stay within the UK, or the EU?  My transport is the equivalent of six horse power and if I refuel with fodder in the UK will I be liable for fuel scale charges?  After dropping the passengers off I suppose I will be accused of using fuel for the private journey back home.  Somebody has told me that if I buy hay labelled as animal food I can avoid VAT but if I buy the much cheaper bedding hay I will need to pay VAT.  Please comment.

Can I also ask about VAT registration?  I know the limit is £85,000 per annum but do blips count?  If I do make supplies at all, I do nothing for 364 days and then, in one day (well night really) I blast through the limit and then drop back to nil turnover.  May I be excused from registration?  If I do need to register should I use AnNOEL Accounting?  At least I can get only one penalty per annum if I get the sums wrong.

I would like to make a claim for input tax on clothing.  I feel that my red clothing not only protects me from the extreme cold but it is akin to a uniform and should be allowable.  These are not clothes that I would choose to wear except for my fairly unusual job.  If lady barristers can claim for black skirts I think I should be able to claim for red dress.  And what about my annual haircut?  That costs a fortune.  I only let my hair grow that long because it is expected of me.

Insurance worries me too.  You know that I carry some very expensive goods on my transport.  Play Stations, Mountain Bikes, i-pads and Accrington Stanley replica shirts for example.  My parent company in Greenland takes out insurance there and they make a charge to me.  If I am required to register for VAT in England will I need to apply the reverse charge?  This seems to be a daft idea if I understand it correctly.  Does it mean I have to charge myself VAT on something that is not VATable and then claim it back again?

Next you’ll be telling me that Father Christmas isn’t real……….

HAPPY CHRISTMAS EVERYBODY!

VAT: New rules for online sellers of goods

By   December 6, 2017

The European Commission announced on 5 December 2017 that it will introduce simpler and more efficient rules for businesses that sell goods online.

It announced that there has been agreement by Economic and Finance Ministers of EU Member States on a series of measures to improve how VAT works for online companies in the EU. It is intended that the new system will make it easier for consumers and businesses, in particular start-ups and SMEs, to buy and sell goods cross-border online. It will also help Member States to recoup the current estimated €5 billion of VAT lost on online sales every year.

The new rules will progressively come into force by 2021 and will:

  • Simplify VAT rules for start-ups, micro-businesses and SMEs selling goods to consumers online in other EU Member States. VAT on cross-border sales under €10,000 a year will be handled according to the rules of the home country of the smallest businesses, giving a boost to 430 000 businesses across the EU. SMEs will benefit from simpler procedures for cross-border sales of up to €100,000 annually. These measures will enter into force by 1 January 2019.
  • Allow all companies that sell goods to their customers online to deal with their VAT obligations in the EU through one easy-to-use online portal in their own language. Without the portal, VAT registration would be required in each EU Member State into which they want to sell – a situation cited by companies as one of the biggest barriers for small businesses trading cross-border.
  • For the first time, make large online marketplaces responsible for ensuring VAT is collected on sales on their platforms that are made by companies in non-EU countries to EU consumers. This includes sales of goods that are already being stored by non-EU companies in warehouses (so-called ‘fulfilment centres’) within the EU which can often be used to sell goods VAT free to consumers in the EU.
  • Address the problem of fraud caused by a previously misused VAT exemption for goods valued at under €22 coming from outside the EU which can distort the market and create unfair competition. Previously, fraudsters had been able to mislabel high value goods in small packages as having a value under the threshold of €22, making the goods exempt from VAT and creating an unacceptable gap of €1 billion in revenues which would otherwise have gone to the budgets of EU Member States.

The new rules will ensure that VAT is paid in the Member State of the final consumer, leading to a fairer distribution of tax revenues amongst EU Member States. They will help to cement a new approach to VAT collection in the EU, already in place for sales of e-services, and fulfil a core commitment of the Digital Single Market (DSM) strategy for Europe. The agreement also marks another step towards a definitive solution for a single EU VAT area, as set out in the Commission’s recent proposals for EU VAT reform.

The One Stop Shop for sales of online goods is due to come into effect in 2021 to give Member States time to update the IT systems underpinning the system.

EC proposes new tools to combat cross-border VAT fraud

By   December 1, 2017

The European Commission has, this week, unveiled new tools to make the EU’s Value Added Tax (VAT) system more fraud-proof and close loopholes which can lead to large-scale VAT fraud. The new rules aim to build trust between Member States so that they can exchange more information and boost cooperation between national tax authorities and law enforcement authorities to fight VAT fraud.

Commentary

One wonders if this is the type of thing that the UK will miss out on after Brexit. Will this increase the threat of fraud? Will fraudsters target the UK? Or will “taking control of our borders” mean that cross-border VAT fraud will be reduced?

We shall just have to wait and see…..

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.

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.