Tag Archives: eu-vat-law

VAT Implications of Transfer Pricing – Valuation

By   21 April 2022

When can Transfer Pricing (TP) adjustments affect the application of VAT?

There is a continuing potential conflict between the way sales are valued. For TP purposes value is determined via arm’s length (open market value) versus the subjective value, ie; the price actually paid, for VAT purposes.

More detail on VAT valuation/consideration here.

Transfer Pricing

The arm’s length principle is the international transfer pricing standard that the Organisation for Economic Co-operation and Development (OECD) member countries have agreed, and which should be used for tax purposes by Multinational Enterprise Group (“MNE group”) and tax administrations, including the price, match comparable market conditions and that profits are fairly divided between the jurisdictions in which MNE operates.

According to the OECD TP Guidelines, by seeking to adjust profits by reference to the conditions which would have been obtained between independent enterprises for comparable transactions and under comparable circumstances, ie; in “comparable uncontrolled transactions” the arm’s length principle treats the members of an MNE group as entities operating separately rather than as inseparable parts of a single unified business. Because the separate entity approach treats the members of an MNE group as if they were independent entities, attention is focused on the nature of the transactions between those members and on whether the conditions thereof differ from those that would be obtained in comparable uncontrolled transactions.

VAT

It is not generally required for VAT purposes that the consideration which must be present in order for a transaction to be qualified as taxable, has to reflect the market value of the goods or services supplied. In fact, as to the concept of “consideration”, it is settled case law of the CJEU that the taxable amount for the supply of goods or services is represented by the consideration actually received for them.

It is an important area of tax and I recommend reading the EC Working Paper for any business or adviser involved in international supplies. It is also an interesting read for students of the tax technical side of such supplies.

We have a strong global structure of skilled advisers which are able to assist if you have any queries.

VAT – The Capital Goods Scheme

By   8 January 2021

A brief guide to the Capital Goods Scheme (CGS)

If a business acquires or creates a capital asset it may be required to adjust the amount of VAT it reclaims. This mechanism is called the CGS and it requires a business to spread the initial input tax claimed over a number of years. If a business’ taxable use of the asset increases it is permitted to reclaim more of the original VAT and if the proportion of the taxable supplies decreases it will be required to repay some of the input tax initially claimed. The use of the CGS is mandatory. 

How the CGS works

Normally, VAT recovery is based on the initial use of an asset at the time of purchase (a one-off claim). The CGS works by applying a longer period during which the initial recovery may be adjusted if there are changes in the use of the asset. Practically, the CGS will only apply in situations where there is exempt or non-business use of the asset. A business using an asset for fully taxable purposes will be covered by the scheme, but it is likely that full recovery up front will be possible with no subsequent adjustments required. This will be the position if, say, a standard rated property is purchased, the option to tax taken, and the building let to a third party. The CGS looks at how capital items have been used in the business over a number of intervals (usually, but not always; years).  It adjusts both for taxable versus exempt use and for business versus non business use over the lifetime of the asset. Example; a business buys a yacht that is hired out (business use) and it is also used privately by a director (non-business use). However, a more common example is a business buying a property and occupying it while its trade includes making some exempt supplies. 

Which businesses does it affect?

Purchasers of certain commercial property, owners of property who carry out significant refurbishment or carry out civil engineering work, purchasers of computer hardware, aircraft, ships, and other vessels over a certain monetary value who incur VAT on the cost.  (As the CGS considers the recovery of input tax, only VAT bearing assets are covered by it).

Assets not covered by the scheme

The CGS does not apply if a business;

  • acquires an asset solely for resale
  • spends money on assets that it acquired solely for resale
  • acquires assets, or spends money on assets that are used solely for non-business purposes.

Limits for capital goods

Included in the CGS are:

  • Land, property purchases – £250,000 or over
  • Refurbishment or civil engineering works costing £250,000 or over
  • Computer hardware costing £50,000 or over (single items, not networks)
  • From 2011, aircraft, ships, and other vessels costing £50,000 or more.

Assets below these (net of VAT) limits are excluded from the CGS.

The adjustment periods

  • Five intervals for computers
  • Five intervals for ships and aircraft
  • Ten intervals for all other capital items

Changes in your business circumstances

Certain changes to a business during a CGS period will impact on the treatment of its capital assets. These changes include:

  • leaving or joining a VAT group
  • cancelling your VAT registration
  • buying or selling your business
  • transferring a business as a going concern (TOGC)
  • selling an asset during the adjustment period

Specific advice should be sought in these circumstances.

Examples

  1. A retailer purchases a brand new property to carry on its fully taxable business for £1 million plus £200,000 VAT. It is therefore above the CGS limit of £250,000. The business recovers all of the input tax on its next return. It carries on its business for five years, at which time it decides to move to a bigger premises. It rents the building to a third party after moving out without opting to tax. Under the CGS it will, broadly, have to repay £100,000 of the initial input tax claimed.  This is because the use in the ten year adjustment period has been 50% taxable (retail sales) for the first five years and 50% exempt (rent of the property for the subsequent five years).
  2. A company purchases a helicopter for £150,000 plus VAT of £30,000. It uses the aircraft 40% of the time for hiring to third parties (taxable) and 60% for the private use of the director (non-business).  The company reclaims input tax of £12,000 on its next return. Subsequently, at the next interval, taxable use increases to 50%. It may then make an adjustment to increase the original claim: VAT on the purchase £30,000 divided by the number of adjustment periods for the asset (five) and then adjusting the result for the increase in business use: £30,000 / 5 = 6000 50% – 40% = £600 additional claim

Danger areas

  • Overlooking CGS at time of purchase or the onset of building works
  • Not recognising a change of use
  • Selling CGS as part of a TOGC
  • Failing to make required CGS adjustments at the appropriate time
  • Overlooking the option to tax when renting or selling a CGS property asset
  • Sale during adjustment period (not a TOGC)
  • Complexities re; first period adjustments and pre-VAT registration matters
  • Interaction between CGS and partial exemption calculations

Summary

There is a lot of misunderstanding about the CGS and in certain circumstances it can produce complexity and increased record keeping requirements.  There are also a lot of situations where overlooking the impact of the CGS or applying the rules incorrectly can be very costly. However, it does produce a fairer result than a once and for all claim, and when its subtleties are understood, it quite often provides a helpful planning tool.

VAT legislation – relationship between EU and UK law. A guide

By   10 April 2017

How does the UK system fit with EU legislation?

Further to my recent article on the legal impact of The Great Repeal Bill and Article 50 here I thought it would be a good idea to take a step back and look at the background. We now know that on the day the UK leaves the EU the following rules will still apply and that there will be no immediate changes to the status quo. After Brexit there is likely to be a review of the VAT position, but we expect any changes to the system to be subtle at first with any significant changes (if any) being made over a much longer period.

So where are we now?

As most people will know, UK domestic VAT law is derived from EU legislation, but what is the actual relationship?

It is important to understand how both elements of legislation work in cases of dispute with HMRC as it often provides additional ammunition.

History

Most Member States already had a system of VAT before joining the EU but for some countries VAT had to be introduced together with membership of the EU.

When the UK joined the EU in 1972 it replaced two taxes; purchase tax and selective employment tax with VAT.

In 1977, the Council of the European Communities sought to harmonise the national VAT systems of its Member States by issuing the Sixth Directive to provide a uniform basis of assessment and replacing the Second Directive promulgated in 1967.

Council Directive 2006/112/EC (the VAT Directive) sets out the infrastructure for a common VAT system which each Member State is required to implement by means of its own domestic legislation. This important Directive codifies into one piece of legislation all the amendments to the original Sixth Directive, thus clarifying EU VAT legislation currently in force.

Intention

The aim of the VAT Directive is to harmonise the indirect tax within the EU, and it specifies that VAT rates must be within a certain range. The basic aims are:

  • Harmonisation of VAT law
  • Harmonisation of content and layout of the VAT declaration
  • Regulation of; accounting, providing a common legal accounting framework
  • Common framework for detailed description of invoices and receipts
  • Regulation of accounts payable
  • Regulation of accounts receivable
  • Standard definition of national accountancy and administrative terms

EU Statements

There are four types of EU statements:

  • Regulations – Are binding in their entirety and have general effect to all EU Member States. They are directly applicable in the UK legal system
  • Directives – Are binding as to result and their general effect is specific to named EU countries. The form and methods of compliance are left to the addressees.
  • Decisions – Are binding in their entirety and are specific to an EU country, commercial enterprise or private individual.
  • Recommendations and Opinions – Are not binding and are directed to specific subjects on which the Council’s or Commission’s advice has been sought.

EU Legislation as part of UK Legislation

EU law is made effective for UK legislation via European Communities Act 1972 section 2. The effects of EU law as regards UK VAT legislation is summarised as follows.

Direct effect

The Court of Justice has held “wherever the provisions of a directive appear … to be unconditional and sufficiently precise, those provisions may … be relied upon as against any national provision which is incompatible with the directive insofar as the provisions define rights which individuals are able to assert against the state” – Becker.  Also, in UFD Ltd it was stated that “in all appeals involving issues of liability, the Tribunal should consider the relevant provisions of the Council directives to ensure that the provisions of the UK legislation are consistent therewith”.

Primacy of EU Directives over UK legislation

A UK court which is to apply provisions of EU law is under a duty to give full effect to those provisions, if necessary refusing of its own motion to apply any conflicting provision of national legislation.

Interpretation of UK law

If UK VAT legislation is unclear or ambiguous, Tribunals are “entitled to have regard to the provisions of the relevant EU Directive in order to assist in resolving any ambiguity in the construction of the provisions under consideration’ (English-Speaking Union of the Commonwealth).

Legal principles

In implementing the common VAT structure, domestic legislation is required to recognise certain legal principles.

Examples of some of these are the principle of:

  • Equality of citizens
  • Subsidiarity and proportionality
  • Non-discrimination on grounds of nationality
  • Fiscal neutrality
  • Legal certainty and the protection of legitimate expectations.

Practical application for most taxpayers

Practically, a result of the above is that taxpayers are regularly able to recover VAT (plus interest) paid to HMRC in error in cases where the UK domestic legislation has not implemented EU law correctly.  However, HMRC has no right to recovery where VAT has been under-collected as a result of inappropriate implementation of the EU legislation.