Category Archives: Technology

VAT: The Windsor Framework

By   1 March 2023
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While we await the fine details, trade between GB and Northern Ireland is likely to be subject to new rules. These are set out under the heading of The Windsor Framework published by HM Government.

(Very) General

Via the Northern Ireland Protocol (NIP), Northern Ireland operated under the EU VAT rules. There are revised VAT rules set out in The Windsor Framework. The EU rules on VAT rates will not apply to a list of goods for consumption in Northern Ireland in certain circumstances.

The Windsor Framework amends the legal text of the NIP to ensure that Northern Ireland will be subject to the same VAT and excise rules that apply in the rest of the UK.

The Framework means that legislation to apply the zero-rate of VAT to energy saving materials can be introduced. A number of other flexibilities should enable UK-wide VAT changes to apply in Northern Ireland. It is anticipated that future VAT issues can be addressed in order to manage any divergences in policy between GB and Northern Ireland.

A bit more detail

The Windsor Framework sets up a new UK internal trade scheme, based on commercial data-sharing rather than traditional international customs processes.

Under the NIP, a framework exists that allows goods to move from GB to Northern Ireland tariff-free. If the goods do not fall within that framework, they are treated as if moving across an international border and full customs declarations are required.

This Framework introduces arrangements through a new UK internal market system (colloquially called the “Green Lane”) for internal trade. Goods being sold in Northern Ireland will not be subject to “unnecessary paperwork, checks and duties”.

The new scheme will significantly expand the number of businesses able to move goods using the Green Lane by being classed as internal UK traders.

The Changes

To ensure that internal UK trade is protected, the agreement expands the number of businesses able to be classed as internal UK traders and move goods as ‘not at risk’ of entering the EU through three changes:

  • businesses throughout the UK will now be eligible – moving away from the previous restrictions that required a physical premises in Northern Ireland.
  • the turnover threshold below which companies involved in processing can move goods under the scheme which they can show stay in Northern Ireland is increased from the current £500,000 limit up to £2 million (this means that four-fifths of manufacturing and processing companies in Northern Ireland who trade with GB will automatically be in scope).
  • if businesses are above that threshold, they will be eligible to move goods under the scheme if those goods are for use in the animal feed, healthcare, construction and not-for-profit sectors.

Businesses in the scheme that can show their goods will stay in Northern Ireland will gain access to a simplified process for goods movements, using ordinary commercial data rather than customs data.

Goods moving to the EU will be subject to normal third-country processes and requirements.

Reduction in so-called frictions

The Framework seeks to address a range of issues that added frictions or costs for internal UK trade:

  • safeguarded tariff-free movements of all types of steel into Northern Ireland .
  • a forward process for ensuring that Northern Ireland businesses can access other goods subject to Tariff Rate Quotas in the future, dealing with the unique disadvantages under the existing system.
  • where businesses cannot be certain of the end destination of their goods when first moving them into Northern Ireland, a new tariff reimbursement scheme for those who can show the goods were ultimately not destined for the EU.

VAT: What are split payments?

By   9 January 2023
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The term “split payment” is increasingly cropping up in conversations and in the media, so I thought it would be a good time to look at the concept.

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

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

Where are we on split payments?

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

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

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

Background

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

Fraud

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

Proposed spilt payment methods

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

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

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

Overall

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

VAT: New process to support repayment claims

By   14 November 2022
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HMRC has announced a useful new tool for speeding up repayment payments.

When a business submits a repayment return (when input tax exceeds output tax) HMRC may carry out a “pre-cred” (pre-credibility check) inspection or queries. This is to ensure that a claim is valid before money is released.

If not subject to a visit, a business is likely to be asked for information to support a claim. Such requests are more common if a business normally submits payment returns or it is a first return. The requested information is usually in the form of copy purchase invoices or import documentation.

Prior to the changes, HMRC sent a letter by snail mail and the information would also be returned by post. This was often subject to delays and “misunderstandings”.

From this month, HMRC has launched an online form so that a claimant, or an agent, can upload documents to support the claim via the Government Gateway. It is hoped that this will result in businesses receiving a repayment in shorter order.

HMRC require:

  • the VAT registration number
  • the CFSS reference number from the HMRC letter
  • details of the main business activities
  • the date the business began
  • the VAT rates that apply to sales
  • details of any VAT schemes
  • the detailed VAT account
  • the five highest value purchase invoices, and
  • any additional specific information requested by HMRC

Depending on circumstances, HMRC may also need:

  • bank statements
  • export sales invoices or supporting documents
  • import VAT documents
  • hire purchase or lease agreements
  • completion statements and proof of transfer of funds for the purchase of land or property
  • the planning reference and postcode of construction
  • sales invoices where non-standard VAT rates were charged

HMRC aim to look at this information within seven working days and will contact the claimant or agent when a decision is made, or if any further information is required.

Let us hope that speeds up the process.

VAT: Trader Support Service extended to December 2023

By   10 October 2022
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HMRC has announced that the Trader Support Service for businesses moving goods between Great Britain and Northern Ireland has been extended until 31 December 2023.

This service is designed to assist businesses navigate changes to the way goods move under the Northern Ireland Protocol since Brexit.

The service provides support to manage digital declarations including completing import and safety and security declarations.

It also provides guidance and training to help businesses understand what the Protocol means for them, enables traders to complete declarations without the need to purchase specialist software saving time and money.

Businesses moving goods between Great Britain and Northern Ireland can sign up to the Trader Support Service and access free online courses and training materials.

VAT: MTD reminder

By   4 October 2022
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HMRC have announced that the existing Making Tax Digital (MTD) online portal closes on 31 October 2022.

What businesses need to do now (or they could face a penalty)

If businesses haven not signed up to MTD and started using compatible software already, they must follow these steps now:

Step 1

Choose suitable MTD-compatible software they can find a list of software on GOV.‌‌‌UK.

Step 2

Check the permissions in their software – once they have allowed it to work with MTD, they can file their VAT returns easily. Go to GOV.‌‌‌UK and search ‘manage permissions for tax software’ for information on how businesses should do this.

Step 3

Keep digital records for their current and future VAT returns – a business can find out what records they need to keep on GOV.‌‌‌UK.

Step 4

Sign up for MTD and file their future VAT returns using MTD-compatible software – to find out how to do this, go to GOV.‌‌‌UK and search ‘record VAT’.

Businesses who file quarterly or monthly VAT returns must complete these steps in order to file their returns due after 1‌‌‌ ‌‌November.

Exemption from MTD for VAT

There are exemptions from MTD and they my be applied for here.

VAT: Exempt insurance intermediation. The Staysure case

By   8 June 2022
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Latest from the courts

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

Background

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

The services amounted to:

  • the provision of insurance leads online and offline
  • placing targeted advertising in the press, television and online
  • owning and operating the domain and related website: staysure.co.uk
  • providing insurance quotations via a bespoke quote engine which employed complex algorithms to produce a personalised price for each customer and resulted in an offer which was competitive from the customer’s perspective while also maximising profit for Staysure, the underwriter, and the service provider
  •  reporting on where prospective customers were falling out of the quotation and lead selection process, and in so doing demonstrate opportunities for further product development

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

  • registered Staysure on the strength of the deemed self-supply
  • assessed for the input tax which was created by the reverse charge.

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

Decision

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

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

Technical

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

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

  • whether a person is an insurance broker or an insurance agent depends on what they do. How they choose to describe themselves or their activities is not determinative
  • it is not necessary for a person to be carrying out all the functions of an insurance agent or broker for the exemption to be satisfied        
  • it is essential that the person has a relationship with both the insurer and the insured party, but this does not need to be a contractual relationship. The requirement that the person has a relationship with the insurer is satisfied where the person is the subcontractor of a broker, which in turn has a relationship with the insurer
  • where the person is a subcontractor of a broker, the exemption is satisfied:
    • where the relationship with the customer is indirect or where the subcontractor is one of a chain of persons bringing together an insurance company and a potential insured, but;
    • the subcontractor’s services must be linked to the essential aspects of the work of an insurance broker or agent, namely the finding of prospective clients and their introduction to the insurer with a view to the conclusion of insurance contracts

Commentary

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

Guide

Reverse charge on services received from overseas
Normally, the supplier of a service is the person who must account to the tax authorities for any VAT due on the supply.  However, in certain situations, the position is reversed and it is the customer who must account for any VAT due.  This is known as the ‘Reverse Charge’ procedure.  Generally, the Reverse Charge must be applied to services which are received by a business in the UK VAT free from overseas. 
Accounting for VAT and recovery of input tax.
Where the Reverse Charge procedure applies, the recipient of the services must act as both the supplier and the recipient of the services.
Value of supply
The value of the deemed supply is to be taken to be the consideration in money for which the services were in fact supplied or, where the consideration did not consist or not wholly consist of money, such amount in money as is equivalent to that consideration.  The consideration payable to the overseas supplier for the services excludes UK VAT but includes any taxes levied abroad.
Time of supply.
The time of supply of such services is the date the supplies are paid for or, if the consideration is not in money, the last day of the VAT period in which the services are performed.
The outcome
The effect of the provisions is that the Reverse Charge has no net cost to the recipient if he can attribute the input tax to taxable supplies and can therefore reclaim it in full. If he cannot, the effect is to put him in the same position as if had received the supply from a UK supplier rather than from one outside the UK. Thus the charge aims to avoid cross border VAT rate shopping. It is not possible to attribute the input tax created directly to the deemed (taxable) supply. 

VAT: New penalty regime delayed

By   17 January 2022
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The new system for the way penalties and interest is charged due to be introduced on 1 April this year has been deferred to 1 January 2023.

The new points-based regime has been delayed to allow HMRC to implement the necessary IT changes.

I wonder if that represents a reasonable excuse for HMRC being late…

VAT: New One Stop Shop (OSS) rules from 1 July 2021

By   15 June 2021
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All you need to know about the new One Stop Shop (OSS)

New VAT rules will be introduced on 1 July 2021, and it is important that businesses and advisers are aware of the impact on transactions from this date. These changes have been introduced to increase the control of tax revenues as it is an area where a significant amount of tax is lost – creating an unfairness for businesses that correctly pay tax. They also aim to provide simplification for suppliers and consumers.  

Who will be affected?

The new rules will impact all businesses that sell products online to consumers (B2C) in the EU, known as: distance sales. It will also affect suppliers of certain designated services and electronic interfaces.

UK online sellers not established anywhere in the EU can use the “Non-Union” version of OSS.

How OSS works

The current position

The current EU VAT rules state that cross-border sales of goods are subject to VAT in the EU Member State (MS) of dispatch. However, there are thresholds; once these sales reach a threshold in the MS of sale, a business is required to VAT register in that MS and ensure compliance and payment of VAT there.

The new rules

All sales will be subject to VAT in the MS of arrival of the goods. The existing thresholds for distance sales of goods (where the supplier is responsible for the transport of the products) within the EU will be replaced by a new EU threshold of €10,000*. To avoid a business having to VAT register in every EU MS into which it supplies goods, online sellers will be able to use the OSS electronic portal. This will enable the seller to account for, and pay, VAT in all EU MS on a single electronic quarterly return in one EU MS.

* As, since Brexit, the UK is no longer an EU MS, one the main differences is that the €10,000 annual turnover threshold for small business does not apply, so an EU VAT registration will be required for any distance sales to the EU. The business will need to nominate any single EU MS to register, submit returns, and make payments. Additionally. As a non-union OSS, depending on the chosen MS’s domestic regulations, a business may be required to appoint a fiscal representative.

Note: Even if a UK business has a turnover below the VAT registration threshold (currently £85,000 pa) so that it need not register here, it will be subject to OSS rules and need to register in an EU MS, this is compulsory.

Supplies covered by OSS

  • distance sales of goods within the EU by suppliers not belonging in that MS
  • supplies of certain B2C services (below) made by a supplier which take place in a MS in which it is not established

Services covered by Non-Union OSS

Examples of supplies of services to customers (a non-exhaustive list) that could be reported under the non-Union scheme are:

  • accommodation services
  • admission to cultural, artistic, sporting, scientific, educational, entertainment or similar events; such as fairs and exhibitions
  • transport services, plus ancillary activities such as; loading, unloading, handling or similar
  • valuation and work on movable tangible property
  • services connected to immovable property
  • hiring of means of transport
  • restaurant and catering services for consumption on board ships, aircraft or trains etc

Electronic interfaces

From 1 July 2021, if an electronic interface, eg; marketplace, platform, etc facilitates distance sales of goods by a non-EU established seller to a buyer in the EU, the electronic interface is considered to be the seller (“deemed supplier” rather than agent) and is liable for the payment of VAT via the OSS.

IOSS

In addition to the OSS, a new scheme covering the import of goods subject to a distance sales transaction and in consignments not exceeding €150 is being introduced to simplify accounting for VAT. This is called the Import One-Stop Shop (IOSS). If the value of the consignment exceeds €150, it will usually be the end customer who will be the importer and will have to pay VAT, and any, customs clearance etc costs.

Note: The VAT exemption at import of small consignments of a value up to €22 will be removed. This means all goods imported in the EU will now be subject to VAT.

VAT rates

Businesses will need to apply the VAT rate of the MS where the goods are dispatched to or where the services are supplied. Information on the VAT rates in the EU is available on the European Commission website.

How to register for the OSS

Each EU MS will have an online OSS portal where businesses can register from 1 April 2021 and can use for transactions made on or after 1 July 2021. The single registration will be valid for all eligible supplies made by online sellers (including electronic interfaces) or supplies facilitated by electronic interfaces.

OSS Requirements

A business that uses the OSS will be required to:

  • apply the VAT rate of the MS to which the goods are shipped
  • collect VAT from the buyer
  • submit a quarterly electronic VAT return
  • make quarterly VAT payments
  • keep records of all OSS supplies for ten years

Summary

The OSS is not compulsory, however, as the alternative is to VAT register in every EU MS where goods are received, it is a simplification in that respect – the previous distance selling rules were cumbersome and antiquated.

Further information

Full details of the OSS and IOSS from the EC here

VAT due on the charging of electric vehicles

By   1 June 2021
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As a result of enquiries from businesses and trade representatives, HMRC has announced that output tax is due on electric vehicle (EV) charging.

The use of EV charging points is becoming more common in public places. HMRC has clarified the rules in specific cases, and confirm:

Output tax

Supplies of EV charging through charging points in public places are charged at the standard rate of VAT. There is no exemption or relief .

NB: There is a reduced rate of VAT for supplies of small quantities of electricity, known as ‘de minimis’. However, the de minimis provision only applies if the supply of electricity is all of the following:

  • ongoing
  • to a person’s house or building
  • less than 1,000 kilowatt hours a month

Consequently, the de minimis provision does not apply to supplies of EV charging as this is done at charging points in public places, eg; car parks, petrol stations and on-street parking, and not to a person’s house or building.

Input tax

A business may recover the input tax incurred in charging its EVs if all of the following apply:

  • it is a sole proprietor
  • you charge your EV vehicle at home
  • the EV is used for business purposes (an apportionment must be made between business and private use)

If an employee charges an EV (which is used for business) at home (s)he cannot recover the input tax as the supply is made to the employee and not to the business.

If an employee charges an employer’s EV (for both business and private use) at the employer’s premises the employee will need to record the business and private mileage. Recovery of the full amount of VAT for the supply of electricity used to charge the EV is permitted (including the electricity for private use). However, output tax will be due on the charge on the amount for private use. Alternatively, a business may recover VAT on only the business element.

New EC VAT rate database

By   8 April 2021
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The European Commission has issued a new tool which enables businesses to check on the VAT rate for specific supplies. It is based on commodity codes but there are drop down menus for detailed descriptions. The tool covers both goods and services. There are both a simple and advanced search functions and the database also covers other taxes:

  • Personal Income Tax
  • Corporate Tax
  • Other Direct Taxes
  • Alcohol
  • Energy Products
  • Real Estate
  • Tobacco
  • Social Security Contributions