Category Archives: Agent/principal

VAT: What are split payments?

By Marcus Ward 9 January 2023

The term “split payment” is increasingly cropping up in conversations and in the media, so I thought it would be a good time to look at the concept.

Split payments, sometimes called real-time extraction, uses card payment technology to collect VAT on online sales and transfer it directly to HMRC rather than the seller collecting it from the buyer along with the payment for the supply, and then declaring it to HMRC on a return in the usual way.

Clearly, HMRC is very keen to introduce such a system, but there are significant hurdles, the biggest being the complexity for online sellers, payment processors, input tax systems, agents, advisers and HMRC itself.

Where are we on split payments?

At the end of the year HMRC published a Prior Information Notice (PIN) and associated Request for Information (RFI), seeking views on the outline requirements and proposed procurement process split payments. This should, inter alia, assist HMRC in:

identifying where it is intended that the purchased goods or services are to be delivered and/or consumed
the possibility to apply a split only above or below a certain value threshold
the feasibility for the splitting mechanism to calculate a composite VAT total across a mixed basket of goods and/ or services, each potentially with a different rate of VAT.

This builds on previous information gathering/consultations/discussions carried out a number of years ago.

Background

The expansion of the online shopping market has brought unprecedented levels of transactions. The results of digitalisation have also brought challenges for tax systems. Jurisdictions all over the world are currently grappling with the question of how to prevent large VAT losses, which can arise from cross-border online sales. This happens when consumers buy goods from outside their jurisdiction from sellers who, through fraud or ignorance, do not comply with their tax obligations. It is costing the UK tax authorities an estimated £1 billion to £1.5 billion (figures for 2015-16) a year. The UK government believes that intercepting VAT through intermediaries in the payment cycle, split payment potentially offers a powerful means of enforcing VAT compliance on sellers who are outside the UK’s jurisdiction.

Fraud

The fraud carried out by online sellers is not particularly sophisticated but is difficult to combat. Simply, sellers either use a fake VAT number to collect VAT without declaring it, or even more basically, collect the VAT and disappear.

Proposed spilt payment methods

The way in which payments are split represent difficult technical VAT issues, particularly when sales are at different VAT rates. The three proposals are:

Standard rate split. This assumes that all sales are liable to the standard rate VAT and does not recognise any input tax deduction. Extraction of 20% of tax, regardless of the actual liability (potentially, 5%, or zero) appears unfair and would be very difficult to impose. Cashflow would be negatively affected too.
Flat Rate Scheme (FRS). This is a proposal by HMRC to insist that online sellers overseas to use the FRS using a specific new rate for this purpose. The FRS threshold of £150,000 pa could be increased for overseas businesses, but this would potentially give overseas sellers an advantage over UK businesses, so politically, if nothing else, would prove to be a hard sell.
Net effective rate. This would mean an overseas business calculating its own exact net effective rate, based on its outputs and inputs from the previous year’s transactions (similar to TOMS).
Composite rate. A composite VAT total across a mixed range of goods or services, each potentially with a different rate of VAT. The mechanism for carrying this calculation out is unclear.

There may be more proposals forthcoming, but none of the above proposals appear reasonable and the complexity they would bring would seem to rule them out as matters stand – although this has not previously stopped HMRC introducing certain measures and the obvious benefits to the authorities cannot be ignored.

Overall

The technology for split payments currently exists and is being used in some Latin American countries (and Poland). The concept is part of a larger movement towards real-time taxation and MTD. Our view is that split payments are coming, but we do not know in which form or when.

VAT: Selling goods using an online marketplace – new guidance

By Marcus Ward 3 January 2023

HMRC has published new guidance for use when a business sells goods using an online marketplace (an e-commerce site that connects sellers with buyers where transactions are managed by the website owner) or direct to customers in the UK.

It can be used to check when a seller is required to pay UK VAT.

It is important, especially for sellers based outside the UK, to understand the tax consequences when such marketplaces are used. It is not always possible to rely on the platforms to deal with output tax on sales made to UK recipients.

The guidance covers:

selling goods using an online marketplace
selling goods direct to customers in the UK
checks online marketplaces need to do
VAT when goods are returned to the seller

Updated guidance on agents VAT registering clients

By Marcus Ward 7 December 2022

HMRC has published updated guidance for agents registering business for VAT. Broadly, the new document covers what information agents require, which may be summarised as:

the agent’s Government Gateway user ID and password for either agent services account or HMRC Online services
agent’s name
agent’s phone number
agent’s email address
the client’s name
client’s date of birth
details of client’s turnover and nature of business
client’s bank account details
client’s National Insurance number
a form of ID from the client, eg: passport or driving licence
client’s Corporation Tax Payments, PAYE, Self-Assessment Return, recent payslip or P60

Limited companies

If an agent is registering a limited company client, they must have a Company Registration Number and a Corporation Tax Unique Taxpayer Reference (UTR) to complete the VAT registration process.

Individuals and partnerships

These applications do not need to have a Self-Assessment UTR to register for VAT, but if they do, it must be supplied.

An agent will be asked to verify the entity it is registering, therefore it is prudent to obtain the basic history and background of the applicant’s business before starting the process. Cleary this is good practice generally!

VAT & Customs Duty – Valuation for import purposes

By Marcus Ward 5 August 2022

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: Disclosed and undisclosed agents

By Marcus Ward 20 July 2022

There has been substantial case law on whether a business acts as agent or principal, the most recent being:

In this brief article I consider the distinction between disclosed and undisclosed agents and the VAT position of each.

Agent

An agent is a person who has been legally empowered to act on behalf of another entity (a principal). An agent may be employed to represent a client in negotiations and other dealings with third parties under his direction. The agent may be given decision-making authority. The relationship between a principal and agent can be disclosed or undisclosed to a third party. A disclosed agent acts in the name of the principal, whereas an undisclosed agent acts in his own name.

VAT Treatment

Disclosed Agents

A disclosed agent acts in the name of the principal and the client is aware that they are dealing with an agent of the principal. The relevant supply is made by the principal to the client. The agent does not make the supply to the client, but rather, to (usually) the principal in respect of commission for its services of acting as the “middle-man” in the transaction.

Output tax is due on the full selling price of the goods or services supplied by the principal. The value is not reduced by any amount paid to the agent. The agent will invoice the principal for his services and in most cases the principal will recover this as input tax (subject to the usual rules).

Undisclosed Agents

The buyer of goods or services will not (usually) know the name of the principal and will deal with the agent in the agent’s own name. The legislation states that ‘where a taxable person acting in his own name but on behalf of another person takes part in a supply of services, he shall be deemed to have received and supplied those services himself’.

This means that the supply of goods or services by an undisclosed agent is treated as a simultaneous supply to, and by, the agent. The agent is treated as both the purchaser (from the principal) and seller (to the client/customer).

The agent treats the goods as its own purchase – incurring VAT charged by the principal and then declares output tax on the onward sale to the client. The input tax charged by the principal is usually recoverable by the undisclosed agent. In some circumstances, the purchase and sale will have different VAT liabilities, eg; the sale of goods may be a VATable UK supply, but the onward sale could be a zero rated export. Generally, the principal is not put in a less advantageous position by operating through an agent.

Summary

It is sometimes difficult to establish whether an entity acts as agent or principal, and if agent, whether it is in a disclosed or undisclosed capacity. Not only is the VAT treatment different, but the distinction effects where goods or services are deemed to be supplied for VAT purposes. The place of supply rules dictates such matters as VAT registration (UK and overseas) whether (and where) VAT is chargeable and the compliance obligations of the principal and agent.

It is important to analyse the terms of the relevant contracts/agreements between the agent and principal to establish the nature of the relationship. However, it also necessary to consider the commercial reality of transactions between the parties as this may differ from the contract.

VAT: Financial Services – Flowchart

By Marcus Ward 30 June 2022

FS Intermediary – flowchart Download

Financial Services (FS) is a complex area of VAT and the legislation and case law add to that complexity. For ease, I have made a flowchart which I hope may help.

The supply of FS intermediary services may be exempt from VAT, but other types of supplies relating to FS are standard rated (advice, marketing, providing information etc).

With new technology advancing all the time, this adds more difficulties in establishing the correct VAT treatment.

VAT: Exempt insurance intermediation. The Staysure case

By Marcus Ward 8 June 2022

Latest from the courts

In the Staysure.Co.UK Limited First Tier Tribunal (FTT) case the issue was whether services of service of generating insurance leads for the appellant fell within the insurance exemption or whether the reverse charge (please see guide below) should be applied.

Background

Staysure is an FCA regulated insurance broker based in the UK which provided travel insurance for people aged 50 or over, home insurance, cover for holiday homes and motor vehicles. It received services from an associated company belonging in Gibraltar.

The services amounted to:

the provision of insurance leads online and offline

placing targeted advertising in the press, television and online

owning and operating the domain and related website: staysure.co.uk

providing insurance quotations via a bespoke quote engine which employed complex algorithms to produce a personalised price for each customer and resulted in an offer which was competitive from the customer’s perspective while also maximising profit for Staysure, the underwriter, and the service provider

reporting on where prospective customers were falling out of the quotation and lead selection process, and in so doing demonstrate opportunities for further product development

If the services were not covered by the relevant exemption, they would be subject to a reverse charge via The Value Added Taxes Act 1994 section 8 by Staysure. As the recipient was not fully taxable, this would create an actual cost when the charge was applied. HMRC considered the service taxable and:

registered Staysure on the strength of the deemed self-supply

assessed for the input tax which was created by the reverse charge.

The assessment was circa £8 million, penalties of over £1 million plus interest. This was on the basis that HMRC concluded that the supply was taxable marketing rather than exempt intermediary services.

Decision

The court decided that the marketing and technology was used to find clients and introduce them to the insurer. The supplier was not supplying advertising, but qualified leads produced by that advertising. The quote engine was not merely technical assistance, but a sophisticated technology which assessed the conditions on which customers might be offered insurance. Consequently, these services were exempt as the supplies of an insurance intermediary (The VAT Act 1994, Schedule 9, Group 2, item 4) and Staysure was not required to account for UK VAT under the reverse charge.

The appeal was allowed. The services were within the insurance exemption, essentially because they were linked to essential aspects of the work carried out by Staysure, namely the finding of prospective clients and their introduction to the insurer with a view to the conclusion of insurance contracts.

Technical

This is another case on the application of the reverse charge. I looked at a previous case here

However, the judge helpfully summarised the following principles on insurance intermediation after considering previous case law.

whether a person is an insurance broker or an insurance agent depends on what they do. How they choose to describe themselves or their activities is not determinative

it is not necessary for a person to be carrying out all the functions of an insurance agent or broker for the exemption to be satisfied

it is essential that the person has a relationship with both the insurer and the insured party, but this does not need to be a contractual relationship. The requirement that the person has a relationship with the insurer is satisfied where the person is the subcontractor of a broker, which in turn has a relationship with the insurer

where the person is a subcontractor of a broker, the exemption is satisfied:
- where the relationship with the customer is indirect or where the subcontractor is one of a chain of persons bringing together an insurance company and a potential insured, but;
- the subcontractor’s services must be linked to the essential aspects of the work of an insurance broker or agent, namely the finding of prospective clients and their introduction to the insurer with a view to the conclusion of insurance contracts

Commentary

Care should always be taken when outsourcing/offshoring services or in fact, when any business restructuring takes place. The VAT impact of doing so could provide costly. In this case, the distinction between intermediary and marketing services was considered. It went in the taxpayer’s favour, but slightly different arrangements could have created a large VAT hit.

Guide

Reverse charge on services received from overseas

Normally, the supplier of a service is the person who must account to the tax authorities for any VAT due on the supply. However, in certain situations, the position is reversed and it is the customer who must account for any VAT due. This is known as the ‘Reverse Charge’ procedure. Generally, the Reverse Charge must be applied to services which are received by a business in the UK VAT free from overseas.

Accounting for VAT and recovery of input tax.

Where the Reverse Charge procedure applies, the recipient of the services must act as both the supplier and the recipient of the services.

Value of supply

The value of the deemed supply is to be taken to be the consideration in money for which the services were in fact supplied or, where the consideration did not consist or not wholly consist of money, such amount in money as is equivalent to that consideration. The consideration payable to the overseas supplier for the services excludes UK VAT but includes any taxes levied abroad.

Time of supply.

The time of supply of such services is the date the supplies are paid for or, if the consideration is not in money, the last day of the VAT period in which the services are performed.

The outcome

The effect of the provisions is that the Reverse Charge has no net cost to the recipient if he can attribute the input tax to taxable supplies and can therefore reclaim it in full. If he cannot, the effect is to put him in the same position as if had received the supply from a UK supplier rather than from one outside the UK. Thus the charge aims to avoid cross border VAT rate shopping. It is not possible to attribute the input tax created directly to the deemed (taxable) supply.

VAT: Place of belonging. The Berlin Chemie A Menarini case

By Marcus Ward 13 April 2022

Latest from the courts

The place of belonging of a business or other person is an important tenet of the tax. I have considered this issue at length here and recent case law here.

A recent CJEU case involved a situation where a business had a registered office in one country and, potentially (hence the appeal) a fixed establishment in another.

Background

“Berlin” used a “third party” to receive certain services. Does this entry represent a fixed establishment for Berlin if it has a sufficient degree of permanence and a suitable structure in terms of technical and human resources? If yes, is it is necessary for those human and technical resources to belong to the company receiving the services or whether it is sufficient for that company to have immediate and permanent access to such resources through a related company, of which it is major shareholder?

Technical

The wording of Article 44 of the VAT Directive and Article 11(1) of Implementing Regulation No 282/2011 do not provide any details as to whether human and technical resources must belong to the company that receives the services.

Decision

The CEUJ ruled that, simple control or ownership, of another entity is insufficient to create a fixed establishment for VAT purposes. Consequently, a third party location does not inevitably represent a fixed establishment by dint of control/ownership.

Having made that comment, the court impressed that the decision should be made “in the context of the economic and commercial reality”.

The analysis of the place of belonging should recognise that it is not necessary for the fixed establishment to own the resources, but there should be control over these resources in the same way as an “owner”. A fixed establishment is characterised by a suitable structure which enables a business to receive and use services supplied to them for their own needs and not by the decision power of a certain structure that businesses have put in place.

Commentary

Although an EU case, it could impact UK businesses who make supplies to EU recipients and particularly, if there is a “network” of offices or business locations in various EU Member States. Overseas suppliers to (potentially) UK business with various business premises and structures will need to recognise this ruling in order to establish the place of supply (and hence what country’s VAT and at what rate to apply).

This decision provides some helpful clarity, which may be summarised as: In principle, a subsidiary does not always create a fixed establishment.

VAT – Overseas holiday lets: A warning

By Marcus Ward 8 April 2022

Do you, or your clients, own property overseas which you let to third parties when you are not using it yourself?

It is important to understand the VAT consequences of owning property overseas.

The position of UK Holiday Lets

It may not be commonly known that the UK has the highest VAT threshold in the EC. This means that for many ‘sideline’ businesses such as; the rental of second or holiday properties in the UK, the owners, whether they are; individuals, businesses, or pension schemes, only have to consider VAT if income in relation to the property exceeds £85,000 pa, and this is only likely if a number of properties are owned.

It should be noted that, unlike other types of rental of homes, holiday lettings are always taxable for VAT purposes.

Overseas Holiday Lets

EU Member States have nil thresholds for foreign entrepreneurs. This means that if any rental income is received, VAT registration is likely to be compulsory. Consequently, a property owner that rents out a property abroad will probably have a liability to register for VAT in the country that the property is located. Failure to comply with the domestic legislation of the relevant Member State may mean; payment of back VAT and interest and fines being levied. VAT registration however, does mean that a property owner can recover input tax on expenditure in connection with the property, eg; agent’s fees, repair and maintenance and other professional costs. This may be restricted if the home is used for periodical own use.

Given that every country has differing rules and/or procedures to the UK, it is crucial to check all the consequences of letting property overseas. Additionally, if any other services are supplied, eg; transport, this gives rise to a whole new (and significantly more complex) set of VAT rules.

A final word of warning; I quite often hear the comment “I’m not going to bother – how will they ever find out?”

If an overseas property owner based in the UK is in competition with local letting businesses, those businesses generally do not have any compulsion in notifying the local authorities. In addition, I have heard of authorities carrying out very simple initiatives to see if owners are VAT registered. In many resorts, income from tourism is vital and this is a very important revenue stream for them so it is well policed.

Please contact us if you are affected by this matter; we have the resources to advise and act on a worldwide basis.

New Form 64-8 agent authorisation

By Marcus Ward 29 March 2022

New 64-8 agent authorisation form

HMRC has issued a notice which states that, from 31 March 2022, businesses taking on new clients will need them to complete a new form 64-8 to give authorisation for them to deal with HMRC on their client’s behalf.

Existing clients do not need to re-authorise their current relationship.

Access

The new form will be available from 31 March 2022 and may be downloaded by searching for “Tax agents and advisers; authorising your agent” on GOV.UK. There is no direct link yet.

The new form is said to improve data protection and allows taxpayers to state which tax regime they want you to access. The form also includes new guidance for taxpayers and what data they are agreeing to share with their agent.