Category Archives: Technical

VAT Latest from the courts – Reverse Charge

By   13 February 2017
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The First Tier Tribunal case of University Of Newcastle Upon Tyne is a useful reminder of the impact of the Reverse Charge.

A brief guide to the Reverse Charge is included below.

Background

As with many UK universities, Newcastle was keen to encourage applications to study from new students from overseas. This is an important form of income for the institution.  It used local (overseas) agents to recruit students. Some 40% of those students were studying as undergraduates, 40% as postgraduates on one year “taught” courses and 20% as postgraduate research students studying for doctorates.  In 2014 the University had agreements with more than 100 agents worldwide. The agents used their own resources to recruit students for universities around the world, including in the UK. The University entered into contractual arrangements with agents and paid commission to them. In 2008 the University paid agent commissions of £1.034m, rising to £2.214m in 2012.

The Tribunal was required to consider whether the services supplied by the agents were a single supply to University or separate supplies to both the University and students. If the entire supply is to the University then the Reverse Charge is applicable and, because the University is partly exempt, this would create a VAT cost to it. If the supplies are to both the students and the University, the Reverse Charge element would be less and the VAT cost reduced. (There were changes to the Place Of Supply legislation during the period under consideration, but I have tried to focus on the overall impact in this article.)

The University contended that agents made two supplies: a supply to the University of recruitment services and a supply to students of support services. The commission paid by the University should therefore be apportioned so as to reflect in part direct consideration paid by the University for supplies of services to it, and in part third party consideration for services supplied to the students. The supplies to students would not made in the UK and therefore were not subject to UK VAT.

Decision

After thorough consideration of all of the relevant material, the judge decided that the agents made a single supply of services to the University and make no supplies to students. This meant that the University must account for VAT on the full value of services received since 2010 under the Reverse Charge (although before 2010 different rules on place of supply applied).  Additionally,  it was decided the University was not entitled to recover as input tax VAT for which it is required to account by means of a Reverse Charge. There was no direct and immediate link between the commission paid to agents and any taxable output of the University or the economic activities of the University as a whole.

Commentary

It is understood that the way the University recruited students using overseas agents is common amongst most Universities in the UK, so this ruling will have a direct impact on them.  It was hardly a surprising decision, but underlines the need for all businesses to consider the impact of the application of the Reverse Charge.  Of course, the Reverse Charge will only create an actual VAT cost if a business is partly exempt, or involved in non-business activities.  The value of the Reverse Charge also counts towards the VAT registration threshold.  This means that if a fully exempt business receives Reverse Charge services from abroad, it may be required to VAT register (depending on value). Generally, this means an increased VAT cost. This situation may also affect a charity or a NFP entity.

The case also highlights the importance of contracts, documentation and website wording (should any more reminders be needed).  VAT should always be borne in mind when entering into similar arrangements. It may also be possible to structure arrangements to avoid or mitigate VAT costs if carried out at an appropriate time.

We can assist with any of the above and are happy to discuss this with you.

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.  On the same VAT return, the recipient must
  • account for output tax, calculated on the full value of the supply received, in Box 1;
  • (subject to partial exemption and non-business rules) include the VAT stated in box 1 as input tax in Box 4; and;
  • include the full value of the supply in both Boxes 6 and 7.
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 Postal claims: Zipvit update

By   6 February 2017
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A full background of this case may be found here

In summary: It was previously decided that certain supplies made by Royal Mail (RM) to its customers were taxable. This was on the basis of the TNT CJEU case. RM had treated them as exempt. HMRC was out of time to collect output tax, but claims made by recipients of RM’s services made retrospective claims. These claims were predicated on the basis that the amount paid to RM included VAT at the appropriate rate (it was embedded in the charge) and that UK VAT legislation stipulates that the “taxable amount” for any supply, is the amount paid by the customer including any VAT included in the price.

Update

We understand that Zipvit’s appeal against the decision by the Upper Tribunal that the relevant input tax was not recoverable has been listed on the Court Of Appeal’s register and is due to be heard in January 2018.

There are a lot of cases stood behind Zipvit and the amount of VAT involved is significant.  If you have an appeal stood behind this case, or act on behalf of a business which has, we recommend that a review of the position is carried out in light of the latest developments. We can assist which such a review if required.

VAT – What is a caravan? Latest from the courts

By   27 January 2017
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Motorhomes versus caravans…

In the Upper Tribunal (UT) case of Oak Tree Motorhomes Limited the simple issue was whether motorhomes may be considered to fall within the definition of a “caravan” and thus benefit from certain zero rating provisions.  Oak Tree sold certain vehicles commonly called ‘motor homes’, ‘motor caravans’ and ‘campervans’

The VAT Act 1994, Section 30(2) provides that supplies of goods of a description specified in Schedule 8 are zero-rated. At the relevant time this was VAT Act 1994, Schedule 8, Group 9, item 1 which described the following goods: “Caravans exceeding the limits of size for the time being permitted for the use on roads of a trailer drawn by a motor vehicle having an unladen weight of less than 2,030 kilogrammes.” Oak Tree contended that the sales of their vehicles were covered by this item and thus should have been zero rated rather than standard rated.

So what is a caravan?

The term is not defined in the VAT legislation, but HMRC base its interpretation on the definitions in the Caravan Sites and Control of Development Act 1960 and the Caravans Sites Act 1968 as set out in Public Notice 701/20 para 2.1.  In that Notice HMRC state that:

“A caravan is a structure that:

  • is designed or adapted for human habitation
  • when assembled, is physically capable of being moved from one place to another (whether by being towed or by being transported on a motor vehicle so designed or adapted), and
  • is no more than:
  • 20 metres long (exclusive of any drawbar)
  • 8 metres wide, or
  • 05 metres high (measured internally from the floor at the lowest level to the ceiling at the highest level)”

(Note: No reference is made to engine here).

The Decision

It was accepted by HMRC that the vehicles were large enough to qualify as caravans, so the matter turned on the interpretation of a “caravan” and whether the fact that the relevant vehicles incorporated an engine disbarred them. The UT did not appear to waste much time in agreeing with the First Tier Tribunal that a motorhome was not a caravan.  This was so even though accommodation in a motorhome and a qualifying caravan might be almost identical. The UT considered that the First Tier Tribunal’s interpretation of “caravan” by reference to the Oxford English Dictionary was appropriate. An important definition being one which refers to a caravan as generally “…able to be towed”. It was also decided that an engine represented “…an obvious and significant distinction” between a caravan and a motorhome.  It is also interesting that despite HMRC’s Notice referring to the Caravan Act 1960, the UT considered that this should not be used in determining whether a vehicle should be regarded as a caravan

Commentary

This was almost a foregone conclusion, but the appellant obviously thought it was worth another bite at the cherry as the claim was worth over £1.1 million (and an ongoing saving). There are lots of areas involving caravans that throw up VAT oddities, including, but not limited to; pitches, skirts, contents, holiday homes and compound/multiple supplies here 

It may also mean that HMRC will have to consider redrafting Notice 701/20

If a business is involved in any transactions involving caravans it would be prudent to consider whether all of the available reliefs are being taken advantage of, and whether VATable supplies have been correctly identified.

VAT (GST) Introduction in India delayed

By   23 January 2017
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It was recently announced that the Indian version of VAT: Goods & Services Tax – GST is intended to be rolled out across the country on 1 July 2017 rather than the previously announced date of April 2017. This is after details of how the income will be shared between various authorities has been agreed.

It is anticipated that GST will follow the European model and that the tax base will be comprehensive, as virtually all goods and services will be taxable, with minimum exemptions.  GST will incorporate and replace all the various central taxes such as: Central Excise Duty, Additional Excise Duty, Service Tax, Additional Custom Duty and Special Additional Duty as well as state-level taxes such as Value Added Tax or Sales Tax, Central Sales Tax, Entertainment Tax, Entry Tax, Purchase Tax, Luxury Tax.

The introduction of GST is likely to bring in significant changes to doing business in India or with Indian suppliers/customers cross-border.

Please contact us should you have any queries on this matter.

VAT – A Christmas Tale

By   12 December 2016
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Well, it is Christmas….

Dear Marcus

My business, if that is what it is, has become large enough for me to fear that HMRC might take an interest in my activities.  May I explain what I do and then you can write to me with your advice?  If you think a face to face meeting would be better I can be found in most decent sized department stores from mid September to 24 December.

First of all I am based in Greenland but I do bring a stock of goods, mainly toys, to the UK and I distribute them.  Am I making supplies in the UK?

The toys are of course mainly for children and I wonder if zero rating might apply?  I have heard that small T shirts are zero rated so what about a train set – it is small and intended for children. Does it matter if adults play with it?

My friend Rudolph has told me that there is a peculiar rule about gifts.  He says that if I give them away regularly and they cost more than £150 I might have to account for VAT.  Is that right?

My next question concerns barter transactions.  Dads often leave me a food item such as a mince pie and a drink and there is an unwritten rule that I should then leave something in return.  If I’m given Tesco’s own brand sherry I will leave polyester underpants but if I’m left a glass of Glenfiddich I will be more generous and leave best woollen socks.  Have I made a supply and what is the value please?  My feeling is that the food items are not solicited so VAT might not be due and, in any event; isn’t food zero-rated, or is it catering? Oh, and what if the food is hot?

Transport is a big worry for me.  Lots of children ask me for a ride on my airborne transport.  I suppose I could manage to fit 12 passengers in.  Does that mean my services are zero-rated?  If I do this free of charge will I need to charge air passenger duty?  Does it matter if I stay within the UK?  My transport is the equivalent of six horse power and if I refuel with fodder in the UK will I be liable for fuel scale charges?  After dropping the passengers off I suppose I will be accused of using fuel for the private journey back home.  Somebody has told me that if I buy hay labelled as animal food I can avoid VAT but if I buy the much cheaper bedding hay I will need to pay VAT.  Please comment.

Can I also ask about VAT registration?  I know the limit is £83,000 per annum but do blips count?  If I do make supplies at all, I do nothing for 364 days and then, in one day (well night really) I blast through the limit and then drop back to nil turnover.  May I be excused from registration?  If I do need to register should I use AnNOEL Accounting?  At least I can get only one penalty per annum if I get the sums wrong.

I would like to make a claim for input tax on clothing.  I feel that my red clothing not only protects me from the extreme cold but it is akin to a uniform and should be allowable.  These are not clothes that I would choose to wear except for my fairly unusual job.  If lady barristers can claim for black skirts I think I should be able to claim for red dress.  And what about my annual haircut?  That costs a fortune.  I only let my hair grow that long because it is expected of me.

Insurance worries me too.  You know that I carry some very expensive goods on my transport.  Play Stations, Mountain Bikes, i-pads and Accrington Stanley replica shirts for example.  My parent company in Greenland takes out insurance there and they make a charge to me.  If I am required to register for VAT in England will I need to apply the reverse charge?  This seems to be a daft idea if I understand it correctly.  Does it mean I have to charge myself VAT on something that is not VATable and then claim it back again?

Next you’ll be telling me that Father Christmas isn’t real……….

HAPPY CHRISTMAS EVERYBODY!

VAT Splitting a business to avoid registration: Disaggregation

By   8 December 2016
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I have a cunning plan to avoid registering for VAT…….

….I’ll simply split my business into separate parts which are all under the VAT registration turnover limit – ha!

I’ve heard this said many a time in “bloke in the pub” situations. But is it possible?

You will not be surprised to learn that HMRC don’t like such schemes and there is legislation and case law for them to use to attack such planning known as “disaggregation”. This simply means artificially splitting a business.

What HMRC will consider to be artificial separation:

HMRC will be concerned with separations which are a contrived device set up to circumvent the normal VAT registration rules. Whether any particular separation will be considered artificial will, in most cases, depend upon the specific circumstances. Accordingly it is not possible to provide an exhaustive list of all the types of separations that HMRC will view as artificial. However, the following are examples of when HMRC would at least make further enquiries:

Separate entities supply registered and unregistered customers

In this type of separation, the registered entity supplies any registered customers and the unregistered part supplies unregistered customers.

Same equipment/premises used by different entities on a regular basis

In this type of situation, a series of entities operates the same equipment and/or premises for a set period in any one-week or month. Generally the premises and/or equipment is owned by one of the parties who charges rent to the others. This situation may occur in launderettes and take-aways such as fish and chip shops or mobile catering equipment.

Splitting up of what is usually a single supply

This type of separation is common in the bed and breakfast trade where one entity supplies the bed and another the breakfast. Another is in the livery trade where one entity supplies the stabling and another, the hay to feed the animals. There are more complex examples, but the similar tests are applied to them too.

Artificially separated businesses which maintain the appearance of a single business

A simple example of this type of separation includes; pubs in which the bar and catering may be artificially separated. In most cases the customer will consider the food and the drinks as bought from the pub and not from two independent businesses. The relationship between the parties in such circumstances will be important here as truly franchised “shop within a shop” arrangements will not normally be considered artificial.

One person has a controlling influence in a number of entities which all make the same type of supply in diverse locations

In this type of separation a number of outlets which make the same type of supplies are run by separate companies which are under the control of the same person. Although this is not as frequently encountered as some of the other situations, the resulting tax loss may be significant.

The meaning of financial, economic and organisational links

Again each case will depend on its specific circumstances. The following examples illustrate the types of factors indicative of the necessary links, although there will be many others:

Financial links

  • financial support given by one part to another part
  • one part would not be financially viable without support from another part
  • common financial interest in the proceeds of the business

Economic links

  • seeking to realise the same economic objective
  • the activities of one part benefit the other part
  • supplying the same circle of customers

Organisational links

  •  common management
  • common employees
  • common premises
  • common equipment

HMRC often attack structures which were not designed simply to avoid VAT registration, so care should be taken when any entity VAT registers, or a conscious decision is made not to VAT register. Registration is a good time to have a business’ activities and structure reviewed by an adviser.

As with most aspects of VAT, there are significant and draconian penalties for getting registration wrong, especially if HMRC consider that it has been done deliberately to avoid paying VAT.

VAT Snippet – e-supplies to Russia

By   1 December 2016
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New VAT rules for B2C supplies to Russian recipients

If your business, or your client’s business provide electronically supplied services to private consumers* in Russia new rules will require foreign (“non-established“) businesses to register and pay VAT on their supplies.

These rules will come into effect from 1 January 2017.

Supplies of such services will be subject to the Russian standard VAT rate of 15.25% of gross revenue.

For the purposes of this legislation electronically supplied services include (but are not limited to):

  • e-books
  • streaming of music and film
  • online access to games and download of games to electronic devices
  • services of social networking sites
  • cloud computing
  • hosting of websites
  • access to search engines
  • internet service providers
  • broadcasting of TV or radio channels
  • online advertising
  • data storage,
  • and other similar services

This definition broadly follows the definition for EU supplies.

Quarterly VAT returns will be required, however, there will be no right to recover input tax on these returns.

Place of belonging

As with any e-sales, it is important to have a procedure in place in order to establish the place of belonging of all customers as this will dictate what (if any) VAT is applicable, and to which authority payment should be made.  In broader terms, the rules for Distance selling must also be adhered to. Guide here 

* Russian definition of place of an individual customer – A “private consumer” is deemed to be in Russia if his/her living place is in Russia; or if he/she purchased the service by using a Russian bank (or a Russian electronic money operator), a network address registered in Russia, or a phone number with the Russia’s country code.

This follows an international trend as may be seen with similar developments here

If you are affected by this new VAT legislation, please contact us.  We have a worldwide network which can take the pain out of international VAT compliance and avoid a business inadvertently triggering swingeing penalties and interest overseas. Please see further details of this service here

VAT – Autumn Statement. Unwelcome changes to the Flat Rate Scheme

By   24 November 2016
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Autumn Statement

The Flat Rate Scheme (FRS) is a very helpful simplification of VAT for smaller businesses. It reduces paperwork and can result in a tax benefit for those who use the scheme. Details of the FRS are at the end of this article.

In the Autumn Statement, the Chancellor has announced changes to the FRS to be introduced from 1 April 2017. Under the misleading heading: “Tackling aggressive abuse of the VAT Flat Rate Scheme” the technical note here

This sets out a new FRS rate for businesses with “ with limited costs”.

Broadly, if a business has VAT inclusive expenditure on goods of either:

  • less than 2% of their VAT inclusive turnover in a prescribed accounting period
  • greater than 2% of their VAT inclusive turnover but less than £1000 per annum if the prescribed accounting period is one year

The above excludes capital expenditure, food or drink for consumption by the business or its employees, and vehicles, vehicle parts and fuel.

Then they will be required to use a FRS rate of 16.5% rather than the rate currently applicable.

There will be anti-forestalling provisions in place to avoid manipulation of timing.

What this means

Assume a business is currently using the 12% flat rate:

100 + 20% VAT = 120 x 12% = 14.4 VAT due

120 x 16.5% = 19.8 VAT due at the new rate

Outside the FRS VAT due = 20 VAT due (but input tax recovery available to offset)

Commentary

This will unfortunately affect many small businesses who have no intention and are certainly not involved in “aggressive abuse”. It appears just another example of, as The Times leader once said of the Rolling Stones case “Who breaks a butterfly upon a wheel?”*

 

Flat Rate Scheme
The Flat Rate Scheme is designed to assist smaller businesses reduce the amount of time and complexity required for VAT accounting. The Flat Rate Scheme removes the need to calculate the VAT on every transaction. Instead, a business pays a flat rate percentage of its VAT inclusive turnover. The percentage paid is less than the standard VAT rate because it recognises the fact that no input tax can be claimed on purchases. The flat rate percentage used is dependent on a business’ trade sector.
A business is eligible for this scheme if its estimated taxable turnover in the next year will not exceed £150,000. Once using the scheme, a business is permitted to continue using it until its income exceeds £230,000.
If eligible, a business may combine the Flat Rate Scheme with the Annual Accounting Schemes, additionally, there is an option to effectively use a cash basis so there is no need to use the Cash Accounting Scheme. There has been recent case law on the percentage certain businesses’ use for the FRS, so it is worth checking closely.  There is a one percent discount for a business in its first year of trading.
Advantages
  • Depending on trade sector and circumstances may result in a real VAT saving
  • Simplified record keeping; no requirement to separate out gross, VAT and net in accounts
  • Fewer rules; no issues with input tax a business can and cannot recover on purchases
  • Certainty of knowing how much of income is payable to HMRC
Disadvantages
  • No reclaim of input tax incurred on purchases
  • If you buy a significant amount from VAT registered businesses, it is likely to result in more VAT due
  • Likely to be unattractive for businesses making zero-rated or exempt sales because output tax would also apply to this hitherto VAT free income
  • Low turnover limit

* For those of a literary bent, the original quote is from Alexander Pope’s Epistle to Dr Arbuthnot of January 1735.

VAT – Treatment of used pre-registration assets

By   9 November 2016
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New HMRC Publication: Brief 16/2016

HMRC has clarified its position on the claim of input tax relating to assets used by a business prior to VAT registration.  HMRC had previously, in some circumstances, sought to disallow an element of such input tax. They now accept that input tax incurred on fixed assets purchased within four years of the Effective Date of Registration (EDR) is recoverable in full, providing the assets are still in use by the business at the time of EDR. HMRC state that there has been no change of policy on this matter, however, experience insists that that there have been cases where they have sought to limit the amount of VAT claimable prior to registration.  This brings the VAT treatment into line with what many advisers always thought the position to be.

Background

UK legislation permits businesses which have become VAT registered to recover tax incurred on goods and services purchased before their EDR. This is so as long as the purchases are used in taxable activities post EDR. The “simplified” rules are now:

  • Services

Services must have been received less than six months before the EDR for VAT to be deductible. This excludes services that have been supplied onwards pre EDR. There may be a restriction to VAT recovery if a business is partly exempt. A guide to partial exemption here

  • Goods

Input tax incurred on goods which were purchased within four years of EDR and are still on hand at the time of EDR may be recovered in full (subject to any partial exemption restriction). Input tax on goods which were consumed or sold prior to EDR do not qualify for recovery.  This rule also applies to fixed assets.

Please contact us if your business, or that of your clients have been the subject of a disallowance of input tax in these circumstances.

Latest from the courts: Excise Duty – against which party may an assessment be raised?

By   19 October 2016
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A little “light” relief from VAT.  Indirect taxes extend to Customs and Excise Duties (as well as IPT and various other “lower profile” taxes) and we are able to assist with all of these.

In an interesting Excise Duty case; B & M Retail Limited (B & M) the Upper Tribunal were asked whether an assessment for Customs Duty due on wine and beer could be issued to an entity “down the chain” to an entity which was holding goods at a given time.

Background

HMRC detained the relevant the goods under The Customs & Excise Management Act 1979 (“CEMA”) Section 139 on the grounds that, in their judgment, on the balance of probabilities, Excise Duty had not been paid on the goods. Under B & M’s terms and conditions of business its suppliers were required to warrant that the sale of alcohol to B & M was on a “Excise Duty paid” basis.

The First Tier Tribunal (FTT) decided that despite an HMRC investigation resulting in the fact that they were not satisfied that duty had been paid on the goods, B & M was not responsible for the duty (and subsequent penalties) as the goods had passed through other various entities before they reached the appellant.  The decision was based on the fact that the duty point must have arisen before the goods reached B & M and consequently, the duty was payable by someone further up the supply chain and not simply by the entity which was holding the Excise Duty goods at the Excise Duty point.

Decision

However, the Upper Tribunal disagreed with the FTT and overturned the verdict.  The Upper Tribunal stated that “… the recognition by HMRC that one or more other Excise Duty points must, in principle, have been triggered before B & M received the relevant goods did not preclude HMRC from assessing B & M for excise duty …”.  The Upper Tribunal did, however, remit the case to the First Tier Tribunal to review the evidence to ensure that the assessment is in time and that, as a matter of fact, the Excise Duty due on the beer and wine remains unpaid.

Conclusion

It would appear that this decision currently gives HMRC the right to raise an assessment for duty and penalties anywhere along the supply chain when an entity is holding the goods, even though a “previous” entity may have been responsible for the payment. This is not * * polite cough * * small beer as the amount in question was £5,875,143 of duty and a penalty of £1,175,028.  This is helpful to HMRC as, in this instant case, it would appear that entities further up the supply chain were either not registered, or became deregistered, making it more difficult for HMRC to recover the Duty due.

It is important for every importer to be clear about the Excise Duty position and to carry out detailed due diligence on the relevant shipment.  It is now not possible to escape an assessment by demonstrating that a third party is responsible for the payment of the duty.