Further to my articles on cryptoassets and Bitcoin HMRC have published an updated Cryptoassets Manual CRYPTO40000 which sets out its interpretation of trading in cryptocurrencies.
It covers:
Any business dealing in any way with cryptoassets needs to understand the VAT and other tax implications of services to, and by it.
From 1 January 2021 there will be changes to the VAT treatment of low value consignments (LVC). These are goods with a value up to £135 – the threshold for customs duty liability. The HMRC guidance states that VAT will be collected at the point of sale rather than on import.
The changes are intended to ensure that goods from EU and non-EU countries are treated in the same way and that UK businesses are not disadvantaged by competition from VAT free imports.
Brief summary
The European Commission (EC) has published an updated Notice to Stakeholders which covers the UK leaving the EU.
The original document which was published in 2018 has been amended to reflect the latest developments which mainly include the official Brexit on 1 February 2020 and the current transition period, which, as matters stand, will end on 31 December 2020. Until that date, EU law in its entirety applies to the UK
The Notice includes:
The Notice states that; “…during the transition period, the EU and the UK will negotiate an agreement on a new partnership, providing notably for a free trade area. However, it is not certain whether such an agreement will be concluded and will enter into force at the end of the transition period”. I think that this is likely to be a charitable conclusion!
The EC advises businesses:
The Notice does not cover the supply of goods nor digital services themself.
General
After the end of the transition period, the EU rules on VAT for services no longer apply to, and in, the UK. This has, particular consequences for the treatment of taxable transactions in services and VAT.
Businesses need to understand the probable changes and make preparations for a No-Deal Brexit.
We cannot control the future…
The Sonaecom case
In the opinion* of the CJEU AG (C-42/19) the importance of a taxpayer’s intention was of utmost importance, regardless of whether that intention was achieved.
Background
Sonaecom intended to acquire a telecoms provider company. As is usual in such cases, input tax was incurred on consultancy received, from, amongst others; accountants and legal service providers. The intention post acquisition was for Sonaecom to make certain charges to the acquired co. These would have been taxable supplies.
Unfortunately, the intended purchase was aborted.
The issue
The issue before the AG was; as no taxable supplies took place as the deal fell through – to what should the input tax incurred on advice be attributed?
Opinion
In the AG’s view the fact that the acquisition was aborted was no reason for the claim for input tax to denied. This was based on the fact that:
Commentary
There are often issues in relation to intentions of a taxpayer. It is clear, and was emphasised in this case, that intention is all important. Of course, intentions can change over a period of time and commercial and political events may thwart or cause intentions to be re-evaluated. There is often an issue about evidencing an intention. HMRC usually require comprehensive documentary evidence to demonstrate an objective. Such evidence is sometime not available for various reasons. Consequently, it is prudent for businesses to record (board meeting minutes etc at the very least) the commercial reasons for taking a certain course of action. This issue quite often arises in transactions in land and property – which can create additional technical issues.
There is legislation in place to cover situations when intentions, or actual events change and which affect the original input tax position: The Capital Goods Scheme (CGS) and The Value Added Tax Regulations 1995, Regs 108 and 109.
Other areas of VAT which often to raise issues are management charges and holding companies. HMRC apparently continue to be eager to attack taxpayers in these areas and I have looked at the role of holding companies and the VAT treatment here, here and here.
I think it is useful to bear in mind a question which, in itself does not evidence an intention, but provides commercial coherence – Why were the costs incurred if there was no intention to make the acquisition? This does leave aside the future management charges position but goes some way to provide business logic.
It will be interesting to see how this case proceeds, but I would find it very surprising if the court diverges from this AG opinion.
* AG’s Opinion
The Court of Justice of the European Union (CJEU) consists of one judge from each Member State, assisted by eleven Advocates General whose role is to consider the written and oral submissions to the court in every case that raises a new point of law, and deliver an impartial opinion to the court on the legal solution.
Further to the history of objection to reduce rating e-publications, and the 2020 budget announcement which stated that e-publications will be zero rated from 1 December 2020, the Chancellor of the Exchequer has today announced that this date is brought forward and zero rating will now apply from 1 May 2020 – which is of course tomorrow.
Further details of the measure here.
Zero rating
This brings electronically supplied sales in line with traditional printed matter. The zero rate will apply to:
What supplied electronically means
The term ‘supplied electronically’ is not defined in legislation. It falls to be interpreted in accordance with its generally accepted meaning and includes supplies made over the internet and by e-mail.
Excluded items
Items that are not entitled to the VAT zero rate:
If more than half of an e-publication is devoted to advertising, audio or video content, its supply will remain standard rated for VAT purposes.
The zero rating extension only applies to the supply of electronic versions of books already zero rated in UK law. As such, zero-rating is limited to electronic versions of books that can be read or looked at. Supplies of audiobooks remain taxable at the standard rate whether supplied in a physical or digital format.
e-book readers are one form of hardware to which e-books can be downloaded before being read but are not in themselves e-books. Therefore, supplies of e-book readers are standard rated
Software, eg: an app is used to access e-publications but is not in itself an e-publication. Therefore, supplies of such software are standard rated.
Lending of electronic publications
The lending of any of the zero rated e-publications for a charge (for example, by a library) is zero rated.
Summary
Although welcome, as zero rating is VAT nirvana, the short lead in time could catch out some business which make such online supplies. Businesses which provide e-publications may want to consider making a retrospective claim as a result of the News Corp case.
A summary of how the 2020 budget changes VAT rules:
e-publications
Zero rating will apply to e-publications from 1 December 2020. This brings e-publications in line with traditional printed matter. The zero rate will apply to:
Presumably, this brings an end to HMRC’s arguments set out in the News Corp case.
Postponed Accounting
From 1 January 2021 postponed accounting will apply to all imports of goods, including those from the EU. This will provide an important boost to those VAT registered UK businesses which are integrated in international supply chains as they adapt to the UK’s position post Brexit.
Sanitary products
From 1 January 2021 the zero rate will apply to women’s sanitary products. This is calculated to save the average women £40 over her life.
Consultation
A consultation paper will be published to gather views on the potential approach to duty and tax-free goods policy post Brexit.
Cross-border goods policy
An informal consultation process will be launched in spring 2020 on the VAT and Excise treatment of goods crossing UK borders after Brexit.
Fund management
As announced on 4 March 2020 the government is legislating to clarify when fund management services are exempt from VAT.
Financial services
An industry working group will be set up to review how financial services are treated for VAT purposes. Presumably how Brexit will affect such services.
“Quick Fixes” Directive
Legislation will be introduced to simplify rules for the VAT treatment of intra-EU movements of call-off stock, allowing businesses to delay accounting for VAT until the goods are called-off.
Partial Exemption
Following the recent call for evidence on the simplification of the VAT rules on Partial Exemption and the Capital Goods Scheme, the government has said it will continue to engage with businesses in relation to their responses and will publish a response in due course.
Commentary
These proposed measures will be broadly be welcomed by business. Especially those in relation to e-publications and Postponed Accounting. It was widely expected that HMRC would lose its argument that e-publications and hard copy publications should be treated differently in any case. Postponed Accounting takes us back to the pre-1990s era. It looks very much like this means a “No-Deal” and although Postponed Accounting may be an easement for some aspects, it remains unnecessary if an agreement with the EU can be reached. However, there appears to be no political will nor appetite to reach such an agreement, so business suffers.
Latest from the courts
In the CJEU case of X, a German business, the issue was whether services provided by telephone could be treated as exempt. The decision is not available in English in the link above, so thanks to Google translate and very rusty schoolboy language skills!
Background
X provided a healthcare hotline to people covered by certain insurance. The types of services carried out where in respect of medical issues; medical advice, answers to queries, explanations of possible diagnoses and treatments, and patient support programmes for certain conditions. The service was provided by suitably qualified nurses, medical staff and doctors.
The issue
Was this service exempt from VAT as personal care considering it was “support” provided by telephone? He relevant legislation is Article 132(1)(c) of the VAT Directive. A separate issue was whether the staff required additional proof of their professional qualifications to qualify as an exempt service by telephone. The advice was provided via a computer assisted assessment, using targeted questions allowing X to assess the patient’s situation and to advise accordingly. Consequently, there was a degree of automation involved.
The German authorities considered that the supplies fell short of the exemption and raised assessments for output tax due on the services.
Decision
The CJEU has ruled that personal care is not dependent on where it is carried out and there is no bar to it being conducted by telephone. X contended that its services were directly connected with illness and was medical care and, as a result of its activities, the cost of subsequent treatment was reduced.
The court established that the supply was exempt if it met two tests:
Therefore, healthcare services carried out by telephone may fall within the exemption, but only if they meet all the conditions for applying this exemption. The test was not how the services were delivered.
Whether X’s services met the exemption conditions depended on case law and whether they were to;
Such services were likely to have a ‘therapeutic purpose’. However, simply; directing patients to factsheets, providing specialists’ contact details and communicating information is insufficient to qualify for exemption and would be regarded as of a (taxable) administrational nature.
Summary
The services provided by telephone, consisting of providing advice on health and illness, were likely to be exempt, if they pursue a ‘therapeutic aim’. However, this was for the German referring court to verify. On the “additional qualifications” point, EU law does not define medical professions, so it is the responsibility of each Member State to determine the necessary qualifications. In the UK, these qualifications are set out at VAT Act 1994, Schedule 8, Group 7, item 1 (mainly; registered or enrolled as a doctor, optician, osteopath, chiropractor, nurse or midwife). It was decided that Article 132(1)(c) does not require that those X’s staff which provide telephone services to obtain additional professional qualifications.
Commentary
There is often significant uncertainty when businesses provide “healthcare”, This has mainly manifested in questions of whether staff or medical services are actually provided (and in more wide-ranging cases, whether the provision of staff is by way of agent or principal). However, with technology moving faster than ever, it is helpful to have these guidelines and the understanding that it is not just “old-fashioned” medical services which are covered by the exemption.
With the end of the Brexit transition period looming, the EU have announced new measures:
e-commerce VAT fraud
The first measure is the European Commission (EC) approving (this month) new measures to transmit and exchange payment data in order to fight e-commerce VAT fraud. Member States will be assisted in their fight against e-commerce VAT fraud by the launch of a Central Electronic System of Payment (CESOP) information arrangement.
CESOP will keep records of cross-border payment information within the EU, as well as payments to third countries or territories, for a period of five years. This will allow tax authorities to properly control the correct fulfilment of VAT obligations on cross-border Business to Consumer (B2C) supplies of goods and services.
The measures will be implemented on 1 January 2025.
Simplified rules for small businesses
The EC has also recently adopted simplified VAT rules applicable to small businesses. The new measures are intended to reduce the administrative burden and compliance costs for small enterprises and create a fiscal environment which will help small enterprises grow and trade across borders more efficiently.
The measures foresee that small enterprises will be able to qualify for simplified VAT compliance rules where their annual turnover remains below a threshold set by a Member State concerned, which cannot be higher than 85 000 EUR. Under certain conditions, small enterprises from other member states, which do not exceed this threshold, will also be able to benefit from the simplified scheme, if their total annual turnover in the whole of the EU does not exceed 100 000 EUR.
The new rules will apply as of 1 January 2025.
New rules for exchange of VAT payment data
In addition to the anti e-commerce fraud proposals above, new measures will enable Member States to collect, in a harmonised way, the records made electronically available by payment service providers, such as banks. These complement the VAT regulatory framework for e-commerce coming into force in January 2021 which introduced new VAT obligations for online marketplaces and simplified VAT compliance rules for online businesses.
The new measures will apply as of 1 January 2024.
How these new incentives affect UK businesses remains to be seen as our future trading relationship with the EU is, to put it diplomatically, unclear.
The Government is consulting on plans to create up to ten freeports. Freeports may provide tariff flexibility, customs facilitations and tax measures designed to encourage global trade and attract inward investment post-Brexit. The proposed Freeports will have different customs rules to the rest of the country.
What is a Freeport?
Freeports are secure customs zones located at ports where business can be carried out inside a country’s land border, but where different customs rules apply. The paper says that Freeports may:
Typically, goods brought into a Freeport do not attract a requirement to pay duties until they leave the Freeport and enter the domestic market. No duty at all is payable the goods are re-exported. If raw materials are brought into a Freeport from overseas and processed into a final good before entering the domestic market, then duties will be paid on the final good.
Government aims
It is stated that the government wants Freeports to boost trade, jobs and investment. They say that is why they are proposing cutting red tape by streamlining customs processes, exploring the use of planning measures to speed up planning processes and accelerate development and housing delivery in and around Freeports, and consulting on a comprehensive set of tax breaks to support businesses. Of course, all this would be unnecessary if Brexit had not have occurred.
Deadline
The consultation deadline is 20 April 2020 so there is not a lot of time to make your views known.
Latest from the courts
Hot on the heels of the update to e-publications here comes new from the Upper Tribunal (UT) in the News Corp UK and Ireland Ltd case.
Background
The issue was whether electronic editions of The Times (plus other e-newspapers from the same company: The Sunday Times, The Sun and The Sun on Sunday) were “newspapers” within the meaning of The VAT Act 1994, Schedule 8, Group 3, Item 2 and could therefore be treated as zero rated.
The relevant part of Schedule 8, Group 3 (where relevant), lists the following items:
“1 Books, booklets, brochures, pamphlets and leaflets.
2 Newspapers, journals and periodicals…”,
At the First Tier Tribunal (FTT) the appeal was dismissed, and the decision went in favour of HMRC. Details here. The facts were consistent throughout both hearings.
Decision
The UT agreed with the FTT in that there was no material difference between the two types of supply despite the sale of e-newspapers being supplies of services and the sale of physical newspapers being supplies of goods.
That being the case, it was possible to interpret Schedule 8, Group 3. Item 2 as extending to e-publications, which, of course, did not exist when the legislation was drafted in 1972. Consequently, the appeal was allowed, and the e-newspapers were zero rated. Such treatment did not extend the scope of UK zero rating which would not be permitted by the EU.
The UT also indicated that the zero rating would be subject to some restrictions in respect of what may be treated as e-publications.
It was observed that it is important that the legislation should be interpreted in a way that maintained its relevance and that the “always speaking” * principle is preserved.
Commentary
The EC European Council (EC) has previously agreed to allow Member States to apply reduced VAT rates to electronic publications. This UT case appears to confirm that this will extend to UK zero rating. Other Members States have already applied reduced rates or are in the process of doing so. The UK have not previously announced its approach, so this decision is likely to force their hand (notwithstanding the fallout from Brexit…).
Action
Supplies or e-publications should review their sales and decide whether their supplies are on fours with this case. If so, it may be possible to make a retrospective claim for overpaid output tax, subject to certain conditions.
Recipients of such supplies should consider approaching their suppliers and obtain a repayment of overpaid VAT if it represents a cost to them.