Tag Archives: vat-valuation

The interaction between Transfer Pricing and VAT

By   20 February 2024
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Are Transfer Pricing (TP) adjustments subject to VAT? – Usually no, but…

What is TP?

A transfer price is the price charged in a transaction between two parties. The transfer pricing legislation concerns itself with the prices charged in transactions between connected parties as, in such circumstances, the price charged may not necessarily be that which would have been charged if the parties had not been connected.

The UK’s transfer pricing legislation details how transactions between connected parties are handled and in common with many other countries is based on the internationally recognised ‘arm’s length principle’.

The UK allows only for a transfer pricing adjustment to increase taxable profits or reduce a tax loss. It is not possible to decrease profits or increase a tax loss.

The UK’s transfer pricing legislation also applies to transactions between any connected UK entities.

The arm’s length principle applies to transactions between connected parties. For tax purposes such transactions are treated by reference to the profit that would have arisen if the transactions had been carried out under comparable conditions by independent parties.

So, is a TP adjustment additional consideration for a supply?

VAT

Value of the supply – what is the consideration?

TP is a direct tax concept which does not necessarily align with VAT considerations. Unhelpfully, there are no provisions in UK legislation which provides for the VAT treatment of TP adjustments. Additionally, there is no case law on this subject.

As a TP adjustment is solely for direct tax purposes, it does not usually affect the value of the supply for VAT purposes. Consequently, such adjustments are usually outside the scope of VAT.

However, price adjustments of previous supply of goods/services must be recognised for VAT market value rules only when:

  • the supply is taxable
  • the relevant input tax is not fully recoverable and
  • HMRC issues an ‘Open Market Value Notice’ to the parties requiring them to apply market values for VAT.

VAT Act 1994, Schedule 6, Part 2, para 1 gives HMRC the vires to issue such a Notice.

Latest

We understand that a case: Arcomet Romania is due to be heard by the CJEU on whether TP adjustments represent consideration and we await the outcome which may provide clarity. (Although after Brexit, the previous position: that the UK VAT Act is to be interpreted with EU case law and general principles of EU law has ended. UK courts whilst still relying on the UK VAT Act and its EU VAT Directive principles, will be able to deviate from ECJ case law).

 

 

VAT: Apportionment of output tax – updated guidance

By   6 March 2023
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HMRC has published new guidance (para 31) on apportioning output tax. More on apportionment here.

Summary

The guidance gives examples of how to apportion output tax in certain situations.

There are two basic methods of apportioning output tax:

  • one based on selling prices
  • the other based on cost values

HMRC provide worked examples of both of these methods, including an example of apportionment where a business can only determine the cost of one of the supplies.

Both methods can be adapted to apply to either tax-inclusive or tax-exclusive amounts.

A business does not have to use any of the methods set out in the guidance but, if a different method is used it must still give a fair result.

Apportionment is only necessary if the price charged is the only consideration for the supplies. If the consideration is not wholly in money VAT must be accounted for on the open market value* of the supplies.

* Open Market Value

The VAT Act 1994, section 19 (5) states that “…the open market value of a supply of goods or services shall be taken to be the amount that would fall to be taken as its value …if the supply were for such consideration in money as would be payable by a person standing in no such relationship with any person as would affect that consideration”.

VAT & Customs Duty – Valuation for import purposes

By   5 August 2022
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Methods of calculating import value

There are six methods for calculating the value of imported goods to assess the amount of Customs Duty and import VAT a business to pay. The same value is also used for trade statistics.

All six methods are outlined below and should be tried in order. If Method 1 does not apply, try Method 2. If that does not apply, try 3 and so on. However, Method 5 can be tried before 4.

Method 1

The transaction value – the price payable to the seller. This is the most common valuation and is used in most cases.

Try Method 2 if there has been no sale of goods.

Method 2

The customs value of identical goods, produced in the same country as the imports.

Try Method 3 if there are no identical goods.

Method 3

The customs value of similar goods, which must be:

  • produced in the same country
  • able to carry out the same tasks and be
  • commercially interchangeable

Try Method 4 if there are no similar goods.

Method 4

The selling price of the goods (or identical or similar goods) in the UK.

Try Method 5 if there are no UK sales of the goods.

Method 5

The production cost of the goods, including the cost of any materials, manufacturing and any other processing used in production.

Try Method 6 if this production cost information is unavailable.

Method 6

Reasonably adapting one of the previous methods to fit unusual circumstances.

Legislation

In the UK valuation is covered by the Taxation (Cross-border Trade) Act 2018 & The Customs (Import Duty) (EU Exit) Regulations 2018 and The VAT Act 1994, Section 19.

What to include in the Method 1 calculation

If they are not already included in the seller’s price, the importer must add the costs of:

  • delivery to the EU border
  • most commissions (except buying commission)
  • royalties and licence fees paid by you on the imported goods as a condition of sale
  • containers and packing
  • any proceeds of resale the seller will receive
  • goods and services you provide to the seller for free or at a reduced cost – eg components incorporated in the imported goods, or development and design work carried out outside the EU and necessary for the production of the imports

If you import goods from a processor – ie a business that assembles or otherwise works on one or more sets of existing products to create your new imported products – transaction values can be built up by adding to the processing costs the value of any materials or components you provided to the processor.

What to exclude from your calculation

Items to be left out of the customs value if certain conditions are met include:

  • delivery costs within the EU
  • EU duties or taxes
  • taxes paid in the country of origin or export
  • quantity and trade discounts and those relating to cash and early settlement, that are valid at the time the goods are valued
  • dividend payments to the seller
  • marketing activities related to the imports
  • buying commission
  • export quota and licence costs
  • interest charges
  • rights of reproduction
  • post-importation work, eg construction or assembly
  • management fees

Further details here.

VAT Implications of Transfer Pricing – Valuation

By   21 April 2022
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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: What is consideration and why is it important?

By   18 March 2022
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VAT Basics

Consideration – background

There is no definition of consideration in legislation. The meaning was originally taken from contract law, but after the European Court of Justice ruled that the term is to be given the Community meaning and is not to be variously interpreted by Member States the UK adopted that approach.

The expression “consideration” means everything received in return for the supply of goods or the provision of services, including incidental expenses (packing, transport, insurance etc). Consideration is a payment for the supply of goods or services. It is usually a payment in money, but can also be of a “non-monetary” nature, such as goods or services supplied in return.

The phrase “in return for the supply” is interpreted to mean that there must be a direct link between the supply and the consideration.

Therefore, in order that a supply for a consideration can be made, there must be at least two parties and a written or oral agreement between them under which something is done or supplied for the consideration. There is a direct link between the supply and the consideration because the supplier expects something in return for his supply and would not fulfil his obligation unless he thought that payment would be forthcoming.

Profit

It is important to recognise that the concept of consideration and profit are wholly different, and the fact that a business makes no profit on a supply does not mean that there is no consideration for it. Whether payment yields a profit or loss is immaterial and has no bearing on whether or not it is consideration for VAT purposes. 

Importance

If consideration is not recognised, or undervalued, a business can expect HMRC assessments and penalties. Overstating consideration will result in an overpayment of tax.

if there is no consideration, there is no supply.

Consideration hallmarks

  • Consideration is defined widely to bring within the tax everything which the taxable person receives as consideration for the goods or services supplied.
  • The consideration must be capable of being expressed in money.
  • There must be some form of bargain or transaction between the parties.
  • A payment should be related to what the payer receives although the fact that people pay the same amount for varying benefits does not stop it from being consideration.

Consequently, if the provision of goods or services is incapable of being expressed in money, it is not consideration and is outside the scope of VAT.

Indicators of no consideration

  • The absence of any consensual element on the part of the payer.
  • A lack of control by the payer over the services provided.

Valuation of consideration

This may seem obvious, but as the amount of case law demonstrates, this is not always the case. The starting point is:

Monetary consideration

Monetary consideration includes cash and payment by cheque, credit card, bank transfer, contactless payment, deduction from pay, etc. This is set out in The VAT Act 1994, section 19(2).

Non-monetary consideration

Non-monetary consideration includes goods or services supplied as payment, for example in a “barter” (including part exchange) agreement. Services provided include the giving up of a right, refraining from doing something, agreeing to suffer some loss etc in return for the supply. At first sight these may appear to be merely conditions of an agreement, but are in fact consideration for a supply. If the supply is for a consideration not consisting or not wholly consisting of money, its value shall be taken to be such amount in money as, with the addition of the VAT chargeable, is equivalent to the consideration. Where a supply of any goods or services is not the only matter to which a consideration in money relates, the supply is deemed to be for such part of the consideration as is properly attributable to it.

In determining the taxable amount, the only advantages received by a supplier that are relevant are those obtained in return for making the supply should be recognised.  Non-monetary consideration has the value of the alternative monetary payment that would normally have been given for the supply.

What is not consideration

Donations

If a monetary donation is freely given, it is not consideration for any supply and so is outside the scope of VAT. In this situation, the donation has to be unconditional, and the following points dictate whether this is the case.

  • Does the donor receive anything in return for the payment?
  • Are there any conditions attached to the payment?
  • What will the payments be used for?
  • If the donor does not benefit directly, does any third party receive a benefit?
  • Is there a contract and what are the terms and conditions?

Donations must be contrasted to sponsorship.

It is necessary to distinguish between donations and sponsorship payments. Whereas a donation means the donor does not expect anything in return, sponsorship involves the sponsor receiving identifiable benefits. These benefits may include advertising, publicity or use of facilities and any sponsorship payment is within the scope of VAT.

Open Market Value

The VAT Act 1994, section 19 (5) states that “…the open market value of a supply of goods or services shall be taken to be the amount that would fall to be taken as its value …if the supply were for such consideration in money as would be payable by a person standing in no such relationship with any person as would affect that consideration”.

Difficult areas

Commonly, areas which give rise to VAT consideration problems include, but are not limited to:

  • when consideration is provided in return for supplies of differing VAT liabilities
  • Special Valuation Provisions in The VAT Act 1994, Schedule 6
  • supplies to staff or goods for own use
  • discounts and special offers (eg; persons providing selling or introductory services to traders who receive goods for a reduced cash payment, or BOGOF)
  • barter transactions – when each supply has a different value
  • part-exchange
  • apportionment of monetary consideration
  • separate/composite supplies
  • supplies between connected parties
  • direct selling structures
  • gifts, prizes, and reward goods.
  • imports
  • prompt payment discounts
  • deemed supplies
  • non-business use of business assets or of services supplied to a business
  • reverse charges
  • reduced rate accommodation
  • supplies expressed in foreign currencies
  • transfer pricing
  • business gifts/samples
  • caravans sold with contents
  • self supplies
  • club membership benefits
  • correspondence courses
  • opticians and hearing aid dispensers (exempt services vs standard rated goods)
  • rebates/refunds
  • disbursements
  • tour operators (TOMS)
  • partial exemption

Further reading

For purposes of research or interest, the following cases on consideration are worth reading:

Staatssecretaries van Financien v Cooperatieve Aardapplenbewarr-plaats ((1981) ECR 445; (1981) – The Dutch Potato case for ease!

BAZ Bausystem Gmbh v Finanzamt Munchen Fur Korperschaften

Apple & Pear Development Council (APDC), (ECJ (1988) STC 221; (1988)2 CMLR 394)

Tolsma C-16/93 (1994 STC 509)

Naturally Yours Cosmetics Ltd

Empire Stores Ltd



VAT: Valuation

By   15 November 2021
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Further to my article on apportionment valuation and case review here and Transfer Pricing valuation I thought it useful to consider HMRC’s internal guidance on its approach to valuation.

Sometimes a single monetary consideration may represent payment for two or more supplies at different VAT rates. In such cases, a business is required to allocate a “fair proportion” of the total payment to each of the supplies. This requirement is set out at in The VAT Act 1994, Section 19(4).

“Where a supply of any goods or services is not the only matter to which a consideration in money relates, the supply shall be deemed to be for such part of the consideration as is properly attributable to it.”

Although this section requires an apportionment of the consideration to be performed, it does not prescribe the methods by which this is to be achieved. The most common methods are based upon the costs incurred in making the supplies or the usual selling prices of the supplies.

Examples of methods that have been found to be of general application are contained in VAT Notice 700 para 8. A business is not obliged to adopt any of these suggested methods, and HMRC may accept alternative proposals provided that they achieve a fair and reasonable result that can be supported by valid calculation.

Some sectors have special methods called margin schemes to determine apportionment of the monetary consideration. Details of these found in their notices and guidance. The schemes include:


Basics

Before it is possible to perform an apportionment calculation, there are four basic questions that need to be addressed to determine whether an apportionment is appropriate and if so, what supplies it relates to.

  1. Is there more than one supply?
  2. Is there a single consideration?
  3. Can any part of the payment be treated as outside the scope of VAT?
  4. What are the liabilities of the supplies in question?

The issue of whether there is a single or multiple supply has created problems from the outset of the tax.  The volume of case law illustrates that each decision is based on the facts of each case and there cannot be a one-size fits all approach to this issue. The most important and recent cases are here:

Card Protection Plan Ltd 

Stocks Fly Fishery

Metropolitan International Schools

The Ice Rink Company Ltd 

General Healthcare Group Limited

VAT: What is open market value? The Jupiter case

By   11 May 2021
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Latest from the courts

In the First Tier tribunal (FTT) case of Jupiter Asset Management Group Ltd the issue was the value of management services to an associated third party VAT group.

Background

The value is important because if HMRC believe that a supply between two connected parties (as defined by The Income and Corporation Taxes Act 1988 Section 839) is undervalue and the recipient cannot recover the relevant input tax in full, it is permitted via The VAT Act 1994, Schedule 6, PART 2, para 1 (1) to substitute open market value (OMV) by way of a Notice.

This paragraph is specifically intended to counter tax avoidance. If a supply between connected persons is made below open market value for a legitimate reason that the trader can substantiate, and which is unconnected with avoidance HMRC has the discretion not to issue a Notice. In Jupiter, HMRC directed that OMV be used to calculate the charge as it considered that value was too low and issued an assessment for underdeclared output tax.

Decision

In the absence of comparable supplies, OMV was to be determined by reference to:

  • the full cost of making the supplies;
  • the full cost included the costs incurred on goods and services used in making the supplies and general overhead costs the input tax in respect of which had been recovered
  • the remuneration paid to the executive directors to the extent that that remuneration related to activities performed by the executive directors in making the supplies of the management services

Consequently, the appeal against the output tax assessment was dismissed.

Commentary

An expected outcome, but ne which emphasises that care should be taken with transactions between connected parties, management charges and inter-company charges in general. This is even more relevant since the decision in the Norseman Gold plc case

VAT – Apportionment issues: Complex and costly

By   16 February 2021
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The dictionary definition of the verb to apportion is “to distribute or allocate proportionally; divide and assign according to some rule of proportional distribution”. 

So why is apportionment important in the world of VAT and where would a business encounter the need to apportion? I thought that it might be useful to take an overall look at the subject as it is one of, if not the most, contentious areas of VAT. If affects both output tax declarations and input tax claims, so I have looked at these two areas separately. If an apportionment is inaccurate it will either result in paying too much tax, or risking penalties and additional attention from HMRC; both of which are to be avoided!

The overriding point in all these examples is that any apportionment must be “fair and reasonable”.

Supplies

The following are examples of where a business needs to apportion the value of sales:

  • Retail sales

Retailers find it difficult to account for VAT in the normal way so they use what is known as a retail scheme. There are various schemes but they all provide a formula for calculating VAT on sales at the standard, reduced and zero rate. This is needed for shops that sell goods at different rates, eg; food, clothing and books alongside standard rated supplies.  As an example, in Apportionment Scheme 1 a business works out the value of its purchases for retail sale at different rates of VAT and applies those proportions to its sales.

  • Construction

A good example here is if a developer employs a contractor to construct a new building which contains retail units on the ground floor with flats above.  The construction of the commercial part is standard rated, but the building of the residential element is zero rated.  The contractor has to apportion his supply between the two VAT rates.  This apportionment could be made with reference to floorspace, costs, value or any other method which provides a fair and reasonable result.  The value of supplies relating to property is often high, so it is important that the apportionment is accurate and not open to challenge from HMRC.  I recommend that agreement on the method used is agreed with HMRC prior to the supply in order to avoid any subsequent issues.

  • Property letting

Let us assume that in the construction example above, when the construction is complete, the developer lets the whole building to a third party. He chooses to opt to tax the property in order to recover the attributable input tax.  The option has no effect on the residential element which will represent an exempt supply. Consequently, an apportionment must be made between the letting income in respect of the shops and flats.

  • Subscriptions

There has been a great deal of case law on whether subscriptions to certain organisations by which the subscriber obtains various benefits represent a single supply at a certain VAT rate, or separate supplies at different rates. A common example is zero rated printed matter with other exempt or standard rated supplies.

  • Take away

Most are familiar with the furore over the “pasty tax” and even with the U-turn, the provision of food/catering is often the subject of disputes over apportionment.  Broadly; the sale of cold food for take away is zero rated and hot food and eat in (catering) is standard rated.  There have been myriad cases on what’s hot and what’s not, what constitutes a premises (for eat in), and how food is “held out” for sale. The recent Subway dispute highlights the subtleties in this area. I have successfully claimed significant amounts of overpaid output tax based on this kind of apportionment and it is always worth reviewing a business’s position.  New products are arriving all the time and circumstances of a business can change.  A word of warning here; HMRC regularly mount covert observation exercises to record the proportion of customers eating in to those taking away.  They also carry out “test eats” so it is crucial that any method used to apportion sales is accurate and supportable.

  • Opticians

Opticians have a difficult time of it with VAT.  Examinations and advice services are exempt healthcare, but the sale of goods; spectacles and contact lenses, is standard rated.  Almost always a customer/patient pays a single amount which covers the services as well as the goods. Apportionment in these cases is very difficult and has been the subject of disagreement and tribunal cases for many years; some of which I have been involved in.  Not only is the sales value apportionment complex, but many opticians are partly exempt which causes additional difficulties. I recommend that all opticians review their VAT position.

Input tax recovery

  • Business/Non-Business (BNB)

If an entity is involved in both business and non-business activities, eg; a charity which provides free advice and also has a shop which sells donated goods. It is unable to recover all of the VAT it incurs.  VAT attributable to non-business activities is not input tax and cannot be reclaimed.  Therefore it is necessary to calculate the quantum of VAT attributable to BNB activities, that VAT which cannot be attributed is called overhead VAT and must be apportioned between BNB activities.  There are many varied ways of doing this as the VAT legislation does not specify any particular method.  Therefore it is important to consider all of the available alternatives. Examples of these are; income, expenditure, time, floorspace, transaction count etc.

  • Partial exemption

Similarly to BNB if a business makes exempt supplies, eg; certain property letting, insurance and financial products, it cannot recover input tax attributable to those exempt supplies (unless the value is de minimis). Overhead input tax needs to be apportioned between taxable and exempt supplies.  The standard method of doing this is to apply the ratio of taxable versus exempt supply values to the overhead tax. However, there are many “special methods” available, but these have to be agreed with HMRC.  Partial exemption is often complex and always results in an actual VAT cost to a business, so it is always worthwhile to review the position regularly.  Exemption is not a relief to a business.

  • Attribution

In both BNB and partial exemption situations before considering overheads all VAT must, as far as possible, be attributed to either taxable or exempt and non-business activities. This in itself is a form of apportionment and it is often not clear how the supply received has been used by a business, that is; of which activity is it a cost component?

  • Business entertainment

At certain events staff may attend along with other guests who are not employed. The recovery of input tax in respect of staff entertainment is recoverable but (generally) entertaining non staff members is blocked. Therefore an apportionment of the VAT incurred on such entertainment is required.

  • Business and private use of an asset

If a company owns, say, a yacht or a helicopter and uses it for a director’s own private use, but it is chartered to third parties when not being used (business use) an apportionment must be made between the two activities. The most usual way of doing this is on a time basis. Apportionment will also be required in the example of a business owning a holiday home used for both business and private purposes. Input tax relating to private (non-business) use is always blocked.

  • Motoring expenses

It is common for a staff member to use a car for both business and private purposes.  Input tax is only recoverable in respect of the business use so an apportionment is required.  This may be done by keeping detailed mileage records, or more simply by applying the Road Fuel Scale Charge which is a set figure per month which represents a disallowance for private use.

The above examples are not exhaustive but I hope they give a flavour to the subject.

If your business apportions, or should apportion, values for either income or expenditure I strongly recommend a review on the method.  There is often no “right answer” for an apportionment and I often find that HMRC impose unnecessarily harsh demands on a taxpayer.  Additionally, many business are unaware of alternatives or are resistant to challenging HMRC even when they have a good case.

VAT: Valuation – interest free credit

By   15 October 2018
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Latest from the courts. The Dixon Carphone plc (Dixon) First Tier Tribunal (FTT) case.

It considered the value of a retail sale where interest free credit was offered. Was it the amount paid by the consumer, or the amount actually received by Dixon after the deductions made by the credit supplier?

Background

The transactions which were the subject of this case are as follows:

  • a consumer purchases goods in a Dixon store and pays a deposit to Dixon
  • the balance of the cost of the purchase is funded by a loan, provided by a third-party loan company
  • the customer gives authority to the loan company to pay the money borrowed to Dixon
  • the customer loan is on favourable terms to the consumer as it is an interest free: “Buy Now, Pay Later” arrangement
  • the amount paid by the loan company to Dixon is a lower amount than that authorised by the consumer, following deduction of an amount described as a “Subsidy”.
  • the customer pays no interest on the amount borrowed if the full amount of credit is repaid by the customer within the “Pay Later” offer period.

Contentions

The appellant argued that the general rule, derived from the VAT Directive Article 73, is that the taxable amount is everything received by the supplier as consideration. In more complex cases, with more than one paying party, the consideration should be everything moving from each paying party and received by the supplier. Consequently, in these transactions there is a reduction in what was received by Dixon consequently, the taxable amount on which VAT should be calculated should be the amount received by Dixon from the loan company.

HMRC contended that output tax was due on the full selling price and that the other transactions did not impact the value of the supply.

Decision

As in a similar case which was decided at the CJEU: Primback Ltd C-34/99 ([2001] STC 803, The FTT decided that the loan company was providing the finance to the consumer who used the money to pay Dixon the full retail price of the goods. The loan company’s “Subsidy” did reduce the amount paid by the loan company directly to Dixon on behalf of the consumer, but this transaction did not affect the amount owed by the consumer for the goods.

The appeal was therefore dismissed.

Practical application

HMRC provide an example of the VAT treatment of interest free credit along the lines as follows:

Goods are sold for £600 on six months interest free credit terms.  As far as the customer is concerned, (s)he merely pays six instalments of £100 to the loan company.

Under separate arrangements between a loan company and the retailer, the loan company makes a deduction from the amount forwarded to the retailer, which accordingly, received only £560, not the full amount of £600. HMRC regard this deduction as third-party consideration, paid by the retailer for the loan made to the customer, and that output tax on £600 is due. Because there is no consideration, in the form of interest, paid by the customer on an interest-free loan, there is no supply for VAT purposes.

Commentary

The value of retail sales has often been an issue in the VAT world, whether it be interest free credit, credit card charges, BOGOF, or “bumping” in the motor industry. Care should be taken when deciding the value of consideration to be used for output tax declarations and advice should be sought if there is any doubt. It appears that the issue of interest free credit has now been killed off, but with ingenious marketing ideas always being created, VAT must be considered at an early stage.







VAT and Customs Duties. Bringing goods into the UK – A brief guide.

By   16 April 2015
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VAT and duty on and imports and acquisitions 

If you are bringing goods into the UK it is important to recognise important VAT and duty rules and procedures.  You must ensure that you pay the right amount of VAT and import duties via the correct mechanism.

Goods brought into the UK from other EC countries are called acquisitions rather than imports, and this is an important distinction as we shall see below.

The details and practicalities can be complex and you may want to seek advice or use an agent or freight forwarder to handle your responsibilities, particularly if you are new to international trade or only need to bring goods here occasionally.

Acquisition of goods from EC Member States

EC Member States

The 28 EC countries are: Austria, Belgium, Bulgaria, Croatia, Republic of Cyprus, Czech Republic, Denmark, Estonia, Finland, France, Germany, Greece, Hungary, Ireland, Italy, Latvia, Lithuania, Luxembourg, Malta, Netherlands, Poland, Portugal, Romania, Slovakia, Slovenia, Spain, Sweden and the UK.

Information

If you are UK VAT registered you need to give your supplier your VAT number. This allows the supplier to treat the sale to you as VAT free.  You will need a VAT invoice as with any other purchase. If not UK VAT registered you will pay VAT applicable in the Member State of the supplier.

Accounting for VAT 

You must account for VAT on acquisitions (“acquisition tax”) on your VAT return. VAT is charged at the normal UK rate of VAT for those goods.  You reclaim this acquisition tax in the same way as you reclaim input tax on purchases of supplies within the UK.  So for most businesses the effect is VAT neutral.  In this way there is no difference between buying the goods in the UK or another EC Member State so it rules out cross-border “VAT rate shopping”. There are no Customs Duties to pay on acquisitions

Reporting

All VAT-registered businesses must show the total value of goods acquired from other EU Member States in box 9 of their VAT Return.

In addition, those who trade in the EC above the Intrastat exemption threshold in force during the year must also complete a monthly Supplementary Declaration (SD). The threshold is £1.5 million.

Importing goods from outside the EC

Your responsibilities for imports

You are normally responsible for clearing the goods through UK customs and paying any taxes and duties. Your supplier needs to provide the documentation you need to clear the goods through Customs. If you are importing you may have to pay import duty.

You will need to decide whether to use an agent to handle your responsibilities.  Freight forwarders can handle Customs clearance as well as transport. You can find reputable freight forwarders through the British International Freight Association: here 

You need to check what import duty applies.

Import duty is based on the type of goods you are importing, the country they originate from and their value. HMRC’s Integrated Tariff sets out the classification of goods and the rates of duty in detail: here

Confirm what paperwork you require from the supplier for Customs clearance

This normally includes an invoice and a copy of the transport documents.  You may need proof of the origin of the goods to claim reduced import duty for goods from certain countries. A valuation document is also normally required for imports above a set value.

Complete an import declaration.

You normally declare imports using the Single Administrative Document (SAD).  If you are registered for VAT in the UK you will need an EORI (Economic Operator Registration & Identification) to enable your inbound commercial shipments to be cleared through the automated  CHIEF (Customs Handling of Import and Export Freight). This is made up of your VAT number, plus a further three digits.

Release of goods

You will need to pay VAT and duty to get the goods released.You pay VAT at the normal UK rate for those goods when sold in the UK.

Deferment

Regular importers are able to defer payment of VAT and duty by opening a deferment account with HMRC. You need to provide security and must agree to pay by direct debit. It is also possible to use your agent or freight forwarder’s deferment account.

Accounting for VAT

If you import works of art, antiques and collectors’ items they are entitled to a reduced rate of VAT.

HMRC will send you a monthly C79 certificate showing the import VAT you have paid. You must retain this.  Certificates cover accounting transactions made in each calendar month should be received around the 24th of each month following imports logged the previous month. 

You can reclaim VAT paid on imports on a C79 in the same way as you reclaim input tax on purchases of supplies within in the UK.  It is not possible to reclaim VAT on any other document, eg; an invoice.  Shipping or forwarding agents can’t reclaim this input tax because the goods weren’t imported to be used in part of their business.

You cannot reclaim import duty.

Be aware of special cases

Check whether any goods you are buying are subject to Excise Duty.

Excise duty is charged on fuel, alcohol and tobacco products.

Excise duty is charged on acquisitions from within the EU as well as imports from countries outside the EC.

If goods are subject to excise duty, you pay this at the same time as you pay VAT and import duty.

VAT is charged on the value of the goods plus excise duty.

Warehousing

You may want to consider using a Customs warehouse if you expect to store imports for a long time. If you store goods in a Customs warehouse, you will not need to pay import duty and VAT until you remove the goods from the warehouse.

Storage ‘in bond’ like this is often used for products subject to excise duty, such as wine and cigarettes, although it is not limited to these goods.

Re-exported goods

You will also find it beneficial to find out about tax relief if you are planning to re-export goods you import.  There are special Inward Processing Relief (IPR) rules so that you do not have to pay import duty and VAT.  This relief can apply to imports that you process before re-exporting them.

Valuation of imported goods for VAT and Duties

There are six methods of valuing imported goods, however, in the vast majority of cases (over 90%) the “Transaction Method” is used and, in fact, you must use this method wherever possible.

Transaction Value

This is the price paid or payable by the buyer to the seller for the goods when sold for export to the EC adjusted in accordance with certain specific rules.

This may also cover situations where goods are imported from a processor. The “transaction value” may be “built up” or “constructed” by reference to the cost of processing plus any items to be added commonly referred to as “assists”.

What items must be added to the price paid or payable?

You must add the following to the price you pay (unless they are already included):

(a) Delivery costs. – The costs of transport, insurance, loading or handling connected with delivering the goods to the EC border must be included.

(b) Commissions. – Certain payments of commission and brokerage, including selling commission, must be included.

But you can exclude buying commission if it is shown separately from the price paid or payable for the goods.

(c) Royalties and licence fees. – You must include these payments when they relate to the imported goods and are paid by you as a condition of the sale to you of those goods.

(d) Goods and services provided free of charge or at reduced cost by the buyer. –  If you provide, directly or indirectly, any of the following, you must include in the customs value any part of the cost or value not included in the price charged to you by the seller:

i.          materials, components, parts and similar items incorporated in the imported goods including price tags, kimball tags, labels

ii.          tools, dies, moulds and similar items used in producing the imported goods, for example, tooling charges. There are various ways of apportioning these charges

iii.          materials consumed in producing the imported goods, for example, abrasives, lubricants, catalysts, reagents etc which are used up in the manufacture of the goods but are not incorporated in them,

iv.          engineering, development, artwork, design work and plans and sketches carried out outside the EC and necessary for producing the imported goods. The cost of research and preliminary design                    sketches is not to be included.

(e) Containers and packing. Include:

  1. the cost of containers which are treated for customs purposes as being one with the goods being valued (that is not freight containers the hire-cost of which forms part of the transport costs), and
  2. the cost of packing whether for labour or materials

Where containers are for repeated use, for example, reusable bottles, you can spread their cost over the expected number of imports. If a number of the containers may not be re-exported, this must be allowed for.

(f) Proceeds of resale. – If you are to share with the seller (whether directly or indirectly) the profit on resale, use or disposal of the imported goods you must add the seller’s share to the price paid. If at the time of importation the amount of profit is not known, you must request release of the goods against a deposit or guarantee.

(g) Export duty & taxes paid in the country of origin or export. – When these taxes are incurred by the buyer they are dutiable. However, if you benefit from tax relief or repayment of these taxes they may be left out of the customs value.

Summary

If you are new to acquisitions or importing it may be worthwhile talking to an expert.  This article only scratches the surface of the subject. There can be significant savings made by accurately classifying goods and applying the correct procedures and rates will avoid assessments and penalties being levied.