Category Archives: Contract

VAT: Preparing for a No Deal Brexit. A checklist

By Marcus Ward 13 February 2019

A guide for Customs, Excise and VAT for exporters

This is a brief overview of certain issues that an exporter needs to consider if, as seems increasingly likely, there is a No Deal Brexit. There are a number of helpful links to assist. This could be an enormous change. HMRC estimate the number of customs declarations will rise from 55m to 255m annually and the EU requires eight copies of each customs declaration.

UK businesses need to plan for Customs and VAT processes, which will be checked at the EU border. They should check with the EU or Member State the rules and processes which need to apply to their goods.

Distance selling arrangements will no longer apply to UK businesses and UK businesses will be able to zero rate sales of goods to EU consumers. Current EU rules would mean that EU Member States will treat goods entering the EU from the UK in the same way as goods entering from other non-EU countries, with associated import VAT and customs duties due when the goods arrive into the EU.

Checklist

Get an EORI number
Check if you can use transitional simplified procedures
Apply the correct customs procedure code
Identify the UK tariff codes for all your products by searching trade tariffs on gov.uk. A tariff code allows you to:
- complete declarations and other documentation
- check if there is duty or VAT to pay and any potential duty reliefs
If you use a UK roll on roll off location you will need to declare your goods before they board the ferry or train
Pay Customs Duty on goods
Research the destinations you want to export to. This background information, along with the commodity code of the goods will enable you to establish if goods will incur import duty in the destination country
Check if you need a licence to import or export your goods
Obtain software or an agent to make declarations
Identify what documentary requirements apply for your products when exported to EU countries by searching the EU Commission Market Access Database. (When choosing a market, you cannot currently select the UK so, assuming the UK would have no tariff preferences under a no-deal scenario, select a country such as the US or China, where no preferential arrangements exist, to establish a comparable level of duty your product would face)
Check for updates. Check the EU Brexit Preparedness portal, to understand the potential outcomes for your sector
Check the origin of all products when exported to, or imported from EU countries. Identify the UK/EU/non-EU content (including all components and raw materials) and whether your goods may qualify as being of UK or EU origin. Access further information on rules of origin
Customs delay – If working in time sensitive sectors, consider how your EU customers may be affected by customs delays. These may include; just-in-time practices, timed deliveries and potential penalties and short shelf-life goods
Identify EU customers and suppliers who are cost-sensitive and who might be reluctant to pay more for goods with the addition of import duties, customs clearance costs, higher freight costs, or currency fluctuations.
Identify exports to countries which have Free Trade Agreements (FTA) with the EU. Are they dependent on duty preferences or other FTA provisions? Consider the implications, particularly where main competition is with other EU businesses
Access details of which countries have FTA with the EU
Identify purchases from other countries which have FTA or Generalised System of Preferences (GSP) agreements with the EU.
Identify sales to EU customers who incorporate those goods into their products, for re-export to countries with FTAs. Check whether supplier declarations are provided
Cash flow – Consider protecting against foreign exchange fluctuations within your business
Map and audit supply chains. Even if a company is ready for Brexit, it will be disrupted if a supplier is not prepared and cannot meet its contracts
Check international contracts and renegotiate if required. Some intra-EU contracts will not include incoterms, the legal provisions for importing and exporting that define who is responsible for shipping goods across borders
Develop a contingency plan – There is no guarantee that border procedures will operate smoothly immediately after Brexit, and businesses may need a contingency plan in case systems fail
Stay up to date by registering for HMRC’s EU Exit update service www.gov.uk/hmrc/business-support, select ‘business help and education emails’, add your email address, select ‘Submit’, select ‘Add subscription’, choose ‘EU Exit’ then ‘Submit’
Customs checks – Establish what level of risk of physical or documentary examination might apply for your goods imported from, or exported to EU countries
For goods being exported to the EU which are not “wholly obtained” in the UK, and which have undergone processing in another third country as part of their production, it is important to understand the supply chain of components going into the product. Goods with components coming from non-UK countries will mean that that product is not able to benefit from any continued zero-tariff trade with the EU unless arrangements are put in place between the EU and UK

I hope that this is helpful. Please contact us if you have any queries.

VAT: New reverse charge for the construction industry

By Marcus Ward 4 February 2019

Further to my article which sets out the basis of these changes, I look further at the measures which will be introduced on 1 October 2019. Time is running out for businesses in the building and construction sector to understand the impact of the new rules and to make arrangements to implement the required changes. These will include:

cashflow implications
accounting procedures
processes
tax compliance
documentation
systems

Background

HMRC will introduce the Reverse Charge (RC) to combat Missing Trader Fraud (MTF). The rules avoid suppliers charging and being paid VAT but failing to declare or pay this over to the government. HMRC has identified the building trade as an area where there has been considerable tax leakage in the past. The UK has introduced similar measures in response to criminal threats for mobile telephones, emissions allowances, gas, electricity and electronic communications. A domestic reverse charge only applies to supplies between UK taxable persons therefore unless the customer is registered or liable to be registered for VAT it will not apply.

The RC will make supplies of standard or reduced rated construction services between construction or building businesses subject to the domestic RC, which means that the recipient of the supply will be liable to account for VAT due, instead of the supplier. Consequently, the customer in the construction industry receiving the supply of construction services will be required to pay the VAT directly to HMRC rather than paying it to the supplier. It will be able to reclaim this VAT subject to the normal VAT rules. The RC will apply throughout the supply chain up to the point where the customer receiving the supply is no longer a business that makes supplies of construction services (a so-called end user, see below).

The supplies to which the RC will apply are set out here

Further information on the RC in general, including invoicing requirements are to be found in VAT Notice 735

Technical

As a general rule, it is the supplier of goods or services who is required to account for VAT on those supplies. However, the VAT Act 1994, section 55A requires the recipient, not the supplier, to account for and pay tax on the supply of any goods and services which are of a description specified in an order made by the Treasury for that purpose.

The final version of the draft legislation has now been published. In addition HMRC have issued guidance notes which include a helpful flowchart.

Mixed supplies

If there is a RC element in a supply, then the whole supply will be subject to the RC. This is to make it simpler for both supplier and customer and to avoid the need to apportion the supply.

End user

End users will usually be recipients who use the building or construction services for themselves, rather than sell the services on as part of their business of providing building or construction services.

VAT Returns

Suppliers

Suppliers applying the RC do not enter a figure for output tax in box 1 of the VAT Return, but should enter the value of such sales in box 6.

Customers

Customers must enter the output tax on purchases to which the RC applies in box 1 of the VAT Return, but must not enter the value of such purchases in box 6. They may reclaim the input tax on the RC purchases in box 4 of the VAT Return and include the value of the purchases in box 7, in the normal way.

Implementation

HMRC state that it understands the difficulties businesses may have in implementing the domestic RC and say it will apply a light touch in dealing with related errors that occur in the first six months after introduction.

Action

It is prudent to check whether you, or your clients’ businesses will be affected by these changes. If so, plans need to be put in place; whether as a supplier or recipient, to ensure that VAT is not charged incorrectly (supplier) and the RC is applied correctly (recipient). It is likely that output tax incorrectly shown on an invoice will be due to HMRC but will not be recoverable by the recipient and the omission of levying the RC will lead to penalties. It will also be helpful for smaller construction providers affected by the RC to examine the impact on their cashflow.

Please contact us if you have any queries or require further information.

VAT Invoices – A Full Guide

By Marcus Ward 3 January 2019

The subject of invoices is often misunderstood and can create serious issues if mistakes are made. VAT is a transaction tax, so primary evidence of the transaction is of utmost importance. Also, a claim for input tax is usually not valid unless it is supported by an original valid invoice HMRC can, and often do, reject input claims because of an inaccurate invoice. There are a lot of misconceptions about invoices, so, although a rather dry subject, it is very important and I thought it would be useful to have all the information in one place, so here is my guide:

Obligation to provide a VAT invoice

With certain limited exceptions a VAT registered person must provide the customer with an invoice showing specified particulars including VAT in the following circumstances.

(a) He makes a supply of goods or services in the UK (other than an exempt supply) to a taxable person.

(b) He makes a supply of goods or services to a person in another EC country for the purposes of any business activity carried on by that person. But no invoice is required where the supply is an exempt supply which is made to a person in another EC country which does not require an invoice to be issued for the supply. (Because practice varies widely across the EC, HMRC guidance is that businesses should be guided by their customers as to whether invoices are required for exempt supplies.)

(c) He receives a payment on account from a person in another EC country in respect of a supply he has made or intends to make.

Exceptions

The above provisions do not apply to the following supplies.

• Zero-rated supplies (other than supplies for acquisition by a person registered in another EC country, see (b) above).

• Supplies where the VAT charged is excluded from credit under VATA 1994, s 25(7) (eg business entertaining and certain motor cars) although a VAT invoice may be issued in such cases.

• Supplies on which VAT is charged but which are not made for a consideration. This includes gifts and private use of goods.

• Sales of second-hand goods under one of the special schemes. Invoices for such sales must not show any VAT.

• Supplies that fall within the Tour Operators’ Margin Scheme(TOMS). VAT invoices must not be issued for such supplies.

• Supplies where the customer operates a self-billing arrangement.

• Supplies by retailers unless the customer requests a VAT invoice.

• Supplies by one member to another in the same VAT group.

• Transactions between one division and another of a company registered in the names of its divisions.

• Supplies where the taxable person is entitled to issue, and does issue, invoices relating to services performed in fiscal and other warehousing regimes.

Documents treated as VAT invoices

Although not strictly VAT invoices, certain documents listed below are treated as VAT invoices either under the legislation or by HMRC.

(1) Self-billing invoices

Self-billing is an arrangement between a supplier and a customer in which the customer prepares the supplier’s invoice and forwards it to him, normally with the payment.

(2) Sales by auctioneer, bailiff, etc.

Where goods (including land) forming part of the assets of a business carried on by a taxable person are, under any power exercisable by another person, sold by that person in or towards satisfaction of a debt owed by the taxable person, the goods are deemed to be supplied by the taxable person in the course or furtherance of his business.

The particulars of the VAT chargeable on the supply must be provided on a sale by auction by the auctioneer and where the sale is otherwise than by auction by the person selling the goods. The document issued to the buyer is treated as a VAT invoice.

(3) Authenticated receipts in the construction industry.

(4) Business gifts

Where a business makes a gift of goods on which VAT is due, and the recipient uses the goods for business purposes, that person can recover the VAT as input tax (subject to the normal rules). The donor cannot issue a VAT invoice (because there is no consideration) but instead may provide the recipient with a ‘tax certificate’ which can be used as evidence to support a deduction of input tax. The tax certificate may be on normal invoicing documentation overwritten with the statement:

“Tax certificate – No payment is necessary for these goods. Output tax has been accounted for on the supply.”

Full details of the goods must be shown on the documentation and the amount of VAT shown must be the amount of output tax accounted for to HMRC.

Invoicing requirements and particulars

A VAT invoice must contain certain basic information.

A VAT invoice must show the following particulars.

(a) A sequential number based on one or more series which uniquely identifies the document.

The ‘invoice number’ can be numerical, or it can be a combination of numbers and letters, as long as it forms part of a unique and sequential series. Where there is a break in the series, eg; where an invoice is cancelled or spoiled and never issued to a customer, this is still acceptable as long as the relevant invoice is retained.

(b) The time of the supply, ie tax point.

(d) The name, address and registration number of the supplier.

(e) The name and address of the person to whom the goods or services are supplied.

(f) A description sufficient to identify the goods or services supplied.

(g) For each description, the quantity of the goods or extent of the services, the rate of VAT and amount payable, excluding VAT, expressed in any currency.

(h) The unit price.

This applies to ‘countable’ goods and services. For services, the countable element might be, for example, an hourly rate or a price paid for standard services. If the supply cannot be broken down into countable elements, the total VAT-exclusive price is the unit price.

(i) The gross amount payable, excluding VAT, expressed in any currency.

(j) The rate of any cash discount offered.

(k) The total amount of VAT chargeable expressed in sterling.

(l) Where the margin scheme for SECOND-HAND GOODS or theTOMS is applied, either a reference to the appropriate provision of EC Council Directive 2006/112/EC or the corresponding provision of VATA 1994or any indication that the margin scheme has been applied.

The way in which margin scheme treatment is referenced on an invoice is a matter for the business and but we recommend:

• “This is a second-hand margin scheme supply.”

• “This supply falls under the Value Added Tax (Tour Operators) Order 1987.”

The requirement only applies to TOMS invoices in business to business transactions.

(m) Where a VAT invoice relates in whole or in part to a supply where the person supplied is liable to pay the VAT, either a reference to the appropriate provision of EC Council Directive 2006/112/EC or the corresponding provision of VATA 1994 or any indication that the supply is one where the customer is liable to pay the VAT.

This covers UK supplies where the customer accounts for the VAT (eg under the gold scheme or any reverse charge requirement under the missing trader intra-community rules). The way in which margin scheme treatment is referenced on an invoice is a matter for the business and we recommend: “This supply is subject to the reverse charge”.

Exempt or zero-rated supplies

Invoices do not have to be raised for exempt or zero-rated transactions when supplied in the UK. But if such supplies are included on invoices with taxable supplies, the exempt and zero-rated supplies must be totalled separately and the invoice must show clearly that there is no VAT payable on them.

Leasing of motor cars

Where an invoice relates wholly or partly to the letting on hire of a motor car other than for self-drive, the invoice must state whether the car is a qualifying vehicle

Alternative evidence to support a claim for input tax

In certain situations HMRC can use its discretion and allow an input tax with documentary evidence other than an invoice. Their guidance here

Electronic invoices

Full information on electronic invoicing here

Retailers

Retailers may issue a “less detailed tax invoice” if a customer requests one. the supply must be for £250 or less (including VAT) and must show:

your name, address and VAT registration number
the time of supply (tax point)
a description which identifies the goods or services supplied
and for each VAT rate applicable, the total amount payable, including VAT and the VAT rate charged.

Summary

As may be seen, it is a matter of law whether an invoice is valid and when they must be issued. Therefore it is important for a business to understand the position and for its system to be able to produce a valid tax invoice and to recognise what is required to claim input tax. As always with VAT, there are penalties for getting documentation wrong. Please contact us should you have any queries.

VAT: More on agent or principal – The All Answers Limited case

By Marcus Ward 9 December 2018

Latest from the courts

In the All Answers Limited (AAL) First Tier Tribunal (FTT) case the issue was whether AAL acted as an agent as it contended, or was a principal as HMRC argued. It also considered the position of contracts in certain situations. There have been a huge number of cases on this point, many of which I have commented on. Some of them here here and here

Background

AAL runs an online business which provides essays, coursework and dissertations to students. The FTT found many euphemisms used for this service, but the service which the student paid for effectively passed off other peoples’ work as the students own in order to obtain a certain grade which was decided by the student. Or in other words; cheating. AAL arranged for one of its circa 400 writers, which were usually other students, teachers or lecturers etc (who should have known better) to provide the required work.

Technical

AAL contended that it was acting as the students’ agent in respect of making arrangements to provide the written work. Consequently, it would only account for output tax on the “commission” retained, rather than on the full value of the amount paid by the student – a significant difference. The contracts produced as evidence fully supported the agency analysis. The Terms and Conditions between AAL and the writer provided that the appellant acts as the writer’s agent to sell his/her services and to enter into “relationships” with clients on the writer’s behalf and to collect payment on the writer’s behalf.

HMRC’s view was that there were no agency services supplied and that the economic reality should be examined rather than relying solely on the relevant contracts. The respondent argued that the notion of agency, so carefully woven into the AAL’s Terms and Conditions, lacked both factual and economic reality because the only service provider was the appellant who choose to use a sub-contractor to provide it with the work which AAL ultimately supplied to the client as principal.

The Decision

Unsurprisingly, the judge concluded that the appellant was acting as principal, not agent and so AAL’s appeal was dismissed. In the ruling, certain comments were made which illustrate how the decision was arrived at and are useful to consider when looking at agency/principal positions.

In respect of the T&Cs, the judge observed “…an agreement which is not a sham may nonetheless be artificial and intended to deflect attention from the true positions taken by both the client and the writer, to whom the appellant profitably lends a willing hand, with no concern for ethics or morality”.

And in respect of the business model: “It could not be stressed more strongly during the appeal before us, and in the documents emanating from the appellant, that its business model is based upon the identity of the client and the identity of the person who is to write the requested piece of academic work, not being made known to one another…” In such circumstances it is difficult to conclude that any agency services are being carried out.

Commentary

As in nearly all agent/principal cases, the VAT position is determined according to the facts of each individual case. Slight variations may produce different VAT outcomes, so it is crucial to look at the detail of each business activity. Contracts are a useful starting point, but as this case shows, if a contract is deliberately drafted to produce a VAT outcome that is not supported by the actual facts of a transaction then it must be disregarded in favour of an analysis of the economic reality. It seems that in this case, AAL desired agency treatment in order to significantly reduce its output tax (which was sticking tax as the recipient was unable to recover it as input tax). Its advisers drafted the relevant contract with this in mind. The FTT saw through that and, came to this sensible decision.