The Irish Supreme Court ruled that the bread sold by the restaurant chain Subway was too sweet to be classified as bread and that the high sugar content meant that it could not be zero rated.
The Irish Supreme Court ruled that the bread sold by the restaurant chain Subway was too sweet to be classified as bread and that the high sugar content meant that it could not be zero rated.
VAT carousel fraud, also known as missing trader fraud or missing trader intra-community (MTIC) fraud, is a complex and highly sophisticated process used by organised criminals which involves defrauding governments of money that should be paid in VAT. It involves a series of transactions where goods are repeatedly bought and sold across borders, with the criminal acquiring goods free of VAT (exports of goods are tax free) and then reselling them with VAT added. The fraudster then does not pay output tax to the relevant authority, usually disappearing or closing the business without doing so. It mainly takes place in Europe, but also increasingly in South East Asia.
Round and round
If the goods are not sold to consumers (B2C) but rather, the transactions pass through a series of businesses. To perpetuate a carousel fraud, companies often create a number of sham shell companies to conceal the nature of the transactions in a complex web. The shell companies continue to trade with each other, and the transactions go round and round like a carousel. This can be almost endless. It is possible for the same goods to be traded many times between companies within the carousel fraud scheme network. Often, these transactions do not actually occur – the goods do not actually move from one party to another, but false invoices are issued.
It is common for these criminals to use the fraudulent money they have illegitimately obtained from other large scale illegal activities.
Innocent participants
Unfortunately, carousel fraud can involve innocent businesses. This often mean that these businesses suffer a VAT cost because HMRC will refuse to repay an input tax claim as the matching output tax was not paid by the missing trader. HMRC do this on the basis that the claimant knew, or should have known, that (s)he was involved in a VAT fraud (so perhaps not always so innocent).
Refusal to repay an input tax claim
This option is available to governments using the “Kittel” principle. This refers to a Court of Justice of the European Union (CJEU) case – Axel Kittel & Recolta Recycling SPRL (C-439/04 and C-440/04) where it was held a taxable person must forego his right to reclaim input tax where “it is ascertained, having regard to objective factors, that the taxable person knew or should have known that, by his purchase, he was participating in a transaction connected with fraudulent evasion of VAT”.
The right of input tax deduction may also be denied where the taxpayer could/should have guessed that their transactions involved VAT fraud.
Due diligence
It is crucial that businesses carry out comprehensive due diligence/risk assessment to avoid buying goods that have been subject to carousel fraud anywhere along the supply chain. It is not enough to avoid a refusal to repay input tax to say to HMRC that a business just “didn’t know” about a previous fraud. The scope of verification of a transaction will depend on its size, value, and the type of business, eg; whether it is a new or existing business partner. Transactions with regular suppliers should also be verified, although there should be be a lower risk of VAT fraud.
HMRC sets out in its internal manuals guidance on due diligence and risk assessment which is helpful. The following quote sets out the authorities’ overview:
“The important thing to remember is that merely making enquiries is not enough. The taxable person must take appropriate action based on the results of those enquiries. Therefore, for example, if the taxable person has undertaken effective due diligence/risk assessment on its supplier and that due diligence/risk assessment shows one or more of the following results in relation to the supplier:
and yet the taxable person still goes ahead and trades without making any further enquiries, this could lead to the conclusion that the due diligence/risk assessment was casually undertaken and of no value”.
Carousel VAT fraud investigations
HMRC carries out serious VAT investigations via the procedures set out in Public Notice 160 in cases where they have reason to believe dishonest conduct has taken place. These are often cases where larger amounts of VAT are involved and/or where HMRC suspect fraudulent behaviour. If a business is under investigation for carousel VAT fraud it will receive a letter from HMRC. The consequences of a carousel VAT fraud conviction are serious, and a recipient of such a letter is strongly advised to contact a specialist carousel fraud barrister immediately to provide expert legal guidance.
The Reverse charge (RC) mechanism
Governments take the threat of carousel VAT fraud very seriously and are continually implementing new measures to deter the schemes. The UK has introduced changes to the way that VAT is charged on mobile telephones, computer chips and emissions allowances to help prevent crime (it was common to use these goods and services in carousel fraud).
The RC mechanism requires the purchaser, rather than the supplier, to account for VAT on the supply via a self-supply. Therefore, the supplier does not collect VAT, so it cannot defraud the government.
The future
VAT policy is consistently updated, so businesses must be aware of these changes to ensure compliance. Technology is being progressively used to fight fraud, and again, businesses need to be aware of this and the obligation to upgrade their own technology to comply with, say; real time reporting, eInvoicing, and other innovations. Compliance technology is increasingly employed to detect inconsistent transactions which means that a business must be compliant, because if it isn’t it will be easier for the tax authorities to detect. Even if non-compliance is unintentional the exposure to penalties and interest is increased.
Latest from the courts
In the Lycamobile UK Ltd First-Tier Tribunal (FTT) case, the issue was whether VAT was chargeable on the supply of a “Plan Bundle” at the time when it was sold and by reference to the whole of the consideration that was paid for it, or whether VAT was instead chargeable only when, and only to the extent that, the allowances in the Plan Bundle were actually used. The time of supply (tax point) was important because not only would it dictate when output tax was due, but more importantly here, if the appeal succeeded, there would be no supply of the element of the bundle which was not used, so no output tax would be due on it.
Background
The Plan Bundles comprised rights to future telecommunication services; telephone calls, text messages and data (together, “Allowances”). There were hundreds of different Plan Bundles sold by the Appellant and the precise composition of those Plan Bundles varied.
Contentions
Lycamobile considered that that the services contained within each Plan Bundle were supplied only as and when the Allowances were used, so that the consideration which was received for each Plan Bundle would be recognised for VAT purposes only to the extent that the Plan Bundle was actually used. In the alternative, these supplies could be considered as multi-purpose vouchers such that output tax was not due when they were issued, but when the service was used. Very briefly, the contention was that it was possible that not all of the use would be standard rated in the UK.
Unsurprisingly, HMRC argued that that those services were supplied when the relevant Plan Bundle was sold (up-front) and output tax was due on the amount paid, regardless of usage.
Decision
The Tribunal placed emphasis on “the legal and economic context” and “the purpose of the customers in paying their consideration”.
It decided that the terms of the Plan Bundle created a legal relationship between Lycamobile and the customer. The Bundle was itself the provision of telecommunication services when sold. The customers were aware that they were entitled to use their Allowances and could decide whether to, or not. As a consequence, consumption was aligned with payment and created a tax point at the time of that payment. There was a direct link between those services and the consideration paid by the customer.
The Tribunal also considered the vouchers point. There were significant changes to the rules for Face Value Vouchers on 1 January 2019 (the supplies spanned this date), but the FTT found that the Plan Bundles were not monetary entitlements for future services under either set of rules, so the tax point rules for vouchers did not apply here.
The appeal was dismissed and HMRC assessments totalling over £51 million were upheld.
Commentary
Not an unexpected result, but an illustration of the importance of; tax points, legal and economic realities, and what customers think they are paying for. All important aspects in analysing what is being provided, and when.
HMRC has updated its guidance on how to pay Customs Duty, Excise Duties and VAT on imports from outside the UK.
The document covers, inter alia:
The update includes the removal of references to the Customs Handling of Import and Export Freight (CHIEF) system, as all import declarations must now be made through the Customs Declaration Service.
HMRC has updated its tool to check if businesses that stores third party goods in the UK is registered with the Fulfilment House Due Diligence Scheme for traders based outside of the UK.
The scheme applies to a business which stores any goods that:
If the scheme applies, failure to apply means a business:
To apply
Apply online for the Fulfilment House Due Diligence Scheme.
A business cannot use an agent to apply on its behalf.
Update
The HMRC form for overseas businesses claiming VAT incurred in the UK has been updated.
The form VAT65A to reclaim VAT paid in the UK if a business is not registered in the UK has been amended to include information about corresponding with HMRC by email.
Claims in the UK
A non-UK based business may make a claim for recovery of VAT incurred in the UK. Typically, these are costs such as; employee travel and subsistence, service charges, exhibition costs, tooling, imports of goods, training, purchases of goods in the UK, and clinical trials etc.
Who can claim?
The scheme is available for any businesses that are:
What cannot be claimed?
The usual rules that apply to UK business claiming input tax also apply to claims from overseas. Consequently, the likes of; business entertainment, car purchase, non-business use and supplies used for exempt activities are usually barred.
Amount
There is no maximum claim amount, but for most periods of less than twelve months a minimum of £130 of VAT must be claimed. For annual claims or for periods less than three months ending on 30 June, the VAT must be at least £16.
Process
The business must obtain a Certificate Of Status (CoS) from its local tax or government department to accompany a claim.
The CoS must be the original and contain the:
The CoS is only valid for twelve months. Once it has expired you will need to submit a new CoS.
HMRC has previously announced (RCB 12 – 2018) that it is taken a firmer stance on what constitutes an acceptable CoS.
Claim form
The application form is a VAT65A and is available here Original invoices which show the VAT charged must be submitted with the claim form and CoS. Applications without a certificate, or certificates and claim forms received after the deadline are not accepted by HMRC. It is possible for a business to appoint an agent to register to enable them to make refund applications on behalf of that business.
Deadline
Claim periods run annually up to 30 June and must be submitted by 31 December of the same year. With the usual Christmas rush and distractions, it may be easy to overlook this deadline and some claims may be significant. Unfortunately, this is not a rapid process and even if claims are accurate and the supporting documents are in all in order the claim often takes some time to be repaid. Although the deadline is the end of the year HMRC say that it will allow an additional three months for submission of a CoS (only).
Payment
Refunds are made within six months of a “satisfactory application”.
The new guidance explains how to manage a Customs Warehouse, handle goods, and process, repair and move goods.
Customs Warehouse
A Customs Warehouse is a warehouse that is under Customs control. Goods stored in a customs warehouse are not in free circulation. No duties or taxes have to be paid until that time when you ship the goods to their next destination.
There are two types of Customs Warehouse where goods may be stored.
This is a warehouse operated by a business whose purpose is to store other people’s goods. They are the warehousekeeper and you’re the depositor.
This is a warehouse operated by you to store your own goods. You are the warehousekeeper and the depositor.
You do not need to be authorised by HMRC to be a depositor in a public or private customs warehouse but, if you operate a private customs warehouse, you’ll need to be authorised as the warehousekeeper.
The warehousekeeper is responsible for coordinating general warehouse operations and activities including shipping and receiving deliveries, conducting stock checks, documenting warehouse transactions and records, and storage of inventory.
To be approved as a warehousekeeper, a person will need to:
Guidance Amendments
Updates include information for warehousekeepers who use a duty management system and guidance on when someone else uses your warehouse.
HMRC have issued a BB 5(2024) on Tour Operators’ Margin Scheme (TOMS) for business to business (B2B) wholesale supplies.
Ultimately, the policy allowing businesses to choose whether to apply TOMS to B2B wholesale supplies remains unchanged.
HMRC guidance
HMRC has published a website Manage your import duties and VAT accounts, which provides a centralised place from which businesses importing goods can manage payment and guarantee accounts, manage and view authorities, and download duty deferment statements, import VAT certificates, postponed import VAT statements, and notification of adjustment statements. The website can only be accessed via the Government Gateway.
From this site a business can:
Downloads are also available for:
To use the service a business must be subscribed to the Customs Declaration service.
HMRC has published an updated version of Notice 700/1: Who should register for VAT.
Information about non-established taxable persons (NETPs) has been updated to include guidance on when they need to apply for VAT.
Other updates include: