Category Archives: Disputes

VAT – Apportionment issues: Complex and costly

By Marcus Ward 16 February 2021

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: Bad Debt Relief – The Regency UT case

By Marcus Ward 3 February 2021

Bad Debt Relief (BDR) is a mechanism which goes some way to protect a business from payment defaulters. Under the normal rules of VAT, a supplier is required to account for output tax, even if the supply has not been paid for (however, the use of cash accounting or certain retail schemes removes the problem of VAT on bad debts from the supplier).

The specific relief for unpaid VAT is via the BDR scheme.

Background

In the Regency Factors plc Upper tribunal (UT) case the issue was whether the appellant met the conditions in The VAT General Regulations 1995, Reg 168 for claiming BDR via The VAT Act 1994, section 36.

Regency provides a factoring service to its clients for which it is paid a fee. VAT invoices for those fees were issued to clients when the invoices which are being factored are assigned to Regency for collection.

Regency appealed against a decision of the First-Tier Tribunal (FTT) in which it dismissed Regency’s appeal against VAT assessments made by HMRC to withdraw BDR which Regency had claimed in its VAT returns.

Regency contended that it is entitled to BDR for the VAT element on the fees that were unpaid by its clients. HMRC contended that Regency is not entitled to BDR because the consideration for the supply was received by Regency and there was no bad debt to write off.

Decision

The UT deliberated on when consideration is received for factoring services and accepted that some debts were bad. However, it decided that Regency had not maintained a bad debt account as required for Reg 168. Consequently, HMRC was correct in refusing to pay the BDR claim.

Commentary

As always with VAT, it is important to keep complete and accurate records, as this case demonstrates. Reg 168 states (where relevant):

(2) Save as the Commissioners may otherwise allow, the record referred to in paragraph (1) above shall consist of the following information in respect of each claim made

(a) in respect of each relevant supply for that claim—

(i) the amount of VAT chargeable,

(ii) the prescribed accounting period in which the VAT chargeable was accounted for and paid to the Commissioners,

(iii) the date and number of any invoice issued in relation thereto or, where there is no such invoice, such information as is necessary to identify the time, nature and purchaser thereof, and

(iv) any payment received therefore,

(b) the outstanding amount to which the claim relates,

(d) the prescribed accounting period in which the claim was made.

(3) Any records created in pursuance of this regulation shall be kept in a single account to be known as the “refunds for bad debts account”.

VAT: Unjust enrichment. The Deluxe case

By Marcus Ward 13 January 2021

Latest from the courts

In the Deluxe Property Holdings Limited High Court case (Deluxe) the issue was whether a VAT claim needed to be passed back to the supplier after a correction – whether the unjust enrichment applied.

Background

Deluxe employed SCL Construction Limited (SCL) to carry out building works. SCL raised invoices in respect of the construction of student accommodation at 20%. It was, however, common ground that the works were in fact zero-rated. SCL recovered the overcharged VAT from HMRC via a VAT Act 1994 Section 80 claim. SCL undertook to repay the amount of VAT to Deluxe via section 10 of VAT Notice 700/45. Without such written reimbursement undertaking, HMRC would have been entitled to refuse the claim. SCL did not make the payment to Deluxe.

Issue

The issue between the parties was whether:

SCL holds the accounting credit obtained from HMRC on trust for Deluxe, or;
the claim is only in debt, in which case SCL sought to set-off such the claim against other monies that it alleges are owed by Deluxe

Decision

The court ruled that SCL had undertaken to reimburse its customer all of the amount credited by HMRC without any deduction, for whatever purpose. Further, SCL had undertaken that it could not use the credit for any other purpose. It was a payment made by HMRC for the sole and express purpose of allowing SCL to reimburse the mistakenly charged VAT to Deluxe and was clearly intended to restrict SCL’s freedom of disposal so that the credit was to be exclusively used for the stated purpose without set-off.

Although SCL gave its undertaking to HMRC rather than to Deluxe to pass on the money, it held the repayment on trust for Deluxe and gave rise to a Quistclose Trust*

Additionally, a constructive trust arose because it would be unacceptable for SCL to derive a benefit of the VAT repayment.

The court found that SCL has acted in breach of trust and is liable as trustee to restore the trust fund and transfer to Deluxe the balance of the trust property without offsetting it against amounts that it claimed it was owed by Deluxe.

Commentary

This is a logical and expected decision and the reasoning is helpful for similar disputes.

* A trust may arise where one person, A, advances money to another, B, on the understanding that B is not to have the free disposal of the money and that it may only be applied for the purpose stated by A. The effect of the trust is to reserve in A the beneficial interest in the money, so providing him with some proprietary security for his advance.

VAT – How to apply for a non-statutory clearance

By Marcus Ward 16 December 2020

One would think that it would be a relatively straightforward matter to write to HMRC to obtain a ruling (non-stat clearance) on a matter. Surely a taxpayer ought to be able to set out the issue, describe the transaction, provide a tax analysis and ask HMRC whether they consider the proposed VAT treatment appropriate. Well, of course, it is not as simple as that (this is VAT after all).

So, what are the issues and what hurdles must be cleared before HMRC engage with a written query?

Checklist

First, there is a checklist which a business must consider and include in a non-stat clearance. Inter alia, this list includes:

Information about the transaction(s)
The reasons why the business is undertaking the transaction
The relevant facts about the transaction, set out chronologically as transaction steps,
The answer sought – set out your view of the tax consequences of the transaction
Any details that are contingent, eg; on future events or the consent of others
Information about commercial background
Explain the significance of the tax result in achieving the desired outcome
Explain why you chose this form of transaction over another that could achieve the same commercial result, where you have considered alternative forms
Information about legal points
Outline the specific legislation at issue
Why you believe the application of the legislation is open to possible different interpretations, summary of those different interpretations, and why the tax consequences are uncertain, including reference to our published guidance or to case law
Any legal advice you have already received, and you are content to disclose
Details of how you intend to use the clearance, such as for public documents
Information about the disclosure of a tax avoidance scheme that covers all or part of the transaction

Failure to address any items on the checklist usually means no determination will be forthcoming.

An applicant must also set out what HMRC guidance (including internal guidance) legislation, case law and other information has been considered. We find it helpful to reproduce the full checklist (as HMRC advise) and provide a comprehensive response to each point in order to avoid a straightforward refusal to respond.

Genuine uncertainty

One of the main reasons HMRC refuses to provide a non-stat clearance is that it considers that there is no genuine uncertainty; in other words, “go and look at the guidance”. This is very unhelpful after time and effort, and fees cost has gone into the application. The fact that an application is required to set out what guidance etc has been considered, and why it is ambiguous in the relevant circumstances does not seem to carry very much weight. I find it is unhelpful to say, “if it wasn’t uncertain, we wouldn’t be writing to you”! We recommend that a full explanation of the genuine uncertainty is provided to forestall such a HMRC refusal to reply.

Chances

Experience insists that it is difficult to obtain a non-stat clearance which is of any value. Quite often, HMRC will reply saying that their letter is not a non-stat clearance, but then go on to address (at least) some of the issues. This sometimes provides a degree of comfort. An approach that I sometimes adopt is to say, “we believe this to be the correct VAT treatment, and one we will apply to the transaction unless you advise otherwise with reasons”. This sometimes creates a reaction.

HMRC guidance

Details of obtaining a non-stat clearance here.

Address

I find that applications are looked at quicker if they are emailed: nonstatutoryclearanceteam.hmrc@hmrc.gsi.gov.uk. However, there is a 2mb size limit which is often unhelpful. If emailing, an applicant should state that you confirm that you understand and accept the risks involved in using email (otherwise this can cause delays).

Postal address

HM Revenue & Customs, Non-Statutory Clearance Team, S0563. 5th Floor, Saxon House, 1 Causeway Lane, Leicester , LE1 4AA

What HMRC will not rule on

Incomplete information
When there is no genuine uncertainty
When they consider it planning advice, or approval of a planning arrangements
HMRC believes that the intention is to avoid tax
There is a statutory clearance applicable to the transaction
Whether activities constitute a business
Whether a transaction represents a Transfer Of a Going Concern (TOGC).

Reliance

Even if a business does obtain a determination, is it possible to rely on it? The answer is no (well, not always). I consider this here.

Summary

It is understandable that a business wants certainty on a transaction, and it ought to be able to rely on HMRC for confirmation of its own analysis, but obtaining such an opinion is fraught with difficulties, frustrations and (genuine) uncertainty. It seems that HMRC will go to lengths to avoid giving a decision, but they are not reticent in penalising a taxpayer once a business has made a decision, applied it, and HMRC subsequently disagree with the VAT analysis.

A wholly unacceptable situation.

How to deal with VAT debt

By Marcus Ward 4 December 2020

In the current climate many businesses are struggling to make payments to HMRC. This clearly can have serious consequences and reduced income due to the Covid 19 coronavirus adds more problems.

This article looks at how to manage a VAT debt position; what can be done, and what not to do.

The first, and most important point to make is; do not ignore a tax debt. It will not go away and, in VAT there is, in most cases a four-year limit for assessing tax, but once assessed or declared, there is no time bar for collecting the debt.

HMRC look for a taxpayer to be taking steps to make a payment, or for a disclosure of the reason funds are unavailable. If HMRC’s Debt Management & Banking team have no idea of the cause of non-payment they will assume that the matter is being ignored and the full force of their powers are likely to be invoked. For background on HMRC’s VAT recovery procedures and powers see here. It is no surprise to learn that the extent of their powers is sweeping and formidable.

Is the VAT debt correct?

The first step is to establish whether a VAT debt is accurate. If it is a result of a normal return, then ensure the declaration is correct. If it is the result of an assessment by HMRC, always challenge it. In the majority of cases, we can assist with getting an assessment reduced or removed completely. A debt may be made up of a combination of; actual VAT, surcharges, penalties and interest

Time To Pay (TTP)

Such an arrangement with HMRC enables a debt to be spread over a period of time. This is usually, but not always, the most beneficial course of action. The process is that the taxpayer submits a proposal for settling the debt over a set period (a “best offer”) in instalments. HMRC may accept the offer, refuse it outright or make a “counter-offer”.

Matters to consider when submitting a VAT TTP proposal:

The shorter the payment period proposed the more likely HMRC is to accept
The sooner a TTP proposal is made the better
HMRC is unlikely to agree a TTP longer than 12 months and most are for a significant shorter period
An offer of an up-front payment also increases the chance of agreement
An agreed TTP avoids penalties for late payment (as long as it is adhered to, otherwise penalties will apply)
If payments are missed HMRC will withdraw from the TTP and the entire debt (plus penalties and interest) will become due immediately
A TTP will avoid HMRC using its debt collection powers
HMRC is likely to request sight of; cash flow forecasts, management accounts and company cash reserve details to evidence a ‘best offer”
Also, information on; management of costs, potential sale of assets, availability of loans, other debts, ability to pay future VAT liabilities may be requested
A business with a history of previous TTPs is less likely to be able to agree a new one
If a formal TTP cannot be agreed, it is still beneficial for a business to make payments as and when they can be afforded. This keeps HMRC onside and may make discussions about future payment more fruitful

What HMRC expect

HMRC look for various ways a business can raise funds to pay a VAT debt, these include:

Sale of assets
Anticipated income, eg; large customer payment, contract or other demonstrable future income
Bank or similar loans (including family members)
Charge on home
Alternative fundraising methods

The Debt Management & Banking staff have experience and knowledge of these methods and also use credit agencies.

Summary

It is always important to talk to HMRC. An ongoing dialogue can improve the debt situation and avoid HMRC taking unilateral action – which is nearly always detrimental to a business. Check that the debt is correct. Consider a TTP arrangement or alternative ways to raise funds. Talk to your advisers.

A debt is often the result of an assessment and penalties. A look at penalties (and how to avoid them) here and an article on how to survive HMRC’s enforcement powers here.

VAT: Is the supply of football pitches an exempt right over land? The Netbusters case.

By Marcus Ward 11 November 2020

Latest from the courts.

In the First-tier Tribunal (FTT) case of Netbusters (UK) Limited the issue was whether the supply was the standard rated provision of sporting facilities, or an exempt right over land.

Background

Netbusters organised football and netball leagues and provided the playing facilities (artificial pitches for football and courts for netball). The hire of the facilities was for a defined period of time and no other party had the right to access the pitches during those times. The hire could be a block, or one-off booking. The appellant contended that the supplies were exempt via VAT Act 1994, Sch 9, Group 1 – “The grant of any interest in or right over land or of any licence to occupy land…” However, item 1 Note (para m) excludes the “the grant of facilities for playing any sport or participating in any physical recreation” in which case they become standard rated. To add complexity, Note 16 overrides the exception for sporting facilities (so they are exempt) if the grant of the facilities is for:

“(a) a continuous period of use exceeding 24 hours; or
(b) a series of 10 or more periods, whether or not exceeding 24 hours in total, where the following conditions are satisfied—
(i) each period is in respect of the same activity carried on at the same place;
(ii) the interval between each period is not less than one day and not more than 14 days;
(iii) consideration is payable by reference to the whole series and is evidenced by written agreement;
(iv) the grantee has exclusive use of the facilities; and
(v) the grantee is a school, a club, an association or an organisation representing affiliated clubs or constituent associations.”

I have a simplified flowchart which may assist if you, or your clients, need to look at these types of supplies further.

Another issue was whether Netbusters’ league/tournament management services which were, in principle, available independently of pitch hire, but in practice rarely were provided in that way, were separate supplies or composite. There was a single price payable for both pitch hire and league management services.

The appellant contended that its supplies were exempt via VAT Act 1994, Sch 9, Group 1 or that Revenue and Customs Brief 8 (2014): sports leagues, is applicable which states “HMRC accepts that the decision of the FTT is applicable to all traders who operate in circumstances akin to Goals Soccer Centres plc. This includes traders who hire the pitches from third parties such as local authorities, schools and clubs…”

HMRC argued that there was no intention to create a tenancy and the agreements between the parties did not provide for exclusive use of the premises, so the supplies fell to be standard rated.

Decision

The appeal was allowed; the supply was a singe exempt supply because the objective character of the supplies were properly categorised as the granting of interests in, rights over or licenses to occupy land. It was found to be significant Netbusters (or its customers) had the ability to exclude others from the pitches during the period of the matches.

It was therefore unnecessary to consider whether Netbusters’ supplies grants of facilities satisfy all the conditions set out in Note 16 (although the FTT were disinclined to do this anyway as a consequence of the way respondent prepared its case).

Commentary

The issue of the nature sporting rights has a long and acrimonious history both in the UK and EU courts. Any business providing similar services are advised to review the VAT treatment applied.

VAT: Education and catering – University Of Southampton Students’ Union case

By Marcus Ward 6 November 2020

Latest from the courts

In the University Of Southampton Students’ Union (USSU) First Tier Tribunal (FTT) case the issue was the VAT treatment of supplies of hot food and coffee; whether the appellant was an eligible institution making principal supplies of education or vocational training and/or whether supplies of hot food and coffee closely related to such principal supplies.

Background

USSU argued that both the supply of hot food and coffee by the USSU shop are exempt via The VAT Act 1994 Schedule 9, group 6, Item 4(a) and note 1(e) as supplies made by an eligible body which makes principal supplies of vocational training, and which are closely related to the (exempt) principal supply of education by the University of Southampton or vocational training by USSU. In the alternative, exemption applies for matters closely related to supplies of education by a third party via a published HMRC concession (and its supplies were within HMRC’s conditions for such a concession).

HMRC disagreed and claimed that these supplies were not closely related to education and that USSU was not an eligible body (no ring fencing of the profits such that they were not necessarily reinvested in its own supplies of education). Therefore, the supplies were properly taxable, and they declined to pay the appellant’s claim of overpaid output tax. The respondent also cited the Loughborough Students’ UnionUpper Tribunal (UT) case.

Decision

The appeal was dismissed for the following reasons:

USSU did not satisfy the definition of vocational training
the supplies of hot food and coffee were not closely related to a supply of education or vocational training
USSU did not satisfy the definition of an “eligible body”

Commentary

Superficially, the claim seemed good. Para 5.5 of PN 709/1 states: “If you’re a student union and you’re supplying catering (including hot takeaway food) to students both on behalf, and with the agreement, of the parent institution, as a concession you can treat your supplies in the same way as the parent institution itself. This means that you can treat your supplies as exempt when made by unions at universities.. This means that most supplies of food and drink made by the union, where the food is sold for consumption in the course of catering will be exempt… For example, food and drink sold from canteens, refectories and other catering outlets (excluding bars), plus food and drink sold from vending machines situated in canteens and similar areas.”

However, the Notice then goes on to add “But it does not cover food and drink sold from campus shops, bars, tuck shops, other similar outlets and certain vending machines…”

This appeal looks a close-run thing, but it demonstrates that small differences in detail can produce different VAT outcomes. We urge all Student Unions and other entities “attached” to education providers to review their position.

A VAT Did you know?

By Marcus Ward 30 October 2020

Latest from the courts.

The rolls used in Subway’s hot sandwiches are not bread. According to a recent ruling by Ireland’s Supreme Court, because of the high level of sugar in the rolls, they cannot be taxed as bread, so the VAT zero rate cannot apply.

VAT: New guidance on the border with the EU post-Brexit

By Marcus Ward 14 October 2020

This month the government have issued new guidance: The Border with the European Union Importing and Exporting Goods on the Border Operating Model. This provides comprehensive guidance on the movement of goods from 1 January 2021 and adds to previous guidance.

This is important information for any business moving goods between GB, the EU and NI and needs to be considered for tax planning and general preparation for Brexit. These rules will likely come into force regardless of whether the UK has negotiated an agreement with the EU.

The introduction comes in three stages:

Stage One – January 2021
Stage Two – April 2021
Stage Three – July 2021

Stage One

Business will need to:

understand the requirements of EU Member States. The necessary processes must have been done and documentation completed to comply with these requirements
obtain a GB EORI number to move goods to or from the UK
if undertaking any EU customs processes, businesses will need an EU EORI
importers; check which goods are on the controlled goods list- if they are on the controlled goods list, a full customs declaration is required
if importing non-controlled goods, decide whether to delay the customs declaration for up to six months or complete full customs declarations on import
decide how to complete customs formalities: Most businesses are expected to use a customs intermediary
consider obtaining a Duty Deferment Account (DDA). A DDA allows holders to delay customs duty, excise duty and import duty, to be paid once a month rather than on individual consignments
check to see if a facilitation would be of benefit. There are a number of facilitations, including the Common Transit Convention
if importing live animals or high-priority plants, business needs to be prepared for submitting additional documentation and checks taking place at point of destination
exporters; be prepared to submit customs export declarations
hauliers; be ready to use the “Check an HGV is ready” service

Stage Two

If businesses are importing Products of Animal Origin (POAO) or a regulated plant and plant product; they will need to:

to submit pre-notification and the relevant health documentation

Stage Three

Businesses must:

meet full customs requirements including submitting declarations, regardless of whether it is a controlled or a non-controlled good
pay VAT and excise duty where necessary
submit safety and security declarations
be prepared for customs compliance checks either at port or an inland site
be prepared for relevant SPS goods to enter GB via a Border Control Post either at port or an inland site, accompanied by sanitary and phytosanitary (SPS) documentary requirements

General

From 1 January 2021

Customs Declarations – Importers and exporters will have to complete UK and EU customs declarations after the end of the transition period. Some locations will require pre-lodgement of customs declarations prior to the movement of goods, which will particularly affect ‘roll on-roll off’ (RoRo) movements
Customs Duties – Importers will need to ensure that any customs duties applicable to their goods under the new UK Global Tariff are paid. Importers will need to determine the origin, classification and customs value of their goods. There are options available to defer any payment that is due
VAT will be levied on imports of goods from the EU, following the same rates and structures as are applied to Rest of World (RoW) imports. VAT registered importers will be able to use postponed VAT accounting. Non-VAT registered importers have the same options available to report and pay import VAT as they do for customs duties

Businesses will need to review their processes for dealing with cross-border goods, both between the EU and Northern Ireland. This includes; customs declarations, compliance, provision of data, obtaining a duty deferment account and GB/EU EORI numbers as necessary. We also advise liaising with suppliers and customers to ensure, as far as possible, that transactions are as seamless as possible in these challenging times.

VAT: Are aphrodisiac products food? – The X case

By Marcus Ward 1 October 2020

Latest from the courts

Can products designed to, errr… stimulate sexual desire be treated as foodstuffs? – Only in VAT do such questions ahem arise eh?

Background

X (the name of the business), sold items in its sex shop which included; capsules, drops, powders and sprays presented as aphrodisiacs that stimulate libido. Those products, which are composed essentially of elements of animal or vegetable origin, were intended for human consumption and were to be taken orally.

X applied the reduced rate to these products (the rate in The Netherlands, certain food in the UK is zero rated) treating the sexual stimulants as foodstuffs.

This was challenged by the tax authorities as it was not considered that they fell within the definitions of ‘foodstuffs for human consumption’. Assessments were issued for the difference between the reduced rate and the standard rate. The case was referred to the ECJ – C-331/19 Staatssecretaris van Financiën vs X

The Gerechtshof den Haag (Court of Appeal, The Hague, Netherlands) found in favour of X, ruling that the use of the products in question as aphrodisiacs did not preclude them from being taxed at the reduced rate applicable to foodstuffs. This was broadly on the basis that the products were intended to be consumed orally and were made from ingredients that may be found in foodstuffs.

The VAT Directive contains no definition of the concepts of ‘foodstuffs for human consumption’ or ‘products normally used to supplement foodstuffs or as a substitute for foodstuffs, so that is, at the least, unhelpful, although it was emphasised that the words must be interpreted in accordance with the usual meaning of them in everyday language.

Decision

It was ruled that any product intended for human consumption which provides the human body with the nutrients necessary to keep the human body alive and enable it to function and develop comes within the scope of the category set out in point 1 of Annex III to the VAT Directive, even if the consumption of that product also aims to produce other effects.

Further; the nutritional role was a decisive factor for a product to be classed as a ‘foodstuff for human consumption’/ The question whether that product has health benefits, its ingestion entails a certain pleasure for the consumer, or its use is part of a certain social context, is irrelevant. Consequently, the fact that consumption of that product has positive effects on the libido of the person ingesting it is irrelevant.

So, aphrodisiacs can be food.

Action

If any business which sell such products which, incidentally, contain nutrients may have a VAT claim based on this case.